Annual Report of the Federal Reserve Board, 1995

TZeport X *^ 7995 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 6, 1996 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-Second Annual Report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1995. Sincerely, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Contents Part 1 Monetary Policy and the U.S. Economy in 1995 3 INTRODUCTION 7 THE ECONOMY IN 1995 7 The household sector 10 The business sector 12 The government sector 14 Labor markets 16 Prices 19 MONETARY POLICY AND FINANCIAL MARKETS IN 1995 21 The course of policy and interest rates 23 Credit and money flows 27 INTERNATIONAL DEVELOPMENTS 28 Foreign economies 30 U.S. international transactions 32 Foreign exchange developments 33 Foreign exchange operations 35 MONETARY POLICY REPORTS TO THE CONGRESS 35 Report on February 21, 1995 67 Report on July 19, 1995 Part 2 Records, Operations, and Organization 93 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS 93 Regulation D (Reserve Requirements of Depository Institutions) 94 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 94 Regulation H (Membership of State Banking Institutions in the Federal Reserve System) 94 Regulation H and Regulation Y (Bank Holding Companies and Change in Bank Control) 96 Regulation H and Rules of Practice 96 Regulation K (International Operations of United States Banking Organizations) 97 Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks; Loans to Holding Companies) 97 Regulation Y 98 Regulation Z (Truth in Lending) 98 Regulation BB (Community Reinvestment) and Regulation C (Home Mortgage Disclosure) 99 Regulation DD (Truth in Savings) 100 Rules Regarding Access to Personal Information under the Privacy Act 100 Rules Regarding Delegation of Authority 100 Rules Regarding Equal Opportunity 102 1995 discount rates 105 MINUTES OF FEDERAL OPEN MARKET COMMITTEE MEETINGS 105 Authorization for Domestic Open Market Operations 107 Domestic Policy Directive 107 Authorization for Foreign Currency Operations 109 Foreign Currency Directive 110 Procedural Instructions with Respect to Foreign Currency Operations 110 Meeting held on January 31-February 1, 1995 126 Meeting held on March 28, 1995 140 Meeting held on May 23, 1995 149 Meeting held on July 5-6, 1995 161 Meeting held on August 22, 1995 169 Meeting held on September 26, 1995 178 Meeting held on November 15, 1995 188 Meeting held on December 19, 1995 199 CONSUMER AND COMMUNITY AFFAIRS 199 CRA reform 200 Fair lending 202 HMDA data and lending patterns 204 Community development 207 Other regulatory matters Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

CONSUMER AND COMMUNITY AFFAIRS—Continued 209 Economic effects of the Electronic Fund Transfer Act 211 Compliance examinations 211 Agency reports on compliance with consumer regulations 215 Applications 216 Consumer complaints 219 Consumer policies 219 Consumer Advisory Council 221 Testimony and legislative recommendations 221 Recommendations of other agencies 223 LITIGATION 223 Bank Holding Company Act—review of Board actions 224 Litigation under the Financial Institutions Supervisory Act 225 Other actions 227 LEGISLATION ENACTED 227 Truth in Lending Act Amendments of 1995 228 Mexican Debt Disclosure Act of 1995 228 Paperwork Reduction Act of 1995 231 BANKING SUPERVISION AND REGULATION 231 Scope of responsibilities for supervision and regulation 238 Supervisory policy 247 Regulation of the U.S. banking structure 250 International activities of U.S. banking organizations 251 Enforcement of other laws and regulations 254 Loans to executive officers 254 Federal Reserve membership 255 REGULATORY SIMPLIFICATION 255 Comprehensive reviews 256 Recordkeeping requirements for certain financial records 256 ATM transaction receipts 256 Exception to anti-tying restrictions 256 CRA 257 Safety and soundness guidelines 257 Capital treatment of certain small business obligations 257 De novo investments in foreign companies 259 FEDERAL RESERVE BANKS 260 Developments in Federal Reserve services 264 Developments in currency and coin 264 Developments in fiscal agency securities and government depository services 268 Examinations Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FEDERAL RESERVE BANKS—Continued 268 Income and expenses 269 Holdings of securities and loans 270 Volume of operations 270 Federal Reserve Bank premises 271 Pro forma financial statements for Federal Reserve priced services 277 BOARD OF GOVERNORS FINANCIAL STATEMENTS 283 STATISTICAL TABLES 284 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31, 1995 286 2. Statement of condition of each Federal Reserve Bank, December 31, 1995 and 1994 290 3. Federal Reserve open market transactions, 1995 292 4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities, December 31, 1993-95 293 5. Number and salaries of officers and employees of Federal Reserve Banks, December 31, 1995 294 6. Income and expenses of Federal Reserve Banks, 1995 298 7. Income and expenses of Federal Reserve Banks, 1914-95 302 8. Acquisition costs and net book value of premises of Federal Reserve Banks and Branches, December 31, 1995 303 9. Operations in principal departments of Federal Reserve Banks, 1992-95 304 10. Federal Reserve Bank interest rates, December 31, 1995 305 11. Reserve requirements of depository institutions, December 31, 1995 306 12. Initial margin requirements under Regulations T, U, G, and X 307 13. Principal assets and liabilities and number of insured commercial banks in the United States, by class of bank, June 30, 1995 and 1994 308 14. Reserves of depository institutions, Federal Reserve Bank credit, and related items—year-end 1918-95, and month-end 1995 314 15. Number of banking offices in the United States, December 31, 1994 and 1995 315 16. Mergers, consolidations, and acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1995 331 FEDERAL RESERVE DIRECTORIES AND MEETINGS 332 Board of Governors of the Federal Reserve System 334 Federal Open Market Committee 335 Federal Advisory Council 336 Consumer Advisory Council 337 Thrift Institutions Advisory Council 338 Officers of Federal Reserve Banks and Branches 340 Conferences of chairmen, presidents, and first vice presidents 340 Directors 361 MAPS OF THE FEDERAL RESERVE SYSTEM 365 INDEX Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Parti Monetary Policy and the US. Economy in 1995 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction The economy performed reasonably 6 percent. Inflation did, in fact, pick up well in 1995. Sustained economic in the first part of 1995, but data expansion kept the unemployment rate released during the spring indicated that at a relatively low level, and inflation, as price pressures were receding, and the measured by the four-quarter change in Committee reduced the federal funds the consumer price index, was less than rate VA percentage point at its July meet- 3 percent for the third consecutive year, ing. Through the remainder of the year, the first such occurrence in thirty years. inflation was even more favorable than The combination of low inflation and had been anticipated in July, and inflalow unemployment provided further tion expectations decreased. In addition, substantiation of a fundamental point an apparent slowing of economic activthat the Board has made on past ity late in the year further reduced occasions—namely, that there is no the potential for inflationary pressures trade-off in the long run between the going forward. To forestall an undue monetary policy goals of maximum increase in real interest rates as inflation employment and stable prices set in the slowed, and to guard against the possi- Federal Reserve Act. Indeed, it is by bility of unnecessary slack developing fostering price stability that a central in the economy, the Committee eased bank can make its greatest contribution reserve conditions in December, reducto the efficient operation and overall ing the federal funds rate lA percentage ability of the nation's economy to create point. jobs and advance living standards over The monetary policy easings after time. mid-1995 contributed to declines in As economic prospects changed over short-term market interest rates, which the course of 1995, the Federal Reserve by year-end were about 1 percentage found that promoting full employment point to 2 percentage points down from and price stability required adjustments the highs reached early in 1995. in its policy settings. In February, the Intermediate- and long-term rates also economy still seemed to be pressing moved sharply lower last year, as the against its potential, and prices were risks of rising inflation receded and as tending to accelerate. To reduce the risk prospects for substantial progress in that inflation might mount, with the reducing the federal budget deficit attendant threat to continued economic seemed to improve. By the end of 1995, expansion, the Federal Open Market these rates were 2 to 2!/2 percentage Committee raised the federal funds rate points below their levels at the beginan additional Vi percentage point, to ning of 1995. Helped by lower interest rates and favorable earnings, major NOTE. The discussion here and in the next two equity price indexes rose 30 percent chapters is adapted from Monetary Policy Report to 40 percent in 1995. These financial to the Congress Pursuant to the Full Employment developments reduced the cost to busiand Balanced Growth Act of 1978 (Board of Govnesses of financing investment and to ernors, February 1996). Data cited here and in the next three chapters are those available as of mid- households of buying homes and con- March 1996. sumer durables; households were also Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

4 82nd Annual Report, 1995 aided by substantial additions to finan- capital early in the year boosted the cial wealth from rising bond and equity credit demands of firms, despite strong prices. corporate profits. Borrowing was also The foreign exchange value of the lifted by the financing of heavy net U.S. dollar, measured in terms of the retirements of equity shares in conneccurrencies of the other G-10 countries, tion with mergers and share repurchase fell about 5 percent, on net, during 1995. programs. Growth of household debt The dollar appreciated substantially remained brisk as consumer credit confrom the summer onward but not tinued to grow quite rapidly. Federal enough to offset a sharp decline that debt grew relatively slowly for a second took place in the first four months of year; the federal deficit declined further, 1995. Interest rates fell in most other and toward year-end, normal seasonal foreign industrial countries, which also borrowing was constrained by the were experiencing slower economic federal debt ceiling. Outstanding state growth, but the decline in rates abroad and local government debt ran off a bit was less than that in the United States. more rapidly than in 1994. Early in 1995, the dollar also was pulled Commercial banks and thrift institudown by the reactions to the crisis in tions again financed a large portion of Mexico, but the negative influence on the borrowing last year; their share of the dollar from this source appeared total outstanding debt of nonfederal secto lessen as Mexican financial markets tors edged up in 1994 and 1995 after stabilized over the balance of the year. having declined for more than fifteen Inflation rates in major industrial coun- years. The growth in depository credit tries held fairly steady in 1995 at levels was funded primarily with deposits, somewhat lower than those prevailing boosting the expansion of the broad in this country; thus, depreciation of monetary aggregates. the dollar in real terms against other M3 grew 6 percent, at the top of its G-10 currencies was less than the depre- 2 percent to 6 percent annual range ciation in nominal terms. Against the established by the Committee at midcurrencies of a broader group of U.S. year. Depositories relied heavily on trading partners, the dollar's real depre- large-denomination time deposits for ciation was even smaller. funding, but retail deposits also showed Borrowing and spending in the United gains as declining market interest rates States was facilitated not only by lower made these deposits more attractive to interest rates but also by favorable sup- retail customers. ply conditions in credit markets. Spreads M2 advanced AlA percent, putting it between interest rates on securities in the upper portion of its 1 percent to issued by private firms and those issued 5 percent annual range. The expansion by the Treasury generally remained nar- of M2 was the largest in six years, and row, and banks continued to ease terms its velocity was little changed after and qualifying standards on loans to having increased substantially during businesses and households through most the previous three years. Nonetheless, of the year. The total debt of domestic growth of the aggregate was erratic nonfinancial sectors grew 5Vi percent through the year, and the stability of its last year, a little above the midpoint of relationship to nominal spending the Committee's 3 percent to 7 percent remained in doubt. monitoring range. Rapid growth of busi- Ml declined last year for the first ness spending on inventories and fixed time since the beginning of the official Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Introduction series, in 1959. An increasing number of banks introduced retail sweep accounts, which shift money from interest-bearing checkable accounts to savings accounts to reduce banks' reserve requirements. Without these shifts, Ml would have risen in 1995, although slowly. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1995 According to estimates that were avail- growth of the real outlays of households able as of mid-March 1996, real gross and businesses, from elevated rates of domestic product increased slightly less increase in 1994 to rates that are more than 1V2 percent over the four quarters sustainable. Real government outlays of 1995 after a gain of 2>Vi percent infor consumption and investment fell 1994. The 1995 rise in aggregate output about VA percent during the year. was accompanied by an increase in pay- Increases in exports and imports of roll employment of \3A million, and the goods and services were smaller in real unemployment rate, after having fallen terms than the increases of 1994, and sharply in 1994, held fairly steady over their combined effect on GDP growth the course of 1995, keeping to a range was slightly positive. of about 5Vi percent to 53/4 percent. Consumer prices, as measured by the CPI for all items, rose 23A percent over The Household Sector the four quarters of 1995, an increase that was virtually the same as those of Real personal consumption expenditures the two previous years. rose about 2 percent during 1995 after Growth of output during the past year having risen 3 percent over the four was slowed in part by the actions of quarters of 1994. The reduced rate of businesses to reduce the pace of inven- rise in consumption spending this past tory accumulation after a burst of stock- year came against the backdrop of modpiling in 1994. Final sales—a measure erate gains in employment and income. of current output that does not end up in The financial wealth of households inventories—rose at an average rate of surged, but the impetus to spending about 2 percent over the four quarters of from this source evidently was coun- 1995 after an increase of 3 percent dur- tered by other influences, such as ing 1994. The slowing of final sales was increases in debt burdens among some largely a reflection of a downshifting in households and a rise, according to survey data, in consumers' concerns about job security. Change in Real GDP Real consumer expenditures for dura- Percent. Q4 to Q4 ble goods increased 2 percent during 1995, a slower rate of rise than in other recent years. Consumer expenditures for motor vehicles declined about 3 percent after having moved up nearly 20 percent over the three previous years. A variety of price concessions to motor vehicle buyers probably gave some lift to sales in 1995; however, pent-up demand, which had helped to boost sales earlier 1991 1993 1995 in the expansion, probably was no NOTE. The data are derived from chained (1992) longer an important factor. dollars and come from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 82nd Annual Report, 1995 Real outlays for durable goods other prices of stocks and bonds. Liabilities than motor vehicles continued to rise at continued to rise fairly rapidly but at a brisk pace in 1995 but not so rapidly a rate well below the rate of increase as in other recent years. Spending for in household assets; the rapid growth furniture and household equipment hit a of consumer credit was again the most temporary lull in the first part of 1995 notable feature on the liability side. but picked up again over the next three Behind these aggregate measures of quarters, lifted in part by a rebound in household assets and liabilities was the construction of new houses. Spend- some wide variation in the circuming for home computers and other elec- stances of individual households. Appretronic gear, which has been surging in ciation of share prices and the rally in recent years, continued to move up rap- the bond market provided a substantial idly in 1995. boost to the wealth of households hold- Consumer expenditures for nondur- ing large amounts of those assets, but ables increased less than 1 percent, in households holding few such assets real terms, during 1995 after a larger- benefited little from the rally in securithan-average gain in 1994. The growth ties prices. Some households also began of real expenditures on apparel slowed to experience greater financial pressure sharply after three years of sizable in 1995. Overall, however, the incidence advances, and outlays for food regis- of financial stress appears to have been tered only a small gain in real terms. limited, as sustained increases in per- Real expenditures for services— sonal income helped to facilitate timely which account for more than half of repayment of obligations. total consumer outlays—increased Consumers maintained relatively 2V6 percent during 1995, a moderately upbeat perceptions of current and future faster pace than in either 1993 or 1994. economic conditions during 1995. The After declining in 1994, outlays for measure of consumer confidence that energy services increased sharply in is prepared by the Conference Board 1995. Spending gains for other catego- held fairly steady at a high level. The ries of services proceeded at an average index of consumer sentiment compiled rate of slightly less than 2Vi percent by the University of Michigan Survey over the four quarters of 1995, just a Research Center edged down a little, on touch faster than the rate of rise in the net, from the end of 1994 to the end of two previous years. 1995, but its level also remained rela- Real disposable personal income tively high. By contrast, some survey grew nearly 3 percent during 1995, a questions dealing specifically with perslightly larger gain than in the previous ceptions of labor market conditions year. Nominal personal income pointed to increased concerns about increased slightly faster in 1995 than it job prospects during the year; although did in 1994, and growth of nominal dis- employment continued to rise in the posable income, which excludes income aggregate, announcements of job cuts taxes, held close to its 1994 pace. Infla- by some major corporations may have tion continued to take only a moderate rekindled consumers' anxieties about bite from increases in nominal receipts. job security. After little change during 1994, the Consumers tended to save a slightly real value of household wealth surged in higher proportion of their income in 1995. The value of assets was boosted 1995 than they had in 1994. Large substantially by huge increases in the increases in financial wealth usually Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1995 cause households to spend a greater decline in activity proved to be relashare of their current income, thereby tively short and mild. By March, mortreducing the share of income that is gage interest rates already were down saved. However, rising debt burdens and appreciably from the peaks of late 1994, increased nervousness about job pros- and midway through the second quarter, pects would work in the opposite direc- most indicators of housing activity were tion, and these influences may have off- starting to rebound. Sales of new homes set the effect of increases in wealth. surged to especially high levels during Some households also may have started the summer, and permits and starts of focusing more intently on saving for single-family units rose appreciably. In retirement, especially in light of the autumn, sales retreated from their increased political debate about curbing midyear peaks. Starts also slipped back the growth of entitlements provided somewhat during the autumn, but perunder government programs. Nonethe- mits continued to firm, climbing to a less, the personal saving rate for all of yearly high in December. 1995, while moving up a little, remained The intra-year swings in the various in a range that was relatively low by housing indicators left the annual totals historical standards. for these indicators at fairly elevated Residential investment fell in the first levels. Sales of existing homes in 1995 half of 1995 but turned up in the second were well above the annual average for half. Both the downswing in the first the 1980s, even after adjusting for half and the subsequent rebound after increases in the stock of houses. Starts midyear appear to have been shaped, at and sales of new single-family dwellleast in a rough way, by swings in mort- ings in 1995 were about one-tenth gage interest rates. Although housing higher than their averages for the 1980s. activity had been slow to respond to So far in the 1990s, demographic influincreases in mortgage interest rates ences have been less supportive of housthrough much of 1994, sizable declines ing activity than in the 1980s; the rate of in sales of new and existing homes household formation has lagged, in part started to show up toward the end of that because many young adults have deyear, and by early 1995, permits and layed setting up their own domiciles. starts also were dropping. However, the However, offsetting impetus to demand has come from the improved affordabil- Change in Real Income and Consumption Private Housing Starts Percent, Q4 to Q4 Millions of units, annual rate Disposable personal income Personal consumption expenditures Single-family illi 0.5 1991 1993 1995 1989 1991 ,995 NOTE. The data are derived from chained (1992) NOTE. The data are seasonally adjusted and come from dollars and come from the Department of Commerce. the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 82nd Annual Report, 1995 ity of housing, brought about in particu- pace of growth could not have been lar by declines in mortgage interest sustained given already high operating rates. levels. Inventory problems cropped up The construction of multifamily units, in some lines of manufacturing and trade after taking a notable step toward recov- in 1995 and prompted production adjustery in 1994, exhibited little momen- ments. Scattered structural problems tum in 1995. For the year as a whole, were apparent as well, especially in starts of multifamily units amounted to parts of retail trade in which intense about 280,000, compared with a tally competition for market share caused of about 260,000 in 1994 and a low of financial losses and eventual bankruptcy about 160,000 in 1993. Financing for for some enterprises. More generally, the construction of new multifamily however, businesses continued to profit projects appeared to be readily available from strategies that have served them in 1995. However, the national vacancy well throughout the 1990s—most notarate for multifamily rental units, while bly, tight control over costs and the rapid down from the peaks of a few years ago, adoption of new technologies achieved remained relatively high, and increases through heavy investment in high-tech in rents apparently were not sufficient to equipment. stimulate a significant gain in the con- In total, real business fixed investstruction of new units. ment increased IV2 percent during 1995 after a gain of 10 percent in 1994. Growth in business spending for equip- The Business Sector ment continued to outpace the growth Most indicators of business activity of investment in structures even though remained favorable in 1995, but strength the latter scored its largest gain of the was less widespread than it had been past several years. On a quarterly basis, in 1994, and growth overall was less investment remained very strong robust. The output of all nonfarm busi- through the first quarter of 1995. After nesses rose slightly less than 2 percent slowing sharply in the spring, it then over the four quarters of 1995 after a picked up again in the third and fourth gain of 4 percent in 1994—the latter quarters but did not reach the pace seen early in the year. Businesses continued to invest Change in Real Business Fixed Investment heavily in computers in 1995. In real Percent, Q4 to Q4 terms, these expenditures rose nearly Structures 40 percent over the year, an increase Producer's durable equipment that was even larger than those of other 20 recent years. UJb Excluding computers, real investment 10 outlays increased less rapidly, on balance, than in 1994, and growth after the first quarter was quite small. In the equipment category, outlays for 10 LJ information-processing equipment other than computers moved up at an annual rate of about 13 percent in the first half 1991 1993 1995 of 1995, fell back a little in the third NOTE. The data are derived from chained (1992) quarter, and turned back up again in the dollars and come from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1995 1 1 year's final quarter. Spending for indus- rarily in the second quarter, but productrial equipment also rose sharply in the tion gains resumed thereafter, leading to first half of the year; it then fell moder- a rise of about 2Vi percent over the four ately in the second half. Real outlays quarters of the year. for transportation equipment followed a With capacity expanding rapidly and choppy pattern that resulted in little net production growth slowing, the rate of gain over the year as a whole. Real capacity utilization in industry turned investment in nonresidential structures down sharply in 1995, backing away moved up in each quarter, with gains from the high operating rates of late cumulating to an annual rise of 6 per- 1994. As of December 1995, the utilizacent; 1995 brought increased construc- tion rate in manufacturing was about tion of most types of nonresidential V2 percentage point above its long-term buildings. average. In the industrial sector, elevated lev- After rising rapidly during 1994, busiels of investment in equipment and ness inventories continued to build at a structures led to a gain of about 4 per- substantial pace in the early part of cent in industrial capacity. However, in 1995. By the end of the first quarter, real a turnabout from the outcome of the inventories of nonfarm businesses were previous year, output of the industrial about 5!/2 percent above the level of a sector rose considerably less rapidly year earlier. Meanwhile, strength that than capacity: A gain of VA percent in had been evident in final sales during total industrial production over the four 1994 gave way to more subdued growth quarters of 1995 was a sharp slowdown in the first quarter of 1995, and the ratio from a 1994 rise of more than 6V2 per- of inventories to sales rose. In the cent. Production of consumer goods fol- second and third quarters, the growth lowed an up-and-down pattern during of inventories slowed appreciably, and 1995 and rose less than Vi percent over another sharp downward step in the rate the year as a whole, the smallest annual of inventory accumulation took place in increase of the current expansion. The the fourth quarter. At year-end, signifioutput of business equipment advanced cant imbalances probably were present in each quarter, but a cumulative gain of in only a few industries. The potential 4l/2 percent for this category was smaller for wider inventory problems appears to than the increases of other recent years. Production of materials faltered tempo- Change in Real Business Inventories Percent, annual rate Industrial Production Index, 1987= 100 • • • i ll 120 I 1 1 \5 / •1 1 10 105 1991 1993 1995 NOTE. Total nonfarm sector. The data are seasonally i i i I 1 adjusted, derived from chained (1992) dollars, and come 1991 1993 1995 from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 82nd Annual Report, 1995 have been contained through a com- of 1995, dropping by the fourth quarter bination of production restraint late in to a level about 15 percent below the 1995, caution in ordering merchandise level in 1990. Both investment and confrom abroad, and discounting by some sumption were cut back. Outlays for retailers during the holiday shopping defense continued to contract, and nonseason. defense expenditures turned down, more Business profits rose further over the than reversing their moderate increase first three quarters of 1995. Economic over the four quarters of 1994. profits of all U.S. corporations increased Federal outlays in the unified budget, at an annual rate of nearly 11 percent, a which covers transfers and grants as pace similar to that seen over the four well as consumption and investment quarters of 1994. The profits of corpora- expenditures other than the consumptions from their operations in the rest of tion of fixed capital, rose 33A percent in the world moved up sharply, on net, and nominal terms in fiscal 1995, matching earnings from domestic operations also almost exactly the percentage rise of the continued to advance. The strongest previous fiscal year. Nominal outlays for gains in domestic profits came at finan- defense declined 3VA percent in both cial corporations and reflected, in part, fiscal 1995 and fiscal 1994. Outlays for an increased volume of lending by social security increased about 5 percent financial institutions, reduced premiums in both years. Spending for Medicare on deposit insurance at commercial and Medicaid continued to rise at rates banks, and rising profits of securities appreciably faster than the growth of dealers. nominal GDP. Net interest payments The economic profits earned by non- jumped in fiscal 1995 after three years financial corporations from their domes- of relatively little change, but working tic operations rose at an annual rate of in the other direction, net outlays for about 3Vi percent over the first three deposit insurance were more negative quarters of 1995 after three years in than in 1994 (that is, revenues from which the annual increases were 15 per- premiums and other sources exceeded cent or more. A moderation of output the payout for losses by a larger growth and a flattening of the rise in amount). Proceeds from auctions of profits per unit of output both worked to spectrum rights also helped to hold reduce the rate of growth in nominal down expenditures; like the premiums earnings at nonfinancial corporations in 1995. Nonetheless, with unit costs also moving up at a moderate pace, the share Change in Real Federal Expenditures on of the value of nonfinancial corporate Consumption and Investment output that ended up as profits changed Percert, Q4 to Q4 little, on net, in the first three quarters, holding in a range that was relatively high in comparison to the average profit share over the past couple of decades. The Government Sector At the federal level, combined real out- 1991 1993 1995 lays for investment and consumption fell NOTE. The data are derived from chained (1992) nearly 6l/2 percent over the four quarters dollars and come from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1995 13 for deposit insurance, these proceeds were experiencing earlier in the 1990s. enter the budget as a negative outlay. In Excluding social insurance funds, surthe first three months of fiscal 1996— pluses in the combined current accounts that is, the three-month period ended in of state and local governments were December 1995—federal outlays were equal to about Vi percent of nominal about 1 percent lower in nominal terms GDP in the first three quarters of 1995; than in the comparable period of fiscal this figure was more than double the 1995. Nominal outlays for defense average for 1991 and 1992, when budcontinued to trend down, and the spend- getary pressures were most severe. ing restraint embodied in continuing Even so, state and local budgets budget resolutions translated into sharp remain at the center of strongly competcuts in some nondefense outlays. ing pressures, with the demand for many Federal receipts rose IV2 percent in of the services that these governments fiscal 1995 after having increased 9 per- typically provide continuing to rise at a cent in fiscal 1994. In both years, cate- time when the public also is pressing for gories of receipts that are most closely tax relief. Although states and localities related to the state of the economy have responded to these pressures in showed sizable increases. With receipts different ways, the aggregate picture is moving up more rapidly than spending one in which expenditures and revenues in fiscal 1995, the federal budget deficit have continued to rise faster than nomifell for a third consecutive year, to nal GDP—but by smaller margins than $164 billion. Progress in reducing the in the early part of the 1990s. In total, deficit in recent years has come from the current expenditures of state and cyclical expansion of the economy, tax local governments, made up mainly of increases, nonrecurring factors such as transfers and consumption expenditures, the sale of spectrum rights, and adher- were equal to about HV2 percent of ence to the budgetary restraints embod- nominal GDP in 1995, up slightly from ied in the Budget Enforcement Act of the percentages of the two previous 1990 and the Omnibus Budgetary Rec- years and about \3A percentage points onciliation Act of 1993. higher than the comparable figure for The economic expansion also has 1989. Total receipts of state and local helped to relieve budgetary pressures governments were equal to about that many state and local governments 133/4 percent of nominal GDP in the first three quarters of 1995, a little above the Change in Real State and Local comparable percentages of the two pre- Expenditures on vious years and about VA percentage Consumption and Investment points higher than the percentage in Percent, Q4 to Q4 1989. State and local outlays for consump- Lilu tion and investment—the expenditures that are included in GDP—have been rising less rapidly than the current expenditures of these jurisdictions because GDP excludes transfer payments, which have been growing faster than other outlays. In real terms, combined state 1991 1993 1995 and local outlays for consumption and NOTE. The data are derived from chained (1992) investment increased about 2!/4 percent dollars and come from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 82nd Annual Report, 1995 over the four quarters of 1995. Real 1995. Hiring continued to expand investment expenditures, which consist briskly at firms that produce business mainly of outlays for construction, equipment. Metal fabricators also susmoved up almost 6 percent. By contrast, tained growth in employment but at a consumption expenditures, which are slower pace than in 1994. The number about four times the size of investment of jobs in transportation equipment outlays, rose less than V/i percent in declined, on net. real terms. In most other sectors of the economy, employment rose moderately last year. The number of jobs in construction Labor Markets increased 130,000 over the twelve The number of jobs on nonfarm payrolls months ended in December, a rise of increased VA million, or 1.6 percent, more than 3 percent. In the private over the twelve months ended in service-producing sector, which now December 1995. After a sharp rise dur- accounts for about three-fourths of all ing 1994, gains in employment began jobs in the private sector, employment to slow in the first quarter of 1995, and increased 1.7 million in 1995 after havthe second-quarter gain was relatively ing advanced 2.6 million in 1994. Estabsmall. Thereafter, increases picked up lishments that are involved in wholesale somewhat. Nearly 450,000 jobs were trade continued to boost payrolls at a added in the final three months of the year, a rate of gain that was about equal Labor Market Conditions to that for the year as a whole. Millions of jobs As in 1994, increases in payroll Net change in payroll employment employment in 1995 came mainly in the Total nonfarm private sector of the economy, but gains there were more mixed than those of 1994. In manufacturing, employment fell about 165,000 over the twelve months ended in December, reversing almost half of the previous year's gain. Losses were concentrated in industries that produce nondurables. A decline this J L L_ L past year in the number of jobs at Percent apparel manufacturers was one of the Civilian unemployment rate largest ever in that industry. Sizable reductions in employment also were reported by manufacturers of textiles, tobacco, leather products, and petroleum and coal. In many of these industries, cyclical deceleration of the economy in 1995 compounded the effects of adjustments stemming from longer-run structural changes. In contrast to the widespread contraction in employment 1989 1991 1993 1995 among producers of nondurables, em- NOTE. The data are from the Department of Labor. ployment at the manufacturers of dura- The department introduced a new survey of households in January 1994; unemployment data from that point on are ble goods increased slightly during not directly comparable with those of earlier periods. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1995 15 relatively brisk pace in 1995. Retailers tend to limit the growth of potential also added to employment but at a output, unless an offsetting rise is forthconsiderably slower rate than in 1994; coming in the trend of productivity within retail trade, employment at growth. So far in the current expansion, apparel outlets fell substantially last measured increases in productivity seem year, and payrolls at stores selling gen- to have followed a fairly typical cyclical eral merchandise dropped moderately pattern, with larger increases early in after a large increase in 1994. Providers the expansion and smaller gains, on of health services added slightly more average, in subsequent years. Overall, jobs than in other recent years. At firms however, this pattern has not yielded that supply services to other businesses, evidence of a significant pickup in the employment growth was sizable again longer-term trend of productivity in 1995 but less rapid than in either growth. of the two previous years; in this cate- The average unemployment rate for gory, providers of computer services all of 1995 was about Vi percentage expanded their job counts at an acceler- point below the average for 1994, and ated pace in 1995, but suppliers of it was only a little above the levels to personnel—a category that includes which the unemployment rate fell in the temporary help agencies—added jobs at latter stages of the long business expana much slower rate than in other recent sion of the 1980s. The low unemployyears. ment rates reached then proved to be Results from the monthly survey of unsustainable, as they eventually were households showed the civilian unem- accompanied by a significant step-up in ployment rate holding in a narrow range the rate of inflation, brought on in part throughout 1995, and the December by faster rates of rise in hourly compenrate—5.6 percent of the labor force— sation and unit labor costs. was near the midpoint of the range. Similar inflation pressures have not The proportion of working-age per- emerged in the current expansion. The sons choosing to participate in the labor employment cost index for hourly comforce edged down slightly, on net, over pensation of workers in private nonfarm the course of 1995. It has changed little, industries rose only 2.8 percent over the on balance, since the start of the 1990s. twelve months ended in December, the By contrast, the two previous decades smallest annual increase on record in a had brought substantial net increases in series that goes back to 1980. Hourly labor force participation, although wages increased 2.8 percent during the longer-term trends during that period past year, the same relatively low rate of were interrupted at times by spells of increase as in 1994. The cost of fringe cyclical sluggishness in the economy. benefits, prorated to an hourly basis, Two or three years ago, cyclical influ- rose only 2.7 percent last year, the ences also seemed to be a plausible smallest annual rise on record. With explanation for the lack of growth in the many firms still undergoing restructurparticipation rate in the current business ings and reorganizations, many of which expansion. But with the sluggishness have involved permanent job losses, persisting as job opportunities have con- workers probably have been more reluctinued to expand, the evidence is point- tant to press for wage increases than ing increasingly toward a slower rate of they normally would have been during a rise in the trend of labor force participa- period of tight labor markets. Also, tion. Slower growth in participation will firms have been making unprecedented Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 82nd Annual Report, 1995 efforts to gain better control over the of the two previous years. The increase rate of rise in the cost of benefits pro- in the total CPI in 1995 came in at vided to employees, especially those 23/4 percent, the third consecutive year related to health care. Although some in which it has been less than 3 percent. of these efforts may have only a one- In the aggregate, rates of price time effect on the level of benefit increase held fairly steady for both costs, groundwork also seems to have goods and services this past year. The been laid for slower growth of benefits CPI for commodities other than food over time than would otherwise have and energy rose PA percent over the prevailed. four quarters of 1995 after increases of V/2 percent in both 1993 and 1994. The last three-year period in which prices of Prices these goods rose by such small amounts Early in 1995, inflation pressures that came in the middle part of the 1960s. had started building in 1994 seemed to Apparel prices continued to decline last be gaining intensity. Indexes of spot year but not so rapidly as in the previous commodity prices continued to surge in year. Price increases for vehicles moderthe early part of last year, and in the ated. The 1995 rise in the CPI for serproducer price index, materials prices vices other than energy was 33A percent; recorded some exceptionally large although this increase exceeded the increases. Consumer prices also began 1994 rise by a slight amount, the results to exhibit some upward pressure, with for both years were among the smallest the index for items other than food and energy moving up fairly rapidly over the Change in Prices first four months of the year. Percent, Q4 to Q4 The surge in inflation proved to be Consumer relatively short-lived, however. The spot prices of industrial commodities turned down in the spring of the year and fell further, on net, after midyear. Price increases for intermediate materials slowed in the second and third quarters of 1995, and by the final quarter of the year these prices also were declining. Monthly increases in the CPI excluding food and energy slowed in May; Consumer excluding food and energy increases in this indicator of core inflation generally were small over the remainder of the year. The slowing of the economy after the start of the year appears to have cut short the buildup of inflationary pressures before they could have much effect on the underlying processes of wage and price determination. In the end, the rise in the core CPI from the final quarter of 1994 to the final 1989 1991 1993 1995 quarter of 1995 amounted to 3 percent, NOTE. Consumer price index for all urban consumers. an increase that differed little from those Based on data from the Department of Labor. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Economy in 1995 17 increases for this category in the last and survey responses about inflation three decades. prospects over the longer term came Trends in food prices and energy down more substantially. Although the prices remained favorable to consumers responses regarding expected inflation in 1995. The rise in food prices from the still tended, on balance, to run to the final quarter of 1994 to the final quarter high side of actual rates of price of 1995 was slightly more than 2Vi per- increase, the easing of inflation expectacent, almost exactly the same as the tions this past year provided another increases of the two previous years. The encouraging sign that inflation processes last yearly increase in food prices in that helped to undermine other recent excess of 3 percent came in 1990. In business expansions were in check as 1995, weather problems led to a decline 1995 drew to a close. • in crop production and to a surge in the prices of some crops, but this surge did not bring about widespread increases in food prices at the retail level. Livestock production continued to advance, helping to restrain price increases for meats and dairy products. Also, moderate rates of increase in the costs of nonfarm inputs that contribute heavily to value added continued to be an important anchor in the setting of food prices at the consumer level. In the energy area, prices at the consumer level fell 13A percent, on net, over the four quarters of 1995, more than reversing a moderate 1994 increase. Gasoline prices dropped nearly 5 percent, on net, over the four quarters of the year, and consumer prices of natural gas also declined appreciably. However, some upward pressures developed late in 1995, partly in response to unexpectedly cold temperatures that boosted fuel requirements for winter heating. All told, the price developments of 1995 appear to have left a favorable imprint on expectations of future rates of inflation, if results from various surveys of consumers and forecasters are an accurate reflection of the views held by the broader public. Monthly responses to the surveys tend to bounce around somewhat, but over 1995 as a whole, average readings of anticipated price increases one year into the future were slightly lower than those of 1994, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

19 Monetary Policy and Financial Markets in 1995 In 1995 the Federal Reserve had to total debt of domestic nonfinancial secadjust its policy stance several times to tors was relatively strong during the first promote credit market conditions sup- half of the year but moderated later in portive of sustained growth with low 1995. For the year, debt grew 5!/2 perinflation. At the beginning of 1995, cent, somewhat above the midpoint of some risk remained that inflation might its monitoring range. Initially, houserise. To provide additional insurance hold and nonfinancial business credit against that development, the Federal demands were concentrated in floating Open Market Committee (FOMC) tight- rate or short-term debt instruments. As ened reserve conditions in February, the yield curve flattened, credit demands raising the intended federal funds rate V2 percentage point, to 6 percent, U.S. Interest Rates thereby extending the episode of policy Percent firming that had begun one year earlier. Short-term As time passed, it became clear that these policy tightenings had been successful in containing inflationary pressures, and the System initiated XA point reductions in the federal funds rate in July and December. Most market interest rates had peaked before the policy tightening of February. During the spring, interest rates declined } I \ \ 1 1 1 1 1 i { i appreciably, as market participants Long-term increasingly came to believe that no 15 additional policy restraint would be Conventional mortgages forthcoming, and, indeed, that easing 12 might be in the cards. Mounting evidence that the growth of spending had downshifted and that price pressures were muted, along with greater hopes that substantial progress would be made U.S. government bonds toward reducing the federal budget defi- 1 1 1 I 1 I 1 I I 1 1 1 cit, contributed to the change in attitudes 1983 1987 1991 1995 and to the drop in interest rates, espe- NOTE. The data are monthly averages. cially longer-term rates. On balance, The federal funds rate is from the Federal Reserve. The rate for three-month Treasury bills is the market interest rates dropped 1 to 2!/2 percentrate on three-month issues on a coupon-equivalent basis age points during 1995, with the largest and is from the Department of the Treasury. declines registered on intermediate- and The rate for conventional mortgages is the weighted average for thirty-year fixed rate mortgages with level long-term securities. payments at major financial institutions and is from the The course of interest rates during the Federal Home Loan Mortgage Corporation. The rate for U.S. government bonds is their market year influenced overall credit flows and yield adjusted to thirty-year constant maturity by the their composition. The expansion of the Department of the Treasury. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 82nd Annual Report, 1995 Annual Rate of Change in Reserves, Money Stock, and Debt Aggregates Percent 1995 Item 1992 1993 1994 Year Ql Q2 Q3 Q4 Depository institution reserves ' Total 20.1 12.2 -1.3 -A.9 -3.7 -8.0 -1.2 -7.2 Nonborrowed plus extended credit . 20.3 12.2 -1.5 -4.9 -2.4 -8.6 -2.2 -6.7 Required 20.3 12.5 -5.2 -4.0 -7.0 -2.3 -8.0 Monetary base 2 10.4 10.5 8.4 4.1 6.0 5.7 1.7 2.7 Concepts of money3 Ml 14.3 10.5 2.4 -1.8 -.1 -.5 -1.5 -5.1 Currency 9.2 10.3 10.3 5.4 7.7 7.7 2.1 3.8 Demand deposits 17.8 13.3 A 1.4 -.1 .4 5.7 -.4 Other checkable deposits. 15.6 8.5 -1.9 -11.2 -7.0 -9.0 -11.7 -18.8 M2 1.8 1.4 .6 4.2 1.4 4.3 7.0 4.0 Non-Mi components -2.6 -2.4 -.3 7.2 2.2 6.6 11.0 8.1 Savings (including MMDAs) 14.5 2.9 -4.3 -3.4 -15.2 -9.2 3.5 7.8 Small denomination time deposits . -18.4 -10.3 2.5 14.9 22.6 21.6 8.4 4.2 Retail money market mutual funds -3.9 -.5 7.5 22.6 11.7 19.0 36.5 16.9 M3 .6 1.0 1.6 6.1 4.9 6.7 8.0 4.3 Non-M2 components -4.9 -.5 6.2 14.4 19.9 16.9 12.2 5.7 Large-denomination time deposits -15.5 -6.5 7.2 15.7 13.7 14.2 13.3 18.0 Institution-only money market mutual funds 18.5 -A3 -6.8 22.9 17.5 30.4 27.7 9.3 Repurchase agreements 5.5 23.3 13.3 4.7 32.3 7.6 -5.0 -15.1 Eurodollars -15.0 23.6 10.3 25.9 18.4 9.2 -12.9 Domestic nonfinancial sector debt . 4.7 5.2 5.2 5.5 5.4 7.0 4.6 4.5 Federal 10.7 8.4 5.7 4.4 5.1 5.4 4.6 2.3 Nonfederal 2.8 4.1 5.0 5.9 5.5 7.6 4.7 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. which have been subtracted all individual retirement 1. Data on reserves and the monetary base incorporate accounts (IRAs) and Keogh accounts at commercial adjustments for discontinuities associated with regulatory banks and thrift institutions; and balances in taxable and changes in reserve requirements. tax-exempt retail money market mutual funds (money 2. The monetary base consists of total reserves; plus funds with minimum initial investments of less than the currency component of the money stock; plus, for all $50,000), excluding IRAs and Keogh accounts. quarterly reporters, and for all weekly reporters without M3 is M2 plus large-denomination time deposits at all required reserve balances, the excess of current vault cash depository institutions other than those due to money over the amount applied to satisfy current reserve require- stock issuers; balances in institution-only money market ments. For further details, see the Federal Reserve's H.3 mutual funds (money funds with minimum initial invest- Statistical Release. ments of $50,000 or more); wholesale RP liabilities (over- 3. Ml consists of currency in circulation excluding night and term) issued by all depository institutions, net vault cash; travelers checks of nonbank issuers; demand of money fund holdings; and Eurodollars (overnight and deposits at all commercial banks other than those due to term) held by U.S. residents at all banking offices in depository institutions, the U.S. government, and foreign Canada and the United Kingdom and at foreign branches banks and official institutions, less cash items in the of U.S. banks worldwide, net of money fund holdings. process of collection and Federal Reserve float; and other For further details, see the Federal Reserve's H.6 Statisticheckable deposits, which consist of negotiable orders cal Release. of withdrawal and automatic transfer service accounts at 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 21 shifted to fixed rate, long-term debt cient to head off inflationary pressures. instruments. The growth of economic activity had Because depository institutions are not shown convincing signs of slowing important sources of short-term and to a more sustainable pace, and availfloating rate credit to households and able information, including a marked businesses, depository assets grew rap- rise in materials prices during the last idly early on and then backed off. The half of 1994, seemed indicative of need to fund the increase in assets, along emerging resource constraints and with declines in market interest rates building inflationary pressures. In these relative to yields on retail deposits, led circumstances, the FOMC agreed on a to the fastest growth in M2 and M3 Vi percentage point increase in the fedsince the late 1980s; M2 ended the year eral funds rate, and the Board of Goverin the top of its annual range, and M3 nors approved an equal increase in the was at the upper end of its range. In discount rate. contrast, Ml declined for the first time During the remainder of the winter since 1959, the beginning of the official and through the spring, incoming data series, as many banks introduced retail signaled that economic growth was sweep accounts that shift deposits from finally moderating. At first, it was interest-bearing checking accounts to unclear if the slowdown was temporary savings-type accounts to reduce reserve or if it was a lasting shift toward a requirements. sustainable rate of economic expansion. Adding to the uncertainty was a pickup of consumer price inflation and a The Course of Policy and pronounced weakening in the foreign Interest Rates exchange value of the dollar. At the The Federal Reserve entered 1995 hav- March meeting, the FOMC determined ing tightened policy appreciably during that it would be prudent to await furthe previous year. Short-term interest ther information before taking any addirates had risen more than 2l/z percentage tional policy actions, but it alerted the points from the end of 1993, and long- Manager of the System Open Market term rates were up 2 percentage points. Account that, if intermeeting action Policy tightening had been necessitated were to be required, the step would more by the threat of rising inflation posed by likely be to firm than to ease. unusually low real short-term interest By the May meeting, the accumulatrates earlier in the 1990s. Rates had ing evidence indicated that the threat of been kept low to counter the effects of rising inflation might be lessening. Ecoimpediments to credit flows and eco- nomic growth was being slowed by the nomic growth. But as these impediments efforts of businesses to correct inventory were reduced, the economy expanded imbalances that had developed earlier in at an unsustainable pace and margins of the year. However, the underlying trajecunderutilized labor and capital began tory of final sales was still uncertain. to erode. Ultimately, a continuation The FOMC determined that the existing of excessive demands on productive stance of policy was appropriate and resources and the resulting higher expressed no presumption as to the inflation would have produced strains, direction of potential policy action over threatening economic expansion. the intermeeting period. In early February the policy actions Intermediate- and long-term interest taken in 1994 did not appear to be suffi- rates had fallen throughout the winter Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 82nd Annual Report, 1995 and spring, as evidence accumulated meetings. Although inflation had that the expansion of economic activity improved, the slowdown had been was slowing and that inflationary pres- anticipated to a considerable extent. sures were ebbing. Furthermore, budget Moreover, uncertainties about federal discussions in the Congress seemed to budget policies and their effects on the foreshadow significant fiscal restraint economy remained substantial. over the balance of the decade, putting At the November meeting, the ecoadditional downward pressure on these nomic signals were mixed. Anecdotal rates. Short-term rates had declined less, information tended to suggest a softenbut in late spring, financial market par- ing in spending after the third quarter, ticipants had begun to anticipate an eas- but the extent of any slowing of ing of monetary policy. By midyear, the spending and inflation was unclear. three-month Treasury bill rate was down Although short-term rates remained slightly from its level at the beginning above long-term averages on an of the year, and rates on securities inflation-adjusted basis, substantial with maturities greater than one year rallies in bond and stock markets were had dropped as much as 2 percentage thought likely to buoy spending. Against points. this backdrop, the FOMC voted to Employment data released shortly maintain the existing stance of monetary after the May FOMC meeting were sur- policy. prisingly weak, and by the July meeting The generally positive news about it appeared that the growth of aggregate inflation and hopes for a budget agreeoutput had sagged markedly during the ment had helped propel the bond marsecond quarter as businesses sought to ket higher throughout the fall. By the keep inventories from rising to undesir- December meeting, intermediate- and able levels. This deceleration of output long-term interest rates were \3A to growth was accompanied by a softening 2Vi percentage points below their of industrial prices and a marked reduc- levels at the beginning of the year. The tion in the pace at which materials prices bond market rally, along with strong were rising. With the economy growing earnings reports, pushed equity prices more slowly than had been anticipated higher during the year, and by midand potential inflationary pressures re- December, equity price indexes were ceding, the FOMC voted to ease reserve up about 35 percent from levels at the pressures slightly with a lA percentage beginning of the year. Since the last point decline in the intended federal easing in July, inflation had been funds rate. somewhat more favorable than antici- Although financial market partici- pated, and the expansion of economic pants had anticipated a decline in the activity had moderated substantially federal funds rate at some point, bond after posting a strong third quarter. and equity markets rallied strongly With both inflation and inflation expecimmediately after the change in policy tations more subdued than expected, was announced. However, a pickup in and with the slowing in economic economic growth during the summer growth suggesting that price pressures made further reductions in the funds rate would continue to be contained, the appear less likely, and interest rates FOMC decided to reduce the intended backed up for a time. federal funds rate an additional The Committee did keep rates un- lA percentage point, bringing it to changed at the August and September 5 V2 percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 23 Credit and Money Flows many of which were eligible to be called in 1995. As those securities were called, In 1995 the debt of the domestic nonand with gross issuance light, the stock financial sectors grew only a bit faster of municipal securities contracted for a than it had in the previous year, although second consecutive year. Despite the debt growth in the first half of 1995 was overall reduction in debt outstanding, stronger than in the second. Credit supthe ratios of tax-exempt yields to taxplies remained plentiful: Banks continable yields jumped in the first half of the ued to be willing lenders, and in securiyear and, for long-term debt, held at an ties markets most interest rate spreads elevated level during the remainder of remained quite narrow. Debt burdens the year. This increase was associated for households increased, but except for with concerns about the demand for taxa few types of consumer credit oblifree municipal debt in light of proposals gations, delinquency rates remained at for changes in federal taxation that low levels. Rising equity prices bolwould sharply reduce the tax advantages stered the overall financial condition of of holding municipal bonds. households. Household borrowing remained ro- Federal debt rose about 4l/i percent in bust in 1995, and the ratio of household 1995, slightly less than in 1994. The debt to disposable personal income rose government's demands for credit were further. Even so, the financial condition restrained by shrinkage of about 20 perof this sector remained good on balance, cent in the deficit for the calendar year. although some signs of deterioration Debt growth also was slowed toward emerged. The rally in the domestic year-end by a Treasury drawdown of its equity markets supported household cash balance to keep borrowing within balance sheets by boosting net worth the $4.9 trillion debt ceiling. sharply. In addition, delinquency rates State and local government debt fell on home mortgages and closed-end 41/2 percent—more than in 1994. A few consumer loans at banks, while rising, years earlier, municipalities had taken remained at low levels. Other indicators, advantage of low long-term rates to prehowever, provided evidence that some refund a substantial volume of issues, households were likely beginning to Total Domestic Nonfinancial Debt Delinquency Rates on Household Loans Trillions of dollars Percent Closed-end consumer Actual loans at banks 14.0 3% 1.5 Monitoring range Mortgages Auto loans at 13.0 finance companies I M I 1 1 1 1 1 1 1 ill 1 1 1 i M 1 i 1 I 1 1975 1985 1995 NOTE. The data for closed-end consumer loans are 1994 1095 from the American Bankers Association; for auto loans, NOTE. The range was adopted by the FOMC for the from the Federal Reserve; and for mortgages, from the period from 1994:Q4 to 1995:Q4. Mortgage Bankers Association. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 82nd Annual Report, 1995 experience increased financial pressures. -term debt. Despite the increase in credit For instance, delinquency rates on credit demands, interest rate spreads of private card debt held by banks and on auto investment-grade securities over compaloans booked at captive finance compa- rable Treasuries widened only slightly nies rose sharply. Furthermore, the aver- and remained narrow by historical stanage household debt service burden— dards, suggesting that lenders continued calculated as the share of disposable to view balance sheets of nonfinancial income needed to meet required pay- corporations as remaining healthy on the ments on mortgage and consumer whole. Spreads on below-investmentdebt—continued to rise last year. By grade debt rose more sharply but stayed year-end, this measure of debt burden well beneath levels reached early in the had reversed about one-half of the decade. decline it posted earlier in the decade. Commercial banks met a significant The average debt service burden of portion of the increase in business credit nonfinancial corporations—the ratio of demands last year, which, in turn, connet interest payments to cash flow—also tributed to the rapid expansion of bank rose last year, but it remained well balance sheets. Banks funded a portion beneath the most recent peak, reached in of the loan increase by reducing their 1990. The increase in debt burden was securities holdings, although higher in part associated with the relatively market prices of securities and offstrong growth of the debt of nonfinan- balance-sheet contracts left reported cial businesses. This sector's debt securities holdings slightly higher for growth was especially robust early in the year. In fact, bank security holdings the year, when business fixed invest- relative to the size of their balance ment picked up further and inventory sheets remained elevated and, together accumulation was rapid. Debt issuance with banks' strong capital positions, was also boosted by the rising wave indicated that late in the year banks were of mergers, although a good number well positioned to continue accommoinvolved stock swaps. Financing needs dating the credit demands of households fell back later on as investment growth and businesses. Although qualitative slowed and profits increased. Funding information suggested that banks were patterns also shifted as bond yields fell, no longer reducing the standards they and firms relied more heavily on longer- applied to businesses seeking loans, Stock of M3 Stock of M2 Billions of dollars Billions of dollars Actual 6% 4600 5% +** 3700 Actual ****** ^ 4500 3600 . 4400 2% *m£?-~ 7 " i% 3500 i 4300 1 Range Range t i it \ \ \ \ \ \ \ \ 1 i i 1 i i i i i J i i j i i 1994 1995 1994 1995 NOTE. The range was adopted by the FOMC for the NOTE. The range was adopted by the FOMC for the period from 1994:Q4 to 1995:Q4. period from 1994:Q4 to 1995:Q4. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Financial Markets 25 some easing of credit terms continued, deposit insurance premiums, which with interest rate spreads on business made large time deposits a more attracloans narrowing further. Growth of real tive source of funds, probably contribestate loans held by banks slowed over uted to this shift. Late in the year, the year as the share of fixed rate mort- branches and agencies of Japanese gages in total originations rose with the banks, facing some resistance in U.S. decline in long-term rates. Banks tend to funding markets, ran off time deposits securitize fixed rate mortgages more while continuing to increase their fundthan adjustable rate loans. Consumer ing from overseas offices. loans on the books of banks began the M2 rose as lower market interest rates year growing at very high rates; this and a flatter yield curve increased the growth decelerated throughout 1995 as relative attractiveness of retail deposits.1 the volume of securitization increased. As is typical, deposit interest rates, and In response to rising delinquency rates, to a lesser extent returns on money marsome banks tightened terms and stan- ket mutual funds, adjusted slowly to dards for consumer loans toward the end declines in market rates last year. Howof 1995. ever, falling interest rates for compa- Total assets of thrift institutions are rable maturity market instruments were estimated to have risen slightly last year. not the whole story for the growth of Growth at healthy thrifts more than off- M2. As the yield curve flattened, the set a substantial transfer of thrift assets relative gains from holding longer-term to commercial banks through mergers. assets with less certain price behavior The revival of growth in thrift assets, fell and probably strengthened housealong with the strong showing of bank hold demand for components of M2. credit, helped to nudge up depository The velocity of M2 was little changed credit as a share of domestic nonfinan- last year after having increased substancial debt for the second straight year tially during the previous three years. after fifteen years of declines. Banks and Ml fell almost 2 percent in 1995, the thrifts still account for more than one- first annual decline in the Board's offithird of all credit to nonfinancial sectors. cial series, which dates back to 1959. Banks and thrifts funded a large share of their asset growth with deposits, and 1. In February 1996 M2 was redefined to M3 grew 6 percent. The non-M2 portion exclude overnight RPs and overnight Eurodollars of M3 was especially strong, in part (they remain in M3); the historical M2 data prebecause depository institutions substi- sented here exclude those instruments. tuted large time deposits for nondeposit The instruments were first included in M2 sources of funds. The sharp reduction in in 1980 because they were being substituted for demand deposits as businesses were in the process of managing their cash holdings more closely. Stock of Ml Since then, other uses of overnight RPs and Euro- Billions of dollars dollars have become more dominant. Moreover, while RPs and Eurodollars are only 3 percent of M2, they contribute substantially to the short-run volatility of that aggregate. Removing these components from M2 should make the weekly levels of the aggregate less volatile and reduce the reporting burden on banks that have had to distinguish between overnight and term RPs and Eurodollars. On a monthly and quarterly basis, the relationships of the two measures of M2 to income and 1994 1995 interest rates are almost indistinguishable. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 82nd Annual Report, 1995 Sweeps of deposits from reservable The runoff in reserve balances held checking accounts, a component of Ml, the growth of the monetary base to to nonreservable money market deposit 4 percent in 1995. In addition, currency accounts were a major influence. With- growth slowed, primarily because of out these sweeps, Ml would have risen reduced shipments abroad. Foreign 1 percent. By the end of last year, demand moderated with the stabilizasweeps had spread to thirty-two bank tion of financial conditions in some holding companies, and the initial countries where dollars circulate widely. amounts swept by these programs to- Indeed, reduced demands from abroad taled $54 billion. The corresponding contributed to a rare decline in the curdecline of more than $5 billion in rency component of Ml this past sumrequired reserves largely showed mer, the first decrease since the early through to reserve balances maintained 1960s. The demand for existing Federal at Federal Reserve Banks. As banks Reserve notes also slackened in anticicontinue to introduce retail sweep pro- pation of the introduction of a newly grams in the future, the aggregate level designed $100 bill that will be more of required reserve balances will tend to difficult to counterfeit. • fall further. Although it has not happened yet, one possible consequence of the declining required reserve balances is greater instability in the aggregate demand for reserves and in overnight interest rates. As a case in point, a cut in reserve requirements at the end of 1990 produced unusually low levels of required reserve balances in 1991; in turn, as banks' volatile clearing needs began to dominate the demand for reserves, the federal funds rate began exhibiting much greater variability, thereby making daily reserve demand more difficult to estimate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

27 International Developments Economic activity in most major foreign Among developing countries, ecoindustrial countries decelerated sharply nomic growth remained robust in most in 1995 from the robust growth recorded of those in Asia, in line with the experiin 1994. By contrast, Japan evidenced ence of the last several years. In Latin some provisional signs of recovery as America, gains in output were more 1995 progressed, after registering subdued in 1995 than in recent years. almost no growth during the previous Mexico's economy contracted sharply three years. in response to policies adopted after the With slack in the slowing European collapse of the peso late in 1994; the and Canadian economies and with developments in Mexico dampened Japan's recovery still tentative, inflation confidence throughout Latin America. remained low in 1995. On average, con- Output accelerated in much of Eastern sumer prices rose about P/4 percent over Europe; in most parts of the former the year in the six major foreign indus- Soviet Union, the prolonged shrinkage trial countries, roughly the same rate as in activity abated somewhat. Economic in 1994.1 growth in African countries was mixed, but the region as a whole maintained the moderate rate achieved in 1994. Growth 1. The six countries are Canada, France, Gercontinued to be slow in the Middle East. many, Italy, Japan, and the United Kingdom. The U.S. trade deficit in goods and services amounted to $111 billion in Exchange Value of the Dollar 1995, close to the 1994 level of and Interest Rate Differential $106 billion. U.S. income growth in Percentage points Ratio scale, December 1973 = 100 1995 was similar to the average for the Price adjusted country's major trading partners, but exchange value of the dollar as is typically the case, comparable increases in income stimulated U.S. imports more than U.S. exports. The dol- 80 lar's depreciation during 1994 and early interest rate differential 1995 worked in the opposite direction, U.S. minus foreign tending to boost exports and hold down imports. Overall, the result of these offsetting tendencies was that the value of 1980 1985 1990 1995 exports grew somewhat faster than the NOTE. The exchange value of the U.S. dollar is its value of imports. However, with imports weighted average exchange value in terms of the curren- significantly exceeding exports at the cies of the other G-10 countries using 1972-76 total trade start of the year, these growth rates weights. Price adjustments are made using relative consumer prices. translated into a slightly larger deficit. The interest rate differential is the rate of long-term The current account deficit was U.S. government bonds minus the weighted-average rate on comparable foreign securities, both adjusted for $153 billion in 1995, about the same as expected inflation; expected inflation is estimated by a in 1994. In contrast to 1994, a large thirty-six month moving average of consumer price inflaportion of the concomitant net capital tion using staff forecasts of inflation where needed. The data are monthly. inflows in 1995 represented accumula- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 82nd Annual Report, 1995 tions of foreign official assets in the half of the year as currency appreciation United States. Substantial amounts of earlier in 1995 slowed exports and private capital moved in both directions, declining business and consumer confibut the resulting net inflow was smaller dence curtailed spending. By contrast, than in 1994. the economic situation in Japan The foreign exchange value of the appeared to improve late in the year. dollar declined about 5 percent on A firming in the growth of domestic balance in 1995 in terms of a trade- demand stimulated by easier monetary weighted average of the other G-10 cur- and fiscal policies over the course of the rencies.2 The dollar's value fell sharply year was only partly offset by a welover the first four months of the year, come ongoing adjustment in the exterdeclining almost 10 percent. Some indi- nal surplus in response to the appreciacations that U.S. growth might be slow- tion of the yen. ing contributed to expectations that fur- Unemployment rates continued to ther increases in U.S. interest rates were decline during 1995 in the United Kingless likely as the year progressed; in addition, increasingly acrimonious trade Changes in GDP, Demand, and Prices disputes between the United States and Percent, from previous year Japan clouded prospects for an early and Gross domestic product harmonious resolution of those prob- 6 lems. The crisis in Mexico also weighed Foreign G-10 on the dollar's value, partly because of 4 2 its negative effects on U.S. trade with U.S. + Mexico. The improvement in the dol- \y 0 lar's value later in the year developed when weaknesses in the economies of Total domestic demand other major industrial countries began to emerge and interest rates there declined relative to those in the United States. Foreign Economies _L Other than in Japan, economic activity Consumer price index in the major foreign industrial countries slowed in 1995. In Canada, where economic activity had been particularly vigorous through 1994, the slowing in growth in part reflected weaker U.S.. growth; but it also resulted from domestic macroeconomic policies designed to 1991 1993 1995 prevent the reemergence of inflationary NOTE. Data for the foreign G-10 countries are from pressures. In Germany and France, national sources. The data are weighted by the countries' growth dropped markedly in the second 1987-89 GDP as valued after adjusting for differences in the purchasing power of their currencies; GDP and domestic demand are in constant prices. Data for the United States are from the Departments of 2. The Group of Ten consists of Belgium, Can- Commerce and Labor. GDP and domestic demand are ada, France, Germany, Italy, Japan, the Nether- derived from chained (1992) dollars. lands, Sweden, Switzerland, the United Kingdom, For GDP and domestic demand, the data are quarterly; and the United States. for consumer prices, the data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 29 dom and Canada, where recoveries have took forms that boosted the deficit been under way for several years. In significantly. continental Europe, labor market condi- Long-term interest rates declined in tions were mixed, with the rate of unem- all foreign G-10 industrial countries in ployment increasing in some countries. 1995, after increasing sharply in 1994. Rising unemployment refocused atten- On average, rates on government instrution on a vexing problem of the last ten ments with a maturity of ten years years in Europe—structural unemploy- dropped nearly 150 basis points. This ment or unemployment related to causes development was due in large part to other than the business cycle. The slight weakening economic growth, which acceleration of activity in Japan did not also motivated foreign monetary prevent the unemployment rate there authorities to ease short-term interest from rising to a post-war high of 3.4 per- rates about 90 basis points on average. cent. Under persistent weakness in the In Japan, short-term rates were cut economic situation, further erosion in more—almost 200 basis points—in Japan's lifetime employment system order to support the flagging recovery. was apparent. By contrast, authorities in the United The slowdown in 1995 sustained or Kingdom and Italy tightened monetary increased gaps between actual output policy to counter inflation pressures. and estimated potential in most major Current account positions improved foreign industrial countries. The robust in a number of foreign industrial counpace of foreign economic growth in tries in 1995. Canada's deficit narrowed 1994 had reduced but not eliminated substantially because exports remained these differentials. Diminishing pressure strong despite slower U.S. activity. With on output gaps helped contain inflation; the yen stronger on average during the on average, consumer prices in the year and economic activity improving, foreign G-10 economies rose slightly Japan's large external surplus declined less than 2 percent over the year, as in to about $110 billion, well below the 1994. In Japan, where the appreciation level of $130 billion registered in both of the yen damped any upward pressure 1993 and 1994. The surpluses in Italy on prices, consumer prices declined and Sweden rose further under the influabout Vi percent. ence of earlier currency depreciations, General government budget deficits which boosted the competitiveness of narrowed further in Canada and in traded goods for these countries. Europe, except Germany, despite the Economic growth in the major develslowing pace of economic growth in oping countries in 1995 was also more 1995. A number of countries pursued moderate on average than the strong policies aimed at reducing their defi- pace recorded in 1994. Mexico's econcits. Much of the impetus to fiscal con- omy contracted substantially, with solidation in Europe was provided by important effects on its trade with the the deficit criterion specified in the United States. In response to the Decem- Maastricht Treaty. Countries wishing to ber 1994 collapse of the peso, Mexican participate fully in the proposed Euro- authorities adopted policies to counter pean Monetary Union—now scheduled inflation and significantly reduce the for early 1999—must reduce their gen- large current account deficit. Under eral government deficits to 3 percent these restraints, output fell 7 percent, of gross domestic product by 1997. In declining even more sharply early in the Japan, expansionary policy measures year but recovering a bit in the fall. The Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 82nd Annual Report, 1995 merchandise trade balance improved conductors rose sharply, but imports of from a substantial deficit in 1994 to other machinery, consumer goods, and moderate surplus in 1995, and the cur- industrial supplies slowed. Import prices rent account moved nearly into balance. increased about IVi percent. Together The financial turbulence in Mexico with low inflation in most U.S. trading helped impose downward pressure on partners, a leveling off of world non-oil exchange rates in Argentina and Brazil, commodity prices after a rapid rise in inducing authorities there to tighten 1994 helped restrain the rise in import macroeconomic policies. These devel- prices that might otherwise have been opments led to a recession in Argentina, associated with the dollar's weakness. which had had several years of rapid Foreign official holdings of financial growth, and caused a pronounced decel- assets in the United States rose a record eration of economic activity in Brazil. $110 billion in 1995, the result of both Economies in Asia on average contin- intervention by some industrial counued their rapid 1994 pace of growth. tries and substantial reserve accumula- Although the expansion was driven tion by several developing countries in largely by strong internal demand, espe- Asia and Latin America. cially for investment, most countries also benefited from very fast export U.S. International Trade growth. The marked acceleration in Billions of dollars exports was attributable at least in part to depreciation of the currencies of these Balances countries in terms of the yen and European currencies early in the year. Activity again expanded more than 10 percent in China in 1995, but tight credit conditions dampened investment demand and slowed growth. Ratio scale, billions of chained (1992) dollars Trade in goods and services U.S. International Transactions 800 Real exports of U.S. goods and services Imports grew 61/2 percent over the four quarters 600 of 1995. Agricultural exports remained high, and the volume of computer exports continued to rise sharply. Exports of machinery and industrial supplies Ratio scale. 1992 = 100 also were robust. While exports to GDP price index (chain-type) Mexico were declining in response to the economic crisis there, shipments to developing countries in Asia were growing rapidly, and exports to Western Non-oil merchandise imports Europe, Canada, and Japan were also increasing. Imports of goods and services J L } i 1 I 1989 1991 1993 1995 increased 414 percent in real terms during 1995, a slower rate of advance than NOTE. The data are from the Department of Commerce; they are quarterly and seasonally adjusted. Data in 1994. Imports of computers and semi- for trade are at annual rates. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 31 Foreign private assets in the United levels. However, despite the rapid rise States also rose rapidly in 1995, in in U.S. stock prices in 1995, foreign net keeping with a continuing trend toward purchases of U.S. corporate stocks were internationalization of securities mar- not nearly as strong as at times in the kets. Net purchases of nearly $100 bil- past. lion of U.S. Treasury securities by U.S. net purchases of foreign securiprivate foreigners far exceeded such ties in 1995 rebounded strongly after a purchases in previous years. As in very weak first quarter. For the year as a 1994, much of this activity was chan- whole, net purchases of stocks in Japan neled through Caribbean financial cen- accounted for almost 40 percent of total ters and was probably associated with U.S. purchases of foreign stocks. U.S. the transactions of hedge funds. Net pur- investors showed little interest in adding chases of U.S. government agency and to their holdings of stocks or bonds from corporate bonds also reached record emerging markets in Latin America, at U.S. International Transactions Billions of dollars, seasonally adjusted Quarter Year Transaction 1994 1995 1994 1995 P Q4 Ql Q2 Q3 Q4P Goods and services, net -106 -111 -27 -29 -33 -27 -22 Exports 701 784 185 189 194 198 202 Merchandise 502 575 134 138 143 145 149 Services 199 209 51 51 52 53 53 Imports 807 895 212 218 228 225 224 Merchandise 669 749 177 183 191 188 187 Services 139 146 35 36 36 37 37 Investment income, net -9 -11 -5 -2 -3 -5 -2 Direct investment, net 45 59 11 14 15 13 17 Portfolio investment, net -54 -71 -16 -16 -17 -18 -19 Unilateral transfers, private and government, net -36 -30 -11 -7 Current account balance -151 -153 -43 -38 -43 -40 -31 Private capital flows, net 121 46 29 3 -11 51 3 Bank-related capital, net (outflows, -) 115 -39 18 -30 -28 _7 25 U.S. net purchases (-) of foreign securities -50 -94 -15 -7 -22 -34 -31 Foreign net purchases (+) of U.S. securities 92 194 36 46 51 68 29 Treasury securities 34 99 26 30 30 37 2 Corporate and other non-Treasury bonds 56 82 13 20 19 26 17 Corporate stocks 3 13 -3 -4 2 5 10 U.S. direct investment abroad -49 -97 -12 -23 -17 -16 -41 Foreign direct investment in United States 49 75 20 17 13 24 21 Other corporate capital flows, net -37 n.a. -18 -1 17 n.a. Foreign official assets in United States (increase, +) 39 22 38 39 11 110 U.S. official reserve assets, net (increase, -) 5 -5 -3 -2 -10 U.S. government foreign credits and other claims, net -1 Total discrepancy -14 7 14 19 19 -49 17 Seasonal adjustment discrepancy 0 0 1 6 * -1 1 Statistical discrepancy -14 7 13 13 19 -42 17 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

32 82nd Annual Report, 1995 least in part because of heightened cau- the Dutch guilder and the Belgian and tion brought on by financial conditions French francs. The French currency in Mexico. moved with the mark on balance, but at Mergers and acquisitions added sub- times it came under severe downward stantially to the inflow of funds from pressure relative to the mark, particuforeign direct investors and also to direct larly during two periods of intense investment outflows. Inflows reached political activity in France—the presi- $75 billion, surpassing the record pace dential election in the spring and the of 1989. U.S. direct investment abroad labor unrest that developed near the end of $97 billion was even larger than for- of the year. The Canadian dollar, which eign direct investment in the United showed little net change versus the U.S. States and also surpassed the previous dollar for the year as a whole, also came peak. This outflow was stimulated in under considerable pressure at the time part by sales of government-owned enti- of the referendum on Quebec indepenties to the private sector in some foreign dence in October. countries. The exchange rate between the dollar and the yen fluctuated over a very wide range in 1995. Early in the year the Foreign Exchange Developments dollar fell sharply, to an historically low One factor behind the dollar's weakness level of 83 yen in May. This developmay have been the ongoing large U.S. ment was doubtless the product of a current account deficit. Two other devel- number of factors, but the ongoing huge opments that appeared to contribute to trade imbalance between the United downward pressure on the dollar early States and Japan probably played an in the year were the possibility of a important role. Market participants spillover from the Mexican financial might have been concerned that any crisis and uncertainty about U.S. govern- breakdown in trade negotiations bement action to reduce the federal budget tween the two countries could lead to deficit. The dollar's partial recovery an appreciation of the yen as a way to later in the year may have been aided by reduce this imbalance. After a trade the apparent containment of the Mexi- agreement between the United States can financial situation and some signs of and Japan was reached at the end of movement toward a balanced U.S. bud- June, the dollar began to move up get over the medium term. The dollar's depreciation is also consistent with the Exchange Value of the Dollar decline in long-term interest rates in the versus Selected Currencies United States relative to those abroad December 1993= 100 during 1995; over the full year, the U.S. rate declined about Vi percentage point more than the average of foreign G-10 Canadian dollar 100 rates. The dollar appreciated slightly versus the pound and yen but declined in value 90 when measured against other foreign Japanese yen G-10 currencies. The dollar fell about 8 percent in terms of the mark and the \ \ i i i \ i \ \ i i 1995 other major currencies that are linked by NOTE. Foreign currency units per dollar. The data are the European exchange rate mechanism, monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 33 strongly and eventually reversed all its During January and February 1995, earlier losses. The appreciation was the Bank of Mexico drew a total of encouraged by U.S. statements favoring $V/2 billion on its swap line with the a strong dollar and occasional U.S. inter- Federal Reserve, of which $650 milvention sales of yen, sometimes in con- lion was outstanding at the end of the junction with Japanese authorities. Fur- year (and was repaid in full the next ther moves to ease Japanese monetary month). • policy also helped the dollar's rebound. Adjusted for relative changes in consumer prices, the dollar also depreciated in terms of nearly all the currencies of the major US. trading partners in Latin America and East Asia. However, in by far the largest movement of 1995, the dollar appreciated sharply relative to the Mexican peso—over 90 percent in nominal terms and about 30 percent after adjusting for the high Mexican inflation rate. This shift balanced the losses elsewhere and left the dollar about 1 percent stronger in terms of the average price-adjusted value of major developing countries' currencies. Foreign Exchange Operations U.S. authorities intervened to support the dollar on several occasions in 1995, sometimes in conjunction with other central banks. The largest operations took place in the spring when the dollar was under heavy downward pressure relative to the yen. For the year as a whole, U.S. authorities sold a total of $3,303 million of yen and $3,250 million of marks. Intervention in dollars by fifteen foreign central banks amounted to net purchases of $66 billion. At year-end, the System held $21,099 million of foreign currencies valued at current exchange rates. No Treasury balances were warehoused with the System during 1995. The System realized $964 million in profits on sales of foreign currency during 1995 and recorded a translation gain of $41 million on foreign currency balances. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

35 Monetary Policy Reports to the Congress Given below are reports submitted to nomic growth. By early 1994, however, the Congress on February 21 and July the expansion clearly had gathered 19, 1995, pursuant to the Full Employ- momentum, and maintenance of the prement and Balanced Growth Act of 1978. vailing stance of policy would eventually have led to rising inflation that, in turn, would have jeopardized economic Report on February 21, 1995 and financial stability. Taking account of anticipated lags in the effects of policy changes, the Federal Reserve began to Monetary Policy and the firm money market conditions last Feb- Economic Outlook for 1995 ruary. The Federal Reserve continued to The U.S. economy turned in a strong tighten policy over the course of the performance in 1994. Real gross domes- year and into 1995, as economic growth tic product increased 4 percent over the remained unexpectedly strong, eroding four quarters of the year. The employ- remaining margins of unused resources ment gains associated with this rise in and intensifying price increases at early production outpaced growth of the labor stages of production. Developments in force by a sizable margin, and the unem- financial markets—for example, easier ployment rate thus declined substan- credit availability through banks and a tially. Price increases picked up in some decline in the foreign exchange value of sectors of the economy in 1994 as labor the dollar—may have muted the effects and product markets tightened, but of the tightening of monetary policy. broader measures of price change Short-term interest rates have showed inflation holding fairly steady: increased about 3 percentage points The consumer price index increased since the start of 1994, with the federal about 23/4 percent over the year, the funds rate rising from 3 percent to 6 persame as the rise during 1993. Signs that cent. Other market interest rates have growth is moderating have emerged in risen between 1 Vz percentage points and the past month or so, but the bulk of the 3 percentage points, on net, with the evidence suggests that the economy con- largest increases coming at intermediate tinues to advance at an appreciable pace. maturities. Through much of the year, Federal Reserve policy during 1994 intermediate- and long-term rates were and early 1995 was aimed at fostering lifted by more rapid actual and expected a financial environment conducive to economic growth, fears of a pickup in sustained economic growth. As the inflation, and market expectations of economy moved back toward high rates additional policy moves. However, a of resource utilization, pursuit of this further substantial tightening in Novemaim necessitated acting to prevent a ber and some tentative signs of moderabuildup of inflationary pressures. Fed- tion in economic activity around yeareral Reserve policy had remained very end and in early 1995 appeared to accommodative in 1993 in order to off- reduce market concerns about increased set factors that had been inhibiting eco- inflation pressures and additional Fed- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 82nd Annual Report, 1995 eral Reserve policy actions. As a result, ting back on new bond issues. Similarly, long-term rates declined, on net, from households turned increasingly to mid-November through mid-February. adjustable-rate mortgages as rates on The foreign exchange value of the fixed-rate mortgages increased substandollar in terms of other Group of Ten tially. Banks encouraged the shift of (G-10) currencies declined almost households and businesses to bank bor- 6V2 percent last year, even as the econ- rowing by easing lending standards and omy picked up and interest rates rose. not allowing all of the rise in market The positive effects on the dollar that rates to show through to loan rates. By would normally have been expected contrast, federal borrowing was slowed from higher U.S. interest rates were in 1994 by policies adopted in previous offset in large part by upward move- years to narrow the federal deficit, as ments in long-term interest rates abroad. well as by the effects of the strong econ- Indeed, foreign long-term rates in- omy on tax receipts and spending. Taken creased as much on average as U.S. together, the debt of all nonfinancial rates during 1994, owing to much more sectors expanded 5Vi percent, about the rapid than expected growth abroad, same as the increase of a year earlier especially in Europe. Concerns about and a figure that was in the middle por- US inflation may have contributed to tion of the 1994 monitoring range of the weakness in the dollar in the middle 4 percent to 8 percent. part of last year; late in the year, the Growth in the broad monetary aggredollar rallied for a time, as tighter mone- gates remained subdued in 1994. M3 tary policy apparently reduced inves- expanded about 1 Vi percent, well within tors' inflation fears. The dollar weak- its 0 percent to 4 percent target range ened again, however, in early 1995, and slightly more than its increase in perhaps reflecting the emerging indica- 1993. M3 was buoyed by growth of tors of moderating growth in the United more than 7 percent in large time depos- States. In addition, financial markets its, as banks turned to wholesale marwere roiled early this year by severe kets to fund credit expansion. For the financial difficulties in Mexico. A sharp year, M2 rose only 1 percent, an depreciation of the peso had adverse increase that was at the lower bound of effects not only in Mexico but also in a its 1 percent to 5 percent target range. number of other countries, and these In contrast to 1992 and 1993, the slow developments also may have contrib- growth in M2, and the resulting further uted to the weakness of the dollar. substantial increase in its velocity (the Despite the rise in U.S. interest rates ratio of nominal GDP to the money in 1994, private-sector borrowing, abet- stock), was not a consequence of unusuted in part by more aggressive lending ally large shifts from M2 deposits to by intermediaries, picked up in support bond and stock mutual funds. Rather, it of increased spending. The debts of both seemed to reflect behavior similar to households and businesses grew at their that in earlier periods of rising shortfastest rates in five years. The step-up term market interest rates. During in growth of private debt was accom- such periods, changes in the rates availpanied by changes in its composition. able on retail deposits usually lag Businesses shifted toward short-term changes in market rates, providing an funding sources as bond yields rose, incentive to redirect savings from these increasing their bank borrowing and deposits to market instruments. These commercial paper issuance, while cut- shifts tend to have an especially marked Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 37 effect on Ml because yields on its conditions of reasonable price stability components either cannot adjust or if that aggregate's velocity resumes its adjust quite slowly to shifts in market historical pattern of no long-term trend. rates. Ml growth last year was 2lA per- M3 velocity has been on a steep upward cent; it had been lO1/^ percent in path in recent years, but the rate of 1993. Only continued strong growth increase might be expected to slow in in currency, much of which likely re- the near term. Part of the increase in M3 flected increased use abroad, supported velocity in the early 1990s resulted from Ml. weak growth of bank credit, in part reflecting substantial loan losses and consequent capital impairment, and the Money and Debt Ranges for 1995 contraction of the thrift sector as failed At its most recent meeting, the Federal institutions were liquidated. However, Open Market Committee (FOMC) the recent strength in bank credit and the reaffirmed the 1995 growth ranges for end of the contraction in thrift sector money and debt that were chosen on a credit suggest that M3 growth could provisional basis last July. The money pick up, perhaps appreciably, and its ranges—1 percent to 5 percent for M2 velocity could begin to level out. The and 0 percent to 4 percent for M3—are resumption of a more normal relationconsistent with the Committee mem- ship between M3 and nominal income bers' expectations of a slowing of nomi- might call for a technical adjustment of nal income growth as the expansion the target range for M3 at mid-year or in moves to a more sustainable pace but 1996. also rest on the anticipation of further The monitoring range for growth in increases in the velocities of these the debt aggregate in 1995 is 3 percent aggregates. The velocity of M2 is likely to 7 percent. This range is 1 percentage to be boosted by lagged effects of the point lower than the monitoring range in increases in short-term interest rates 1994, reflecting the more moderate path during 1994 and early 1995 and possi- anticipated for expansion in nominal bly by increased flows from M2 depos- spending and borrowing. Private-sector its into long-term mutual funds, as in- debt growth will likely remain fairly vestor concerns about capital market strong in the coming year, boosted by volatility recede. The M2 range also substantial capital investment as well as provides an indication of the longer-run merger and acquisition activity. Credit growth that could be expected under availability is unlikely to constrain private-sector borrowing, as banks continue to be eager to lend and as quality Ranges for Growth of Monetary spreads in financial markets remain and Debt Aggregates relatively narrow. The outlook for the Percent federal deficit suggests that Treasury Aggregate 1993 1994 1995 borrowing will be comparable to that in 1994. M2 1-5 1-5 1-5 The monetary and debt aggregates M3 0_4 0_4 0-4 Debt 4-8 4-8 3-7 will continue to be among the variables monitored by the Committee to inform NOTE. Change from average for fourth quarter of preceding year to average for fourth quarter of year indi- its policy deliberations. Given the uncercated. Ranges for monetary aggregates are targets; range tainties about the behavior of the velocifor debt is a monitoring range. Debt is of the domestic nonfinancial sector. ties of the aggregates, however, the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 82nd Annual Report, 1995 Committee will also need to continue rates probably will be showing up in assessing a wide variety of other finan- other interest-sensitive sectors as well. cial and economic indicators. Other influences also will be working to moderate the rate of growth. For example, large increases in real outlays Economic Projections for 1995 for consumer durables over the past The members of the Board of Governors three years, partly financed in recent and the Reserve Bank presidents, all of quarters by unsustainably rapid growth whom participate in the deliberations of in the volume of consumer credit, probthe Federal Open Market Committee, ably have exhausted most of the pent-up expect the economy to settle into a pat- demand that had accumulated when the tern of more moderate expansion in economy was sluggish early in the 1995, after a burst of growth that has 1990s. Similarly, business investment brought rates of resource utilization to in new equipment has been rising the highest levels since the latter part of extremely rapidly for some time and has the 1980s. Most of the Board members moved to quite a high level; businesses and Reserve Bank presidents expect the likely will be shifting to more moderate rise in real GDP over the four quarters rates of spending growth before too of 1995 to be in a range of 2 percent to long. Inventory investment seems likely 3 percent. to moderate as well, as sustained addi- Effects of the past year's increases tions to stocks at the pace of recent in interest rates probably will show quarters would almost surely generate through more strongly in the coming an unwanted backup of inventories at year, reflecting the typical lags between some point. Federal Reserve policy actions and In other areas, however, increased changes in the pace of economic growth. strength may be forthcoming. Nonresi- Residential building, especially of dential construction, which often tends single-family units, is the part of the to lag other sectors of the economy over economy in which those effects are the course of the business cycle, now likely to emerge earliest and stand out appears to be picking up steam. In most clearly, but reactions to the higher addition, net exports may be a less Economic Projections for 1995 Percent Federal Reserve governors and Reserve Bank presidents Measure Administration Central Range tendency Change, fourth quarter to fourth quarter' Nominal GDP 43/4-6'/2 5-6 5.4 Real GDP 2-3 VA 2-3 2.4 Consumer price index2 23/4-33/4 3-3 Vi 3.2 Average level, fourth quarter Unemployment rate3 5'/4-6 About 5'/2 5.5-5.8 1. Change from average for fourth quarter of preced- 3. Civilian labor force. Figures for the Administration ing year to average for fourth quarter of 1995. are annual averages. 2. All urban consumers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 39 negative factor in coming quarters than quarter of 1995, spans a range of 3 perthey were in 1994. Many foreign indus- cent to 3 V2 percent. trial economies entered the new year The economic prospects anticipated with considerable forward momen- by the governors and Reserve Bank tum; that should keep real exports of presidents for 1995 appear to be closely goods and services on a solid uptrend, in line with those of the Administration. even allowing for lower exports to The Administration's forecasts of real Mexico as a consequence of the peso's GDP growth and inflation are in the devaluation and the likelihood of little middle of the Federal Reserve's central or no growth in that country in 1995. tendency ranges, and the Federal Imports, meanwhile, should begin to Reserve forecasts of the unemployment slow as growth of demand in this coun- rate are centered near the low end of the try eases. annual range that was published in the The Board members and Reserve Economic Report of the President. Bank presidents expect that output Over the coming year, the Federal growth of the magnitude they anticipate Reserve will seek to foster continued will be accompanied by moderate economic expansion while avoiding the increases in employment and little provision of so much liquidity that the change in the unemployment rate. Fore- expected near-term step-up in inflation casts of the unemployment rate for the develops sustained momentum. Much fourth quarter of 1995 are tightly clus- progress has been made over the past tered around 5Vi percent. couple of business cycles in reducing An especially encouraging develop- the role that inflation plays in the ecoment in 1994 was that inflation remained nomic decisions of households and busirelatively quiescent even as the econ- nesses. Moving ahead, the challenge omy moved to high rates of resource will be to preserve and extend this utilization. However, the costs of materi- progress, given that the Federal Reserve als and components have been rising can best contribute to long-run prosperrapidly, squeezing profit margins in ity by establishing an environment of some sectors, and anecdotal reports of effective price stability. pressures on wages and finished goods Economic prospects for the long run prices have proliferated in recent will be further enhanced if the Congress months; increases in average hourly and the Administration succeed in makearnings and consumer prices picked up ing further progress in reducing the fedin January. Assessing the prospects, eral budget deficit. An improved outmembers of the Board of Governors and look for the federal deficit over the the Reserve Bank presidents think that remainder of this decade and beyond the most likely outcome for this year is could have significant, favorable effects that inflation will run somewhat higher in financial markets, including a shift in than in 1994. Such an outcome would long-term interest rates to a trajectory be consistent with patterns of price lower than that which would otherwise change during earlier periods when the prevail. Such a shift in long-term rates economy was operating at levels of would be an essential part of a process resource utilization like those seen in which a larger share of the nation's recently. The central tendency of the limited supply of savings would be Federal Reserve officials' CPI forecasts, channeled to productivity-improving measured in terms of the change from investment, thereby boosting growth in the final quarter of 1994 to the final output and living standards. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 82nd Annual Report, 1995 The Performance of the Economy goods and services edged down on net over the four quarters of 1994. Federal The economy recorded a third year of purchases of goods and services, which strong expansion in 1994. Real GDP had declined sharply in 1993, fell furgrew 4 percent over the four quarters of ther in 1994 as a consequence of actions the year, industrial output rose nearly taken in recent years to reduce the size 6 percent, and the number of jobs on of the federal deficit. Meanwhile, the nonfarm payrolls increased about real purchases of state and local govern- 3V2 million, the largest gain in ten years. ments rose only modestly. Although the Labor and product markets tightened expanding economy has provided states appreciably. Price pressures intensified and localities with a stronger revenue in the markets for materials, but broader base, many of these jurisdictions are measures of price change showed infla- striving to hold spending in check; a tion holding steady. number of states have chosen to cut As in 1992 and 1993, the economic taxes. advance during 1994 was driven mainly As in the two previous years, a sigby sharp increases in the real expen- nificant portion of the rise in domestic ditures of households and businesses. spending in 1994 went for imports of Consumer purchases of motor vehicles goods and services, which increased rose further in 1994, and purchases of about 15 percent in real terms during the other consumer durables increased even year. Meanwhile, growth of real exports faster than they had in the two previous of goods and services picked up noticeyears. Residential investment posted a ably, with gains cumulating to about small gain, on net, over the four quarters 10 percent over the year. Foreign econoof the year, despite sharp increases in mies strengthened in 1994, and the price mortgage interest rates. Business invest- competitiveness of this country's prodment in office and computing equipment ucts in world markets was aided by a slowed from the spectacular pace of subdued rate of rise in production costs 1993 but continued to rise rapidly none- and a somewhat lower exchange value theless, and business investment in other of the U.S. dollar. types of equipment accelerated. Real Labor and product markets tightened outlays for nonresidential construction, in 1994. After ticking up in January of which had been a weak sector of the last year in conjunction with the introeconomy in previous years, picked up in duction of a new labor market survey, 1994; outlays for office construction the civilian unemployment rate fell ended a long slide that had stretched sharply over the remainder of the year, well back into the 1980s. Business to 5.4 percent in December. The level of investment in inventories, which had the unemployment rate in January of this been quite restrained in previous years year—5.7 percent—was a full percentof the expansion, increased appreciably age point below that of a year earlier. in 1994. Much of the inventory buildup In manufacturing, gains in production apparently was intentional and reflected exceeded the growth of capacity by a the desires of firms to stock up in antici- sizable margin during 1994, and the rate pation of continued strength in sales or of capacity utilization climbed nearly to build stronger buffers against poten- 3 percentage points. Its level in re recent tial delays in supply. months has been essentially in line with In contrast to the strength in private the highest level achieved during the expenditures, government purchases of economic expansion of the 1980s. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 41 Inflation pressures picked up in some ment debt picked up substantially, to a markets in 1994. Prices of raw industrial pace comparable with some of the larger commodities rose even more rapidly increases that were observed during the than in 1993, and price increases for expansions of the 1970s and 1980s. intermediate materials accelerated Real consumer expenditures for sharply, especially after midyear. How- durable goods increased about 8 percent ever, the inflation impulse in these in 1994, bringing the cumulative rise in markets did not carry through with any these outlays over the past three years to visible force to the consumer level, nearly 30 percent. The stock of durable probably because unit labor costs, which goods that households wish to hold make up by far the largest part of value apparently continued to rise quite rapadded in production and marketing, idly in 1994, and at least some housecontinued to rise at a modest rate. The holds probably were still making up for employment cost index of hourly com- purchases that had been put off earlier in pensation in private nonfarm industries the 1990s when the economy was slugactually slowed noticeably from the gish and concerns about job prospects pace of 1993, and productivity gains in were widespread. Real expenditures for 1994 held close to the pace of the previ- motor vehicles moved up an additional ous year. As for retail prices, 1994 was 3 percent over the four quarters of 1994, the fourth year in a row in which the after gains of about 9 percent in each of rise in the total CPI has been around the two preceding years; increases in 3 percent. The CPI excluding food and sales of vehicles in 1994 might have energy rose just 2.8 percent over the been a bit stronger still but for capacity four quarters of 1994, after an increase constraints and various supply disrupof 3.1 percent in 1993; the rate of rise in tions that sometimes limited the availthis index, which is widely used as an ability of certain models. Real outlays indicator of underlying inflation trends, for durable goods other than motor fell almost half from 1990 to 1994. vehicles rose about W/i percent over the four quarters of 1994, a pickup from the already rapid rates of expansion of The Household Sector the two previous years. Purchases of Real personal consumption expenditures personal computers and other electronic advanced nearly 3V2 percent over the equipment continued to surge in 1994, four quarters of 1994, about in line with and spending on furniture and housethe average pace of the two previous hold appliances moved up further. years. Support for the rise in spending Consumer expenditures for noncame from rapid income growth, and, durables and services exhibited mixed according to surveys, sharp increases in patterns of change in 1994. Real outlays consumer confidence. Outlays for dura- for nondurables increased 3 percent over ble goods continued to rise especially the year, a pickup from the subdued rate rapidly, seemingly little affected by of growth recorded in the previous year rising interest rates. Nor did spending and, for this category, a larger-thanappear to be much affected, in the aggre- average advance by historical standards. gate, by poor performance of the stock By contrast, real expenditures for serand bond markets, which cut into the vices increased roughly 2lA percent, a real value of household assets. Credit slightly smaller gain than that of 1993; generally was readily available during growth of outlays for services was held 1994, and growth of consumer install- down, to some degree, by a decline in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 82nd Annual Report, 1995 real outlays for energy, as warm weather In contrast to most other indicators late in 1994 reduced the amount of fuel for the household sector of the economy, needed for heating. household balance sheets—which had Real disposable personal income rose strengthened appreciably in previous 4lA percent during 1994. Except for a years—showed no further improvement couple of occasions in previous years in 1994. According to preliminary data, when income growth was boosted tem- the aggregate net worth of households porarily by special factors, the rise in appears to have recorded a relatively real disposable income in 1994 was the small increase in nominal terms over largest increase since the 1983-84 the year, and, in real terms, net worth period. Growth of wages and salaries probably declined slightly. Household accelerated in 1994 in conjunction with assets rose only moderately in nomthe step-up of employment growth. inal terms, and the growth of nominal Income from capital also rose: Divi- liabilities picked up somewhat, as a dends moved up along with corporate result of the sharp increase in use of profits, and interest income turned back consumer credit. Early this year, stock up after three years of decline. By con- and bond prices have risen, on net, givtrast, transfer payments, the growth of ing some renewed lift to household which tends to slow as the economy wealth. strengthens, registered the smallest With personal income growing faster annual increase since 1987. The net than net worth during 1994, the ratio of income of nonfarm proprietors appears wealth to income fell over the course of to have about kept pace with the average the year. In the past, declines in this rate of growth in other types of income. ratio sometimes have prompted house- Farm income rose moderately on an holds to boost the proportion of current annual average basis, as an increase in income that is saved, in an attempt the volume of output more than offset to restore wealth to more desirable the effects of sharp declines in farm levels, and this same tendency may output prices that developed over the have been at work, to some extent, in course of the year. 1994. After dipping in the first quarter Consumers' perceptions of economic of the year to the lowest level of the and financial conditions brightened con- current expansion, the personal saving siderably during 1994. By year-end, the rate rose a full percentage point over composite measures of consumer confi- the remainder of the year, to a fourthdence that are prepared by the Confer- quarter level of 4.6 percent. Even then, ence Board and the University of Michi- however, the saving rate remained quite gan Survey Research Center had both low by historical standards. Rising levmoved to new highs for the current els of income and employment and business expansion. Consumers became increased confidence in the outlook apmore optimistic over the year in regard parently convinced consumers to push to both current and future economic ahead with increases in outlays, most conditions. Perceptions of employment notably those on consumer durables. prospects also improved, with a growing In addition, although improvement in proportion of respondents saying that household balance sheets apparently jobs were plentiful and a reduced pro- flagged, signs of outright stress in portion saying that jobs were hard to household financial conditions were find. Surveys taken early this year indi- not much in evidence: Delinquency cate that confidence remains high. rates on mortgages and other house- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 43 hold loans generally remained quite rate of decline in sales of new homes low relative to their historical ranges. slowed. Residential investment held up In the second half of the year, the remarkably well in 1994 in the face of signals were mixed: Sales of existing sharp increases in mortgage interest homes trended down at a moderate pace rates. Preliminary data indicate that, in during this period; however, singlereal terms, these investment outlays family starts and sales of new singlewere up about 2 percent, on net, over the family homes changed little, on net, four quarters of the year, after gains of from the second quarter to the fourth 17 percent and 8 percent, respectively, quarter. Sizable gains in employment in 1992 and 1993. Although starts and and income and rising optimism about sales of single-family houses fell back the future of the economy apparently from the exceptionally high peaks that helped to blunt the effects of increases were reached briefly in late 1993, they in interest rates during the second half remained at elevated levels. In total, of the year. In addition, the availability 1.20 million single-family units were of a widening variety of alternative started in 1994, topping, very slightly, mortgage instruments and, perhaps, the highest annual total of the 1980s. some easing of loan qualification stan- Sales of existing homes were about the dards may have permitted some buyers same as the previous annual peak, set in who otherwise would not have been able 1978, and although sales of new homes to obtain financing to go ahead with remained well short of previous highs, their purchases. their annual total was closely in line Late in 1994 and in early 1995, a with the brisk pace of 1993. Only in the softer tone seems to have taken hold in past month or so have indications of a key indicators of single-family housing weakening in housing activity started to activity. Sales of new homes tailed off show up more consistently in the incom- toward the end of last year, and the ratio ing data. of the number of unsold homes to the Declines in the starts and sales of number of sales, which had turned up single-family houses in early 1994 basi- early in 1994, continued to rise. The cally reversed the huge gains of late ratio in December was slightly to the 1993. Whatever tendency there may high side of the long-run average for have been for these indicators to exhibit this series. Starts of new single-family at least a temporary setback after a houses, which had increased in Novemperiod of unusual strength was probably ber and December, fell sharply in Janureinforced by the initial reactions of ary, to a level noticeably below the builders and homebuyers to increases lower bound of the range of monthly in mortgage interest rates that had begun readings reported during 1994. in the final quarter of 1993. Excep- Various measures of house prices tionally severe winter weather in the showed small-to-moderate increases in Northeast and Midwest early in 1994, 1994. The median transaction prices of coming on the heels of favorable condi- new and existing homes that were sold tions in late 1993, probably also helped in the first half of the year were roughly to account for the sharpness of the 3!/2 percent above the level of a year downturn. In any event, starts of single- earlier, and a similar rise was reported family homes ticked back up a bit in during that period in price indexes that the second quarter of the year, sales of adjust for changes in the quality and existing homes flattened out, and the regional mix of homes that are sold. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 82nd Annual Report, 1995 After mid-year, the four-quarter changes on a sound footing: Investment expenin transaction prices slowed, but the rate ditures continued to be financed preof rise in the quality-adjusted indexes dominantly with internal funds, and picked up somewhat. All told, prices signs of financial stress were largely have been firmer in the past couple of absent. years than they were earlier in the Industry entered 1994 with consider- 1990s. able momentum, and expansion was After falling to exceptionally low lev- maintained at a rapid pace throughout els in late 1992 and early 1993, con- the year. Industrial production rose struction of multifamily housing units nearly 6 percent over the four quarters increased throughout 1994. Although of 1994, a rate of expansion exceeded in the level of activity in this part of the only one of the past ten years. The prohousing sector was not especially high, duction of business equipment advanced gains during the year were large in especially rapidly, buoyed by rising percentage terms: Starts of these units investment in the domestic economy and moved up about 65 percent from the further large increases in exports of fourth quarter of 1993 to the fourth capital goods. Production of intermequarter of 1994, at which point they diate products—which consist mainly were more than double the lows of a of supplies used in business and couple years ago. The national average construction—also moved up substanvacancy rate for multifamily rental units tially during 1994, as did the output remained relatively high in 1994, but of materials, especially those used as markets in some areas of the country inputs in the production of durable had tightened enough to make con- goods. The industrial sector also appears struction of new multifamily units eco- to have had a strong start in 1995, as nomically attractive. Reauthorization industrial production rose 0.4 percent in in August 1993 of a tax credit on low- January. income housing units also provided The rate of capacity utilization in some incentive for new construction. industry increased about 2 V2 percentage The financing of multifamily projects points over the twelve months of 1994. was facilitated through more ready In manufacturing, the operating rate rose availability of credit and increased about 3 percentage points during the equity investment. year. By year-end, utilization rates in some industries had moved to exceptionally high levels. Most notably, the The Business Sector average operating rate among manufac- Robust expansion was evident in 1994 turers engaged in primary processing in most of the economic indicators for (basically, the producers of materials) the business sector of the economy. Real had climbed to the highest level since output of nonfarm businesses increased the end of 1973, surpassing, by small about 414 percent over the four quar- margins, the peaks of the late 1970s and ters of the year, nearly matching the late 1980s. large gain of 1993. For a second year, After rising 23 V2 percent over the four business investment in fixed capital quarters of 1993, corporate profits advanced exceptionally rapidly. Inven- increased another 4 percent over the first tory investment also picked up apprecia- three quarters of 1994. The profits bly, spurred by large, sustained increases earned by nonfinancial corporations in sales. Business finances remained from their domestic operations increased Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 45 about IV2 percent over the first three terms. Business purchases of industrial quarters of 1994, after a gain of equipment advanced about 13 percent 21 Vi percent in 1993. Although the 1994 during 1994, one of the larger gains of gain in these profits was partly the result the past two decades. By contrast, comof increased volume, profits per unit of mercial aircraft once again was a notable output also rose. In the second and third area of weakness; the investment cycle quarters, before-tax profits of nonfinan- in that sector has been sharply out of cial corporations amounted to nearly phase with those of most other indus- 11 percent of the gross domestic output tries, owing to persistent excess capacity of those businesses—the highest that and poor profitability in the airline this measure of the profit share has been business. since the late 1970s. A shift in the Business investment in nonresidential capital structure of corporations toward structures rose about 4 percent during reduced reliance on debt, as well as 1994, after an increase of IV2 percent in cyclical recovery of the economy, has 1993 and declines in each of the three helped to push the profit share to this years preceding 1993. Investment in high level. In contrast to the experience industrial structures rose for the first of nonfinancial corporations, the profits time since 1990, more than likely a of private financial institutions from response to high—and rising—rates of their domestic operations fell about capacity utilization. Investment in office 7 percent on net over the first three buildings also turned up in 1994, after a quarters of the year, as net interest mar- long string of declines that, in total, had gins narrowed. The decline reversed brought spending on these structures some of the large rise in profits that down about 60 percent from the peak of these institutions had reported in 1993. the mid-1980s; declining vacancy rates Business fixed investment increased and a firming of property values pro- 13 percent in real terms over the four vided additional evidence of improvequarters of 1994, after a gain of 16 per- ment in this sector of the economy in cent during 1993. Outlays for office and 1994. The investment data for other computing equipment, which had regis- types of structures showed a mix of tered an astonishing gain in 1993, pluses and minuses: Expenditures on slowed in 1994, but the rise in these commercial structures other than offices outlays still amounted to nearly 20 per- moved up further, after large gains in cent in real terms. Meanwhile, the 1992 and 1993; however, outlays for growth of real expenditures for most drilling declined for a fourth year, to the other types of business equipment lowest level since the early 1970s. picked up. Because a large share of the growth Business investment in motor vehi- in business fixed investment in recent cles rose about 18V2 percent over the years has gone for items that deprefour quarters of 1994. With the gains ciate relatively quickly—computers of 1994 coming on the heels of big being a prime example—net additions increases in each of the two previous to the stock of productive capital have years, annual business outlays for vehi- not been as impressive as the data on cles reached a level about one-third gross investment expenditures might higher than the peak year of the 1980s. seem to indicate. Nonetheless, with the Outlays for communications equipment further increase in gross investment also scored an especially big gain in in 1994, net additions to the capital 1994, more than 25 percent in real stock appear to have become more Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 82nd Annual Report, 1995 substantial. Still unclear is the degree to quite low by the standards of the past which these increases in the capital quarter-century. stock will ultimately translate into Inventory accumulation in the farm higher rates of increase in output per sector of the economy also picked up in worker and faster rates of increase in 1994. Stocks of farm products had been living standards; as discussed in more drawn down in 1993, when farm prodetail below, the trend of growth in duction fell sharply because of floods in labor productivity, which is affected by the Midwest and droughts in some other the amount and quality of capital that regions of the country. However, crop workers have available, seems to have conditions in 1994 were unusually picked up in recent years but by a rela- favorable throughout the year, and the tively small amount. output of some major crops climbed to Business investment in inventories levels considerably above previous picked up sharply in 1994. Earlier in peaks. With the demand for farm output the expansion, firms had refrained from rising much less rapidly than producbuilding stocks, even as the economy tion, inventories of crops increased strengthened. Increased reliance on sharply. Livestock production also rose "just-in-time" systems of inventory appreciably in 1994; inventories of livecontrol reduced the level of stocks that stock, which consist mainly of the cattle firms needed to maintain their normal and hogs on farms and ranches, continoperations, and, with a degree of slack ued to expand. still present in the economy, businesses usually were able to obtain goods quickly from their suppliers and thus The Government Sector were probably reluctant to hold stocks Federal purchases of goods and serin house. At the end of 1993, the level vices, the part of federal spending that is of real inventories in the nonfarm busi- included in GDP, fell 6.2 percent in real ness sector was only 2 percent larger terms over the four quarters of 1994. than it had been at the start of the recov- Real outlays for defense remained on a ery in early 1991. sharp downtrend, and nondefense out- Circumstances changed in 1994, how- lays, which had risen rapidly early in the ever. Markets tightened as demand con- 1990s, declined moderately for a second tinued to surge, and supplies became year. more difficult to obtain on a timely Total federal outlays, measured in basis. Anticipation of further growth nominal dollars in the unified budget, in demand and increased concern increased 3.7 percent in fiscal 1994, about possible bottlenecks apparently after a rise of 2.0 percent the previous prompted businesses to begin investing fiscal year. These increases are among more heavily in inventories. Some firms the smallest of recent decades. Nominal may also have been trying to stock up outlays for defense fell again in fiscal on materials in advance of anticipated 1994. In addition, the growth of outlays price increases. For the year as a whole, for income security (a category that accumulation of nonfarm inventories includes the expenditures on unemploywas more than twice what it had been ment compensation and welfare benein 1993. This additional accumulation fits) slowed further as the economy conbrought to a halt the previous downtrend tinued to strengthen. Increases in social in the ratio of nonfarm inventories to security outlays also slowed somewhat business sales, but the ratio remained in fiscal 1994; the rise was about 1 per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 47 centage point less than that of nominal appear to have edged down a bit, on GDP. Outlays for Medicaid slowed as average, over the four quarters of 1994, well, but the rate of rise in those expen- and nominal receipts apparently rose ditures continued to exceed the growth somewhat less rapidly than nominal of nominal GDP by a large margin. GDP over that period. Federal receipts were up 9 percent in Many states and localities also have fiscal 1994, the largest rise in several been trying to restrain the growth of years. With rapid expansion of the econ- expenditures, but success on that score omy giving a strong boost to almost all has been difficult to achieve because of types of income, the major categories of increased outlays for entitlements and federal receipts all showed sizable gains. rising demand for many of the public Combined receipts from individual services that traditionally have been proincome taxes and social insurance taxes vided by state and local governments. increased a bit more than 7 percent in Transfers of income from state and local fiscal 1994, after moving up 5.4 percent governments to persons rose about in the previous fiscal year. Receipts from 9 percent in nominal terms over the four taxes on corporate profits increased quarters of 1994, roughly the same as nearly 20 percent, slightly more than the the rise during 1993 but less than the gain of 1993. increases of previous years; from 1988 The federal budget deficit declined to to 1992, the average compound rate of $203 billion in fiscal 1994, an amount growth in these transfers was about that was equal to 3.1 percent of nominal 15 percent a year. In categories other GDP. Earlier in the 1990s, when the than transfers, increases in spending economy was sluggish, the federal defi- have been fairly restrained in recent cit had climbed to a cyclical peak of years; nominal purchases of goods and 4.9 percent of nominal GDP. The previ- services (which account for about ous cyclical low in the ratio of the defi- 80 percent of the total expenditures of cit to nominal GDP, 2.9 percent, was state and local governments) have been reached in fiscal 1989. Since fiscal 1989, trending up less rapidly than nominal defense spending as a share of GDP has GDP since the early 1990s. dropped appreciably, but this source of In real terms, the 1994 rise in purdeficit reduction has been essentially chases of goods and services by state offset by increased outlays for health and local governments amounted to just and social insurance. Thus, the ratio of 2 percent. Compensation of employees, total federal outlays to GDP has changed which accounts for about two-thirds of little, on net; it was about 22 percent in total state and local purchases, increased both fiscal 1989 and fiscal 1994. The 1Vi percent in real terms over the four ratio of federal receipts to nominal GDP quarters of 1994, a gain that was roughly was about 19 percent in both of those in line with the growth of state and local fiscal years. employment over that period. Construc- The stronger economy of recent years tion outlays declined slightly in real has provided state and local govern- terms during 1994, as gains over the ments with a growing revenue base and final three quarters of the year were not a broadening set of fiscal options. Some sufficient to offset a first-quarter plunge. governments have responded to these Nonetheless, real outlays for structures developments by cutting taxes, in most remained at high levels; a strong uptrend cases by small amounts. Effective tax in construction expenditures over the rates of state and local governments past ten or twelve years has more than Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 82nd Annual Report, 1995 reversed a long contraction that began in terms against the currencies of the G-10 the latter half of the 1960s and bottomed countries, but it has moved up in terms out in the first half of the 1980s. of the Mexican peso. The deficit in the combined operating Growth of real GDP in the major and capital accounts of all state and foreign industrial countries rebounded local governments (a measure that sharply during 1994, significantly excludes the surpluses in state and local exceeding the pace of recovery widely social insurance funds) amounted to expected at the start of the year. In the about 0.6 percent of nominal GDP in United Kingdom and Canada, where calendar 1994, little changed from the recovery was already well established, corresponding figure for 1993 and down growth continued to be vigorous. In only slightly from a cyclical peak of Germany, France, and other continental 0.8 percent in 1991. The recent cyclical European countries, where activity had peak in this measure was larger than the been sluggish during 1993, strong peaks reached in recessions of the 1970s expansion of real GDP resumed and and 1980s, and declines in the deficit strengthened as the year progressed. during this expansion have not been Recovery was evident in Japan as as large as the declines that occurred well, but the pace of expansion there during other recent expansions. Histori- remained somewhat subdued relative to cally, the combined operating and capi- that of the other industrial countries. tal accounts of state and local govern- Although most of these economies ments have been in deficit more often clearly had moved past the troughs of than they have been in surplus; as a their recessions, considerable slack share of nominal GDP, the annual sur- remained. As a result, consumer price pluses and deficits since World War II inflation remained low and, in some have averaged out to a deficit of cases, fell further. On average, in the ten 0.3 percent. major foreign industrial countries, consumer prices rose 2 percent during the year, even less than the price increase in The External Sector the United States. When adjusted for differing rates of Economic growth in the major develincrease in consumer prices, the trade- oping countries in 1994 continued at weighted average foreign exchange about the strong pace of 1993. In Asia, value of the U.S. dollar declined 5Vi per- the newly industrializing economies cent against the currencies of the other grew rapidly, as external demand was G-10 countries in 1994. This deprecia- sustained by lagged effects of depreciation was slightly smaller than the almost tion of their currencies against the yen 6V2 percent nominal depreciation of the and by recovery in the industrial coundollar, as U.S. inflation exceeded foreign tries. Growth in China, although still inflation by a small amount. An index quite rapid, was somewhat slower than of exchange rates that also includes the that in 1992-93, as credit conditions currencies of several of the major U.S. were tightened somewhat further and trading partners in Latin America and various controls were imposed to damp East Asia showed about the same degree demand. of real depreciation as did the index for In Mexico, real GDP growth rose the currencies of the G-10 countries. In markedly during the second and third the first few weeks of 1995, the dollar quarters of 1994 from its near-zero rate has weakened, on balance, in nominal in 1993, in part because of fiscal stimu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 49 lus. However, the economic policy pro- to rise rapidly in real terms, about gram put in place at the end of the year 30 percent for the year; this gain conin response to the peso crisis is likely to tributed significantly to the double-digit restrain growth once again in the com- growth in total exports. After declining ing year. The Mexican macroeconomic in 1993, agricultural exports bounced stabilization program is designed to back last year; the much-improved harmaintain wage restraint, reduce govern- vest of 1994 eased supply constraints ment spending and development bank that previously had been limiting shiplending, and result in significant im- ments of farm products. Other cateprovement in the current account deficit gories of merchandise exports averaged in 1995. The program includes guide- more than 8 percent real growth during lines on increases in wages, guidelines the year, as the pace of activity in the on increases in final energy product economies of U.S. trading partners prices to consumers and to industry, net improved significantly. Geographically, cuts in public expenditures, and a reduc- the increase in U.S. merchandise exports tion of lending by development banks. was accounted for by increased ship- Mexico has committed to maintain the ments both to developing countries in current floating exchange rate regime, Latin America and Asia and to Canada and the Bank of Mexico has agreed to and Japan. restrain the growth of money. Structural Imports of goods and services rose reform measures include continued about 15 percent in real terms over the privatization and lessened restrictions four quarters of 1994, reflecting the vigon foreign investment. Further mea- orous growth of U.S. income during the sures could be required if inflation and year. Imports of computers continued to the exchange rate do not respond as expand extremely rapidly in real terms. projected. Of the other import categories, imports The nominal U.S. trade deficit in of machinery and automotive products goods and services increased to about were particularly buoyant. Import prices $110 billion in 1994, compared with rose about 4 percent in 1994, influenced $75 billion in 1993. Imports grew by depreciation of the U.S. dollar, noticeably faster than exports, as U.S. increases in world commodity prices, growth about equaled that of U.S. trad- and a rebound in oil prices, which had ing partners and as the lagged effects declined in 1993 and early 1994. of dollar appreciation during 1993 con- In the first three quarters of 1994, tinued to be felt. The current account recorded net capital inflows were subdeficit averaged about $150 billion at an stantially larger than those of 1993, an annual rate over the first three quarters. increase that coincided not only with Net investment income moved from a the growing current account deficit, but small positive to a moderately negative also with a sharp swing in unrecorded figure in 1994, reflecting recovery of transactions in the U.S. international foreign earnings on direct investment in accounts, from a positive figure in 1993 the United States and the effects of to a negative one in the first three quarhigher interest rates on high and rising ters of 1994.l U.S. net external indebtedness. Based on initial estimates for the 1. In effect, recorded net capital inflows in the first three quarters of 1994 were larger than necesfourth quarter, exports of goods and sersary to balance the rising current account deficit. vices grew 10 percent in real terms dur- Moreover, outflows of currency to foreigners, an ing 1994. Computer exports continued item that is not reflected in recorded transactions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 82nd Annual Report, 1995 Among the recorded capital flows, Labor Markets increases in foreign official assets in the Employment rose substantially in 1994. United States were substantial in 1994 The total number of jobs in the nonfarm but were somewhat smaller than in sector of the economy increased 3.5 mil- 1993. In particular, the large reserve lion over the twelve months ended in accumulations in 1993 by certain devel- December, after a gain of 2.3 million oping countries in Latin America experi- during 1993.2 About a quarter of a milencing massive private capital inflows lion of the rise in jobs during 1994 was were not repeated in 1994. in the government sector, mostly at the U.S. net purchases of foreign securi- local level. Job growth in the private ties, particularly bonds, fell sharply from nonfarm sector amounted to 3.2 million, record 1993 levels. Private foreign net the largest gain since 1984. Increases in purchases of U.S. securities also fell, but employment at nonfarm establishments only slightly. Rising interest rates on were sizable in each quarter of 1994. A bonds denominated in dollars and many further gain in payroll employment, other major currencies produced capital smaller than the average increase of the losses for U.S. holders of long-term past year, was reported in January of bonds and resulted in flows out of U.S. this year; however, total labor input rose global bond funds. In the first three considerably faster than employment in quarters of 1994, U.S. investors made January as the workweek lengthened. heavy net purchases of stocks in Japan; Producers of goods boosted employ- Japan alone accounted for more than ment more than half a million in 1994. one-third of all U.S. net foreign stock The job count in construction increased purchases. In developing countries, about 300,000 over the year; employthose that received the largest net equity ment at general building contractors rose inflows from U.S. investors in 1993 briskly for a second year, as did the (Hong Kong, Mexico, Argentina, Branumber of jobs at firms involved in spezil, and Singapore) were less favored by cial trades related to construction. The investors in 1994, while interest picked number of jobs in manufacturing up in a wide assortment of other develincreased about 275,000 during 1994, oping countries, including South Korea, after five years of decline. Producers of Chile, Indonesia, China, India, and Peru. durables accounted for most of the rise The first three quarters of 1994 also in manufacturing employment; among witnessed a revival of foreign direct these producers, job gains were wideinvestment in the United States while spread. Employment at factories that U.S. direct investment abroad remained produce nondurables rose slightly in at near-record levels. The direct investtotal, as advances in some industries— ment inflow was swelled by takeovers such as printing and publishing and rubof U.S. companies and by the revival of ber and plastics—were partly offset by profits and reinvested earnings reported continued secular declines in the numby affiliates of foreign companies in the ber of jobs in industries such as apparel, United States. tobacco, and leather goods. The average and, therefore, is a part of unrecorded net inflows 2. The Bureau of Labor Statistics has in the international accounts, increased substan- announced that the level of nonfarm payroll tially in 1994, suggesting that the other unre- employment in March 1994 will be raised 760,000 corded outflows of capital may have been even when revised estimates are released this summer. larger than the published data on errors and omis- The revision may lead to larger estimates of job sions indicate. growth in both 1993 and 1994. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 51 workweek in manufacturing, which had holds. After ticking up in January 1994, stretched out in 1992 and 1993 when when a redesigned household survey factory employment was declining, was implemented and new population lengthened further in 1994, rising to new estimates were introduced, the civilian highs for the postwar period. The high unemployment rate turned back down in fixed costs that are associated with add- February and declined in most months ing new workers probably continued to thereafter. The rate increased last month, be an important factor in firms' deci- to 5.7 percent, but was still a full persions to rely still more heavily on a centage point below that of a year earlonger workweek as a way to boost lier.3 Appreciable net declines in unemlabor input. Growth of factory output ployment rates have been reported over surpassed the rise in labor input by a the past year for nearly all occupational sizable amount in 1994, a reflection of and demographic groups. substantial gains in productivity that Data on the reasons why individuals were realized in this sector of the econ- are unemployed seem to be 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 23A 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 has declined sharply, on net, over the increased about 800,000 over the year. past year. The number of individuals in Auto dealers, stores that sell building this category had soared earlier in the materials, and those that sell general 1990s, when the economy was strugmerchandise were among the retail out- gling to gain momentum and many large lets that reported impressive gains. Hir- companies were restructuring their ing at eating and drinking places also operations. However, with the more moved up briskly; after three years of recent decline, the number of these "job slow growth around the start of the losers," measured as a percentage of the decade, hiring at these establishments labor force, has moved back toward the has increased substantially in each of lows of the late 1980s. Much of the the past three years. Employment at decline in the number of job losers this firms that supply services to other busi- past year has been among workers who nesses rose about 710,000 in 1994, even were permanently separated from their more than in 1993. Once again, job previous jobs. The number of persons growth within this category was espe- unemployed for reasons other than the cially rapid at personnel supply firms— loss of a job (that is, the sum of "job those that essentially lease the services leavers" and new entrants or re-entrants of their workers to other employers, often on a temporary basis. Employment at businesses that supply health services 3. Research undertaken by the Bureau of Labor increased a quarter of a million in 1994, Statistics suggests that the unemployment rate would have run about two-tenths of a percentage about the same as the gain in 1993; point lower in 1994 but for the changes that were hiring at hospitals has flattened out over introduced in January of last year. Other series the past couple of years, but elsewhere from the household survey were also affected by in the health sector job growth has con- the introduction of the new survey and the revised population estimates; therefore, data for the period tinued at a rapid clip. starting in January 1994 are not directly compa- Strength also was evident in 1994 in rable with those for the period ended in December data from the monthly survey of house- 1993. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 82nd Annual Report, 1995 unable to find work) has also declined the average rate of rise in output per over the past year. As in other business hour in the nonfarm business sector cycles, the number of these individuals, amounted to slightly more than 1 lA permeasured relative to the size of the labor cent, up only modestly from an average force, has been displaying a cyclical pat- rate of rise of about 3A percent during tern considerably more muted than that most of the 1970s and 1980s.4 of job losers. The rate of increase in hourly com- Growth of the civilian labor force— pensation moved down another notch in which consists of the individuals who 1994. The employment cost index for are employed and those who are seeking private industry, a measure of hourly employment but have not yet found it— labor costs that comprises both wages picked up a bit in the second half of and benefits, rose 3.1 percent during the 1994 and in early 1995. However, even twelve months ended in December with these increases, the cumulative rise 1994, after increases of 3.6 percent in in the labor force in the current business 1993 and 3.5 percent in 1992. The rise expansion has been relatively small in the wage component of compensation compared with the gains recorded in was slightly less than that of 1993, and other recent expansions; growth of the the rate of increase in hourly benefits working-age population has been slower slowed appreciably. Increases in benethis decade than it was in the expansions fits were restrained, in large part, by of the 1970s and 1980s, and the share of another year of deceleration in health the population participating in the labor care costs and a further slowing in workforce, which trended up in earlier expan- ers' compensation insurance costs. The sions, has changed little, on net, during rise in nominal compensation per hour this one. in 1994 was the smallest yearly increase According to preliminary data, output in the fifteen-year history of the series, per hour of labor input in the nonfarm the previous low of 3.2 percent having business sector increased 1.4 percent come midway through the expansion of over the four quarters of 1994, after a the 1980s. Toward the end of that rise of 1.8 percent in 1993 and still decade, as bidding for labor resources larger gains in 1992 and 1991. Over the intensified, increases in compensation business cycle, productivity gains typically are largest in the early years of 4. Whether even this small degree of improveexpansion, and, in that regard, the recent ment in the productivity trend will stand up experience does not appear to be through future revisions of the data is not clear. unusual. Abstracting from cyclical For example, among the many difficult issues that are involved in the measurement of productivity is variation, the trend of productivity the choice of an appropriate set of prices to be growth in recent years seems to have used in valuing the output of goods and services. picked up somewhat from the unusually Currently, aggregate output is tallied by using the sluggish pace that prevailed through prices of 1987, but some major changes in relative prices have taken place since then, the most much of the 1970s and 1980s, but, at the notable of which is a huge decline in the price of same time, the pickup has not been office and computing equipment. Using the prices nearly so large as some anecdotal of a more recent year to gauge real output would reports might appear to suggest. For result in less weight being given to office and example, from late 1988 to late 1994, an computing equipment and, in turn, a smaller contribution from this rapidly growing category to interval of time that is long enough to growth of real output. All else equal, the growth of capture all the phases that productivity productivity would also be negatively affected by goes through during the business cycle, switching to the prices of a more recent year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 53 moved up for a time to around 5 percent materials. Prices of primary industrial a year. inputs, which had moved up sharply Unit labor costs in the nonfarm busi- during 1993, continued to surge in 1994, ness sector rose 2.0 percent over the and price increases for intermediate four quarters of 1994 after an increase materials accelerated as the year proof just 0.6 percent over the four quarters gressed. Prices of imports also picked of 1993. In manufacturing, a sector of up somewhat, influenced by the deprethe economy in which productivity has ciation in the exchange value of the advanced quite rapidly in recent years, dollar; as was true in the domestic econa rise in output per hour of 4.6 percent omy, the largest price increases for during 1994 more than offset a modest imported goods were those for materiincrease in hourly compensation, and als. Gains in productivity apparently unit labor costs declined noticeably for a enabled manufacturers of finished goods second year. to absorb these increases in the costs of domestically produced and imported materials without raising their own Price Developments prices very much. Although price increases picked up in Early this year, materials prices consome parts of the economy in 1994, the tinued to surge. The producer price broader measures of price change con- index for crude materials other than food tinued to yield readings that were quite and energy jumped 3 percent in January, favorable. The rise in the total CPI was to a level about \ll/i percent above that about 23/4 percent in 1994, the same as of a year earlier. Further along in the the increase during 1993. The CPI production chain, the PPI for intermediexcluding food and energy also rose ate materials other than food and energy about 23A percent over the four quarters rose 1 percent last month; the index has of 1994, after increasing slightly more moved up 6 percent during the past than 3 percent in 1993. The producer twelve months, the largest such rise price index for finished goods increased since the late 1980s, when the twelve- 1 lA percent during 1994, after edging up month rate of increase in intermediate just lA percent during the previous year. materials prices topped out at slightly As in 1992 and 1993, the past year's more than 7 percent. By contrast, the increases in all these price indexes PPI for finished goods other than food were among the lowest readings of the and energy again showed only a modest past quarter-century. Measures of infla- increase in January. Since mid-January, tion expectations held steady in 1994, the prices of a number of industrial combut continued to show readings that modities have backed away from earlier were somewhat higher, on average, highs, but, given the volatility that these than the actual rates of price increase. prices sometimes exhibit, the experience Price data for January of this year were of a few weeks may not signal the emerless favorable than those of 1994: The gence of a new trend. total CPI moved up 0.3 percent last In the CPI, the prices of commodities month, and the CPI excluding food and other than food and energy rose 1V2 perenergy jumped 0.4 percent, the largest cent over the four quarters of 1994, monthly rise in that measure since late about the same as the rise of 1993. 1992. Prices of new cars and new trucks, The pickup of price increases last year responding to strong demand and, at was confined largely to markets for times, shortages in the supply of some Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 82nd Annual Report, 1995 models, moved up faster than prices in cally produced farm products, which, in general; prices of used cars rose espe- turn, were pulled down by the huge cially rapidly for a third year. The increases in crop and livestock producprices of tobacco products, which had tion noted previously. With beef and fallen sharply in 1993 when producers pork prices declining over the year, the made steep one-time price reductions, CPI for meats, poultry, fish, and eggs turned back up in 1994, rising moder- changed little in total. Retail prices ately over the four quarters of the year. of dairy products rose only a small By contrast, prices of home furnishings amount. Prices of foods that are more changed little over the year, and the CPI heavily influenced by the costs of nonfor apparel fell noticeably. In January farm inputs also snowed only small 1995, the CPI for goods other than food to moderate advances in 1994: The and energy jumped 0.4 percent; this rise increase in the CPI for prepared foods followed a string of months in which the amounted to about 2Vi percent, slightly index had increased very slowly. less than the previous year's increase, The CPI for non-energy services, a and, for a third year, the rise in the category that accounts for about half of price index for food away from home the total CPI, rose slightly less than was less than 2 percent. Coffee was the 3l/i percent over the four quarters of only item in the CPI for food to show 1994, after an increase of about 33A per- sustained price acceleration; freeze cent in 1993. The increase in these damage to the crop in Brazil caused prices in 1994 was just a bit more than world prices of raw coffee to surge and half the rise that was recorded in 1990, led to a price rise of more than 50 perwhen CPI inflation hit its most recent cent at retail over the four quarters of peak. Prices of medical services contin- 1994. Fresh vegetable prices, which ued to slow in 1994, and airline fares, tend to be especially sensitive to which have been an especially volatile short-run supply developments, took a category in the CPI in recent years, fell jump toward year-end after Hurricane appreciably after having risen sharply Gordon had damaged crops in Florida, the previous year. However, auto finance but the run-up was partly reversed last charges turned up, and the rate of rise in month. owners' equivalent rent, a category that The CPI for energy rose about has a weight of nearly 20 percent in the IV2 percent during 1994, after edging total CPI, rose slightly faster over the down V2 percent in 1993. Gasoline four quarters of 1994 than it had during prices increased 4V2 percent over the the corresponding period of 1993. Like four quarters of 1994, reversing the the prices of goods, the CPI for non- decline of the previous year. Much of energy services accelerated sharply in the increase in gasoline prices came in January of this year. the third quarter and followed, with a In 1994, for a fourth year, neither short lag, a second-quarter rise in crude food prices nor energy prices provided oil prices, which were moving back up much impetus to the inflation process. from the low levels of late 1993 and The consumer price index for food early 1994. Prices of other energy prodrose a shade more than 2l/z percent ucts exhibited brief periods of rapid over the four quarters of 1994, about increase, but sustained upward pressures the same as the rise of 1993. Food prices in these prices did not materialize. Fuel in 1994 were restrained, in part, by oil prices shot up temporarily early in sharp declines in the prices of domesti- 1994, when stocks were pulled down for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 55 a time by cold weather in the Midwest Monetary and Financial and the Northeast; later in the year, how- Developments ever, stocks were replenished and the earlier price increases were more than With the economy generally strong, reversed. Natural gas prices followed a financial markets in 1994 and early 1995 pattern similar to the price of fuel oil, have been characterized by somewhat rising sharply in the first quarter of the more rapid growth in private debt and year but falling back thereafter, to a by higher interest rates. The increase fourth-quarter level that was about in interest rates reflected, in part, the 2lA percent lower than that of a year policy actions of the Federal Reserve. earlier. Electricity prices rose only Concerned about inflationary pressures slightly during the year. In January of resulting from rapid economic growth this year, energy prices were up moder- and dwindling margins of available ately in the CPI. resources, the Federal Reserve firmed With the favorable inflation perfor- policy on seven occasions. These mance of the past year, the average rate actions were taken to foster a financial of rise in the total CPI since the business environment more likely to be consiscycle trough in early 1991 has been tent with sustained economic growth 2.9 percent at an annual rate. Excluding and low inflation. In total, the policy food and energy, the rate of rise has tightenings raised the federal funds rate been 3.3 percent at an annual rate. Infla- by a cumulative 3 percentage points tion rates lower than these have not between early February 1994 and early been sustained through the first few February 1995. Other short-term rates years of any business expansion since rose by similar amounts. Over this span, that of the 1960s, when both the CPI the Board of Governors hiked the disand the CPI excluding food and energy count rate on four occasions by a total of showed average rates of increase of less 2lA percentage points. than 1.5 percent during the first four Longer-term rates increased \Vi peryears after the business cycle trough of centage points to 3 percentage points on early 1961. Average rates of price balance since January 1994, with the increase during the current expansion largest increases posted at intermediate have been much smaller than those maturities. In addition to the policy reported during the expansion that began actions, these rates were boosted in the mid-1970s. They also have been through much of 1994 by greater-thansomewhat smaller than those reported expected underlying strength in the during the first few years of the expan- economy and the resulting higher desion that began in late 1982, a period mand for credit, as well as by upward when price increases were braked in part revisions to expectations in financial by unusually steep declines in oil prices. markets about the policy tightenings that In measuring the progress that has been would be required to counter an incipimade toward bringing the economy ent increase in inflation. Since late last closer to the goal of long-run price fall, however, the extent of Federal stability, the ratcheting down of the rate Reserve actions, along with incoming of price advance from cycle to cycle data suggesting some moderation in the since the 1970s is perhaps an even more pace of expansion, have calmed inflameaningful indicator than the favorable tion fears and trimmed estimates of the trends in the annual price data of recent eventual rise in short-term interest rates. years. As a consequence, longer-term rates Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 82nd Annual Report, 1995 have retraced some of their earlier offset by lower growth in government upward movements. debt. The effects of the strong economy Increases in intermediate- and long- on government expenditures and term rates over the course of the year receipts, policy moves to reduce the caused significant capital losses for federal deficit, and retirements of taxsome investors. Well-publicized losses exempt securities that had been at a number of investment funds in the advance-refunded all contributed to the first half of the year, along with substan- slowdown in government borrowing. tial portfolio reallocations in view of the Banks funded much of the pickup in changed economic and financial out- their loans with nondeposit funds and, in look, may have contributed to increased the second half of the year, with sales of financial market volatility at that time. securities. As a result, the doubling of On the whole, however, risk premiums loan growth was not reflected in signifiremained modest, and volatility ebbed cantly stronger expansion of the moneover the course of the year. Late in the tary aggregates. M3, which was boosted year, the tax-exempt securities market by relatively heavy issuance of large dipped following the bankruptcy of CDs, rose \Vi percent, a somewhat Orange County that resulted from larger increase than in 1993. With banks mounting losses in its investment fund, pricing savings and small time deposits but the effects, beyond those on the unaggressively as market interest rates fund's investors, proved to be small and rose, M2 grew 1 percent over the year, short-lived. somewhat below its 13A percent pace in One consequence of the higher and 1993. The increase in market interest more volatile long-term interest rates rates relative to rates on transaction was a shift in business borrowing away deposits slowed the growth of Ml to from the capital markets and toward just 2lA percent from the double-digit shorter-term sources, such as banks. increases posted in 1992 and 1993. This shift, which reversed the move The foreign exchange value of the toward long-term financing that dollar declined in terms of the other occurred as bond yields fell in 1992 and G-10 currencies last year, even as the 1993, was marked by the first annual U.S. economy expanded briskly and increase in bank business loans in sev- interest rates rose. In part, the weakness eral years. Consumer lending also accel- was the result of unexpectedly strong erated in 1994, as the improved eco- growth abroad, especially in Europe, nomic outlook encouraged increased use where the recovery in many countries of consumer credit. Higher interest rates was more rapid than had been anticilikely held down household mortgage pated. As a result, long-term interest debt growth, in that the resulting decline rates in many of the other G-10 counin refinancing activity limited the ability tries increased by amounts similar to of households to "cash out" some of rates in the United States. Heightened the equity in their homes. Higher rates concerns about inflation prospects in the also encouraged households to shift to United States may also have contributed adjustable-rate mortgages, which offered to the weakness of the dollar. Indeed, lower initial interest costs. The debt the dollar rebounded late in the fall of all nonfinancial sectors increased when tighter monetary policy evidently 5lA percent in 1994, about the same eased those concerns. The dollar increase as in 1993, as the pickup in declined, however, in early 1995 amid business and household borrowing was the signs of slower U.S. growth and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 57 concerns about the implications for the pressures to build, while a more gradual United States of turmoil in Mexican move would allow financial markets financial markets. time to adjust to the changed environment. Although many market participants seemed to anticipate a firming The Course of Policy and Interest Rates move fairly soon, it would be the first In early 1994, short-term interest rates tightening in many years, and some remained at the very low levels reached investors would undoubtedly reconsider in late 1992, with the federal funds rate their portfolio strategies, possibly causfluctuating around 3 percent—roughly ing sharp movements in bond and stock in line with the rate of inflation. The prices. In addition, a slower initial shift Federal Reserve had maintained an would allow more time to assess the accommodative policy stance through- strength of the economy and the effects out 1993. This stance was unusual so far of the change in policy. into the expansion phase of a business In the event, the Committee tightened cycle, but it was believed to be neces- policy gradually through the winter and sary because of a number of extraor- early spring. Pressures on reserve posidinary factors that seemed to be inhibit- tions were increased by relatively small ing growth. These factors included amounts in February, March, and April; efforts by households, firms, and finan- once market participants seemed to have cial intermediaries to repair strained made substantial adjustments to the new balance sheets, business restructuring direction of policy, a larger tightening activities, and the fiscal contraction move was implemented in May. Taken associated, in part, with the downsizing together, the four policy actions raised of defense industries. the federal funds rate about 1 lA percent- During the recovery and expansion, age points. The May policy action was however, considerable progress had accompanied by an increase of Vi perbeen made by households and busi- centage point in the discount rate, voted nesses in decreasing their debt-service by the Board of Governors. 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 moves, with the largest increases comdata early last year suggested that much ing at intermediate maturities. Besides of that momentum had likely carried the effect of the policy actions, longerover into 1994. In the circumstances, term rates were boosted by incoming continued accommodative policy risked data suggesting continued robust pushing the demands on productive growth, which heightened market conresources to levels that ultimately would cerns about a pickup in inflation and be associated with increased inflation. expectations of further tightening by the Consequently, the FOMC, at its meeting Federal Reserve. In addition, uncerin early February 1994, agreed that pol- tainty about the timing and magnitude icy should be moved to a less stimula- of future policy actions, as well as the tive stance. capital losses that followed the tighten- The pace at which the adjustment to ings, encouraged investors to shorten the policy should be made was less clear: maturity of their investments and reduce A rapid shift in policy stance would their degree of leverage. The resulting minimize the risk of allowing inflation portfolio adjustments likely contributed Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 82nd Annual Report, 1995 to increased market volatility and may the policy move, while long-term yields have intensified the upward pressure on declined slightly, perhaps as a result of longer-term interest rates. downward revisions to expectations of Incoming data in the late spring and future tightening. early summer suggested that the econ- In advance of the meeting in late Sepomy continued to expand significantly, tember, most market rates increased as led by sales of business equipment, a incoming economic data were seen in rebound in nonresidential construction the market as raising the likelihood of following bad weather earlier in the higher inflation and the resulting need year, and a pickup in inventory invest- for tighter reserve conditions. The data ment. Inflation was of growing concern, suggested that the economy had not yet as commodity prices increased rapidly, been greatly affected by the tightening and measures of slack suggested that the in monetary policy: Employment was economy was entering a range in which growing strongly, and final sales, espepressures on broad price indexes might cially of consumer goods, appeared to begin to build. In part reflecting this have firmed. Manufacturing activity had concern, long-term rates moved up, and continued to expand rapidly, boosted in the dollar weakened. Given the rela- part by an increase in motor vehicle tively large policy action in May, how- production. Given the uncertain duraever, the Committee decided to take no tion of lags between changes in moneaction at the July meeting and to wait tary policy and the resulting effects on for more information on the perfor- the economy, however, it was not clear mance of the economy. The Committee whether the effects of the earlier interest saw the possible need for tighter policy, rate increases were smaller than had however, and issued an asymmetric been expected or were still in train. directive to the Federal Reserve Bank of Another possibility was that the under- New York suggesting that policy would lying momentum of the expansion was respond promptly to evidence of greater than had been evident earlier. increased inflation pressures. Given these uncertainties, the Commit- In the interval between the Commit- tee took no immediate tightening action tee meetings in early July and mid- at its September meeting. As in July, August, the economy continued to however, the Committee agreed to an expand robustly, and, coming into the asymmetric directive suggesting that the August meeting, it appeared that the likely direction of any move over the markets expected a small further intermeeting period was toward addiincrease in reserve pressures. At its tional restraint. meeting, the Committee agreed that a Broad measures of inflation remained prompt further tightening move was moderate through the fall in spite of needed to provide greater assurance that continued substantial economic growth inflationary pressures in the economy in an economy that was running close to would remain subdued, and the mem- its estimated potential. Nonetheless, bers chose a tightening action somewhat strong economic data and continued larger than had been expected by the upward pressure on prices at earlier markets. A rise of Vi percentage point stages of production apparently heightin the discount rate, voted by the Board ened investors' inflation concerns, as of Governors, was allowed to show well as expectations of future policy through fully to the federal funds rate. tightenings. Consequently, most market Short-term market rates rose following interest rates rose appreciably between Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 59 the September and November meetings, municipalities that had invested in the with the largest increases occurring at fund. In addition, investors had to conintermediate maturities. At the Novem- sider the likelihood of other state and ber meeting, the Committee members local governments having similar investagreed that the stance of policy was not ment difficulties. Over the following sufficiently restrained given the clear days and weeks, however, only a few risks of higher inflation. As a result, other problem situations emerged, and they chose a sizable firming of monetary they were on a much smaller scale. policy, tightening reserve conditions in In the period leading up to the line with the increase of 3A percentage December meeting, incoming data conpoint in the discount rate approved by tinued to show robust growth and subthe Federal Reserve Board. dued inflation. The Committee felt that The yield curve flattened appreciably the effects on economic activity of the in response to the larger-than-expected policy actions during the year, and espepolicy action. The increase in the federal cially the substantial tightening moves funds rate pushed up most short-term in the second half of the year, were not interest rates. Long-term rates increased yet visible, owing to the lags in the initially, but in late November and effects of monetary policy on the econearly December these rates more than omy. As a result, the Committee decided reversed the earlier increases. Evidently, to take no further policy action at the market participants ultimately inter- meeting, and to await additional inforpreted the substantial policy tightening mation on the underlying strength in the as demonstrating the Committee's inten- economy and the effects of the earlier tion to take the actions necessary to policy actions. This decision was reincontain inflation at relatively low levels. forced by concerns that the financial By contrast, intermediate-term rates markets might be somewhat unsettled increased over the weeks following the owing both to the usual year-end adjust- November meeting as a variety of ments and to uncertainty about the incoming data indicated that the econo- effects and incidence of the sizable marmy's growth had accelerated further in ket losses sustained by some investors the fourth quarter and additional tighten- over the year. In view of the substantial ings might be required to slow growth to strength evident in the incoming data, a more sustainable pace. By the time of however, the Committee again chose an the December meeting, rates on two- asymmetric directive pointing toward year Treasury notes were only a little further restraint. below those on thirty-year Treasury In advance of the Committee meeting bonds, although both yields remained at the end of January, broad measures of well above short-term rates. inflation remained modest, although Financial markets were focused in anecdotal reports suggested that some early December on the failure of an firms intended to raise prices early in the investment fund run by Orange County, new year. Incoming data on production California, and the subsequent bank- and employment continued to be upbeat, ruptcy of the county itself. The munici- with healthy growth reported in virtupal securities market bore the brunt of ally all industries and regions. Some these developments, with rates rising for indicators, however, raised the possibila time relative to those on comparable ity of a slowing in the pace of the expan- Treasury issues. The failure had a sub- sion. Nonetheless, output growth in the stantial effect on the finances of the fourth quarter was the fastest of the year, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 82nd Annual Report, 1995 and the Committee felt that, with output public to obtain this added detail and and employment at or even beyond esti- the Committee's need to debate policy mates of their sustainable levels, the issues openly and without the sort of risks of rising inflation were still consid- restraint that more rapid disclosure erable. As a result, the Board of Gover- might generate. nors voted an increase of Vi percentage point in the discount rate, and the Committee agreed to allow the increase to be Credit and Money Flows in 1994 fully reflected in the federal funds rate. The debt of all nonfinancial sectors grew Because it had been widely anticipated 5VA percent in 1994, somewhat below in the financial markets, other interest the middle of its monitoring range of rates and the foreign exchange value of 4 percent to 8 percent, and about the the dollar were little affected by the same increase as that of a ye^r earlier. policy action. Interest rates turned down More rapid growth of private-sector debt subsequently, as additional information was offset by slower growth of publicon the economy seemed to reinforce sector debt. As long-term rates rose well the possibility that a slowdown was in above their late 1993 lows, privateprocess. sector borrowing shifted toward shorter- At the same meeting, the Committee term sources of funds. In part as a result also formally adopted two practices that of this shift, financial intermediaries had been followed on a provisional basis during 1994. First, the Committee voted Growth of Money and Debt to continue to announce any change in Percent the stance of policy on the day the decision is made. These announcements, Domestic Measurement non- Ml M2 M3 which had followed each of the policy period financial debt tightenings agreed to in 1994, are intended to minimize any confusion and Year1 1980 7.4 8.9 9.6 9.1 uncertainty about the stance of policy. In 1981 5.4 9.3 12.4 9.9 addition, a public announcement ensures 2.52 1982 8.8 9.2 9.9 9.6 that all financial market participants 1983 10.4 12.2 9.9 11.8 have the same access to information 1984 5.5 8.1 10.9 14.4 regarding changes in monetary policy. 1985 12.0 8.7 7.6 14.1 1986 15.5 9.3 8.9 13.5 Second, the Committee agreed to con- 1987 6.3 4.3 5.7 10.2 tinue releasing the transcripts of Com- 1988 4.3 5.3 6.3 9.0 1989 .6 4.8 3.8 8.0 mittee meetings with a five-year delay. The published minutes of Committee 1990 4.2 4.0 1.7 6.5 1991 7.9 2.9 1.2 4.6 meetings, which are available soon after 1992 14.3 2.0 .5 4.7 the subsequent meeting, provide a rela- 1993 10.5 1.7 1.0 5.2 1994 2.3 1.0 1.4 5.3 tively complete summary of the arguments presented and the reasons for a Quarter (annual rate)3 policy choice. The transcripts provide 1994:Q1 5.5 1.8 .6 5.3 Q2 2.6 1.7 1.3 5.6 additional information, however, that Q3 2.4 .8 2.0 4.4 may be of use to those interested in the Q4 -1.2 -.4 1.7 5.5 details of the policy process. The Com- 1. From average for fourth quarter of preceding year to mittee decided that a five-year delay average for fourth quarter of year indicated. struck an appropriate balance between 2. Adjusted for shift to NOW accounts in 1981. 3. From average for preceding quarter to average for the right of interested members of the quarter indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 61 supplied a larger share of new debt than in mortgage debt because some housethey had for several years. Much of the holds had taken the opportunity afforded depository credit growth was funded by refinancing to cash out a portion with nondeposit funds, however, and of the equity in their properties. Higher growth in the broad monetary aggre- rates on fixed-rate mortgages also gates, which consist primarily of depos- induced many borrowers to shift to its, remained subdued. adjustable-rate mortgages that carried Debt growth both in the federal and in much lower initial rates. Concessional the state and local government sectors starting rates and the growing use of slowed last year. Growth of federal gov- adjustable-rate contracts with initial ernment debt was smaller because of the fixed-rate periods lasting several years narrowing of the federal budget deficit. also may have contributed to this shift. The outstanding volume of state and Over the last few months of the year local government debt actually declined about half of all new home mortgages as bonds that previously had been were of the adjustable-rate variety. The refunded in advance of their earliest call shift to adjustable-rate mortgages and date were retired. Much of the bulge the sluggish adjustment of consumer in tax-exempt issues in 1993 had been loan rates mitigated the effect of higher for the advance refunding of higher-cost market interest rates on household debtdebt issued in the 1980s. These offer- service burdens. ings subsided early in 1994, as the The debt of nonfinancial businesses amount of bonds eligible for advance expanded in 1994 after three years of refunding dwindled and borrowing costs stagnation. Earlier efforts to restructure rose. balance sheets by increasing equity capi- Household debt growth increased tal and refinancing higher-cost credit modestly in 1994, as an acceleration in appeared to leave businesses in a better consumer credit was partly offset by position to increase debt in 1994, as the slower growth in mortgage debt. The sector's debt-service burden had fallen pickup in consumer debt reflected, in about one-third from its peak five years part, increased demand for consumer earlier. A decline in equity issuance, perdurables. In addition, responses to Fed- haps resulting from the lackluster pereral Reserve surveys of banks indicated formance of the stock market, may also that many respondents were more will- have boosted business borrowing. Busiing to extend credit to households last ness financing needs were strengthened year, which may have led them to ease by increased spending on capital and terms and standards on consumer loans. inventories, as well as merger and Indeed, spreads between consumer loan acquisition activity. The total value of rates and market rates narrowed signifi- mergers and acquisitions increased cantly last year, as increases in loan substantially last year, and the share of rates lagged those in market interest such activity requiring cash payments rates. Consumer credit may also have to shareholders—rather than swaps of been boosted somewhat by the increased shares—rose sharply, although it reuse of credit cards offering rebates or mained below the levels reached in the other incentives. Rising mortgage rates late 1980s. in 1994 greatly reduced the volume of Rising and more volatile long-term mortgage refinancings from the very interest rates encouraged businesses to high levels reached in 1993. The refi- rely more heavily on short-term debt in nancings had contributed to an increase 1994. This shift was reinforced by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

62 82nd Annual Report, 1995 changes in supply conditions in various In 1994, thrift sector credit expanded markets. Capital losses early in the year for the first time in several years, as the likely caused some of those supplying Resolution Trust Corporation virtulong-term funds to become more cau- ally completed its liquidation of insoltious; for example, some savers backed vent thrift institutions. In part, the away from bond mutual funds. At the increase in thrift sector credit also likely same time, banks were loosening terms reflected the shift by households toward on business loans as well as easing their adjustable-rate mortgages. Thrift instituunderwriting standards. Banks attributed tions and banks find holding adjustablethe easing of loan terms and standards to rate mortgages less risky than holding increased competition for business cus- fixed-rate mortgages, and so adjustabletomers from other banks and also from rate loans are less likely to be securinonbank lenders. The competitive pos- tized and sold. ture of banks likely reflected, in part, the With bank credit growth picking up high level of profits earned by banks in and thrift sector credit rising, growth recent years and the resultant strength- of depository credit in 1994 nearly ening of their balance sheets. As a result matched that of total nonfinancial debt. of these factors, bank business loans Thus, the share of credit provided by increased more than 9 percent, their first these intermediaries stabilized last year annual increase in several years. Other after having declined substantially since sources of short-term business finance, 1988. Despite the growth in depository including commercial paper and finance credit, the broad monetary aggregates company loans, also expanded over the continued to expand sluggishly. Domesyear. tic banks funded much of their credit The effect of the pickup in business expansion from non-deposit sources, and consumer loans on bank credit such as borrowings from their foreign growth was partially offset by slower offices, that are not included in the growth in bank securities holdings. monetary aggregates. Funds from these Early in the year, banks purchased a sources are not subject to deposit insursignificant volume of government secu- ance premiums, which may help account rities, and reported levels of other for their recent rise. The broadest monesecurities holdings were boosted by tary aggregate, M3, did pick up a bit as an accounting change.5 Much of this banks turned, in part, to large time growth was reversed later in the year, deposits to fund asset growth. M3 however, as banks used sales of securi- expanded about V/z percent, well above ties to fund loan growth. Reported secu- the lower bound of its 0 percent to 4 perrities growth was also damped by cent annual range and a somewhat larger declining securities prices.6 increase than that in 1993. Growth in large time deposits topped 7 percent for the year, marking the first annual 5. New Financial Accounting Standards Board increase in this component since 1989. rules, effective at the start of the year, limited the Much of the increase in large time ability of banks to net off-balance-sheet items for deposits was in senior bank notes, which reporting purposes. The new rules affected items such as swaps and options, the cash values of which are reported on balance sheets in the other securities category. ties into those that it intended to hold to maturity, 6. A Financial Accounting Standards Board which could be reported at book value, and those rule implemented at the start of the year required that were available for sale, which had to be each bank to divide its investment account securi- marked to market. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 63 are not subject to deposit insurance offered on retail balances. This consispremiums. tency suggests that, unlike the past few M2 grew 1 percent in 1994—the years, the slow growth in M2 last year lower bound of its annual range. The was not the result of portfolio shifts slow growth reflected, in part, relatively toward bond and equity mutual funds. sluggish upward adjustment of retail Indeed, the growth in M2 plus long-term deposit rates. Rates on savings accounts mutual funds ran slightly below the and other checkable deposits (OCDs), 1 percent pace of M2 growth. Net sales including NOW accounts, responded of equity mutual funds continued at a about as slowly as they have in the past high level in 1994, although the pace of to the increase in market rates, while sales slowed somewhat late in the year. the response of rates on small time Equity fund sales were partly offset, deposits was sluggish relative to his- however, by outflows from bond mutual torical norms. Evidently, banks believed funds in the last three quarters of the that generating increased retail deposits year. Apparently, falling bond prices and would be more expensive than raising greater market uncertainty, and, perhaps, wholesale funds given that higher retail reports of derivatives losses at some rates would have to be paid on existing funds, led households to scale back their liquid deposits and on time deposits as holdings of bond mutual funds in favor they were rolled over, as well as on any of investments that posed less risk of new deposits. Increasing retail deposits capital loss. With deposit rates lagging, would also require higher advertising, however, these outflows did not transadministrative, and deposit insurance late into faster M2 growth. Some of the costs. withdrawals from bond funds may have In contrast to the previous several been invested directly in Treasury secuyears, M2 behavior in 1994 was roughly rities. Reflecting such portfolio shifts, consistent with its long-run historical net noncompetitive tenders for Treasury relation with movements in nominal bills, which had been negative in 1993, income and opportunity costs as tradi- totaled more than $16 billion last year, tionally defined—that is, the difference and net noncompetitive tenders for Treabetween rates on short-term instruments sury notes also increased substantially.7 (for example, Treasury bills) and those Consistent with its historical behavior, Ml growth slowed sharply last year in response to widening differen- Monthly Average Net Sales of Shares in Long-Term Mutual Funds tials between market interest rates and those offered on transaction deposits. Millions of dollars Ml expanded only 2lA percent—down Measurement Total Equity Bond substantially from the double-digit period funds funds Year 7. The Treasury permits noncompetitive bids at 1991 10,820 3,821 7,000 1992 16,844 7,268 9,576 its auctions to make it easier for smaller, less 1993 23,445 11,832 11,634 sophisticated bidders to participate. Those submit- 1994 9,674 11,073 -1,399 ting noncompetitive tenders are assured of receiving the security, and the yield on the security they Quarter 1994:Q1 17,438 13,744 3,694 obtain is the average issue rate established at the Q2 10,128 10,935 -808 auction. The level of net noncompetitive tenders Q3 9,826 11,166 -1,340 during a period is the dollar volume of securities Q4 1,306 8,447 -7,141 purchased under noncompetitive tenders less the NOTE. Gross sales of shares less redemptions. volume of repayments of maturing securities that SOURCE. Investment Company Institute. had been purchased under noncompetitive tenders. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

64 82nd Annual Report, 1995 increases recorded the previous two to December 1994. After displaying years. Following the typical pattern, some strength at the start of 1994, the demand deposits and OCDs were espe- weighted-average foreign exchange cially responsive to the rise in short- value of the dollar fell about 10 percent term interest rates. On balance, demand from February through early November. deposits edged up only x/i percent, com- Although U.S. growth continued to be pared with growth of YbxM percent in stronger than expected, market percep- 1993, as higher market rates encouraged tions about the strength of economic deposit holders to economize on these activity in the other industrial countries non-interest-earning assets. In addition, were also revised sharply higher as the the turnaround reflected the decline in year progressed. These changed percephome mortgage refinancing activity last tions led market participants to raise year: Demand deposits had been boosted their expectations of market interest in 1993 because prepayments of securi- rates abroad, which, together with tized mortgages were held primarily in increased concerns over potential inflasuch deposits for a time before they tion pressures in the U.S. economy, were distributed. The rates offered on put downward pressure on the dollar OCD accounts adjusted slowly to higher against most foreign currencies. The market rates last year, encouraging dollar rebounded somewhat at the households to shift funds into higher- end of the year as the greater-thanyielding assets. OCD growth also was expected tightening action by the Feddepressed by the introduction of sweep eral Reserve in November reassured account programs at some large banks. market participants that U.S. inflation In these programs, the portion of cus- risks were being addressed. In early tomers' OCD balances in excess of a 1995, however, with U.S. growth predetermined level are swept into appearing to moderate and the turmoil money market deposit accounts at the in Mexican financial markets raising end of each day. concerns about possible implications for In contrast to transaction deposits, the the United States, the dollar declined on currency component of Ml continued balance, nearly reaching its fall 1994 to register strong growth last year. low. Currency increased 10V4 percent, the Long-term interest rates in major forsame rise as 1993 and close to the rec- eign industrial countries generally rose ord increase in 1990. As has been the during the year. On average, yields on case since 1990, much of the currency foreign government issues with maturigrowth appeared to reflect rapid expan- ties of ten years increased 200 basis sion in U.S. currency circulating abroad. points in the twelve months to Decem- Informal reports suggest that foreign ber, about the same as in the United demand was particularly strong in 1994 States. In Japan, where the evidence for in Russia and the other former Soviet a buoyant recovery remained somewhat republics. mixed, long-term rates rose less. In contrast to long-term rates, foreign shortterm rates were little changed on aver- Foreign Exchange Developments age and even declined slightly in several The trade-weighted foreign exchange countries, including France and Gervalue of the dollar in terms of the other many. Major exceptions were Canada, G-10 currencies declined nearly 6!/2 per- where short-term market rates rose cent on balance from December 1993 about 300 basis points, and the United Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 65 Kingdom, where they rose 100 basis attracted funds from markets upset by points. In both countries, official lending the peso crisis. rates were increased during the year to In contrast to its experience in terms contain inflation risks in the face of vig- of the ERM currencies and the yen, the orous economic growth. During the first dollar appreciated in terms of the Canafew weeks of this year, foreign long- dian dollar nearly 4lA percent during term rates on average rose slightly fur- 1994. The relative weakness of the ther, but they have since retraced most Canadian currency appeared to reflect of that rise. pressures arising from the increases in During 1994 the dollar depreciated U.S. short-term rates, concerns over 8 percent in terms of the mark and the large fiscal deficits of the central declined by similar amounts in terms of government and the provinces, and, at the other currencies in the exchange rate times, perceived risks associated with mechanism (ERM) of the European possible secession by Quebec. In the Monetary System. The German econ- first few weeks of 1995, the Canadian omy expanded over the year, and the dollar weakened further, as markets growth of the targeted monetary aggre- apparently became more concerned gate, M3, remained above target until about the large outstanding Canadian the very end of the year. Market partici- federal and provincial debt and the perpants trimmed their expectations of sistent federal government deficit. As a further declines in official Bundesbank result, market interest rates have risen lending rates, and German long-term further, and the Bank of Canada has interest rates rose. The dollar depreci- moved up overnight rates several times, ated by lesser amounts in terms of ster- including an increase to match the ling and the lira, both of which had been upward shift in the U.S. federal funds withdrawn from the ERM in 1992. The rate following the most recent FOMC persistent strength of the U.K. recovery meeting. In response, the Canadian dolraised concerns of renewed inflation lar strengthened but, more recently, has pressures there, and the political uncer- given up some of these gains. tainties in Italy and, to a lesser extent, in The dollar depreciated nearly 5 perthe United Kingdom held back market cent in 1994 against the currencies of enthusiasm for the two currencies. major U.S. trading partners in Latin The dollar also depreciated about America and East Asia when adjusted 8 percent in terms of the yen during the for relative changes in consumer prices. year. At times, the dollar-yen rate fluc- The dollar appreciated sharply against tuated in response to developments in the Mexican peso, however, first in U.S.-Japanese trade talks. The dollar March and more significantly during the reached a historic low of 96.11 yen in final two weeks of the year and in early November and was very weak against 1995. the German mark as well, and the Fed- In response to continuing downward eral Reserve joined the U.S. Treasury in pressures on the peso and sizable losses intervention purchases of dollars against of international reserves over the course yen and marks at that time. Subse- of 1994, the Bank of Mexico announced quently, the dollar rebounded somewhat on December 20 a 13 percent change in in terms of the yen and European cur- the lower bound of the range that it rencies. In early 1995 the dollar weak- unilaterally had set for the peso-dollar ened further, especially against the exchange rate. The peso immediately mark, in part because that currency fell to the new lower limit, from about Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 82nd Annual Report, 1995 3.5 to 4 pesos per dollar, and reserve on financial markets in other countries. losses continued. As a consequence, the In particular, equity markets in Argen- Bank of Mexico on December 22 per- tina and Brazil had declined in volamitted the peso to float and activated the tile trading. More generally, investors North American Swap Facility, which appeared to be retreating from investprovides up to $6 billion of short-term ments in a variety of emerging market funds to the Bank of Mexico, evenly economies, some of which have subsplit between the Federal Reserve and stantial current account deficits, while the Treasury, and an additional C$1 bil- others maintain fixed exchange rates that lion from the Bank of Canada. pose the risk of becoming overvalued. During the following days the peso On January 31 the Administration withremained volatile on exchange markets, drew the request for approval of the fluctuating in a range between 5 and guarantee program and, with the support nearly 6 pesos to the dollar. On Janu- of the bipartisan leadership of the Conary 2 a package was announced totaling gress, announced a new plan to provide $18 billion in international financial sup- $20 billion to support financial stabilizaport for Mexico, including an increase tion in Mexico using the resources of from $6 billion to $9 billion in the swap the Exchange Stabilization Fund (ESF) facilities extended by the United States and, in the short run, the Federal (again split between the Federal Reserve Reserve. On February 1 the Federal and the Treasury), an additional Reserve's swap line with the Bank of C$500 million in the swap facility of the Mexico was increased further, to $6 bil- Bank of Canada, $5 billion in credit lion, as part of this package. The packsupported by other central banks acting age will consist of short-term swaps, through the Bank for International which will be provided by the Federal Settlements (BIS), and $3 billion in Reserve and the ESF, and swaps with credit from commercial banks. On Janu- maturities of three to five years and ary 6 the IMF began talks with Mexico securities guarantees with maturities of on a standby arrangement in support five to ten years provided by the ESF. of Mexico's economic reform program, Repayment will be assured from the proand on January 12, against the back- ceeds of exports of Mexican oil. Addiground of increased turbulence in inter- tional multilateral support for Mexico national capital markets, the Clinton included an increase from $7.8 billion to Administration, with the support of the $17.8 billion in the funds provided by bipartisan leadership of the Congress, the International Monetary Fund under a announced a proposal to provide standby arrangement that was approved $40 billion in guarantees on securities to on February 1 and an increase from be issued by Mexico in an effort to $5 billion to $10 billion in the shortrestore investor confidence. term credit supported by the central Subsequently, the peso weakened banks of a number of major industrial further as support within the Congress countries acting through the BIS. for the guarantee proposal appeared to The peso rebounded during the week decline. The Mexican stock market also following the announcement of the continued to slide, and short-term peso January 31 program and, on net, has interest rates rose sharply. In late Janu- since held most of that gain in volaary the peso reached a new low of tile trading. Through mid-February, the 6.55 pesos to the dollar amid signs that dollar on balance has appreciated problems in Mexico were having effects substantially against the peso since Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 67 December 19, the day before the peso's erated further in the second quarter and devaluation. was probably about flat, as measured by real gross domestic product. The inventory adjustment was especially Report on July 19, 1995 large in the motor vehicle sector, which accounted for much of the downswing in manufacturing activity in the spring. Monetary Policy and Homebuilding also showed marked the Economic Outlook weakness, in part because builders hesifor 1995 and 1996 tated to start new projects until they During 1994, spending by U.S. house- could work down stocks of unsold new holds and businesses grew at an excep- homes. tionally rapid pace, and by the end of While output growth was stalling in the year, demands clearly were taxing the first half of this year, the still-high the productive capacity of the economy. level of resource utilization of the Pressures on resources were particularly economy, as well as the effects of rapid intense in sectors of manufacturing that increases in materials prices, contribprovide inputs for other producers, and uted to a pickup in inflation from sharp increases in the prices of materials its 1994 pace. Nonetheless, by July it and supplies signaled what could have appeared likely that pressures on been the first stage of a broader infla- resources and hence on prices were in tionary process. A weakening of the dol- the process of easing. Materials prices lar on foreign exchange markets as 1995 were showing signs of softening, and began heightened that risk. To damp a period of greater stability in the these inflationary pressures and foster exchange value of the dollar suggested a sustainable economic expansion, the that the rise of import prices might soon Federal Open Market Committee in slow. With the threat of future inflation February tightened policy somewhat, thus reduced, the FOMC elected to ease extending the series of actions under- the stance of policy slightly at its meettaken during 1994, and the Board of ing in July. Governors approved a V2 percentage The moderation in economic growth point increase in the discount rate. and improvement in inflation prospects The economy's growth began to mod- over the first half of 1995 sparked a erate in the first quarter of 1995. Among considerable decline in market interest the factors contributing to the slowing rates. The greater likelihood of signifiwere the lagged effects of 1994's cant progress toward a balanced federal increases in interest rates on housing budget also seemed to contribute to the and other rate-sensitive sectors and the decrease in longer-term interest rates. impact on U.S. exports of the sharp con- Intermediate- and long-term yields have traction in Mexico's economy and fall fallen 1 lA to PA percentage points since in the foreign exchange value of the year-end 1994, with the decline in peso. As final sales moderated, busi- thirty-year fixed mortgage rates this year nesses scaled back their desired inven- reversing most of the increases registory accumulation. In some key sectors, tered since early 1994. Lower interest the slackening in sales was greater than rates, solid earnings growth, and prosanticipated, leaving firms with excess pects for sustained economic expansion inventories. As businesses took steps to helped push most broad stock price trim stocks, aggregate production decel- indexes to record highs. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 82nd Annual Report, 1995 The drop in longer-term interest rates erably, a move reflecting a widening gap in the United States contributed to between capital expenditures (including downward pressure on the foreign inventory investment) and internally exchange value of the dollar in 1995. generated funds, and also reflecting the In terms of the currencies of the other balance sheet restructuring associated G-10 countries, the dollar has declined with stock repurchases and a surge IV2 percent on balance. Over the past in merger and acquisition activity. half-year, foreign long-term interest Although the decline in long-term interrates have fallen significantly as growth est rates this year has spurred a signifiprospects abroad have weakened, but by cant pickup in bond issuance and fixed less than U.S. long-term interest rates. In rate mortgage borrowing very recently, addition, the Mexican crisis was seen by the increase in credit this year has been market participants as having adverse concentrated in short-term or floatingimplications for U.S. growth, espe- rate debt. cially exports, and it contributed to the Depository institutions, as traditional dollar's decline in terms of currencies providers of short-term and floating-rate other than the peso in early 1995. With credit, have enjoyed a sharp increase in the dollar at times under greater down- loan demand. To fund the growth of ward pressure than seemed justified their loan portfolios, banks and thrift by fundamentals, the Federal Reserve, institutions pulled in more deposits, acting on behalf of the Treasury and for providing a lift to growth of the broad its own account, joined other central monetary aggregates. Indeed, M3 exbanks in concerted intervention in panded at a 6VA percent pace from the support of the currency on several fourth quarter through June, slightly occasions in 1995. In recent weeks, the exceeding the upper bound of its revised dollar has fluctuated in a range some- annual range. In their usual fashion, what above the lows reached in the yields on small time deposits and money spring. market mutual funds have adjusted with Despite the slower expansion of a lag to the declines in market interest nominal spending this year, net bor- rates this year. Investors have responded rowing by households and businesses by shifting their portfolios toward these remained substantial. In fact, total pri- assets, boosting M2 growth from the vate credit flows strengthened, offsetting fourth quarter through June to 3Vi perslower growth of federal debt and an cent at an annual rate. M2 velocity over outright decline in state and local gov- the first half of 1995 is estimated to have ernment debt; as a result, total domestic held about steady, in marked contrast to nonfinancial debt expanded at a 5l/i per- the rise in M2 velocity over the previous cent pace from the fourth quarter of five years. 1994 through May, a little faster than in Unlike the broad monetary aggre- 1994. Credit supply conditions remained gates, Ml has grown quite sluggishly quite favorable, with banks continuing this year. Low interest returns on transto ease terms and conditions of lend- action deposits have encouraged houseing and with risk spreads in securities holds and businesses to move excess markets persisting at quite low levels. balances into higher-yielding M2 assets Household borrowing this year has been and also into market instruments. This a bit more subdued than in 1994 but still process has been amplified by the appreciable. Nonfinancial businesses expansion of retail sweep accounts have stepped up their borrowing consid- offered by a few banks that allow Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 69 customers to hold a lower average track, growth of M2 in the upper half of level of transaction balances. Currency this range in 1995 and near the upper growth—although slower than the bound of the provisional range in 1996 double-digit pace of the last two years— would be consistent with the Commithas remained strong, boosted again by tee's expectations for nominal income heavy foreign demands. growth. The existing range was retained for next year in view of the lingering uncertainties about the money-income Money and Debt Ranges relationship and to serve as a benchmark for 1995 and 1996 for the rate of growth of M2 that would In setting ranges for money and debt in be expected under conditions of rea- 1995 and 1996, the Committee noted sonable price stability and historical that the velocities of the monetary velocity behavior. The Committee also aggregates have been behaving more reaffirmed the 3-to-7 percent range for in line with historical patterns than was the debt aggregate and carried this range the case earlier in the decade. How- forward on a provisional basis for 1996, ever, financial innovation, technological concluding that debt growth within this change, and deregulation have blurred range would be expected to accompany distinctions among various financial the moderate economic expansion it was instruments that can serve as savings seeking to foster. vehicles and sources of credit. As a With regard to M3, the Committee consequence, considerable uncertainty had noted in its February 1995 report remains about the future relationships of to the Congress that the depressed money and debt to the fundamental growth of this aggregate in recent years objectives of monetary policy; the reflected the balance sheet adjustments Committee will thus continue to rely of banks and thrift institutions in reprimarily on a wide range of other infor- sponse to the extraordinary strains they mation in determining the stance of experienced in the early 1990s. The policy. Committee observed that, as these insti- The Committee retained its current tutions returned to health and intermerange of 1 to 5 percent for M2 for 1995 diation resumed more normal patterns, and chose the same range for 1996. If M3 growth could pick up appreciably M2 velocity continues on a more normal and the velocity of M3 might begin to stabilize or even decline, as it had on average over several decades before 1990. In the event, M3 has strengthened Ranges for Growth of Monetary considerably so far in 1995, apparently and Debt Aggregates for the reasons noted by the Commit- Percent tee in February. As a consequence, the Provisional Committee made a technical adjustment Aggregate 1994 1995 for in its M3 range at the July meeting—to 1996 2 to 6 percent for 1995—and carried M2 1-5 1-5 1-5 that range forward on a provisional basis M3 0-4 2-6' 2-6 Debt 4-8 3-7 3-7 into 1996. The Committee stressed that this change simply recognized the return NOTE. Change from average for fourth quarter of preceding year to average for fourth quarter of year of historical financing patterns and bore indicated. Figures for debt of the domestic nonfinancial no implications for the underlying thrust sector are monitoring ranges. of monetary policy. 1. As revised at the July 1995 FOMC meeting. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 82nd Annual Report, 1995 Economic Projections increases in the value of bond and for 1995 and 1996 stock portfolios that have accompanied The members of the Board of Governors the decline in interest rates should and the Reserve Bank presidents, all of strengthen aggregate demand more genwhom participate in the deliberations of erally. The strong competitive position the Federal Open Market Committee, of the United States likely will bolster generally anticipate that, after a weak net export growth on balance over the second quarter, the economy will experi- remainder of 1995. To be sure, the level ence moderate growth in the second half of U.S. exports to Mexico probably of 1995 and in 1996. For all of 1995, will remain depressed for some time, this would produce growth that was but Mexico's external adjustment has somewhat below forecasts made for the already been substantial and further February meeting. In line with these declines in U.S. export demands from expectations, the unemployment rate in this source are likely to be less severe the second half of 1995 may move up than in the first half of 1995. Finally, the somewhat from its recent relatively low anticipated pickup in spending will help level. businesses work off excess inventories A number of factors should contrib- more rapidly and reduce the need for ute to a pickup in demand and pro- further production cutbacks to bring duction over coming months. Lower inventories back in line with final sales. interest rates, in particular, likely will The Board members and the Reserve directly stimulate spending on housing, Bank presidents generally expect the motor vehicles and consumer durables, rise in the consumer price index over and business investment. Moreover, the four quarters of 1995 to end up at Economic Projections for 1995 and 1996 Percent Federal Reserve governors and Reserve Bank presidents Measure Administration Central Range tendency 1995 Change, fourth quarter to fourth quarter' Nominal GDP 33/4-5'/4 4»/4-43/4 5.4 Real GDP P/8-3 11/2-2 2.4 Consumer price index2 3-3 V* 3'/8-33/8 3.2 Average level, fourth quarter Unemployment rate3 5'/2-6'/4 53/4-6'/8 5.5-5.8 1996 Change, fourth quarter to fourth quarterx R C N e o o a n m l s i u G n m a D l e P r G p D ri P ce index2 4 2 2 V 5 I/ / 2 f 8 e - - 3 - 5 3 1 '/ / 2 2 4 2 2 3 7 '/ / / 4 4 8 - - - 2 3 5 3 ' 3 / / / 4 4 s 3 2 5 .2 . . 5 5 Average level, fourth quarter Unemployment rate3 5'/2-6'/4 53/4-6'/8 5.5-5.8 1. Change from average for fourth quarter of preced- 3. Civilian labor force. Figures for the Administration ing year to average for fourth quarter of year indicated. are annual averages. 2. All urban consumers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 71 around VA percent, the same as in the 1989 peak, and the unemployment rate first half of the year. For 1996, inflation was close to the low point of the late is projected to edge down, to the neigh- 1980s. Moreover, economic expansion borhood of 3 percent. The first-half was still brisk, with real gross domestic slowdown in the industrial sector has product growing at a 5 percent annual reduced pressure on materials prices; rate in the fourth quarter. Although moreover, wage trends have been stable, inflation for 1994 as a whole remained suggesting that labor costs are unlikely moderate, commodity prices, which can to provide an impetus to inflation. signal the onset of inflationary pres- The Administration has not released sures, were rising rapidly at the end of an update of the economic projections last year. contained in the February Economic A deceleration in activity was widely Report of the President. Those earlier anticipated, and growth in real GDP did forecasts pointed to real GDP growth of moderate to a 23A percent annual pace in 2.4 percent for 1995, well within the the first quarter of 1995. But the slowing central tendency range in the Federal did not stop there: Spending in several Reserve's February report. Given the sectors of the economy softened in the slow start this year, that growth pace for spring, industrial production fell, and the year appears less likely, and the employment grew relatively little. The average unemployment rate for the year level of real GDP appears to have been probably will be around the upper end essentially flat in the second quarter. of the 5.5 to 5.8 percent range in the A slackening in household demand Administration's February report. The for big-ticket items was a significant Administration's 3.2 percent CPI fore- element in the drop-off in economic cast is in line with the Federal Reserve's growth in the first half. After registering central tendency. sizable gains last year, spending on con- The inflation rates anticipated by the sumer durables weakened considerably FOMC are marginally above those pre- early this year. And residential construcvailing in 1993 and 1994 but are consid- tion, which continued to grow in the erably below rates of only a few years face of rising mortgage rates last year, ago—and lower than many observers began to fall this winter and was off seemed to anticipate for the current sharply in the second quarter. These economic expansion only a few months domestic drags were reinforced by the ago. Nonetheless, they should be re- effects of the plunge in net exports to garded as only a milepost along the path Mexico, which came in the wake of that toward the long-term goal of price sta- nation's financial crisis. bility. The Federal Reserve recognizes With domestic sales and exports softthat eliminating the economic distor- ening, businesses cut orders and protions associated with inflation is the duction. However, in some cases, the most important long-run contribution it adjustments were not quick enough to can make to the economic growth and avoid an unwanted accumulation of welfare of the nation. inventories—especially for cars and light trucks, but for some other goods as well. Efforts to trim stocks reinforced The Performance of the Economy the contractionary forces in the manu- At the end of 1994, resource utilization facturing sector of the economy. in the U.S. economy was high: Manufac- Despite the falloff in growth in the turing capacity utilization equaled its first half, the unemployment rate edged Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

72 82nd Annual Report, 1995 up only slightly, and although manufac- gage refinancing wave of 1993 and early turing capacity utilization fell consider- 1994 likely had been exhausted. The ably, it remained above historical aver- downturn in interest rates this year has ages. Under the circumstances, it is not led to a comparatively modest rebound surprising that the mounting inflationary in refinancings recently, which may free pressures of the latter part of 1994 car- up some income for additional spending ried over into the first part of this year in coming months. and that materials prices surged further. The slackening in consumer demand Rising import prices, related to the in the first quarter was concentrated in depreciation of the dollar, also contrib- motor vehicles, where sales fell off after uted to domestic inflation. Reflecting surging in the fourth quarter of 1994. these and other factors, the consumer However, real spending on goods other price index increased at a 3VA percent than motor vehicles also grew less rapannual rate in the first half of this year, idly in the first quarter than in the secup from a 23/4 percent increase for 1994 ond half of 1994. Some of the deceleraas a whole. tion in other consumer durables may Nonetheless, increases in hourly have reflected the weakness in home wages and benefits remained moderate, sales because families often purchase holding down unit labor costs. Further- new furnishings and appliances when more, the drop in manufacturing activity they change houses. Among nondurable in the first half of the year contributed goods, outlays for apparel were espeto a flattening in industrial commodity cially weak, following rapid growth in prices, suggesting some lessening of spending in the second half of 1994. inflationary pressures "in the pipeline." The slowing of consumer spending These favorable factors were reflected growth so far this year has been about in in some moderation of price increases line with the slowing in income growth. toward midyear. Through the first quarter, wage and salary income posted solid gains, bolstered by a healthy pace of hiring. But The Household Sector increases in wage and salary income After advancing at more than a 4 per- faded in the spring, reflecting slow cent annual rate in the second half of growth in employment and a drop in the 1994, growth in consumer spending workweek. The deceleration in labor slowed appreciably on average in the income was only partially offset by rapid first half of this year. Real personal con- growth in interest and dividend income sumption expenditures increased at just in the first half of 1995. Dividend a W2 percent annual rate in the first income benefited from the improvement quarter, before picking up moderately in in corporate profits. Growth in interest the second. income was strong in the first quarter, Outlays for consumer durables moved reflecting the lagged effects of increases up sharply in 1994, and by the end of in market interest rates in 1994, but the year, the level of spending was high began to flag in the second quarter as the relative to income. Many households decline in market interest rates this year may have brought their stocks of showed through to interest earnings. durables up to desired levels, limiting Surveys suggest that consumer confifurther purchases this year. In addition, dence remained high through the first by early this year, the stimulus to con- half of 1995. Movements in both of the sumer spending from the massive mort- major surveys—from the Michigan Sur- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 73 vey Research Center and the Confer- The Business Sector ence Board—were similar in the first In the second half of 1994, nonfarm half of 1995: Both spent part of the first inventories increased nearly 5 percent at half above their 1994 average values, an annual rate, about keeping pace with but by June, both had moved back down growth in final sales, as firms built to their 1994 averages. stocks to ensure adequate supplies—or, Early this year, residential construcin some instances, to beat anticipated tion activity weakened significantly, and price increases. In the first quarter, single-family housing starts in the first inventory growth continued at about its quarter were 14 percent (not an annual late 1994 pace, but growth in final sales rate) below their fourth-quarter average. moved down to a 2Vi percent annual Sales of new and existing homes also rate, leaving many firms with stocks fell in the first quarter, although not they did not want. quite so steeply. Single-family starts The first-quarter inventory run-up was edged up in April but more than disproportionately in motor vehicles, as reversed this gain in May; however, production increased while sales were building permits, a more reliable indifalling. To bring inventories back in line, cator, moved up in May. New home manufacturers cut production sharply; sales jumped 20 percent in May, to the between February and May, output highest level since late 1993. Although dropped 10 percent. The decline in outreported new home sales are volatile, put of motor vehicles, parts, and related and the initial readings are often revised inputs was the most important factor in substantially, other indicators of housing the 1 percent drop in overall industrial activity also point in a favorable direcproduction in this period. Motor vehicle tion: Applications for mortgages to purinventories accumulated further in April chase homes rose sharply in May and when sales fell sharply, but there was remained elevated in June, and attitudes some progress in trimming excess stocks of households and builders toward the in May and June. Nonetheless, much of housing market became more positive in the overhang of vehicles that developed the second quarter. earlier this year remains. Like single-family homebuilding, multifamily construction fell early this The inventory buildup outside the year, with starts off 11 percent in the motor-vehicle sector was also quite first quarter. The drop this year follows large in the first quarter, and it continued a two-year period of recovery, during at a rapid pace in April. The available which starts doubled from their thirty- data for May suggest a somewhat five-year low reached at the beginning smaller rate of increase. Although stocks of 1993. Multifamily starts turned back of most goods remained in better alignup in April and May. Prospects for a ment with sales than in the motorcontinued gradual increase in multi- vehicle sector, inventory accumulation family starts appear good, as newly built has been running ahead of sales in a few apartments were quickly filled last year sectors, particularly in apparel, furniand vacancy rates for apartments contin- ture, and appliances. In response, manuued to move down in the first quarter facturers have cut production in these of this year. However, continuing over- areas. The accumulation of furniture and hangs of empty apartments in some mar- appliances is likely related to the dropkets are likely to keep total multifamily off in home sales in early 1995, and starts well below the levels of the 1980s. the revival in home sales that appears Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 82nd Annual Report, 1995 to be under way should boost sales in Corporate operating profits increased these areas, helping to trim inventories at a 7 percent annual rate in the first further. quarter, a somewhat faster pace than in Business fixed investment rose at an the second half of 1994. However, firstextraordinary pace in the first quarter, quarter profits were boosted by an with strong gains in both the equipment increase in earnings of U.S. corporations and structures components. Real spend- on foreign operations; profits on priing on equipment increased at a 25 per- vate domestic operations were about cent annual rate. With the exception of unchanged. The increase in profits on motor vehicles, the growth in equipment foreign operations resulted in part from spending was widespread in the first the decline in the exchange value of the quarter. For structures, real outlays dollar, which pushed up the value of increased at a 12 percent annual rate profits earned abroad. Private domestic in the first quarter, following a AV2 per- financial profits improved in the first cent gain over the four quarters of 1994. quarter, in part because of a surge in The first-quarter increase in construc- bank earnings, which were boosted by tion was also widespread across strong loan growth. First-quarter earncomponents. ings on domestic operations of U.S. non- Indicators for the second quarter sug- financial corporations declined slightly, gest that growth in capital spending con- following solid gains in 1994. Profits tinued to be brisk although not quite as were 10.6 percent of the output of nonfast as in the first quarter. Shipments of financial corporate businesses in the first capital goods by domestic manufactur- quarter, about the same as in 1994 as a ers in April and May were up moder- whole, when the profit share was the ately from their first-quarter average. highest since the late 1970s. And permits for nonresidential struc- In the farm sector, indications are tures, which tend to lead construction that production will fall well short of by a few months, indicate that construc- last year's exceptionally high levels. tion should continue to trend upward Weather conditions have been less although at a slower pace than in the favorable than those of 1994, with early part of this year. unusually heavy rains keeping plantings The surge in capital spending in behind schedule across large parts of the recent years has pushed growth of the Midwest. Also, with stocks relatively capital stock to its fastest pace since high after last year's large harvests, the the late 1970s. This improvement in U.S. Department of Agriculture reduced the rate of capital accumulation may the amount of acreage that farmers lead to a pickup in productivity growth, contracting for subsidy payments were but there is as yet little indication of allowed to plant. However, livestock a significant break with past trends. production has remained strong so far Indeed, when output is measured in 1995, which will help cushion the using the new chain-type alternative effects of smaller harvests on total agriindex—which will become the official cultural production. Because of the likemeasure later this year—trends in lihood that production will fall this year, productivity growth in the nonfarm farm inventory investment will probably business sector in the 1990s are little be smaller this year than in 1994, and changed from those of the 1970s and stocks of some crops will likely be 1980s. drawn down appreciably. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 75 The Government Sector for the decline. As of the first quarter, the level of real federal purchases was The federal government deficit has con- 17 percent below the peak reached four tinued to shrink in the current fiscal years ago. year. For the first eight months of the State and local government deficits 1995 fiscal year, the budget deficit was on combined capital and operating 19 percent below the same period a year accounts (that is, excluding social insurearlier. Nominal expenditures over this ance funds) totaled $37 billion in the period were 4 percent higher than a year first quarter of 1995, a small improveearlier, while receipts were up 8!/2 perment from the deficit a year earlier. cent. In addition to the strong economic Excluding social insurance, tax receipts growth of 1994, receipts were boosted increased 7 percent between the first by changes in rules that allowed some quarter of 1994 and the first quarter individuals to defer until 1995 certain of 1995, while expenditures were up tax payments that would have been due 6!/4 percent. Transfer payments continue in 1994 under previous rules. to grow faster than other spending, Higher interest outlays contributed to although the rate of increase is well the increase in federal spending in the below that earlier in the 1990s. first part of the 1995 fiscal year. Exclud- Real purchases of goods and services ing interest outlays, nominal federal by state and local governments have spending in the first eight months of this been rising only moderately for some fiscal year increased about 2 percent, time; in the first quarter of 1995, they compared with the year-earlier period. were little changed. The slowing in the Defense expenditures continued to first quarter was concentrated in condecline in nominal terms; they have struction spending, which fell after three been the main factor holding down fedquarters of solid increases. Purchases eral spending in recent years. Spending of other goods and services remained on income security programs, such as on the gradual uptrend that has been unemployment insurance and welfare evident over the past few years. State benefits, also edged down, mostly reand local employment increased about flecting the economic expansion. Spend- 14,000 per month, on average, over the ing on Medicare and other health pro- first six months of 1995, considerably grams was up 9 percent in the first eight below the pace of the 1992-94 period. months of the fiscal year; while still The small improvement in the budget quite rapid, this growth is slower than situation for the state and local sector as that of the early 1990s, when these a whole masks important differences expenditures were rising 10 to 20 per- across levels of government. Available cent per year. Spending on social secu- evidence suggests that while state budrity and on other nondefense functions gets are in relatively good shape, budincreased less than the recent trend in gets at the local level remain under presnominal GDP. sure. State aid to localities, particularly In real terms, federal purchases of to school districts, has been eroding goods and services—the part of federal relative to expenses for several years. spending included in gross domestic Also, local governments rely more product—fell at an annual rate of 4 per- heavily than state governments on propcent in the first quarter of 1995. Falling erty taxes, and while sales and incomes defense spending more than accounted have rebounded in the current business Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 82nd Annual Report, 1995 cycle expansion, property values have the four quarters of 1994. In large part, lagged behind, limiting property tax the weaker export performance was the receipts. result of the macroeconomic adjustments taking place in Mexico and the reduced Mexican demand for U.S. ex- The External Sector ports. Preliminary data for April indi- The nominal trade deficit on goods and cated that the quantity of exports services widened somewhat in the first expanded a bit further from the firstquarter, to $120 billion at an annual quarter average. For the first four rate. However, net investment income months of the year, exports to Mexico improved in the first quarter, as did net fell while they increased moderately to transfers, and as a consequence, there most other areas of the world. was a narrowing of the current account Real output in Mexico declined deficit in the first quarter from its fourth- sharply in the first quarter as instability quarter level, to $162 billion at an in the financial markets weakened conannual rate. Nonetheless, the first- fidence and the government implequarter current account deficit exceeded mented a program of fiscal and monethe 1994 average of $151 billion. In tary restraint. The Mexican economy April, the trade deficit increased further apparently continued to contract in the from the first-quarter average. second quarter. The crisis and ensuing The quantity of U.S. imports of goods policy responses induced a dramatic and services expanded 10 percent at an reduction in Mexico's current account annual rate during the first quarter, deficit during the first quarter of the somewhat less rapidly than in 1994. The year. In the wake of the Mexican crisis, slower pace of U.S. income growth con- the Argentine authorities chose to tributed to the lower import growth; tighten macroeconomic policies, which increased imports from Mexico were a has led to a weakening of economic partial offset. In April, real imports con- activity in Argentina. In contrast, Brazil tinued to grow at about the first-quarter experienced very strong growth of real pace. The increases in imports in the output in the first quarter as consumpfirst four months of the year were wide- tion spending surged; available indicaspread across major trade categories. tors suggest some slowing of growth in Non-oil import prices rose at a the second quarter. 3V2 percent annual rate in the first In Japan, recovery from the recent quarter, somewhat less than during the recession remains tentative. First-quarter second half of 1994, when they were real GDP growth was only 0.3 percent pushed up by large increases in world at an annual rate; data for the second commodity prices, especially for coffee. quarter also suggest that the recovery In April and May, non-oil import prices may be stalling. Asset prices have rose at a nearly 6 percent annual rate, continued to fall, adding to concerns with increases for most major trade cate- about the lack of progress in improving gories. The pickup in price increases for banks' balance sheets and limiting imported goods reflected, in part, the the capacity of banks to extend credit recent dollar depreciation. in support of the recovery. In May, The quantity of U.S. exports of goods the Japanese government announced and services rose at a 5 percent annual another package of structural reforms rate in the first quarter, more slowly and measures to boost domestic dethan the double-digit rate of growth over mand. The sluggish pace of activity in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 77 Japan and the rise in the value of the yen Net capital flows into the United have eliminated inflation: Consumer States were large in the first quarter of prices were unchanged over the twelve 1995. Foreign official holdings in the months through June. United States rose more than $20 bil- In other industrial countries, the rate lion, as foreign governments made large of economic expansion appears to have intervention purchases of dollars in slowed from its rapid 1994 pace. In Can- March in response to strong upward ada, real GDP growth slowed to less pressure on the foreign exchange value than 1 percent at an annual rate in the of their currencies. Sizable official first quarter; second-quarter indicators inflows continued in April and May. In suggest continued sluggishness. In the addition, net private foreign purchases United Kingdom, where the expansion of U.S. securities were considerable in has been vigorous over the past three the first quarter, particularly purchases years, real GDP continued to grow of Treasury bonds and notes and new strongly in the first quarter, although at Eurobond issues by U.S. corporations. less than the 1994 pace. In most con- Private foreign net purchases of U.S. tinental European countries, the rate of securities moderated a bit in April and real output growth in the first half of May. In contrast, U.S. net purchases of 1995 was somewhat lower than the rapid foreign securities, which had fallen subpace during the second half of 1994. In stantially last year from their 1993 peak, Canada and several major European continued to decline on balance over the countries, measures intended to reduce first five months of 1995. government deficits as a share of GDP U.S. direct investment abroad was have been announced. considerable in the first quarter, at Inflation rates in the industrial coun- $18 billion. Investment in Western tries generally remain low. However, in Europe was particularly strong. Foreign the United Kingdom and Italy, currency direct investment in the United States, at depreciation has added upward pres- $10 billion, remained substantial. On sure on prices, and consumer prices net, there was a large outflow of direct in the twelve months through June investment in the first quarter, after netrose 3J/2 percent in the United Kingdom ting to about zero in 1994. and nearly 6 percent in Italy. In western Germany, exchange rate appreciation Labor Markets helped offset domestic inflationary pressures, and consumer prices rose only Employment grew rapidly in 1994, and 2lA percent in the twelve months labor markets tightened considerably. through June. Although job growth slowed in the first Among our Asian trading partners quarter of this year, it was still large other than Japan, real GDP growth has enough—at 226,000 per month—to remained near the rapid 1994 pace, in keep the unemployment rate at about the part because substantial depreciations of same level as in the fourth quarter of those countries' currencies against the 1994. In the second quarter, growth of Japanese yen and the German mark nonfarm payroll employment slowed to stimulated exports. However, economic only 60,000 per month and the quarterly activity decelerated somewhat in China average unemployment rate edged up, and Singapore, reflecting past tightening from 5.5 percent to 5.7 percent. of monetary policy and the reduction of The deceleration in employment was spare capacity in these economies. particularly marked in the goods- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 82nd Annual Report, 1995 producing sector, where payrolls fell the same in both periods, but the pace of during the second quarter after posting benefits gains declined significantly. strong gains in the early months of the The largest contribution to the decelyear. In construction, payroll growth eration in benefits costs in recent years averaged 30,000 per month in 1994 and has come from health insurance. Among through the first quarter of 1995, but the factors restraining the increase in employment then fell 8,000 per month health insurance costs are slower in the second quarter. Manufacturing medical-sector inflation, increased use job growth also averaged 30,000 per of managed-care plans, and efforts by month in 1994. Factory hiring slowed employers to shift a greater proportion in the first quarter, and in the second of health care costs to employees. Costs quarter, 35,000 jobs per month were of workers' compensation programs lost. The decline in manufacturing have also contributed to the deceleration employment was widespread across in benefits costs; these costs, too, have industries. Employers have also trimmed been affected by lower medical inflathe factory workweek, which in 1994 tion, although regulatory reform has had reached the highest level since played a role as well. Unemployment 1945. insurance costs decelerated sharply over Although employment continued to the past two years; firms pay into the rise in most service-producing indus- unemployment insurance program on tries in the first half of 1995, the rate of the basis of their recent layoff experigrowth slowed by the second quarter. In ence, and the improved economy wholesale and retail trade, where 75,000 through the first part of this year lowjobs per month were added in the sec- ered these payments. ond half of 1994, the pace of job gains Output per hour in the nonfarm fell in the first quarter, and only 12,000 business sector—measured in 1987 jobs per month were added in the sec- dollars—increased at an annual rate of ond quarter. Similarly, in business ser- 2.7 percent in the first quarter of 1995. vices, where 46,000 jobs per month Output per hour increased 2.0 percent were added in 1994, employment decel- over the four quarters ended in the first erated in the first quarter and was about quarter, down slightly from the rate of flat in the second. Among sectors show- growth over the preceding four-quarter ing employment gains in the first half of period. this year, entertainment industries posted considerable growth, and increases in Price Developments employment in the health sector continued to run at about the same pace as in The pickup in consumer price inflation the second half of 1994. so far this year was a bit larger for the The rate of increase in hourly com- index that excludes food and energy pensation moved down further early this than for overall prices: The CPI excludyear. The employment cost index for ing food and energy increased at a private industry workers, a measure of 3.6 percent annual rate over the first six hourly labor costs that includes both months of 1995, up from a 2.6 percent wages and benefits, rose 2.9 percent increase in 1994. The acceleration in over the twelve months ended in March the first half was mostly in non-energy 1995, down from a 3.3 percent increase services prices, which increased at a over the preceding twelve-month period. 4Vi percent annual rate over the first six The increase in wages and salaries was months of 1995, up from a 3lA percent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 79 increase over the twelve months of ucts. But this pickup was partly offset 1994. Airfares increased sharply in the by declines in prices where there have first half of 1995, rising at more than a been large inventory buildups. Notably, 40 percent annual rate after falling apparel prices continued to decline in 10 percent in 1994; this acceleration the first half, and prices of appliances, accounted for two-thirds of the pickup which had increased in 1994, fell in the in services inflation in the first half. first half of 1995. Auto finance rates also increased rapidly The slowdown in the industrial sector early in 1995—rising at a 38 percent has begun to relieve pressure on materiannual rate in the first four months als prices, and the PPI for intermediate the year—following a large increase in materials other than food and energy the second half of 1994. However, the increased just 0.2 percent per month CPI for auto finance declined sharply in in May and again in June, suggesting May and June as interest rates on auto reduced pressures on finished goods loans began to reflect the declines in prices in the near term. market rates in the first half of 1995. Consumer food prices increased at a Price increases for other services were, PA percent annual rate over the first six on balance, roughly in line with their months of 1995, down about a percentrate of increase in 1994. age point from 1994. Coffee prices, As a result of the brisk expansion of which had increased 64 percent in 1994, the industrial sector in 1994 and the fell 12 percent over the first six months consequent rapid increases in prices of this year. The swing in coffee prices of basic manufactured products, the can more than account for the deceleraproducer price index for intermediate tion in food prices. Prices of meats conmaterials other than food and energy tinued to fall in the first half of 1995, as increased at a 11A percent annual rate production remained strong. over the second half of 1994. In the first Energy prices increased at a 2 percent quarter of this year, these materials annual rate in the first half of 1995, prices rose even faster—nearly 10 per- about the same as last year. Natural gas cent at an annual rate. The rapid prices have continued to decline. Reguincreases in materials prices began to latory changes have led to increased affect finished goods prices in early competition among suppliers of natural 1995, and the PPI for finished goods gas; in addition, natural gas prices were other than food and energy, which cov- depressed early this year by the relaers domestically produced consumer tively warm winter, which held down goods and capital equipment, increased demand. Gasoline prices increased at a at a 3 percent annual rate over the first 12 percent annual rate in the second six months of 1995, up from a IV2 per- quarter, reflecting the run-up in crude oil cent rate of increase over the twelve prices that occurred between December months of 1994. and April. Since April, crude oil prices The consumer price index for com- have reversed nearly all of their earlier modities other than food and energy run-up, indicating that gasoline prices increased at a ll/2 percent annual rate will move down in coming months. over the first six months of 1995, about Survey data suggest that expectations the same as in 1994. Prices accelerated of inflation have changed little since the at the retail level for some items for end of 1994. According to the survey of which producer prices have been rising households conducted by the Survey rapidly, such as household paper prod- Research Center of the University of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 82nd Annual Report, 1995 Michigan, as of the first half of 1995, out, at least temporarily, considerably the expected increase in consumer prices reducing pressures on resources. In early over the coming twelve months was the July, with the risks of a prolonged same as it was in the fourth quarter of upturn in inflation fading, the FOMC 1994. In the Conference Board survey decided to ease reserve pressures of households, the expected rate of infla- slightly, resulting in a decline in the tion over the coming year remained at federal funds rate of lA percentage point. 41/4 percent in the first half of 1995, the As incoming data in 1995 increassame as in each of the four quarters ingly suggested slower economic of 1994. Expectations of inflation over growth and an attendant relief of inflalonger periods also have not changed tion pressures, intermediate- and longmuch on balance this year. In the Uni- term interest rates moved down substanversity of Michigan survey, the expecta- tially. Additional downward pressures tion in the second quarter of 1995 for seemed also to arise from the growthe rate of consumer price inflation over ing conviction of market participants the next five to ten years was the same of the commitment of the Congress and as it was in the fourth quarter of 1994. Administration to making progress Similarly, in the May 1995 survey of toward a balanced budget. On balance, professional forecasters conducted by most longer-term interest rates have the Federal Reserve Bank of Philadel- declined 120 to 180 basis points since phia, expectations of inflation over the the end of last year, with the sharpest coming ten years were about 3V2 per- drops at intermediate maturities. The cent, the same as in the survey taken at trade-weighted exchange value of the the end of 1994. dollar has depreciated about IV2 percent against the other G-10 currencies—in large part reflecting the decline in U.S. Financial, Credit, and long-term interest rates relative to those Monetary Developments in the other G-10 countries. In addition, In charting the course of monetary pol- the fall in interest rates, coupled with icy this year, the Federal Reserve has continued strong corporate earnings, sought to promote sustainable economic fueled a run-up in equity prices; most growth and continued progress toward major stock price indexes have climbed price stability. Despite the tightening 15 to 35 percent since the beginning of actions undertaken during 1994, eco- the year. nomic data at the beginning of 1995 Despite slower economic expansion suggested that the economy was operat- this year, growth rates of broad money ing beyond its long-run potential and and credit have picked up, and the might continue to do so for some decline in intermediate- and long-term time—a situation that would no doubt interest rates has only recently begun to lead to a significant pickup in inflation if leave an imprint on the composition of allowed to persist. Against this back- borrowing. Total domestic nonfinancial drop, the Federal Open Market Commit- debt increased 5!/2 percent from the tee voted in February to tighten reserve fourth quarter of 1994 through May—a conditions somewhat further, resulting little above last year's pace—as stronger in a V2 percentage point increase in the private sector borrowing more than offfederal funds rate. In the months follow- set slower growth of the federal debt ing the February FOMC meeting, eco- and a decline in state and local governnomic activity seemed to be leveling ment debt. Borrowing in the nonfinan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 81 cial business sector has been largely contrast to the expansion of the broad concentrated in short-term or floating- monetary aggregates, Ml growth has rate debt such as bank loans and been quite weak, reflecting the low commercial paper. Recently, however, yields on these assets and the implemendeclines in longer-term interest rates tation by a few banks of retail sweep have stimulated a sharp jump in corpo- accounts, which move funds out of rate bond issuance. Household borrow- NOW accounts and into nontransaction ing this year has been considerable, balances. although below the pace of 1994. Taxexempt debt is estimated to have declined outright again this year as The Course of Policy and Interest Rates many state and local units have called The Federal Reserve entered 1995 havsecurities that had been advance re- ing tightened policy appreciably during funded. Federal debt growth has edged 1994, thereby boosting short-term rates down a bit this year, extending the trend 2V2 percentage points. Nonetheless, data toward slower expansion of federal debt reviewed at the FOMC meeting in that began in 1991. December 1994 suggested that pressures Depository institutions have been on resources were intensifying and that especially important suppliers of credit inflation threatened to move higher. to both businesses and households this Although the Committee took no action year. Borrowers' demands were concen- to increase rates further at this meeting, trated in the types of credit in which it did adopt a directive indicating a bias depositories are traditional lenders and, toward additional tightening in the interon the supply side, commercial banks meeting period. continued to pursue new lending oppor- Information reviewed at the February tunities aggressively. The health and meeting suggested that despite some profitability of depositories have re- fragmentary evidence of slowing, the mained solid to date, although federal economic expansion remained brisk in regulators have cautioned depositories an economy already operating at or that their lending standards should take beyond its long-run potential. The account of the potential for deterioration demand for consumer durables and of loan performance in a less favorable homes was softening, but output and economic climate. employment had posted substantial The surge in bank lending and the gains near year-end, and capacity utiliflattening of the yield curve this year zation had moved up from already high have provided a significant impetus for levels. In addition, a marked rise in growth of the broad monetary aggre- materials prices during the second half gates. M3 advanced 6lA percent at an of 1994 posed a threat of increased annual rate from the fourth quarter of consumer price inflation in coming 1994 through June—slightly above the months. In these circumstances, the upper bound of its revised 2 to 6 percent Board of Governors approved the pendannual range set at the July FOMC ing requests of several Reserve Banks meeting—as banks pulled in deposits to for a V2 percentage point increase in the fund loans. The drop in market interest discount rate, and the Committee agreed rates has enhanced the attractiveness of to allow this increase to show through M2, which increased at a 33A percent fully to the federal funds rate. In light of rate over the same period—a little above the tightening of policy called for at this the midpoint of its annual range. In meeting and the anticipated lagged Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 82nd Annual Report, 1995 effects of previous tightenings, the Com- mately reducing inflation, in a period mittee viewed the odds of a need for when it seemed to be moving higher. further policy action developing over Following the March meeting, incomthe intermeeting period as relatively ing data signaled a further deceleration small and evenly balanced, and there- of economic activity. In addition, finanfore issued a symmetric directive to cial markets appeared to view budget guide any intermeeting changes in discussions in the Congress as foreshadreserve conditions. owing significant fiscal restraint over the In subsequent weeks, evidence sug- balance of the decade. Shorter-term gested that economic activity was interest rates began to incorporate the moderating, especially in the interest- possibility of an easing of monetary sensitive sectors. Financial markets policy, and yields on longer-term appeared to view these signs as indicat- securities—especially those at intermeing that the previous policy actions of diate maturities—moved down sharply the Federal Reserve had substantially as well. reduced the odds of rising inflation and Information reviewed at the May thus also the need for additional mone- FOMC meeting provided persuasive tary restraint. Indeed, yields on Treasury evidence that the pace of the economic securities at maturities ranging from one expansion had slowed, relieving presto ten years fell 60 to 70 basis points sures on resources and reducing the between the February and March FOMC threat of a pickup in inflation. The Commeetings. mittee observed that an adjustment to At its meeting in late March, it was inventory imbalances that had develnot clear to the Committee whether the oped earlier in the year was contributing deceleration in economic activity was to the slowdown and that the underlying only temporary or was a lasting shift trajectory of final sales was still unclear. toward a sustainable rate of economic The Committee determined that the expansion. On balance, the Committee existing stance of policy was appropriviewed the economy as retaining consid- ate in these circumstances and adopted a erable upward momentum and observed symmetric directive regarding potential that the decline in longer-term interest policy adjustments during the intermeetrates, the rise in stock prices, and the ing period. sharp depreciation of the exchange value Employment data released shortly of the dollar could be expected to buoy after the May FOMC meeting were suraggregate demand in the months ahead. prisingly weak, prompting considerable Moreover, consumer prices, as antici- speculation in financial markets of an pated, had risen more rapidly in 1995. imminent monetary policy easing. The In these circumstances, the Committee sharpness of the downward movement determined that it would be prudent to in longer-term rates seemed to reflect, await further information before taking in addition to economic fundamentals, any additional policy actions, but the trading dynamics associated with the Committee's directive included a bias attempts of investors to rebalance their toward additional monetary restraint portfolios in light of the substantial over the intermeeting period. The asym- change in interest rates. At one point in metric directive was considered appro- late June, the spread between the thirtypriate to emphasize the Committee's year Treasury bond yield and the federal commitment to containing and ulti- funds rate reached a low of 48 basis Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 83 points but edged higher in subsequent increased credit demands, depositories weeks. turned more heavily to time deposits From the information reviewed at the and other liabilities included in M2 July meeting of the FOMC, it appeared and M3. Stronger funding needs and that the economy flattened out during increased reliance on deposits provided the second quarter as businesses sought a considerable lift to growth of the broad to pare inventories to desired levels. monetary aggregates. This pause in the expansion, in turn, Slower growth of federal debt this had alleviated the inflation pressures year relative to 1994 reflects stronger that had loomed large earlier in the tax revenues and diminished growth of year. In these circumstances, the Com- expenditures, especially defense-related mittee voted to ease reserve pressures outlays. In the state and local sector, slightly, resulting in a lA percentage debt outstanding has continued to point decline in the federal funds decline, largely driven by calls of rate. Although financial markets had higher-cost debt issued during the anticipated a decline in the federal funds rate at some point, both bond and equity markets rallied strongly after Growth of Money and Debt the change in policy was announced. At the close on July 7, the thirty-year Percent bond rate was down about 165 basis Domestic points from its recent high of last Measurement Ml M2 M3 nonperiod financial November. debt Year1 1980 7.4 8.9 9.6 9.1 Credit and Money Flows 1981 5.4 9.3 12.4 9.9 2.52 The debt of domestic nonflnancial sec- 1982 8.8 9.2 9.9 9.6 1983 10.4 12.2 9.9 11.8 tors grew 5V2 percent at an annual rate 1984 5.5 8.1 10.9 14.4 from the fourth quarter of 1994 through 1985 12.0 8.7 7.6 14.1 May of this year—a modest pickup over 1986 15.5 9.3 8.9 13.5 1987 6.3 4.3 5.7 10.2 the pace of recent years but well within 1988 4.3 5.3 6.3 9.0 its annual range of 3 to 7 percent. 1989 .6 4.8 3.8 7.9 Slower growth of federal debt and a 1990 4.2 4.0 1.7 6.5 decline in the debt of state and local 1991 7.9 2.9 1.2 4.6 1992 14.3 2.0 .5 4.7 governments in 1995 were more than 1993 10.5 1.7 1.0 5.2 offset by strength in business and house- 1994 2.3 1.0 1.4 5.1 hold borrowing. Although declines in Quarter (annual rate)3 longer-term interest rates and the flatten- 1994:Q1 5.5 1.8 .6 5.2 ing of the yield curve have stimulated Q2 2.7 1.7 1.3 5.4 Q3 2.4 .9 2.1 4.2 long-term, fixed rate borrowing of late, Q4 -1.2 -.3 1.7 5.2 both households and businesses con- 1995:Q1 .0 1.6 4.3 5.5 tinued during much of the year to Q2 -.9 4.2 6.7 5.44 favor borrowing that was short-term or 1. From average for fourth quarter of preceding year to floating-rate. In part, the reliance on average for fourth quarter of year indicated. such debt contributed to the larger share 2. Adjusted for shift to NOW accounts in 1981. of private debt intermediated through 3. From average for preceding quarter to average for quarter indicated. the depository sector. In meeting 4. Based on data through May. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 82nd Annual Report, 1995 1980s.8 Yields on municipal bonds rela- decline in long-term rates in recent tive to Treasuries had moved up consid- months has sparked renewed interest in erably after Orange County defaulted on refinancing. Households carrying ARMs its debt late in 1994 but reversed much with rates that are (or soon will be) of this increase early in 1995. The ratio above rates offered on FRMs have reof municipal yields to Treasury bond portedly begun to refinance with FRMs. yields has climbed again more recently Household debt-service burdens— as various budget proposals before the measured as the ratio of scheduled prin- Congress raised the prospect of reduced cipal and interest payments on debt relafederal tax advantages for municipal tive to income—have risen in 1995 but debt. In addition, the recent decision remain well below levels reached in the by Orange County voters not to raise late 1980s and early 1990s. Mortgage taxes to cover the county's losses has refinancings undertaken at lower intertended to boost risk premiums for the est rates in recent years have helped to obligations of many municipalities in keep the level of debt-service burdens California and, to a lesser extent, for relatively low despite the growth of other borrowers in the municipal bond household debt relative to income. In market. fact, some measures of delinquency Borrowing by households—although rates on home mortgages have edged off a bit from last year's pace—has gen- down this year to the lowest levels in erally remained strong this year. Weaker more than twenty years. The picture for auto sales and the associated slower delinquency rates on consumer credit is growth of auto loans resulted in a less clear: Some measures such as the modest deceleration of consumer credit. delinquency rates on consumer install- Growth of revolving credit—principally ment credit remain quite low, while credit card debt—trended higher from others—especially auto loans booked at the already brisk pace recorded last year. finance companies—have moved up The proliferation of incentive programs considerably. offered with many credit cards has likely Borrowing by nonfinancial businesses encouraged greater convenience use for has increased in 1995, propelled in large transactions in recent quarters. part by a rise in capital expenditures in Growth of home mortgage debt mod- excess of internal sources of funds and a erated somewhat in the first quarter, a jump in merger activity. In addition, a pattern consistent with the overall slug- number of firms have initiated stock gish demand for housing. As long-term repurchases financed in part with debt. rates moved down this year, the pro- As in 1994, the composition of business nounced shift toward adjustable rate borrowing this year has been heavily mortgages (ARMs) evident last year dis- weighted toward short-term commercial sipated. As of May, 60 percent of new paper and bank loans. Lower long-term mortgage originations were fixed rate interest rates, however, have stimulated mortgages (FRMs). In addition, the a flurry of new bond issues very recently. 8. Many state and local units took advantage of Various unsettling developments in historically low long-term interest rates in 1993 to financial markets, including the Orange issue bonds that were targeted to replace existing County debacle, losses associated with high-cost debt issued during the 1980s as the call complex derivatives and cash instrudates on those bonds arrived. Calls on previously ments, the failure of Barings Brothers, issued debt likely will continue to depress net state and local borrowing for some time. and the financial crisis in Mexico, have Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 85 had some limited effects on the specific portion of the decline in net equity companies or sectors involved. They shares outstanding. In addition, gross have not, however, had a large impact issuance of new equity has ebbed as on broad market perceptions of credit price-earnings ratios have fallen and risks; spreads of yields on short- and many firms have repurchased their stock long-term corporate debt over Treasur- with both accumulated cash and the proies have widened only a bit this year, a ceeds of new debt. situation that likely reflects the elevated The shift to short-term funding in the supply of new corporate debt and per- business sector has been a boon to interhaps a small uptick in risk premiums. mediaries that tend to specialize in The gap between the capital expendi- short-term lending. Finance companies tures and internal cash flow of nonfinan- and commercial banks, in particular, cial corporations (the financing gap) have enjoyed a prominent role as supplibegan widening in mid-1994 and has ers of credit over the past year. To date, grown even larger in 1995. In part, the there are few indications that the health bulge in the financing gap is the result of of these institutions has deteriorated. the large buildup of inventories earlier Credit ratings for finance companies in the year. Most external funding for have been stable, and bank profitability the purpose of carrying inventories and capital ratios have been solid. apparently has taken the form of com- An important factor contributing to mercial paper or bank loans. the overall strength of depository credit A surge in merger activity beginning has been the stabilization of the thrift in late 1994 has also spurred business industry, especially savings and loan borrowing. Many of the largest mergers associations. After several years of have been strategic, intra-industry com- sharp contraction, thrift assets expanded binations, concentrated especially in slightly over the second half of 1994 areas such as defense, pharmaceuticals, and continued a modest recovery in telecommunications, and (most recently) 1995. The number of thrift institutions banking. In contrast to the merger and continues to decline, however, with acquisition wave during the late 1980s, many filing for bank charters or being the current acquisition boom has not acquired by banks. entailed highly leveraged takeovers The growth of bank credit picked up financed heavily with junk bonds. In- appreciably during the first half of 1995, deed, until quite recently, junk bond with strength especially evident in bank issuance this year had been anemic. loans. Indeed, over the past twelve Merger activity in recent quarters h&s months, the share of the increase in noninvolved substantial use of stock swaps federal domestic debt funded by bank coupled with reductions in financial loans climbed to record levels. Surveys assets and new investment-grade debt of bank lending officers have indicated issuance (often in the form of commer- banks' increased willingness to extend cial paper). Survey evidence indicates consumer credit as well as continued that banks have played only a modest easing of terms and standards applied to role in directly funding recent mergers, business loans. Data from the Federal although they have facilitated trans- Reserve's Survey of Terms of Bank actions by providing backup lines for Lending to Business show that spreads merger-related commercial paper. of loan rates over the federal funds rate Equity retirements associated with for large commercial loans have been mergers have accounted for a sizable about the same as last year but well Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86 82nd Annual Report, 1995 below those prevailing through much growth at the foreign offices of U.S. of the late 1980s and early 1990s. Com- banks has slowed considerably this parable spreads for smaller commercial year. Consistent with this development, loans are wider than in the late 1980s borrowing by domestically chartered but have continued the narrowing trend banks from their foreign offices has of recent years. The strength of bank increased in 1995 but not at the pace of lending has been viewed favorably in last year. financial markets—bank stock prices Depositories' shift back into funding have risen this year about in line with or with domestic liabilities has helped spur faster than the climb in broad stock price the growth of the broad monetary aggreindexes, while spreads on bank debt gates this year. From the fourth quarter relative to Treasuries have widened only of 1994 through June, growth of M3 has slightly. averaged 6lA percent, placing the level The continued easing of bank lending of M3 above the upper bound of its standards after more than a year of annual range. Over the same period, M2 monetary policy restraint has attracted growth has averaged 33A percent, placthe attention of federal regulators. The ing the level of M2 in the upper half of Office of the Comptroller of the Cur- its annual range. rency warned banks against allowing The pickup in M3 growth this year their standards to fall to a point that reflects stronger expansion in both its could expose them to heavy losses in an M2 and non-M2 components. The acceleconomic downturn. In the same spirit, eration of "wholesale" funding sources, the Federal Reserve issued a super- especially large time deposits, has been visory letter cautioning banks that loan quite marked this year. Banks' heavier terms and standards should be set with a reliance on wholesale funds is typical long-term view that takes loan perfor- during periods in which bank loan mance in less favorable economic condi- portfolios are expanding swiftly. The tions into account. non-M2 portion of M3 has also been Banks have funded the bulge in their boosted by a sharp jump in institutionloan portfolios this year in part by liqui- only money funds. The yields on these dating a portion of the large holdings funds tend to lag movements in shortof securities they had accumulated term market interest rates and, as a earlier in the 1990s.9 In addition, banks result, became especially attractive to have increased their liabilities. Last investors when short-term market interyear, banks relied heavily on borrowings est rates began falling on expectafrom their non-U.S. offices to fund tions of a near-term easing of monetary growth of their domestic assets. Deposit policy. The acceleration of M2 this year results chiefly from the waning influ- 9. Published data on changes in securities port- ence of previous increases in short-term folios at banks may not accurately portray funding interest rates and a marked flattening of strategies because recent accounting changes have the yield curve. On balance this year, the increased the share of securities and off-balancesheet contracts that must be marked to market returns on assets in M2 have become on banks' balance sheets. Estimates suggest that more attractive relative to both shortchanges in the market valuation of securities and and long-term market instruments. Sizoff-balance-sheet contracts under these accounting able inflows to stock mutual funds have rules have added about 1 percentage point at an continued, but the flatter yield curve has annual rate to the growth of bank credit from the fourth quarter of 1994 through June of this year. damped the demand for other long-term Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 87 investments. Inflows to bond mutual required reserves.10 Estimates suggest funds—while stronger than during the that retail sweep accounts have reduced bond market rout last year—have been Ml by about $12 billion so far this year. much smaller than inflows earlier in These programs affect the composition the 1990s. Also, judging from noncom- but not the level of M2 because balances petitive tenders at recent Treasury auc- are swept from transaction deposits into tions, households' direct investments other accounts included in M2. in Treasury securities have dwindled The expansion of retail sweep sharply this year. At least a portion of accounts poses some potential problems the flows that previously had been for the implementation of monetary poldirected to mutual funds and direct icy by the Federal Reserve. To date, investments in securities appears to have such accounts have been offered by boosted M2 growth. Growth of money large banks that must maintain a balance market mutual funds and small time at a Federal Reserve Bank to meet their deposits, in particular, has been espe- reserve requirements. As a result, the cially brisk. Indeed, more than half of reduction in required reserves associthe increase in M2 since April is attrib- ated with sweep accounts has implied a utable to a steep climb in M2 money nearly equivalent reduction in aggregate funds. required reserve balances; estimates In contrast to the marked expansion suggest that the $12 billion dollar of the broader aggregates, Ml growth decline in OCDs this year translates to a has weakened this year, primarily as reduction in required reserve balances a result of wide opportunity costs on of nearly $1.2 billion.11 In early 1991, transaction deposits and the introduction following the cut in reserve requireand expansion of retail sweep accounts ments at the end of 1990, unusually low at some large banks. Interest rates levels of aggregate reserve balances offered on other checkable deposits were associated with greater variability (OCDs) have edged up only slightly in the federal funds rate as banks' volasince the beginning of 1994 despite tile clearing needs began to dominate the sharp rise in short-term market the demand for reserves. If many banks interest rates. Households have re- begin to offer retail sweep programs sponded by reducing balances in these in the future, the aggregate level of accounts in favor of higher-yielding assets. The development of sweep accounts 10. Under the current structure of reserve reby a few large banks for their retail quirements, OCD accounts are subject to a 10 percent reserve requirement at banks with more than customers has facilitated the shift away $54 million of net transaction deposits. By law, from transaction balances. Sweep personal MMDAs are exempt from reserve accounts transfer a customer's OCD requirements. account balances in excess of a certain 11. The reduction in required reserve balances threshold into a money market deposit is not necessarily identical to the reduction in required reserves because banks typically use vault account (MMDA). Automatic transfers cash in addition to reserve balances to satisfy from the customer's MMDA account reserve requirements. The level of vault cash held back to the OCD account are initiated as by banks is primarily determined by their customchecks and other withdrawals deplete ers' needs. Required reserves for some banks are nearly or even completely satisfied by vault cash. OCD balances. Such sweep accounts In these cases, a reduction in required reserves due may allow customers to earn more interto sweeps would not show through to a decline in est and benefit the bank by reducing its required reserve balances on a one-for-one basis. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

88 82nd Annual Report, 1995 required reserve balances would likely The dollar was supported only briefly fall substantially, potentially leading to by the increase in the discount rate and instability in the aggregate demand for the federal funds rate at the February reserves. FOMC meeting. With the U.S. economic The monetary base expanded at a expansion softening, market participants 5Vi percent rate from the fourth quarter came to expect that no further increases of 1994 through June. Currency growth in these rates were likely in the near this year—at 1XA percent from 1994:Q4 term. Downward pressure on the dollar through June—is off a bit from last intensified in late February, and on year's pace but still quite robust. For- March 2, in somewhat thin and disoreign demands for U.S. currency have derly market conditions, the dollar fell generally remained strong this year. In sharply further against the mark and the concert with the decline in transaction yen. The foreign exchange Trading deposits, total reserves contracted at a Desk at the New York Federal Reserve 6 percent rate from 1994:Q4 through Bank entered the market, selling both June. In the absence of the increase in marks and yen on behalf of the Treasury sweep accounts, the decline in total and the Federal Reserve System. The reserves over this period would have next day several other central banks been 2J/2 percent at an annual rate. joined the Desk in concerted intervention in support of the dollar. Intervention by the Desk on behalf of the International Financial Developments Treasury and the Federal Reserve Sys- At the turn of the year, the foreign tem totaled $1.42 billion. In a statement exchange value of the dollar was under confirming the intervention, Secretary downward pressure, and that pressure Rubin highlighted official concern about continued through the first months of the dollar's exchange value. Downward 1995. On balance, the multilateral trade- pressure on the dollar continued, parweighted value of the dollar in terms of ticularly against the yen, and on April 3 the other G-10 currencies has depreci- and 5 the Desk, acting on behalf of the ated about IV2 percent since the end of Treasury and Federal Reserve System, December 1994. The dollar declined as again joined several other central banks economic indicators began to suggest in intervention to support the dollar. that economic growth in the United Secretary Rubin issued a statement that States was slowing, lowering the likeli- these actions were in response to recent hood of further increases in U.S. market movement on exchange markets and that interest rates. In addition, the Mexi- the Administration was committed to a can crisis appeared to weigh on the strong dollar. dollar in early 1995. External adjust- The dollar fell further through midment by Mexico was rightly expected April, particularly against the yen, and to involve, to an important extent, a on April 19 it touched a record low of corresponding decrease in U.S. net less than 80 yen per dollar. After recovexports. Primarily for that reason, finan- ering slightly and remaining fairly stable cial turmoil in Mexico and depre- through mid-May, the dollar rebounded ciation of the peso were seen as hav- sharply but subsequently relinquished ing possible adverse implications for some of those gains. On May 31, the U.S. growth and external accounts and, Desk—on behalf of the Treasury and in general, as negative for dollar- the Federal Reserve—joined the central denominated assets. banks of the other G-10 countries in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 89 intervention purchases of dollars. Secre- rates. The yen fluctuated in response to tary Rubin stated that the intervention progress, or lack of progress, in the resowas in keeping with the objectives of lution of trade disputes with the United the April 28 communique of the G-7 States. Persistent strength in the yen finance ministers and central bank gov- appears to reflect the large Japanese ernors, which endorsed the orderly current account surplus and market perreversal of the decline in the dollar in ceptions that some adjustment of that terms of other G-7 currencies. Through surplus, through yen appreciation, is May and June, the dollar fluctuated in a inevitable, especially given the slow range somewhat above its lows of mid- growth of the Japanese economy. Japa- April and early May. On July 7, follow- nese financial markets more broadly ing moves by both the Federal Reserve have reflected the weak state of the and the Bank of Japan to ease monetary Japanese economy. Stock prices have conditions, the Desk joined the Japanese fallen considerably so far this year, with monetary authorities in intervention pur- the Nikkei down about 16 percent since chases of dollars; the dollar moved up a the end of December, and land prices bit in response. have fallen further. These declines in Long-term (ten-year) interest rates in asset prices have added to the perceived the major foreign industrial countries risks in the Japanese banking system have, on average, declined about 100 and concerns that the recovery in ecobasis points since December as eco- nomic activity is stalling. nomic indicators have suggested some Net depreciation of the dollar in terms slowing of real output growth abroad as of the German mark over this period has well as in the United States. With U.S. been about 10 percent. Some of the long-term rates falling much more, upward pressure on the mark over the about 170 basis points on balance, the past several months resulted from shifts change in the long-term interest differ- within the Exchange Rate Mechanism ential is consistent with some decline in (ERM) of the European Monetary Systhe exchange value of the dollar. Long- tem, as political uncertainties and fiscal term rates have dropped about 150 basis problems in Italy, Sweden, Spain, and points in Japan, nearly as much as the later France, led at times to the selling decline in U.S. long-term rates. Rates of their respective currencies for marks. in Germany are down about 90 basis Realignment within the ERM on points. Three-month market interest March 5 that lowered the values of the rates in these countries have declined Spanish peseta and the Portuguese about 90 basis points on average since escudo contributed to the upward moveyear-end 1994; central bank official ment of the mark. In contrast to the lending rates were lowered in 1995 in dollar's movement against the yen and several countries, including Japan, Ger- the mark since December, the dollar is many, and Canada. Following the Fed- down only 3 percent in terms of the eral Reserve easing on July 6, the cen- Canadian dollar. Early in the year, the tral banks of Canada and Japan lowered U.S. dollar appreciated against the Canaovernight lending rates. dian dollar; uncertainty about whether Since December 1994, the dollar has fiscal problems in Canada would be depreciated about 12 percent on balance addressed and spillover from the Mexiagainst the Japanese yen, despite can crisis caused the Canadian dollar to declines in Japanese long-term rates fall. Since then, the Canadian dollar has that nearly matched the decline in U.S. regained those losses. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 82nd Annual Report, 1995 Over the past several months, the Mexican peso has recovered somewhat in terms of the U.S. dollar from the lows reached during the height of the crisis. On balance, the peso has depreciated 40 percent in nominal terms from December 19, 1994, before the crisis broke out. Mexican officials have drawn on the Treasury Department's Exchange Stabilization Fund facility and the Federal Reserve's swap line in addressing Mexico's international liquidity problems. Outstanding net drawings to date total $12.5 billion. The outstanding total of tesebonos, the government's dollardenominated short-term obligations, has been reduced below $10 billion. • 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

93 Record of Policy Actions of the Board of Governors Regulation D the Board amended Regulation D Reserve Requirements of accordingly. Depository Institutions The Garn-St Germain Depository Institutions Act of 1982 established a November 14, 1995—Amendments zero percent reserve requirement on the first $2 million of an institution's reserv- The Board amended Regulation D to able liabilities. The act also provides for increase the amount of transaction annual adjustments to that exemption balances to which the lower reserve amount based on deposit growth nationrequirement applies. wide. By the beginning of 1995, that amount had been increased to $4.2 mil- Votes for this action: Messrs. Greenspan, lion. Recent growth in deposits war- Blinder, Kelley, and Lindsey and Mses. Phillips and Yellen.1 ranted an increase to $4.3 million, and the Board amended Regulation D Under the Monetary Control Act of accordingly. 1980, depository institutions, Edge Act The amendments are effective with corporations, Agreement corporations, the reserve computation period beginand U.S. agencies and branches of ning December 19, 1995, for institutions foreign banks are subject to reserve reporting weekly or quarterly. requirements set by the Board. Initially, To reduce the reporting burden for the Board set reserve requirements small institutions, the Board allows at 3 percent of an institution's first depository institutions with total depos- $25 million in transaction balances and its below specified levels to report their at 12 percent of balances above that deposits and reservable liabilities quaramount. Subsequently, the Board low- terly or less frequently; larger instituered the maximum reserve requirement tions must report weekly. The growth to 10 percent. The act directs the Board rate of total deposits at all depository to adjust annually the amount subject institutions increased from June 30, to the lower reserve requirement to 1994, to June 30, 1995. To reflect that reflect changes in transaction balances increase, the Board raised the deposit nationwide. By the beginning of 1995, cutoff levels that, used in conjunction that amount was $54 million. Recent with the exemption level, determine the decreases in transaction balances war- frequency and detail of deposit reportranted a decrease to $52 million, and ing required for each institution; the cutoff was raised from $55.4 million to $57 million for nonexempt depository institutions and from $45.1 million to $46.4 million for exempt depository 1. Throughout this chapter, note 1 indicates that one vacancy existed on the Board when the action institutions, beginning in September was taken. 1996. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

94 82nd Annual Report, 1995 Regulation E back-office location if the proceeds of Electronic Fund Transfers the loan are received by the customer at a location other than a loan-production March 16, 1995—Amendment office or back-office facility. The Board approved an amendment to Regulation E to revise the requirements June 19, 1995—Amendment for receipts at automated teller ma- The Board approved an amendment to chines, effective April 24, 1995. Regulation H to require that state member banks use the standard flood haz- Votes for this action: Messrs. Greenspan, Blinder, Kelley, LaWare, and Lindsey and ard determination form developed by Mses. Phillips and Yellen. the Federal Emergency Management Agency, effective January 2, 1996. The amendment gives financial insti- Votes for this action: Messrs. Greenspan, tutions flexibility in the amount of iden- Blinder, Kelley, and Lindsey and tifying information that they include on Ms. Yellen. Absent and not voting: receipts for transactions at automated Ms. Phillips.1 teller machines. It eliminates the requirement that a receipt from an elec- The rule requires that banks use a tronic terminal disclose a number or standard form for determining whether code that uniquely identifies the con- collateral is located in a special flood sumer, the consumer's account, or the hazard area. The form also was adopted access device. The amendment makes by the other federal banking agencies, final an interim amendment that had the Farm Credit Administration, and the been in effect since December 1, 1994. National Credit Union Administration. Regulation H Regulation H Membership of State Banking Membership of State Banking Institutions in the Federal Reserve Institutions in the Federal Reserve System and System Regulation Y March 28, 1995—Interpretation Bank Holding Companies and Change in Bank Control The Board approved an interpretation of Regulation H concerning the establish- February 2, 1995—Amendments ment of loan-production offices and back-office facilities by state member The Board approved amendments to banks, effective April 6, 1995. Regulations H and Y to revise its riskbased capital guidelines for state mem- Votes for this action: Messrs. Greenspan, ber banks and bank holding companies Blinder, Kelley, LaWare, and Lindsey and Mses. Phillips and Yellen. to limit the amount of capital they are required to hold against certain assets Under the interpretation, a back-office transferred with recourse, effective facility established by a state member March 22, 1995. bank is not considered a branch of the Votes for this action: Messrs. Greenspan, bank. The interpretation also provides Blinder, Kelley, LaWare, and Lindsey that loans originated by a loan- and Ms. Yellen. Absent and not voting: production office may be approved at a Ms. Phillips. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 95 To implement section 350 of the The Board, along with the other fed- Riegle Community Development and eral banking agencies, eliminated the Regulatory Improvement Act of 1994, accounting distinction between origithe Board revised its risk-based capital nated mortgage-servicing rights and purguidelines to limit the amount of capital chased mortgage-servicing rights and that banking organizations are required included both in regulatory capital when to hold against assets sold with low lev- determining tier 1, or core, capital; thus, els of recourse to the maximum amount originated mortgage-servicing rights of loss possible under the contractual become subject to the regulatory capital terms of the obligation. limitations that had previously applied only to purchased mortgage-servicing rights. In connection with this action, June 30, 1995—Amendments the agencies also sought public com- The Board approved amendments to ment on the interim amendments. Regulations H and Y to revise its riskbased capital guidelines for state mem- August 21, 1995—Amendments ber banks to incorporate interest rate risk, effective September 1, 1995. The Board approved amendments to Regulation H to revise the risk-based Votes for this action: Messrs. Greenspan and Blinder and Mses. Phillips and Yellen. and leveraged-capital guidelines for Absent and not voting: Messrs. Kelley and state member banks. The Board Lindsey.' approved amendments to Regulation Y to revise the risk-based capital guide- To implement section 305 of the Fedlines for bank holding companies to eral Deposit Insurance Corporation change the regulatory treatment of cer- Improvement Act, the Board stated that tain transfers of assets with recourse that in determining a bank's capital needs, involve small business obligations. The the Board will consider a bank's expoamendments became effective Septemsure to declines in the economic value ber 1, 1995. of its capital due to changes in interest rates. The other federal banking agen- Votes for this action: Messrs. Greenspan, cies also adopted the new standard. Blinder, Kelley, and Lindsey and Mses. Phillips and Yellen.1 July 14, 1995—Interim The Board specified that a qualifying Amendments insured banking organization that transfers small business loans and leases on The Board approved amendments to personal property with recourse needs to Regulations H and Y to revise its risk- include only the amount of the retained based capital guidelines for state mem- recourse in risk-weighted assets when ber banks and bank holding companies calculating its risk-based capital ratios, to afford the same treatment to origi- provided certain conditions are met. The nated mortgage-servicing rights and pur- revision implements section 208 of the chased mortgage-servicing rights for Riegle Community Development and regulatory capital purposes, effective Regulatory Improvement Act of 1994, August 1, 1995. and it lowers the capital requirement for small business loans on leases on per- Votes for this action: Messrs. Greenspan, Blinder, Kelley, and Lindsey and Mses. sonal property that have been transferred Phillips and Yellen.1 with recourse. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 82nd Annual Report, 1995 November 1, 1995—Amendments Ms. Yellen. Absent and not voting: Ms. Phillips. The Board approved amendments to Regulations H and Y to revise its risk- The Riegle Community Development based capital guidelines for state mem- and Regulatory Improvement Act of ber banks and bank holding companies 1994 authorized the federal banking to modify the criteria used to define the agencies to prescribe safety and sound- OECD-based group of countries, effec- ness standards and eliminated bank tive January 1, 1996. holding companies from the scope of section 132 of the act. Subpart D and Votes for this action: Messrs. Greenspan, appendix D of Regulation H are the Blinder, Kelley, and Lindsey and Mses. Interagency Guidelines Establishing Phillips and Yellen.1 Standards for Safety and Soundness. Subpart I of the Rules of Practice for Under the risk-based capital guidelines and the Basle Accord, claims on Hearings specifies procedures for subgovernments of countries in the Organi- mitting compliance plans and for issusation for Economic Co-operation and ing orders to correct deficiencies. Development and claims on banks in OECD countries receive lower risk weights than corresponding claims on Regulation K the governments and banks of other International Operations of United countries. Under the amended guide- States Banking Organizations lines, any OECD country that reschedules its sovereign debt is excluded from lower-risk-weight treatment for five December 21, 1995—Amendment years from the rescheduling. The other The Board approved an amendment to federal banking agencies also adopted Regulation K to expand the authority of the revised definition. strongly capitalized and well-managed banking organizations to make certain Regulation H foreign investments, effective Decem- Membership of State Banking ber 21, 1995. Institutions in the Federal Reserve Votes for this action: Messrs. Greenspan, System and Kelley, and Lindsey and Mses. Phillips Rules of Practice for Hearings and Yellen. Absent and not voting: Mr. Blinder.1 February 2, 1995—Amendments The Board amended subpart A of The Board approved a new subpart D Regulation K to permit U.S. banking and appendix D of Regulation H and a organizations that are strongly capitalnew subpart I to its Rules of Practice for ized and well managed to make larger Hearings to establish standards for investments in foreign countries without safety and soundness for state member advance approval or review by the banks, effective August 9, 1995. Board. The amendment also streamlines Votes for this action: Messrs. Greenspan, the review procedures for notices and Blinder, Kelley, La Ware, and Lindsey and applications. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 97 Regulation O Regulation Y Loans to Executive Officers, Bank Holding Companies and Directors, and Principal Change in Bank Control Shareholders of Member Banks; Loans to Holding Companies and April 25, 1995—Amendments Affiliates The Board approved an amendment to Regulation Y to permit subsidiaries of March 28, 1995—Amendment bank holding companies to offer a dis- The Board approved an amendment to count on their products to customers Regulation O, effective April 7, 1995, to who maintain certain combined miniallow a member bank to make a loan to mum balances, effective May 26, 1995. an executive officer without the approval of its board of directors if the loan is Votes for this action: Messrs. Greenspan, Blinder, Kelley, La Ware, and Lindsey and secured by a first lien on the officer's Mses. Phillips and Yellen. residence. The amendment to the antitying pro- Votes for this action: Messrs. Greenspan, visions of Regulation Y allows subsidi- Blinder, Kelley, La Ware, and Lindsey and aries of a bank holding company to offer Mses. Phillips and Yellen. a discount on their products to customers who maintain a combined minimum The revision implements an amend- balance in products specified by the ment to the Federal Reserve Act by company offering the discount. the Riegle Community Development and Regulatory Improvement Act of 1994. June 23, 1995—Amendment The Board approved an amendment to Regulation Y to eliminate the require- June 2, 1995—Amendment ment for certain determinations of con- The Board approved an amendment to trol under the Bank Holding Company Regulation O to revise the definition of Act, effective July 6, 1995. unimpaired capital and surplus, effective July 1, 1995. Votes for this action: Messrs. Greenspan, Blinder, Kelley, and Lindsey and Mses. Phillips and Yellen.1 Votes for this action: Messrs. Greenspan, Blinder, Kelley, and Lindsey and Mses. Under certain conditions the amend- Phillips and Yellen.1 ment eliminates the need for a bank holding company to file a request with The amendment conforms the defini- the Board for a determination under section of unimpaired capital and surplus to tion 2(g)(3) of the Bank Holding Coma revision by the Office of the Comptrol- pany Act that it no longer controls ler of the Currency of the definition of shares or assets that it has sold to a third capital and surplus used to calculate the party with financing. The conditions are limit on loans by a national bank to a that the purchaser is not an affiliate or a single borrower. principal shareholder of the divesting Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 82nd Annual Report, 1995 bank holding company or of a company evaluating compliance by financial insticontrolled by its principal shareholder tutions with the requirements of the and that the purchaser has no officers, Community Reinvestment Act (CRA). directors, trustees, or beneficiaries in The revised regulation is effective Janucommon with, or subject to control by, ary 1, 1996, for small financial instithe divesting company. tutions and institutions electing to be evaluated under a strategic plan. Wholesale and limited-purpose institutions that Regulation Z have collected data on their community Truth in Lending development lending may elect to be evaluated under a separate test after March 13, 1995—Amendments January 1, 1996. Large financial institu- The Board approved amendments to tions will be subject to the final rule no Regulation Z to require certain dis- later than July 1, 1997. closures for reverse mortgages and mortgages with rates or fees above a Votes for this action: Messrs. Greenspan, Blinder, Kelley, and Lindsey and certain percentage or amount, effective Ms. Yellen. Votes against this action: March 22, with optional compliance Mr. LaWare and Ms. Phillips. until October 1, 1995. The Board also adopted related con- Votes for this action: Messrs. Greenspan, Blinder, Kelley, LaWare, and Lindsey and forming amendments to Regulation C Mses. Phillips and Yellen. and to the instructions that financial institutions use to comply with the To implement the requirements of the annual reporting requirements under the Home Ownership and Equity Protection regulation, effective May 1, 1995. Com- Act of 1994, the Board amended Regupliance for loan and application data is lation Z to require new disclosures for mandatory for data collected after reverse mortgages, which provide peri- December 31, 1995. odic advances, usually to elderly homeowners, and rely mostly on the home's Votes for this action: Messrs. Greenspan, value for repayment. The amendments Blinder, and Lindsey and Ms. Yellen. also require that creditors disclose infor- Votes against this action: Messrs. Kelley and LaWare and Ms. Phillips. mation about the potential cost of the transaction and impose substantive limi- The revision of Regulation BB was tations on home mortgage transactions part of a comprehensive effort by the having rates or fees above a certain perfederal financial supervisory agencies to centage or amount. reform their standards for evaluating complaince with the requirements of the Regulation BB CRA. In addition to incorporating new Community Reinvestment and procedures for assessing compliance, the Board provided guidance to financial Regulation C institutions on those procedures. Parallel Home Mortgage Disclosure regulations were adopted by the other federal banking agencies. April 19, 1995—Revision and In dissenting, Mr. LaWare thought Related Amendments that the revised Regulation BB and The Board approved a revised Regula- related amendments to Regulation C tion BB to change the standards for imposed management mandates that far Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 99 exceeded the intent of the original Com- The Truth in Savings Act requires munity Reinvestment Act, and he dis- that depository institutions calculate and agreed with the underlying premise disclose an annual percentage yield for that banks did not satisfactorily meet interest-bearing accounts that reflects the credit needs of their communities. the interest rate paid and the frequency Both Mr. LaWare and Ms. Phillips of compounding. The formula for calwere concerned that these actions culating the annual percentage yield would lead to the allocation of credit. assumes that interest remains on deposit Ms. Phillips did not think that the until maturity. This assumption produces revised Regulation BB achieved the goal an annual percentage yield that does not of more emphasis on performance with always reflect the time value of money less process and paperwork, and she when there are interest payments before was concerned about the increased bur- maturity. To facilitate the comparison dens of data collection and processing, of accounts, the Board revised the defiincreased costs for examinations, and nition of the annual percentage yield increased requirements for documenta- to reflect the frequency of interest tion for which she did not see offsetting payments. benefits. Ms. Phillips did not support the In dissenting, Messrs. Greenspan and amendments to Regulation C because LaWare and Ms. Phillips believed that she did not think that expansion of the the costs associated with implementing requirement to collect home mortgage the amendment would not be offset by loan data by census tract would be con- increased benefits to consumers arising structive. from an annual percentage yield that Mr. Kelley did not support the amend- assumes all periodic interest payments ments to Regulation C because he are immediately reinvested at the conthought that the expanded reporting tract rate. requirements would not improve the ability of the agencies to assess CRA performance enough to justify the sub- January 17, 1995—Reconsideration stantial additional burden on financial of Decision, Interim Amendment institutions. The Board agreed to reconsider the January 4, 1995, amendment to Regulation DD, which would have required Regulation DD that the annual percentage yield dis- Truth in Savings closed by depository institutions on interest-bearing deposits reflect the January 4, 1995—Amendment frequency of interest payments. The Board also approved an interim amend- The Board approved an amendment to ment to the regulation to permit institu- Regulation DD to require that the annual tions to disclose an annual percentage percentage yield on interest-bearing rate equal to the contract interest rate for accounts reflect the frequency of interest certain accounts with maturities greater payments. than one year, effective January 18, 1995. Votes for this action: Messrs. Blinder, Kelley, and Lindsey and Ms. Yellen. Vot- Votes for this action: Messrs. Greenspan, ing against this action: Messrs. Greenspan Blinder, Kelley, LaWare, and Lindsey and and LaWare and Ms. Phillips. Mses. Phillips and Yellen. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 82nd Annual Report, 1995 In response to requests from several Authority to allow the Federal Reserve banking and consumer organizations, Banks to approve certain investments the Board agreed to reconsider the Janu- designed primarily to promote the pubary 4, 1995, amendment and sought fur- lic welfare, effective June 5, 1995. ther public comment on calculation of Votes for this action: Messrs. Greenspan, the annual percentage yield. The Board Blinder, Kelley, and La Ware and Mses. also approved an interim rule that per- Phillips and Yellen. Absent and not votmits institutions to disclose an annual ing: Mr. Lindsey. percentage rate equal to the contract Regulation H (Membership of State interest rate for time accounts with Banking Institutions in the Federal maturities greater than one year that do Reserve System) permits state member not compound and require interest distribanks to make some public welfare butions at least annually. investments without advance approval by the Board and to make other such Rules Regarding Access to investments with specific approval. The Personal Information Board delegated to the Federal Reserve Under the Privacy Act Banks the authority to approve certain public welfare investments that other- January 5, 1995—Revision wise would have required the Board's approval. The Board revised and updated its Rules Regarding Access to Personal Information Under the Privacy Act, effective Rules Regarding Equal February 16, 1995. Opportunity Votes for this action: Messrs. Greenspan, December 27, 1995—Amendment Blinder, Kelley, La Ware, and Lindsey and Mses. Phillips and Yellen. The Board approved an amendment to its Rules Regarding Equal Opportunity The Board's Rules Regarding Access to correct an ambiguity in a provision to Personal Information implement the concerning confidential information in requirements of the Privacy Act of 1974, an investigative file, effective Febwhich is designed to restrict access by ruary 5, 1996. third parties to records on individuals that are maintained by the federal gov- Votes for this action: Messrs. Greenspan, ernment and to give individuals access Kelley, and Lindsey and Mses. Phillips to their own records. As part of its regu- and Yellen. Absent and not voting: Mr. Blinder.1 latory review and improvement process, the Board revised the rules to reflect The rules require that the file comchanges in the Board's organization and piled during an investigation of an procedures. administrative complaint of discrimination be made available to each complainant on completion of the investiga- Rules Regarding Delegation tion. The Board amended its rules to of Authority clarify that confidential information relevant to the complaint must be April 25, 1995—Amendment included in the investigative file The Board approved an amendment unless it is classified national security to its Rules Regarding Delegation of information. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 101 March 24, 1995—Guidelines for August 9, 1995—New Fedwire Appeals of Material Supervisory Closing Times Determinations The Board approved the establishment The Board approved a process for of a firm closing time for the Fedwire appeals by depository institutions of securities transfer service, beginning adverse material supervisory decisions, January 2, 1996. effective March 24, 1995. Votes for this action: Messrs. Blinder, Votes for this action: Messrs. Greenspan, Kelley, and Lindsey and Ms. Phillips. Blinder, Kelley, LaWare, and Lindsey and Absent and not voting: Mr. Greenspan and Mses. Phillips and Yellen. Ms. Yellen.1 The Riegle Community Development The Board established a firm closing and Regulatory Improvement Act of time of 3:15 p.m. eastern time for trans- 1994 required that the Board and the fer originations and 3:30 p.m. eastern other federal banking agencies establish time for reversals of the Fedwire bookan independent, intra-agency process to entry securities transfer system. The review appeals by depository institu- Board also authorized the Federal tions of material supervisory determina- Reserve Banks to continue to close the tions such as an adverse examination service earlier than the regular times on report. To implement the requirements days when the U.S. government and of the act, the Board adopted a set of mortgage securities markets observe guidelines for such appeals. holidays. The new closing time is expected to benefit market participants by reducing uncertainty about the final May 22, 1995—Regulatory closing time of the system. Ombudsman Policy Statement The Board approved a policy statement August 9, 1995—Policy Statement that outlines the responsibilities of the on Payment System Risk Board's ombudsman for agency regulatory matters, effective August 2, 1995. The Board approved revisions of the Fedwire third-party access policy to Votes for this action: Messrs. Greenspan, clarify its applicability and reduce Blinder, Kelley, and Lindsey and Mses. Phillips and Yellen.1 administrative burden, effective August 10, 1995. Section 309 of the Riegle Community Votes for this action: Messrs. Blinder, Development and Regulatory Improve- Kelley, and Lindsey and Ms. Phillips. ment Act of 1994 requires that each Absent and not voting: Mr. Greenspan and federal banking agency appoint a regula- Ms. Yellen.1 tory ombudsman. The Board adopted a policy statement that provides for the To reduce costs imposed by the polappointment of an ombudsman to act as icy, the Board made several requirea facilitator and mediator for the resolu- ments applicable only to arrangements tion of complaints and to ensure that in which the service provider is not those complaints are addressed fairly affiliated with the Fedwire participant. and promptly. The Board also appointed The Board also clarified the scope of the an ombudsman. policy. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 82nd Annual Report, 1995 1995 Discount Rates action accompanied a corresponding tightening of reserve conditions ap- The Board approved one change in the proved by the FOMC on the same day. basic discount rate during 1995, an The purpose of these actions was to increase from 43A percent to 5lA percent adjust monetary policy to a stance that in early February. Over the course of the was judged to be needed to contain inyear, the Board also approved numerous flation and foster sustainable economic changes, including both increases and growth. decreases, in the rates charged by the Over the remainder of 1995 the Board Federal Reserve Banks for seasonal and considered but took no action on further for extended credit; rates for both types requests to change the basic rate. All of credit are set on the basis of marketthose requests called for reductions of related formulas, and they exceeded the lA or xh percentage point in the basic basic discount rate by varying amounts rate. At various times from June through during the year. September and then again in December, one to five Reserve Banks had such requests pending before the Board, all Basic Discount Rate but two of which had been withdrawn The Board's decisions on the basic rate by year-end. In reaching its decisions are made against the background of the not to approve the requests, the Board policy actions of the Federal Open Mar- took account of the slight easing actions ket Committee (FOMC) and the related implemented by the FOMC in early economic and financial developments July and mid-December. Those actions that are covered more fully in the min- focused on indications of receding inflautes of the FOMC and in the monetary tionary pressures and some associated policy reports to the Congress that moderation in inflationary expectations, appear elsewhere in this REPORT. and given surrounding circumstances, Monetary policy had been tightened the Board decided not to accompany considerably during 1994; as part of the them with reductions in the basic rate. process, the basic discount rate was raised in three steps, from 3 percent to Structure of Discount Rates 43/4 percent. Despite these policy tightening moves, economic activity had The basic rate is the rate normally continued to advance at a substantial charged on loans to depository instituand unsustainable pace, and a number tions for short-term adjustment credit, of signs—including high levels of utili- while flexible, market-related rates genzation of labor and other producer erally are charged on seasonal and resources—had pointed to a continued extended credit. These flexible rates are risk of some increase in inflation. calculated periodically in accordance During January 1995 a growing num- with formulas that are subject to Board ber of Federal Reserve Banks—a total approval. of seven by late in the month— Under the seasonal program, whose submitted requests to raise the basic dis- purpose is to assist smaller institutions count rate by XA or xh percentage point. in meeting regular needs arising from a The Board considered the requests dur- clear pattern of intrayearly movements ing January but took no action until in their deposits and loans, funds may February 1, when it approved an be provided for periods longer than increase of xh percentage point. This those permitted under adjustment credit. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 103 Since its introduction on January 9, and to submit such rates to the Board of 1992, the flexible rate charged on sea- Governors for review and determinasonal credit has been closely aligned tion. Federal Reserve Bank proposals with short-term market rates; it is never on the discount rate include requests to less than the basic rate applicable to renew the formulas for calculating the adjustment credit. flexible rates on seasonal and extended A different flexible rate is charged on credit. Votes relating to the reestablishextended-credit loans, which are made ment of existing rates or for the updatto depository institutions that are under ing of market-related rates under the sustained liquidity pressure and are not seasonal and extended credit programs able to obtain funds from other sources. are not shown in this summary. All The rate for extended credit is 50 basis votes on discount rates taken by the points higher than the seasonal rate and Board of Governors during 1995 were is at least 50 basis points above the basic unanimous. rate. The first thirty days of borrowing on extended credit may be at the basic rate, but further borrowings ordinarily Votes on the Basic Discount Rate are charged the flexible rate. February 1, 1995. Effective this date, Exceptionally large adjustment-credit the Board approved actions taken by loans that arise from computer break- the directors of the Federal Reserve downs or other operating problems that Banks of Boston, New York, Richmond, are not clearly beyond the reasonable Chicago, St. Louis, Kansas City, and control of the borrowing institution are San Francisco to increase the basic assessed the highest rate applicable to discount rate Vi percentage point, to any credit extended to depository insti- 5lA percent. tutions; under the current structure, that rate is the flexible rate on extended Votes for this action: Messrs. Greenspan, credit. Blinder, Kelley, LaWare, and Lindsey and Mses. Phillips and Yellen. Votes against At the end of 1995 the structure of this action: None. discount rates was as follows: a basic rate of 5.25 percent for short-term The Board subsequently approved adjustment credit, a rate of 5.75 per- similar actions taken by the directors of cent for seasonal credit, and a rate of the Federal Reserve Banks of Philadel- 6.25 percent for extended credit. During phia, Atlanta, Minneapolis, and Dallas, 1995 the flexible rate on seasonal credit effective February 2, 1995, and the Fedranged from a low of 5.60 percent to a eral Reserve Bank of Cleveland, effechigh of 6.10 percent, and the flexible tive February 9, 1995. . rate on extended credit ranged from a low of 6.10 percent to a high of 6.60 percent. Board Votes Under the provisions of the Federal Reserve Act, the boards of directors of the Federal Reserve Banks are required to establish rates on loans to depository institutions at least every fourteen days Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

105 Minutes of Federal Open Market Committee Meetings The policy actions of the Federal Open execute transactions for the System Market Committee, contained in the Open Market Account. In the area of minutes of its meetings, are presented in domestic open market activities, the the ANNUAL REPORT of the Board of Federal Reserve Bank of New York Governors pursuant to the requirements operates under two sets of instructions of section 10 of the Federal Reserve from the Open Market Committee: an Act. That section provides that the Authorization for Domestic Open Mar- Board shall keep a complete record of ket Operations and a Domestic Policy the actions taken by the Board and by Directive. (A new Domestic Policy the Federal Open Market Committee on Directive is adopted at each regularly all questions of policy relating to open scheduled meeting.) In the foreign curmarket operations, that it shall record rency area, the Committee operates therein the votes taken in connection under an Authorization for Foreign Curwith the determination of open market rency Operations, a Foreign Currency policies and the reasons underlying each Directive, and Procedural Instructions such action, and that it shall include in with Respect to Foreign Currency its annual report to the Congress a full Operations. These policy instruments account of such actions. are shown below in the form in which The minutes of the meetings contain they were in effect at the beginning of the votes on the policy decisions made 1995. Changes in the instruments during at those meetings as well as a resume of the year are reported in the records for the discussions that led to the decisions. the individual meetings. The summary descriptions of economic and financial conditions are based on the Authorization for Domestic Open information that was available to the Market Operations Committee at the time of the meetings, rather than on data as they may have In Effect January 1, 1995 been revised later. Members of the Committee voting for 1. The Federal Open Market Committee a particular action may differ among authorizes and directs the Federal Reserve themselves as to the reasons for their Bank of New York, to the extent necessary to carry out the most recent domestic policy votes; in such cases, the range of their directive adopted at a meeting of the views is noted in the record. When Committee: members dissent from a decision, they are identified in the record along with (a) To buy or sell U.S. Government a summary of the reasons for their securities, including securities of the Federal dissent. Financing Bank, and securities that are direct obligations of, or fully guaranteed as to Policy directives of the Federal Open principal and interest by, any agency of the Market Committee are issued to the Fed- United States in the open market, from or to eral Reserve Bank of New York as the securities dealers and foreign and inter- Bank selected by the Committee to national accounts maintained at the Federal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 82nd Annual Report, 1995 Reserve Bank of New York, on a cash, regu- applying reasonable limitations on the vollar, or deferred delivery basis, for the System ume of agreements with individual dealers; Open Market Account at market prices, and, provided that in the event Government secufor such Account, to exchange maturing U.S. rities or agency issues covered by any such Government and Federal agency securities agreement are not repurchased by the dealer with the Treasury or the individual agencies pursuant to the agreement or a renewal or to allow them to mature without replace- thereof, they shall be sold in the market or ment; provided that the aggregate amount of transferred to the System Open Market U.S. Government and Federal agency securi- Account; and provided further that in the ties held in such Account (including forward event bankers acceptances covered by any commitments) at the close of business on the such agreement are not repurchased by the day of a meeting of the Committee at which seller, they shall continue to be held by the action is taken with respect to a domestic Federal Reserve Bank or shall be sold in policy directive shall not be increased or the open market. decreased by more than $8.0 billion during the period commencing with the opening of 2. In order to ensure the effective conduct business on the day following such meeting of open market operations, the Federal Open and ending with the close of business on the Market Committee authorizes and directs the day of the next such meeting; Federal Reserve Banks to lend U.S. Government securities held in the System Open (b) When appropriate, to buy or sell in Market Account to Government securities the open market, from or to acceptance deal- dealers and to banks participating in Governers and foreign accounts maintained at the ment securities clearing arrangements con- Federal Reserve Bank of New York, on a ducted through a Federal Reserve Bank, cash, regular, or deferred delivery basis, for under such instructions as the Committee the account of the Federal Reserve Bank of may specify from time to time. New York at market discount rates, prime bankers acceptances with maturities of up to 3. In order to ensure the effective conduct nine months at the time of acceptance that of open market operations, while assisting in (1) arise out of the current shipment of goods the provision of short-term investments for between countries or within the United foreign and international accounts main- States, or (2) arise out of the storage within tained at the Federal Reserve Bank of the United States of goods under contract of New York, the Federal Open Market Comsale or expected to move into the channels of mittee authorizes and directs the Federal trade within a reasonable time and that are Reserve Bank of New York (a) for System secured throughout their life by a warehouse Open Market Account, to sell U.S. Governreceipt or similar document conveying title ment securities to such foreign and interto the underlying goods; provided that the national accounts on the bases set forth in aggregate amount of bankers acceptances paragraph l(a) under agreements providing held at any one time shall not exceed for the resale by such accounts of those $100 million; securities within 15 calendar days on terms comparable to those available on such trans- (c) To buy U.S. Government securities, actions in the market; and (b) for New York obligations that are direct obligations of, or Bank account, when appropriate, to underfully guaranteed as to principal and interest take with dealers, subject to the conditions by, any agency of the United States, and imposed on purchases and sales of securities prime bankers acceptances of the types in paragraph l(c), repurchase agreements in authorized for purchase under l(b) above, U.S. Government and agency securities, and from dealers for the account of the Federal to arrange corresponding sale and repurchase Reserve Bank of New York under agree- agreements between its own account and ments for repurchase of such securities, obli- foreign and international accounts maingations, or acceptances in 15 calendar days tained at the Bank. Transactions undertaken or less, at rates that, unless otherwise with such accounts under the provisions of expressly authorized by the Committee, shall this paragraph may provide for a service fee be determined by competitive bidding, after when appropriate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings 107 Domestic Policy Directive these objectives, the Committee at its meeting in July reaffirmed the ranges it had estab- In Effect January 1, 19951 lished in February for growth of M2 and M3 of 1 to 5 percent and 0 to 4 percent respec- The information reviewed at this meeting tively, measured from the fourth quarter of suggests a further pickup in economic 1993 to the fourth quarter of 1994. The Comgrowth in recent months. Nonfarm payroll mittee anticipated that developments contribemployment rose sharply in November, and uting to unusual velocity increases could perthe civilian unemployment rate declined to sist during the year and that money growth 5.6 percent. Industrial production registered within these ranges would be consistent with another large increase in November and its broad policy objectives. The monitoring capacity utilization moved up further from range for growth of total domestic nonfmanalready high levels. Retail sales have contin- cial debt was maintained at 4 to 8 percent for ued to rise rapidly. Housing starts increased the year. For 1995, the Committee agreed on appreciably in November. Orders for nonde- tentative ranges for monetary growth, meafense capital goods point to a continued sured from the fourth quarter of 1994 to the strong expansion in spending on business fourth quarter of 1995, of 1 to 5 percent for equipment; permits for nonresidential con- M2 and 0 to 4 percent for M3. The Commitstruction have been trending higher. The tee provisionally set the associated monitornominal deficit on U.S. trade in goods and ing range for growth of domestic nonfinanservices widened somewhat in October from cial debt at 3 to 7 percent for 1995. The its average rate in the third quarter. Prices of behavior of the monetary aggregates will many materials have continued to move up continue to be evaluated in the light of rapidly, but broad indexes of prices for con- progress toward price level stability, movesumer goods and services have increased ments in their velocities, and developments moderately on average over recent months. in the economy and financial markets. On November 15, 1994, the Board of In the implementation of policy for the Governors approved an increase from 4 to immediate future, the Committee seeks to 43/4 percent in the discount rate, and in line maintain the existing degree of pressure on with the Committee's decision the increase reserve positions. In the context of the Comwas allowed to show through fully to interest mittee's long-run objectives for price starates in reserve markets. In the period since bility and sustainable economic growth, and the November meeting, short-term interest giving careful consideration to economic, rates have risen considerably while long- financial, and monetary developments, someterm rates have declined slightly. The trade- what greater reserve restraint would weighted value of the dollar in terms of the or slightly lesser reserve restraint might other G-10 currencies recovered further over be acceptable in the intermeeting period. the intermeeting period. The contemplated reserve conditions are Growth of M2 resumed in November after expected to be consistent with modest several months of decline, while M3 growth in M2 and M3 over coming months. expanded moderately further. For the year through November, M2 grew at a rate at the bottom of the Committee's range for 1994 Authorization for Foreign and M3 at a rate in the lower half of its range Currency Operations for the year. Total domestic nonfinancial debt has continued to expand at a moderate rate in recent months and for the year-to-date it has In Effect January 1, 1995 grown at a rate in the lower half of its monitoring range. 1. The Federal Open Market Committee The Federal Open Market Committee authorizes and directs the Federal Reserve seeks monetary and financial conditions that Bank of New York, for System Open Market will foster price stability and promote sus- Account, to the extent necessary to carry out tainable growth in output. In furtherance of the Committee's foreign currency directive 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 20, 1994. tee may issue from time to time: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 82nd Annual Report, 1995 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 Amount Act of 1934, with foreign monetary authori- Foreign bank (millions of ties, wjih the Bank for International Settle- dollars 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 Bank of Mexico German marks Swiss francs Regular 3,000 Special 1,500 Netherlands Bank 500 B. To hold balances of, and to have Bank of Norway 250 outstanding forward contracts to receive or Bank of Sweden 300 Swiss National Bank 4,000 to deliver, the foreign currencies listed in Bank for International Settlements paragraph A above. Dollars against Swiss francs 600 Dollars against authorized European C. To draw foreign currencies and to currencies other than Swiss francs 1,250 permit foreign banks to draw dollars under the reciprocal currency arrangements listed in paragraph 2 below, provided that draw- Any changes in the terms of existing swap ings by either party to any such arrangement arrangements, and the proposed terms of any shall be fully liquidated within 12 months new arrangements that may be authorized, after any amount outstanding at that time shall be referred for review and approval to was first drawn, unless the Committee, the Committee. because of exceptional circumstances, specifically authorizes a delay. 3. All transactions in foreign currencies undertaken under paragraph 1(A) above D. To maintain an overall open posi- shall, unless otherwise expressly authorized tion in all foreign currencies not exceeding by the Committee, be at prevailing market $25.0 billion. For this purpose, the overall rates. For the purpose of providing an investopen position in all foreign currencies is ment return on System holdings of foreign defined as the sum (disregarding signs) of currencies, or for the purpose of adjusting net positions in individual currencies. The interest rates paid or received in connection net position in a single foreign currency is with swap drawings, transactions with fordefined as holdings of balances in that cur- eign central banks may be undertaken at rency, plus outstanding contracts for future non-market exchange rates. receipt, minus outstanding contracts for future delivery of that currency, i.e., as the 4. It shall be the normal practice to sum of these elements with due regard to arrange with foreign central banks for the sign. coordination of foreign currency transactions. In making operating arrangements 2. The Federal Open Market Committee with foreign central banks on System holddirects the Federal Reserve Bank of New ings of foreign currencies, the Federal York to maintain reciprocal currency Reserve Bank of New York shall not commit arrangements (''swap" arrangements) for the itself to maintain any specific balance, unless System Open Market Account for periods up authorized by the Federal Open Market to a maximum of 12 months with the follow- Committee. Any agreements or understanding foreign banks, which are among those ings concerning the administration of the designated by the Board of Governors of the accounts maintained by the Federal Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings 109 Bank of New York with the foreign banks eign currency operations, and to consult with designated by the Board of Governors under the Secretary on policy matters relating to Section 214.5 of Regulation N shall be foreign currency operations; referred for review and approval to the Committee. C. From time to time, to transmit appropriate reports and information to the 5. Foreign currency holdings shall be National Advisory Council on International invested insofar as practicable, considering Monetary and Financial Policies. needs for minimum working balances. Such investments shall be in liquid form, and 8. Staff officers of the Committee are generally have no more than 12 months authorized to transmit pertinent informaremaining to maturity. When appropriate in tion on System foreign currency operations connection with arrangements to provide to appropriate officials of the Treasury investment facilities for foreign currency Department. holdings, U.S. Government securities may be purchased from foreign central banks under 9. All Federal Reserve Banks shall paragreements for repurchase of such securities ticipate in the foreign currency operations within 30 calendar days. for System Account in accordance with paragraph 3 G(l) of the Board of Governors' 6. All operations undertaken pursuant to Statement of Procedure with Respect to Forthe preceding paragraphs shall be reported eign Relationships of Federal Reserve Banks promptly to the Foreign Currency Sub- dated January 1, 1944. committee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Com- Foreign Currency Directive mittee, the Vice Chairman of the Board of Governors, and such other member of the In Effect January 1, 1995 Board as the Chairman may designate (or in the absence of members of the Board serving 1. System operations in foreign currencies on the Subcommittee, other Board Members shall generally be directed at countering disdesignated by the Chairman as alternates, orderly market conditions, provided that and in the absence of the Vice Chairman of market exchange rates for the U.S. dollar the Committee, his alternate). Meetings of reflect actions and behavior consistent with the Subcommittee shall be called at the the IMF Article IV, Section 1. request of any member, or at the request of the Manager for Foreign Operations, System 2. To achieve this end the System shall: Open Market Account ("Manager"), for the purposes of reviewing recent or con- A. Undertake spot and forward purtemplated operations and of consulting with chases and sales of foreign exchange. the Manager on other matters relating to his responsibilities. At the request of any mem- B. Maintain reciprocal currency ber of the Subcommittee, questions arising ("swap") arrangements with selected forfrom such reviews and consultations shall be eign central banks and with the Bank for referred for determination to the Federal International Settlements. 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 Trea- currencies, and to facilitate operations of the sury fully advised concerning System for- Exchange Stabilization Fund. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 82nd Annual Report, 1995 C. For such other purposes as may be operation is associated with repayment of expressly authorized by the Committee. swap drawings. 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 2. The Manager shall clear with the Comarrangements under the IMF Article IV. mittee (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 the Operations Subcommittee is not feasible in the time available): A. Any operation that would result in a In Effect January 1, 1995 change in the System's overall open position In conducting operations pursuant to the in foreign currencies exceeding $1.5 billion authorization and direction of the Federal since the most recent regular meeting of the Open Market Committee as set forth in the Committee. 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 for Foreign Operations, swap arrangement. System Open Market Account ("Manager"), shall be guided by the following procedural 3. The Manager shall also consult with understandings with respect to consultations the Subcommittee or the Chairman about and clearance with the Committee, the Forproposed swap drawings by the System, and eign Currency Subcommittee, and the Chairabout any operations that are not of a routine man of the Committee. All operations undercharacter. taken pursuant to such clearances shall be reported promptly to the Committee. 1. The Manager shall clear with the Sub- Meeting Held on committee (or with the Chairman, if the January 31-February 1, 1995 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 starting on Tuesday, January 31, 1995, on any day or $600 million since the most at 1:30 p.m. and continuing on Wednesrecent regular meeting of the Committee. day, February 1, 1995, 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January-February HI Mr. Blinder Mr. Rosine,2 Senior Economist, Mr. Hoenig Division of Research and Mr. Kelley Statistics, Board of Governors Mr. La Ware Mr. English,2 Economist, Division of Mr. Lindsey Monetary Affairs, Board of Mr. Melzer Governors Ms. Minehan Mr. Freeman,2 Section Chief, Division Mr. Moskow of International Finance, Board of Ms. Phillips Governors Ms. Yellen Ms. O'Day,2 Associate General Counsel, Legal Division, Board of Messrs. Boehne, Jordan, McTeer, and Governors Stern, Alternate Members of the Mr. Baer2 and Ms. Misback,2 Federal Open Market Committee Managing Senior Counsels, Legal Division, Board of Governors Messrs. Broaddus, Forrestal, and Parry, Mr. Ely,2 Senior Attorney, Legal Presidents of the Federal Reserve Division, Board of Governors Banks of Richmond, Atlanta, and Ms. Low, Open Market Secretariat San Francisco respectively Assistant, Division of Monetary Affairs, Board of Governors Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Messrs. Barron and Rasdall, First Vice Mr. Coyne, Assistant Secretary Presidents, Federal Reserve Banks Mr. Gillum, Assistant Secretary of San Francisco and Kansas City Mr. Mattingly, General Counsel respectively Mr. Patrikis, Deputy General Counsel Mr. Prell, Economist Mr. Truman, Economist Messrs. Beebe, Goodfriend, Lang, Rosenblum, and Sniderman and Messrs. Davis, Dewald, Lindsey, Ms. Tschinkel, Senior Vice Mishkin, Promisel, Siegman, Presidents, Federal Reserve Banks Slifman, and Stockton, Associate of San Francisco, Richmond, Economists Philadelphia, Dallas, Cleveland, and Atlanta respectively Mr. Fisher, Manager, System Open Messrs. McNees and Miller, Vice Market Account Presidents, Federal Reserve Banks of Boston and Minneapolis Mr. Ettin, Deputy Director, Division of respectively Research and Statistics, Board of Mr. Evans and Ms. Krieger, Assistant Governors Vice Presidents, Federal Reserve Mr. Madigan, Associate Director, Banks of Chicago and New York Division of Monetary Affairs, respectively Board of Governors Mr. Simpson, Associate Director, In the agenda for this meeting, it was Division of Research and reported that advices of the election of Statistics, Board of Governors Mr. Winn,2 Assistant to the Board, the following members and alternate Office of Board Members, Board members of the Federal Open Market of Governors Committee for the period commencing Messrs. Hooper and Reinhart,2 January 1, 1995, and ending Decem- Assistant Directors, Divisions of ber 31, 1995, had been received and that International Finance and Monetary Affairs respectively, the named individuals had executed Board of Governors their oaths of office. The elected members and alternate 2. Attended portions of the meeting. members were as follows: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 82nd Annual Report, 1995 William J. McDonough, President of the Lynn E. Browne, Thomas E. Davis, Federal Reserve Bank of New York, William G. Dewald, David E. Lindsey, with James H. Oltman, First Vice Presi- Frederic S. Mishkin, Larry J. Promisel, dent of the Federal Reserve Bank of Charles J. Siegman, Lawrence Slifman, New York, as alternate; David J. Stockton, and Carl E. Cathy E. Minehan, President of the Federal Vander Wilt, Associate Economists Reserve Bank of Boston, with Edward G. Boehne, President of the Federal By unanimous vote, the Federal Reserve Bank of Philadelphia, as alternate; Reserve Bank of New York was selected Michael H. Moskow, President of the Fed- to execute transactions for the System eral Reserve Bank of Chicago, with Open Market Account until the Jerry L. Jordan, President of the Fed- adjournment of the first meeting of the eral Reserve Bank of Cleveland, as Committee after December 31, 1995. alternate; By unanimous vote, Peter R. Fisher Thomas C. Melzer, President of the Federal Reserve Bank of St. Louis, with was selected to serve at the pleasure of Robert D. McTeer, President of the the Committee as Manager, System Federal Reserve Bank of Dallas, as Open Market Account, on the underalternate; standing that his selection was subject to Thomas M. Hoenig, President of the Federal being satisfactory to the Federal Reserve Reserve Bank of Kansas City, with Gary H. Stern, President of the Fed- Bank of New York. eral Reserve Bank of Minneapolis, as alternate. Secretary's note. Advice subsequently was received that the selection of Mr. Fisher was By unanimous vote, the following satisfactory to the board of directors of the Federal Reserve Bank of New York. officers of the Federal Open Market Committee were elected to serve until the election of their successors at the By unanimous vote, the minutes of first regularly scheduled meeting of the the meeting of the Federal Open Market Committee after December 31, 1995, Committee held on December 20, 1994, with the understanding that should they were approved. discontinue their official connection The Manager of the System Open with the Board of Governors or with a Market Account reported on develop- Federal Reserve Bank, they would cease ments in foreign exchange markets since to have any official connection with the the December meeting. There were no Federal Open Market Committee: market transactions for System Account during this period, and thus no vote was Alan Greenspan Chairman required of the Committee. William J. McDonough Vice Chairman The Manager also reported on developments in domestic financial markets Donald L. Kohn Secretary and and on System open market transactions Economist in government securities and federal Normand R.V. Bernard Deputy Secretary agency obligations during the period Joseph R. Coyne Assistant Secretary December 20, 1994, through Janu- Gary P. Gillum Assistant ary 31, 1995. By unanimous vote, the Secretary Committee ratified these transactions. J. Virgil Mattingly, Jr. General Counsel The Committee then turned to a dis- Ernest T. Patrikis Deputy General cussion of the economic and financial Counsel Michael J. Prell Economist outlook and the implementation of Edwin M. Truman Economist monetary policy over the intermeeting Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January-February 113 period ahead. A summary of the eco- weather. In manufacturing, the output of nomic and financial information avail- motor vehicles and parts surged again able at the time of the meeting and of and further solid gains were recorded in the Committee's discussion is provided the production of other goods. The large below, followed by the domestic policy advance in industrial output in Decemdirective that was approved by the Com- ber boosted rates of capacity utilization mittee and issued to the Federal Reserve above already high levels. Bank of New York. Retail sales were reported to have The information reviewed at this changed little over November and meeting suggested a strong further rise December after substantial advances in in economic activity during the closing September and October; the flattening months of 1994. Although consumer of sales reflected sharply reduced spending appeared to be less buoyant increases in outlays for non-auto conand housing demand had softened some- sumer goods. Consumer spending on what, growth in business investment, services rose moderately on balance exports, and inventories remained brisk. over November and December, with Industrial production and payroll outlays for energy services held down employment continued to record sub- by unusually mild weather. Although stantial gains. Broad indexes of prices some indicators of housing demand had for consumer goods and services had weakened, housing starts posted sizable risen moderately on average over recent gains on balance over November and months despite shrinking margins of December; single-family construction unemployed resources and further siz- remained at a relatively high level able increases in the prices of many despite the rise in mortgage rates in materials. 1994, and multifamily construction con- Nonfarm payroll employment ad- tinued its gradual recovery from the vanced considerably further in Decem- depressed levels of early 1993. The ber after a sharp rise in November. Sub- regional pattern of starts activity sugstantial job gains were recorded in gested that favorable weather accounted December in service industries and in for little of the strength in December. the retail trade sector. Hiring in manu- Business fixed investment was estifacturing was brisk for a third straight mated to have grown at a very rapid month, with labor demand especially pace in the fourth quarter, with a pickup strong in motor vehicles, capital goods, indicated for business spending on both and electronic equipment. Construction equipment and nonresidential structures. payrolls slipped after a large increase in New orders for nondefense capital November. The average workweek was goods declined on balance over Novemunchanged in December, but factory ber and December, but the large backlog overtime edged back up, matching the of unfilled orders, especially for comhighest level reached in the history of puters, pointed to a continued strong this series. The civilian unemployment expansion in spending on business rate declined to 5.4 percent. equipment in coming months. Non- Industrial production registered residential construction activity was up another large advance in December. considerably in November for a third Manufacturing accounted for all of the straight month, with increases in congain; an upturn in mining production struction widespread by type of strucoffset a decline in the output of utilities ture. Recent data indicated that permits associated with unseasonably warm for nonresidential construction were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 82nd Annual Report, 1995 continuing to trend higher and perhaps also advanced more slowly in Decemwere running ahead of construction ber, with a drop in energy prices balancactivity. ing a surge in food prices. Prices of Business inventory investment finished goods other than food and remained brisk in November; in the energy increased modestly in 1994 after aggregate, the buildup was in line with being held down in 1993 by a sharp shipments and sales. In manufacturing, drop in the prices of tobacco products. stocks increased more rapidly in In contrast to prices of finished goods, November, but the ratio of stocks to price inflation at earlier stages of proshipments declined further and was at a duction picked up in 1994. For intermehistorically low level. In wholesale diate goods other than food and energy trade, inventories rose less rapidly in items, prices rose at a faster rate in the November, but the inventory-to-sales second half of 1994, with the pickup ratio increased further, although it most clearly evident in materials used in remained within its range of recent manufacturing. Prices of crude materials years. Inventory accumulation slowed a rose rapidly in the second half of 1994 little at the retail level, and the and for the year as a whole. Increases in inventory-to-sales ratio for this sector labor costs remained moderate. Average remained near the middle of its range of hourly earnings were little changed recent years. on balance over November and The nominal deficit on U.S. trade in December, and for the year as a whole goods and services widened somewhat they advanced only slightly more than further in November, and for October in 1993. More broadly, hourly compenand November combined the deficit was sation of private industry workers well above its average rate in the third increased more slowly in the fourth quarter. The value of exports of goods quarter than in any of the previous and services increased more slowly in three quarters of 1994, and the rise for the October-November period than in the year was significantly less than in the third quarter, largely reflecting 1993. reduced growth of exported industrial At its meeting on December 20,1994, supplies. The rise in the value of imports the Committee adopted a directive that of goods and services for the October- called for maintaining the existing November period was led by increased degree of pressure on reserve positions imports of non-oil industrial supplies and that included a bias toward the and automotive, capital, and consumer possible firming of reserve conditions goods. Available data for the fourth during the intermeeting period. Accordquarter of 1994 indicated continued ingly, the directive stated that in the growth in economic activity, though context of the Committee's long-run perhaps at a somewhat slower pace, in objectives for price stability and sustainthe major foreign industrial countries. able economic growth, and giving care- Consumer price inflation slowed a ful consideration to economic, financial, little in December despite a jump in and monetary developments, somewhat food prices that was only partly offset greater reserve restraint would be by a decline in energy prices. Excluding acceptable or slightly lesser reserve food and energy items, consumer prices restraint might be acceptable during the edged up in December and rose signifi- intermeeting period. The reserve condicantly less in 1994 than in 1993. At the tions associated with this directive were producer level, prices of finished goods expected to be consistent with modest Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January-February 115 growth in the broader monetary aggre- the consequences for the U.S. economy gates over coming months. of the sharp depreciation of the Mexican Open market operations during the peso and the related economic and intermeeting period were directed financial problems in Mexico and other toward maintaining the existing degree developing economies; market particiof pressure on reserve positions. With pants expressed some concern that the the need for seasonal credit diminishing crisis might constrain U.S. monetary over the period, adjustment plus sea- policy in the event of further domestic sonal borrowing trended lower but aver- inflation pressures and that the counteraged a little above anticipated levels. part to the large prospective reduction in Near year-end, the Trading Desk accom- the Mexican current account deficit modated heavy demands for reserves would lie importantly in the already subthrough System repurchase agreements stantial U.S. deficit. (RPs). The federal funds rate averaged Growth of M2 and M3 strengthened close to 51/2 percent during the inter- in December, and data for the first half meeting period. of January suggested a further accelera- Most other market interest rates tion in that month. Much of the pickup declined slightly on balance over the in M2 in December was due to rapid period after the December 20 meeting. expansion in overnight RPs and over- Very short term interest rates fell after night Eurodollars, which outweighed a the first of the year, reflecting the disap- further contraction of liquid accounts pearance of year-end premiums. More associated in part with depositor efforts broadly, favorable news on inflation and to obtain higher returns by shifting indications of some unexpected slowing funds into market instruments. The in the growth of final demand appar- faster growth of M3 reflected, in addiently led market participants to con- tion to the acceleration of its M2 compoclude that further tightening of mone- nent, bank use of large CDs and nondetary policy, though still expected to be posit sources of funds to finance substantial, would be less than previ- relatively robust demands for credit. ously thought and would be spread over From the fourth quarter of 1993 to the a longer period. Yields on tax-exempt fourth quarter of 1994, M2 grew at the instruments declined considerably as lower end of the Committee's range for concerns about the implications of 1994 and M3 in the lower half of its Orange County's problems for the finan- range. Total domestic nonfinancial debt cial condition of other municipal gov- had continued to expand at a moderate ernments abated. Strong earnings rate in recent months, and for 1994 it reports for the fourth quarter boosted was in the lower half of its monitoring major indexes of equity prices. range. In foreign exchange markets, the The staff forecast prepared for this trade-weighted value of the dollar in meeting suggested that growth of ecoterms of the other G-10 currencies nomic activity would slow substantially declined somewhat over the intermeet- over the next several quarters and for ing period. The dollar fell substantially some period thereafter would average against the mark, which was buoyed by less than the rate of increase in the safe-haven inflows from weaker Euro- economy's potential output. Consumer pean currencies, but dropped less spending was projected to be well susagainst the yen. One factor that weighed tained for a time but to be restrained against the dollar was uncertainty about later by smaller gains in real incomes, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 82nd Annual Report, 1995 the satisfaction of pent-up demands, and which probably would be concentrated the lagged effects of higher interest rates at least initially in the housing and conon the demand for durable goods. Busi- sumer durables sectors, would undoubtness outlays for new equipment were edly reinforce an expected cutback in expected to decelerate substantially in inventory investment from its unsustainresponse to higher financing costs and able pace in recent quarters. A key slower growth of sales and profits. uncertainty in the outlook was whether Homebuilding was anticipated to soften the slowing in overall economic growth a little in response to slower growth in would be sufficient to relieve the current jobs and income as well as to the pressures on labor and other producer increase that had occurred in mortgage resources, which many members saw as rates. Recent developments in Mexico portending higher inflation, or, indeed, were expected to cut into exports in the whether such pressures would intensify near term, but the sustained economic further. Opinions differed to some growth elsewhere would keep export degree with regard to both the likely demand on an uptrend. Although there extent of the prospective slowing in ecowas considerable uncertainty regarding nomic growth and the outlook for inflathe fiscal outlook, in light of the con- tion. However, most of the members gressional intent to cut the federal defi- concluded that some rise in inflation cit the forecast incorporated a somewhat appeared probable over coming quargreater degree of fiscal restraint than ters, and they were concerned that this had been built into recent forecasts. In upturn would not be reversed and could the staff's judgment, the economy cur- be extended in the absence of further rently was operating beyond its long- monetary restraint. run, noninflationary capacity, and there In keeping with the practice at meetremained a substantial risk that inflation ings when the Committee establishes its could ratchet higher absent further mone- long-run ranges for growth of the money tary policy actions. and debt aggregates, the members of the In the Committee's discussion of cur- Committee and the Federal Reserve rent and prospective economic develop- Bank presidents not currently serving as ments, the members agreed that growth members had prepared individual proin economic activity could be expected jections of economic activity, the rate of to moderate considerably over the unemployment, and inflation for the course of 1995, although inflation was year 1995. Measured from the fourth likely to be higher than in 1994. They quarter of 1994 to the fourth quarter of acknowledged that their current projec- 1995, their forecasts of the growth in tions were subject to substantial risks. real GDP had a central tendency of 2 to The expansion continued to display 3 percent, compared with a growth rate appreciable momentum and signs of of 4 percent estimated for 1994. Most of slower growth were still quite limited the members also anticipated that ecoand tentative. Even so, the members nomic expansion in line with their foreremained persuaded that the lagged casts would be associated with little effects of the policy tightening imple- change in the unemployment rate, and mented over the course of 1994 would their projections of the rate in the fourth become increasingly evident in interest- quarter of 1995 were centered in a narsensitive sectors of the economy as the row range around 5l/i percent. The high year progressed. The projected modera- levels of resource utilization implied by tion in the growth of final demands, these projections were viewed by most Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January-February 117 members as likely to foster somewhat December, but they also noted that the greater pressure on wages and prices. available information on consumer Accordingly, projections of the rate of spending during the first few weeks of inflation, as indexed by the consumer this year was inconclusive with regard price index, had a central tendency of 3 to the possible emergence of a slowing to 31/2 percent for the period from the trend. Anecdotal commentary on retail fourth quarter of 1994 to the fourth sales was mixed, and evidence of some quarter of 1995, compared with rates of decline in January sales of motor vehiabout 23/4 percent in both 1993 and cles needed to be evaluated with caution 1994. because of the introduction of a new In their review of regional economic reporting method. Consumer confidence developments, members referred to was at a high level, but some members widespread evidence of further growth observed that consumer indebtedness in business activity, but a number also had grown rapidly and was likely to mentioned scattered signs of some soft- exert a retarding effect on consumer ening in a few areas or industries. Sev- spending at some point. In this regard, eral emphasized, however, that the anec- however, it was pointed out that rising dotal evidence did not currently point to consumer incomes had kept debt service any significant moderation in the overall burdens from increasing significantly growth of the economy. With regard to thus far. On balance, the members financial conditions, members com- believed that the growth in consumer mented that they saw little indication spending probably would slow over the that policy tightening actions over the forecast horizon though such spending past year were constraining the avail- might be relatively well maintained for ability of credit to any observable some period, given the ongoing expandegree. Despite higher interest rates, sion in jobs and incomes and the ready financial conditions remained broadly availability of financing to many consupportive of further economic expan- sumers. In any event, the outlook for sion. The performance of stock market this sector of the economy, which was prices and the relatively narrow quality critical to any significant moderation in spreads in debt markets attested to a overall economic growth, was uncertain considerable degree of confidence with regard to both the timing and the among investors. Members also took extent of possible slowing. note of the accommodative lending poli- Housing construction was cited as cies of banking institutions. Those poli- potentially the most important demand cies had encouraged rapid growth in sector of the economy that was likely to consumer and business loans and evi- contribute to more moderate economic dently were contributing to the ongoing growth over the year ahead. As evistrength of the economic expansion. denced by nationwide data through the Some members expressed concern that a end of 1994, single-family housing number of banks might have eased their starts had held up unexpectedly well lending standards unduly and thus despite sizable increases in home mortassumed unwarranted risks in their loan gage rates, but anecdotal reports from portfolios. around the country had pointed to In their assessment of developments weakening demand for new homes for in key sectors of the economy, members several months and continued to do referred to the sluggish behavior of non- so. Against the background of current auto retail sales in November and mortgage rate levels and the rise that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 82nd Annual Report, 1995 had occurred in home mortgage indebt- inventory-sales ratios across much of edness, the members continued to the economy and little anecdotal or other anticipate softening demand for hous- evidence of unintended inventory accuing, at least in the single-family sector. mulation. Moreover, because an unusu- The mild uptrend in the much smaller ally large share of the inventory buildup multifamily sector was likely to con- in recent quarters appeared to involve tinue for some period, given low rental imports, a cutback in such investment vacancy rates in a number of areas, and should tend to have a smaller-than-usual further improvement in nonresidential impact on domestic production. There construction was likely to offset to some was no current evidence that inventory extent the overall slowing in housing investment was slowing, and indeed construction. recent data on business loans at banks In the capital goods sector, real might suggest some acceleration in business-fixed investment had strength- inventory accumulation since the beginened further in the fourth quarter, and ning of the year. Nonetheless, as more the members believed, on the basis of moderate growth in final demand began rising order backlogs and the strength of to emerge, concerns about the availabilpermits for new business construction, ity of materials used in the production that considerable momentum had car- process or stocks needed to meet market ried into this year. While the growth demand should diminish, and business in spending for business equipment firms could be expected to trim their undoubtedly would moderate from its demand for inventories, perhaps aggresextraordinary pace over an extended sively for a time. Indeed, this sector of period, large business profits and the the economy might well account for still relatively low user cost of capital much of the slowing in the expansion would tend to support appreciable fur- for some period of time during the year ther growth in such investment in the ahead. context of elevated levels of capacity Fiscal policy was under active debate utilization and ongoing efforts, induced in the Congress, and the members by strong market competition, to viewed the outcome of that debate as increase productivity. Moreover, non- very uncertain. The emergence of a residential construction was now trend- moderately restrictive fiscal policy ing higher, with particular strength evi- might be a reasonable assumption to dent in industrial and commercial incorporate in current forecasts, albeit construction. an assumption that clearly was subject The pace of inventory accumulation0 to a wide range of error. In any event, in recent quarters was viewed as unsus- any progress toward cutting future budtainable and a decline in inventory get deficits was likely to have a favorinvestment was seen as likely over the able effect on domestic financial marforecast horizon, though the precise tim- kets and perhaps also on the dollar in ing and extent were impossible to pre- foreign exchange markets. dict. While slower growth in final Developments in Mexico and their demand might in most circumstances possible repercussions in other developstimulate a relatively sharp adjustment ing nations had negative implications in inventory investment, members cited for U.S. exports, at least over the short factors that could mute the size of that run. Indeed, some members cited anecadjustment and its effects on overall dotal evidence that reduced trade with GDP. These included relativelv low Mexico had alreadv emerged since late Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January—February 119 1994. Moreover, the effects of the earth- raw materials and other producer inputs quake in Kobe, Japan, seemed to be to the prices of final goods, the members disrupting trade with that nation in agri- referred to increasingly numerous cultural and other bulk goods and was examples of successful efforts to raise likely to continue doing so over the near such prices and to apparently growing term. Looking beyond the months business expectations that it would be immediately ahead, the relatively robust possible to implement such increases growth projected for many industrial over the months ahead. On balance, the countries together with the lower value members generally were persuaded that of the dollar should boost the nation's the economy had attained levels of labor overall external trade balance, though and capital utilization that implied a probably not to the extent of providing strong risk of rising inflation over comsubstantial stimulus to the economy. ing quarters. One member observed that a number of In keeping with the requirements of countries throughout the world faced the the Full Employment and Balanced potential for important changes in politi- Growth Act of 1978 (the Humphreycal conditions that could have adverse Hawkins Act), the Committee at this effects on their growth and trading rela- meeting reviewed the ranges for growth tionships, with possible repercussions on of the monetary and debt aggregates in U.S. exports. 1995 that it had established on a tenta- Members commented that the strong tive basis at its meeting in July 1994. growth in economic activity and high The tentative ranges included expansion levels of resource utilization had fos- of 1 to 5 percent for M2 and 0 to 4 pertered relatively rapid increases in the cent for M3, measured from the fourth prices of many raw materials and semi- quarter of 1994 to the fourth quarter of finished goods used in the production 1995. The monitoring range for growth process, but contrary to numerous fore- of total domestic nonfinancial debt had casts these developments had not led been set provisionally at 3 to 7 percent thus far to a broad pickup in inflation as for 1995. The ranges for M2 and M3 measured by the prices of final goods were unchanged from those that the and services. This favorable develop- Committee had used in 1994, while the ment might be explained in part by lags range for debt was 1 percentage point in the inflation transmission process and lower. perhaps to some degree by various struc- All the members endorsed a proposal tural changes and productivity improve- to adopt the ranges that the Committee ments in recent years that may have had set on a tentative basis in July 1994. raised both the level and the rate of While some acceleration in the growth increase of the economy's potential for of the broad monetary aggregates from sustained activity. Many members the pace in 1994 could be anticipated observed, however, that it would not be over the year ahead according to a staff prudent from a monetary policy stand- analysis, monetary expansion within the point to assume that continued rapid ranges in question appeared to be coneconomic growth and further pressures sistent with the moderation in the expanon producer resources would not lead to sion of nominal GDP that the members rising inflation over the quarters ahead. were projecting for 1995 and that they While competitive pressures still gener- viewed as desirable to head off increasally limited the extent to which business ing inflation. Moreover, the ranges for firms could pass through rising costs of the broad monetary aggregates had been Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 82nd Annual Report, 1995 reduced over the past decade to levels the Federal Reserve in its efforts to that, notably in the case of M2, should counteract the effects of cyclical shortnow be consistent over long periods falls in the performance of the economy. with the Committee's objectives for The members agreed that the discussion stable prices and maximum sustainable had been helpful in outlining the issues economic growth. This outcome would and that the subject should be revisited. depend on the restoration over time of It was noted in this connection that the the historical velocity patterns linking Committee might be asked to comment the monetary aggregates to broad mea- during the months ahead on specific sures of. economic performance, includ- congressional proposals for inflation ing a level velocity trend for M2. It was targeting. noted in this regard that until recent At the conclusion of its discussion, all years the growth of M3 had tended to the members voted to approve without exceed that of M2—a pattern that change the tentative ranges for 1995 that seemed to be re-emerging—and there- the Committee had established in July fore a somewhat higher range might be of last year. In keeping with its usual set for M3 than for M2. However, the procedures under the Humphreymembers did not believe that a persua- Hawkins Act, the Committee would sive argument could be made at this review its ranges at midyear, or sooner juncture for raising the M3 range, if interim conditions warranted, in light though they did not want to rule out the of the growth and velocity behavior of option of doing so later, possibly when the aggregates and ongoing economic the ranges were reviewed at midyear. and financial developments. Accord- Indeed, to make the change at this point ingly, the following longer-run policy might convey a misleading message statement for 1995 was approved for regarding the Committee's policy inten- inclusion in the domestic policy tions or its confidence in prospective directive: monetary growth relationships. The Committee also considered the The Federal Open Market Committee potential advantages and disadvantages seeks monetary and financial conditions that of setting specific targets for bringing will foster price stability and promote sustainable growth in output. In furtherance of inflation down and achieving price stathese objectives, the Committee at this meetbility over time. Such targets might ing established ranges for growth of M2 and provide an alternative or supplemental M3 of 1 to 5 percent and 0 to 4 percent approach to the monetary growth respectively, measured from the fourth quarranges, which had been found to be ter of 1994 to the fourth quarter of 1995. The Committee anticipated that money growth unreliable guides for monetary policy within these ranges would be consistent with over the past several years. The memits broad policy objectives. The monitoring bers discussed a number of aspects of range for growth of total domestic nonfinaninflation targeting. On the one hand, cial debt was lowered to 3 to 7 percent for such targeting would help to anchor the the year. The behavior of the monetary aggregates will continue to be evaluated in conduct of monetary policy and progress the light of progress toward price level stain meeting these objectives could bility, movements in their velocities, and enhance the credibility of the Federal developments in the economy and financial Reserve and perhaps reduce the overall markets. cost of attaining price stability. On the other hand, close adherence to preset Votes for this action: Messrs. Greenspan, inflation targets could unduly constrain McDonough, Blinder, Hoenig, Kelley, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January-February 121 LaWare, Lindsey, and Melzer, Ms. Mine- prompt move would provide some han, Mr. Moskow, and Mses. Phillips and insurance against what these members Yellen. Votes against this action: None. viewed as the principal risk in current circumstances—that of rising inflation. In the Committee's discussion of pol- The risks of excessive tightening, while icy for the intermeeting period ahead, all not completely absent, were believed to the members indicated that they could be limited in light of the apparent support some firming in reserve condi- strength and momentum of the expantions, though a few preferred to delay sion, which many forecasters had undersuch an action pending the receipt estimated over the past year. One within the next few weeks of significant member expressed the view that while new information that could help the monetary growth had been damped, Committee to evaluate whether and to continuing restraint on the growth of the what extent the economic expansion narrow monetary aggregates was desirmight be slowing. Most of the members able to offset a previous buildup in were convinced, however, that current liquidity and to help ensure that inflamonetary policy should be adjusted tionary pressures would be contained. promptly to a more clearly restrictive Members who saw an advantage in stance. In their view, prompt action was postponing a decision to tighten policy needed to counter inflationary pressures commented that, in light of some scatand inflationary expectations in an econ- tered signs of a moderating expansion, it omy that already seemed to be operating would be helpful to wait for certain key at, and perhaps beyond, sustainable statistics that would become available capacity levels and to be continuing to within the next few weeks to judge the expand at a pace above its long-run extent of any moderation. Data on retail potential. In these circumstances, a sales in January might provide particudelay in tightening policy would incur lar insights as to whether the softening an unacceptable risk of allowing further in such sales in November and Deceminflationary momentum to develop in ber was persisting. The favorable news the economy and would require more on inflation in the fourth quarter had tightening over time than might other- lessened concerns about an immediate wise be needed to achieve the Commit- inflation threat, and if the incoming tee's objectives. Part of the risk involved information confirmed the need for fura potential further decline in the dollar ther tightening, the short delay in impleat a time when there already was consid- menting it would have only a minimal erable concern about rising pressures on cost. In addition, an increase in moneprices. Some tightening of policy at this tary restraint would be likely to exacermeeting was generally anticipated in bate the problems of Mexico and permarkets, and a failure to take action now haps to some extent those of Canada and was likely in the view of a number of would have potentially adverse implicamembers to raise questions about the tions for U.S. trade with both of these credibility of the System's anti-inflation key trading partners. Because the probresolve and to generate some unsettle- ability that incoming information would ment in financial markets, notably in the counsel against any further policy tightforeign exchange market where the dol- ening was certainly less than 50 percent lar already appeared to be vulnerable to so that only a matter of timing was further weakness. In terms of balancing likely to be involved, these members the policy risks that were involved, a indicated that they would join with the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 82nd Annual Report, 1995 other members in voting to tighten pol- about possible adjustments to policy icy at this meeting. during the intermeeting period. Accord- Concerning the possible need to ingly, in the context of the Committee's adjust policy during the intermeeting long-run objectives for price stability period, the members were unanimously and sustainable economic growth, and in favor of adopting a symmetric giving careful consideration to ecodirective. Given a decision to implement nomic, financial, and monetary developsome tightening in monetary policy at ments, the Committee decided that this meeting, they did not believe that somewhat greater or somewhat lesser there should be a presumption toward reserve restraint would be acceptable possible further tightening in this period. during the intermeeting period. Accord- A number of members observed that ing to a staff analysis, the reserve condifurther monetary restraint might not be tions contemplated at this meeting needed if, in line with their expecta- would be consistent with moderate tions, the incoming evidence on the per- growth in M2 and M3 over coming formance of the economy suggested that months. the expansion was moderating suffi- At the conclusion of the meeting, the ciently for the economy to return to a Federal Reserve Bank of New York was growth path consistent with containing authorized and directed, until instructed inflation pressures. In any event, the otherwise by the Committee, to execute Committee's most difficult decision over transactions in the System Account in the next several quarters was likely to be accordance with the following domestic that of determining when further tight- policy directive: ening was no longer desirable. Prior to the end of the meeting, the The information reviewed at this meeting members were apprised of a disposition suggests a strong further rise in economic on the part of the Board of Governors to activity during the closing months of 1994. approve an increase of Vi percentage Nonfarm payroll employment was up considerably further in December after a sharp point in the discount rate that was pendincrease in November, and the civilian uneming at several Federal Reserve Banks. In ployment rate declined to 5.4 percent. Industhe event that such an increase was trial production registered another large approved by the Board, the members advance in December and capacity utilizaagreed that open market operations tion continued to move up from already high levels. Current estimates indicate little should be conducted so as to allow that change in retail sales over November and increase to be reflected fully in reserve December, while housing starts posted sizmarkets. able gains on balance over the two months. At the conclusion of the Committee's Orders for nondefense capital goods point to discussion, all the members indicated a continued strong expansion in spending on that they could support a directive that business equipment; permits for nonresidential construction have been trending apprecalled for increasing somewhat the ciably higher. The nominal deficit on U.S. degree of pressure on reserve positions. trade in goods and services widened some- In the implementation of this policy, what in October-November from its average account would be taken of a possible rate in the third quarter. Prices of many mateincrease of xh percentage point in the rials have continued to move up rapidly, but broad indexes of prices for consumer goods discount rate that was under considerand services have increased moderately on ation by the Board of Governors. The average over recent months. members also agreed that the directive Most market interest rates have declined should not include any presumption slightly on balance since the Committee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January-February 123 meeting on December 20, 1994. In foreign Temporary Increase in Reciprocal exchange markets, the trade-weighted value Currency Agreement with the Bank of the dollar in terms of the other G-10 of Mexico and Increase in currencies has declined somewhat over the Agreement to "Warehouse" intermeeting period. The Mexican peso has depreciated sharply against the dollar. Foreign Currencies Growth of M2 and M3 strengthened in December and January. From the fourth On December 30, 1994, the Committee quarter of 1993 to the fourth quarter of 1994, approved a temporary increase from M2 grew at a rate at the bottom of the $3 billion to $4Vi billion in the System's Committee's range for 1994 and M3 at a rate reciprocal currency (swap) agreement in the lower half of its range for the year. Total domestic nonfinancial debt has contin- with the Bank of Mexico and it also ued to expand at a moderate rate in recent approved the activation of that agreemonths, and for the year 1994 it grew at a ment. The Committee approved a furrate in the lower half of its monitoring range. ther temporary increase of $VA billion The Federal Open Market Committee and activation of that amount at this seeks monetary and financial conditions that meeting, thereby raising the swap will foster price stability and promote sustainable growth in output. In furtherance of arrangement with the Bank of Mexico to these objectives, the Committee at this meet- a level of $6 billion, consisting of the ing established ranges for growth of M2 and regular $3 billion line and a special M3 of 1 to 5 percent and 0 to 4 percent $3 billion line. The special $3 billion respectively, measured from the fourth quarline may be drawn on until January 31, ter of 1994 to the fourth quarter of 1995. The Committee anticipated that money growth 1996. Drawings would be for threewithin these ranges would be consistent with month periods and could be renewed a its broad policy objectives. The monitoring maximum of three times. Once a drawrange for growth of total domestic nonfinan- ing on the special line is repaid, the size cial debt was lowered to 3 to 7 percent for of the line will be reduced pari passu. the year. The behavior of the monetary aggregates will continue to be evaluated in All drawings on the special line will the light of progress toward price level sta- have to be repaid no later than Janubility, movements in their velocities, and ary 31, 1997. The terms and conditions developments in the economy and financial for use of the permanent $3 billion swap markets. facility with the Bank of Mexico remain In the implementation of policy for the unchanged and drawings, once repaid, immediate future, the Committee seeks to increase somewhat the existing degree of will require Committee action prior to pressure on reserve positions, taking account subsequent use. The Treasury has underof a possible increase in the discount rate. In taken to ensure the repayment of any the context of the Committee's long-run swap drawing by the Bank of Mexico on objectives for price stability and sustainable the $6 billion in lines that is outstanding economic growth, and giving careful consideration to economic, financial, and monetary more than twelve months. developments, somewhat greater reserve restraint or somewhat lesser reserve restraint Votes for this action: Messrs. Greenspan, would be acceptable in the intermeeting McDonough, Blinder, Hoenig, Kelley, and period. The contemplated reserve conditions LaWare, Ms. Minehan, Mr. Moskow, and are expected to be consistent with moderate Mses. Phillips and Yellen. Votes against growth in M2 and M3 over coming months. this action: Messrs. Lindsey and Melzer. Votes for this action: Messrs. Greenspan, The Committee also approved at this McDonough, Blinder, Hoenig, Kelley, meeting an increase from $5 billion to La Ware, Lindsey, and Melzer, Ms. Minehan, Mr. Moskow, and Mses. Phillips and $20 billion in the amount of eligible Yellen. Votes against this action: None. foreign currencies that the System is Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 82nd Annual Report, 1995 prepared to "warehouse" for the Trea- ing the growth of trade between the two sury and the Exchange Stabilization nations and the resulting creation of jobs Fund (ESF). The purpose of the ware- in both countries. Moreover, Mexico's housing facility, which has been in place financial problems appeared to be for many years, is*to supplement the spreading to a number of other nations U.S. dollar resources of the Treasury and adversely affecting the dollar in the and the ESF for financing purchases of foreign exchange markets. The particiforeign currencies and related interna- pation of the Federal Reserve in this tional operations. The size of the ware- effort was strongly endorsed by the housing facility had ranged up to Administration and the overall program $15 billion in past years, but it was had the support of the bipartisan leaderreduced to $5 billion in February 1992. ship in the Congress. Apart from tem- The expansion of the, warehousing porary financial resources, the Federal agreement at this meeting was intended Reserve was in a position to supply to facilitate U.S. participation in the expertise and experience that were not Multilateral Program to Restore Finan- readily available elsewhere. On the cial Stability in Mexico, announced by negative side, the members acknowl- President Clinton on January 31, 1995, edged that there could be no assurances by warehousing up to $20 billion in that the rescue program would succeed, German marks and Japanese yen held but its scale, its multinational character, by the Treasury through the ESF..The and the apparent willingness of Mexican Committee will review each year the officials to pursue the difficult policies need to maintain this level of warehous- needed to ensure success were grounds ing authority in light of the progress and for optimism. needs of the Program. Messrs. Lindsey and Melzer dissented with respect to increases in both the Votes for this action: Messrs. Greenspan, swap line and the warehousing arrange- McDonough, Blinder, Hoenig, Kelley, and ment with the Exchange Stabilization LaWare, Ms. Minehan, Mr. Moskow, and Mses. Phillips and Yellen. Votes against Fund. They did not believe that the this action: Messrs. Lindsey and Melzer. Committee had been provided sufficient information to assess whether develop- Members who voted to approve these ments in Mexico threatened U.S. finanproposals were persuaded that the nature cial stability, a possible justification for and severity of Mexico's financial prob- increased central bank lending on a lems could not be contained without short-term basis. Furthermore, they conmaking substantial financial assistance sidered it inappropriate for the Federal available to the Government of Mexico. Reserve to participate, directly or indi- The financial support provided by the rectly, in intermediate- to long-term United States would be accompanied by financing to facilitate debt restructuring. similar assistance from the IMF and They were concerned that such particiwould be conditioned on Mexico's com- pation in a fiscal policy matter might mitment to implement major changes in compromise, or appear to compromise, its economic policies, including mone- the independence of the monetary poltary policy. It was emphasized during icy process. Mr. Lindsey added that the the Committee's discussion that the latter risks were significantly enhanced United States had a strong interest in given the absence of congressional encouraging the restoration of stability authorization or more general public in Mexico for numerous reasons, includ- support for these measures. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings; January-February 125 Disclosure Policy meetings, transcripts for an entire year will be released with a five-year lag; At this meeting, the Committee decided earlier transcripts dating back to to retain the procedures that it had fol- March 1976 will continue to be released lowed over the past year for providing on an ongoing basis as the light editing greater information to the public about process is completed. Continuing the its policy actions and discussions. It was practice followed since the beginning the judgment of the members that these of 1994, transcripts prepared by the procedures strike an appropriate balance Committee's Secretariat will be cirbetween making the Committee's deci- culated to each participant to verify his sions and deliberations accessible to the or her comments, and only changes public as soon and as fully as feasible, that clarify meaning, such as the correcwhile safeguarding the Committee's tion of grammar or transcription errors, flexibility in policymaking and preserv- will be permitted. A limited amount ing an unfettered deliberative process. of material will be withheld from The procedures in question involve the the publicly released version of these prompt announcement of the Commit- documents, primarily to protect the contee's decisions and the release of min- fidentiality of foreign and domestic utes and transcripts of FOMC meetings. sources of information that likely The Committee will continue its prac- would be lost if the information they tice of announcing each change in the provide were to be made public. As stance of monetary policy in a press required by law, a complete, unrerelease on the day the decision is made. dacted version of the transcript of each This practice removes any uncertainty meeting will be turned over to the about the Committee's intentions in National Archives after thirty years have regard to reserve conditions and enables elapsed. all financial market participants and For the purpose of preparing the minothers to receive the information at the utes and transcripts, the discussions of same time. When no change is made at a monetary policy at Committee meetings meeting, the Committee normally will will continue to be recorded. The tape announce only the time when the meet- recorder may be turned off at the Chairing ended and that there are no further man's discretion when the Committee announcements. However, in some deals with issues unrelated to monetary infrequent circumstances, the Commit- policy, such as organizational and pertee may decide to issue a statement even sonnel matters. The transcripts will indiwhen no change in policy is made. cate that the tape recorder has been The full substance of the Commit- turned off and the minutes will provide tee's deliberations relating to each pol- a summary description of the matters icy decision will continue to be reported, that were discussed. As permitted by the as is the current practice, in comprehen- National Records Act, the recordings sive minutes of the meeting that are and unedited transcripts will be disreleased two or three days following the carded after all the participants at the next regularly scheduled meeting. For meeting have reviewed and corrected, as historians and other students of mone- necessary, the transcripts prepared by tary policymaking, those minutes will the Secretariat. be supplemented by lightly edited tran- It was agreed that the next meeting scripts of the discussion at each Com- of the Committee would be held on mittee meeting. For recent and future Tuesday, March 28, 1995. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 82nd Annual Report, 1995 The meeting adjourned at 3:20 p.m. Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors Donald L. Kohn Mr. Madigan, Associate Director, Secretary Division of Monetary Affairs, Board of Governors Mr. Simpson, Associate Director, Meeting Held on Division of Research and March 28, 1995 Statistics, Board of Governors A meeting of the Federal Open Market Ms. Low, Open Market Secretariat Assistant, Division of Monetary Committee was held in the offices of Affairs, Board of Governors the Board of Governors of the Federal Reserve System, in Washington, Messrs. Goodfriend, Lang, Rolnick, D.C., on Tuesday, March 28, 1995, at Rosenblum, and Sniderman, 9:00 a.m. Senior Vice Presidents, Federal Reserve Banks of Richmond, Present: Philadelphia, Minneapolis, Dallas, Mr. Greenspan, Chairman and Cleveland respectively Mr. McDonough, Vice Chairman Mr. Blinder Mr. Kos, Mr. Judd, and Mr. Hoenig Ms. Rosenbaum, Vice Presidents, Mr. Kelley Federal Reserve Banks of Mr. Lindsey New York, San Francisco, and Mr. Melzer Atlanta respectively Ms. Minehan Mr. Moskow Mr. Thornton, Assistant Vice President, Ms. Phillips Federal Reserve Bank of St. Louis Ms. Yellen By unanimous vote, the minutes of Messrs. Boehne, Jordan, McTeer, and the meeting of the Federal Open Market Stern, Alternate Members of the Federal Open Market Committee Committee held on January 31- February 1, 1995, were approved. Messrs. Broaddus, Forrestal, and Parry, By unanimous vote, responsibility for Presidents of the Federal Reserve making decisions on appeals of denials Banks of Richmond, Atlanta, and by the Secretary of the Committee for San Francisco respectively access to Committee records was dele- Mr. Kohn, Secretary and Economist gated under the provisions of 271.4(d) Mr. Bernard, Deputy Secretary of the Committee's Rules Regarding Mr. Coyne, Assistant Secretary Availability of Information to Ms. Phil- Mr. Gillum, Assistant Secretary lips and, in her absence, to Ms. Yellen. Mr. Mattingly, General Counsel By unanimous vote, the Committee Mr. Baxter, Deputy General Counsel Mr. Prell, Economist elected Thomas C. Baxter, Jr., as Dep- Mr. Truman, Economist uty General Counsel from the Federal Reserve Bank of New York and Wil- Ms. Browne and Messrs. Davis, Hunter, liam C. Hunter as Associate Economist Lindsey, Mishkin, Promisel, from the Federal Reserve Bank of Chi- Siegman, Slifman, and Stockton, cago to serve until the next election at Associate Economists the first meeting of the Committee Mr. Fisher, Manager, System Open after December 31, 1995, with the Market Account understanding that in the event of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 127 discontinuance of their official connec- By unanimous vote, the Authorization with the Federal Reserve Banks of tion for Domestic Open Market Opera- New York and Chicago respectively, tions shown below was reaffirmed. they would cease to have any official connection with the Federal Open Market Committee. Authorization for Domestic Open On January 12, 1995, the continuing Market Operations rules, regulations, and other instruments of the Committee had been distributed Reaffirmed March 28, 1995 with the advice that, in accordance with procedures approved by the Committee, 1. The Federal Open Market Committee authorizes and directs the Federal Reserve they were being called to the Commit- Bank of New York, to the extent necessary tee's attention to give members an to carry out the most recent domestic policy opportunity to raise any questions they directive adopted at a meeting of the might have concerning them. Committee: Members were asked to indicate if (a) To buy or sell U.S. Government securities, including securities of the Federal they wished to have any of the instru- Financing Bank, and securities that are direct ments in question placed on the agenda, obligations of, or fully guaranteed as to and no requests for substantive con- principal and interest by, any agency of the sideration were received. Apart from United States in the open market, from or to the updating of the Manager's title securities dealers and foreign and inter- (see minutes of Jan. 31-Feb. 1 meeting), national accounts maintained at the Federal Reserve Bank of New York, on a cash, reguall of the instruments identified below lar, or deferred delivery basis, for the System remained in effect in their existing Open Market Account at market prices, and, forms: for such Account, to exchange maturing U.S. Government and Federal agency securities 1. Federal Open Market Committee Rules with the Treasury or the individual agencies a) Rules of Organization or to allow them to mature without replaceb) Rules of Procedure ment; provided that the aggregate amount of c) Rules Regarding Availability of U.S. Government and Federal agency securi- Information ties held in such Account (including forward d) Open Market Operations of Federal commitments) at the close of business on the Reserve Banks day of a meeting of the Committee at which e) Procedures for Allocation of Securi- action is taken with respect to a domestic ties in the System Open Market Account policy directive shall not be increased or f) Resolution to Provide for the Contin- decreased by more than $8.0 billion during ued Operation of the Committee During an the period commencing with the opening of Emergency business on the day following such meeting g) Resolution Authorizing Certain and ending with the close of business on the Actions by Federal Reserve Banks During an day of the next such meeting; Emergency (b) When appropriate, to buy or sell in h) Guidelines for the Conduct of Sys- the open market, from or to acceptance dealtem Open Market Operations in Federal ers and foreign accounts maintained at the Agency Issues Federal Reserve Bank of New York, on a 2. Authority for the Chairman to appoint cash, regular, or deferred delivery basis, for a Federal Reserve Bank as agent to operate the account of the Federal Reserve Bank of the System Account in case the New York New York at market discount rates, prime Bank is unable to function bankers acceptances with maturities of up to 3. Resolution relating to examinations of nine months at the time of acceptance that the System Open Market Account (1) arise out of the current shipment of goods 4. Regulation relating to Open Market between countries or within the United Operations of Federal Reserve Banks States, or (2) arise out of the storage within Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 82nd Annual Report, 1995 the United States of goods under contract of ment securities to such foreign and intersale or expected to move into the channels of national accounts on the bases set forth in trade within a reasonable time and that are paragraph l(a) under agreements providing secured throughout their life by a warehouse for the resale by such accounts of those receipt or similar document conveying title securities within 15 calendar days on terms to the underlying goods; provided that the comparable to those available on such transaggregate amount of bankers acceptances actions in the market; and (b) for New York held at any one time shall not exceed Bank account, when appropriate, to under- $100 million; take with dealers, subject to the conditions (c) To buy U.S. Government securities, imposed on purchases and sales of securities obligations that are direct obligations of, or in paragraph l(c), repurchase agreements in fully guaranteed as to principal and interest U.S. Government and agency securities, and by, any agency of the United States, and to arrange corresponding sale and repurchase prime bankers acceptances of the types agreements between its own account and authorized for purchase under l(b) above, foreign and international accounts mainfrom dealers for the account of the Federal tained at the Bank. Transactions undertaken Reserve Bank of New York under agreewith such accounts under the provisions of ments for repurchase of such securities, oblithis paragraph may provide for a service fee gations, or acceptances in 15 calendar days when appropriate. or less, at rates that, unless otherwise expressly authorized by the Committee, shall be determined by competitive bidding, after By unanimous vote, the Authorizaapplying reasonable limitations on the vol- tion for Foreign Currency Operations ume of agreements with individual dealers; was amended to reflect the new title provided that in the event U.S. Government of Manager, System Open Market securities or agency issues covered by any Account (see minutes of Jan. 31-Feb. 1 such agreement are not repurchased by the dealer pursuant to the agreement or a meeting). renewal thereof, they shall be sold in the market or transferred to the System Open Market Account; and provided further that in the event bankers acceptances covered by Authorization for Foreign Currency any such agreement are not repurchased Operations by the seller, they shall continue to be held by the Federal Reserve Bank or shall be sold in the open market. Amended March 28, 1995 2. In order to ensure the effective conduct 1. The Federal Open Market Committee of open market operations, the Federal Open authorizes and directs the Federal Reserve Market Committee authorizes and directs the Bank of New York, for System Open Market Federal Reserve Banks to lend U.S. Govern- Account, to the extent necessary to carry out ment securities held in the System Open the Committee's foreign currency directive Market Account to Government securities and express authorizations by the Committee dealers and to banks participating in Governpursuant thereto, and in conformity with ment securities clearing arrangements consuch procedural instructions as the Commitducted through a Federal Reserve Bank, tee may issue from time to time: under such instructions as the Committee A. To purchase and sell the following may specify from time to time. foreign currencies in the form of cable trans- 3. In order to ensure the effective conduct fers through spot or forward transactions on of open market operations, while assisting in the open market at home and abroad, includthe provision of short-term investments for ing transactions with the U.S. Treasury, with foreign and international accounts main- the U.S. Exchange Stabilization Fund estabtained at the Federal Reserve Bank of lished by Section 10 of the Gold Reserve New York, the Federal Open Market Com- Act of 1934, with foreign monetary authorimittee authorizes and directs the Federal ties, with the Bank for International Settle- Reserve Bank of New York (a) for System ments, and with other international financial Open Market Account, to sell U.S. Govern- institutions: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 129 Austrian schillings Amount Belgian francs Foreign bank (millions of Canadian dollars dollar equivalent) Danish kroner Austrian National Bank 250 Pounds sterling National Bank of Belgium 1,000 French francs Bank of Canada 2,000 National Bank of Denmark 250 German marks Bank of England 3,000 Italian lire Bank of France 2,000 German Federal Bank 6,000 Japanese yen Bank of Italy 3,000 Mexican pesos Bank of Japan 5,000 Netherlands guilders Bank of Mexico Norwegian kroner Regular 3,000 Swedish kronor Special 3,000 Netherlands Bank 500 Swiss francs Bank of Norway 250 Bank of Sweden 300 Swiss National Bank 4,000 B. To hold balances of, and to have Bank for International Settlements: outstanding forward contracts to receive or Dollars against Swiss francs 600 Dollars against authorized European to deliver, the foreign currencies listed in currencies other than Swiss francs 1,250 paragraph A above. C. To draw foreign currencies and to permit foreign banks to draw dollars under Any changes in the terms of existing swap the reciprocal currency arrangements listed arrangements, and the proposed terms of any in paragraph 2 below, provided that draw- new arrangements that may be authorized, ings by either party to any such arrangement shall be referred for review and approval to shall be fully liquidated within 12 months the Committee. after any amount outstanding at that time 3. All transactions in foreign currencies was first drawn, unless the Committee, undertaken under paragraph l.A. above because of exceptional circumstances, spe- shall, unless otherwise expressly authorized cifically authorizes a delay. by the Committee, be at prevailing market D. To maintain an overall open posi- rates. For the purpose of providing an investtion in all foreign currencies not exceeding ment return on System holdings of foreign $25.0 billion. For this purpose, the overall currencies, or for the purpose of adjusting open position in all foreign currencies is interest rates paid or received in connection defined as the sum (disregarding signs) of with swap drawings, transactions with fornet positions in individual currencies. The eign central banks may be undertaken at net position in a single foreign currency is non-market exchange rates. 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 itself to maintain any specific balance, unless New York to maintain reciprocal currency authorized by the Federal Open Market arrangements ("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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 82nd Annual Report, 1995 needs for minimum working balances. Such 9. All Federal Reserve Banks shall parinvestments shall be in liquid form, and gen- ticipate in the foreign currency operations erally have no more than 12 months remain- for System Account in accordance with paraing to maturity. When appropriate in con- graph 3 G(l) of the Board of Governors' nection with arrangements to provide Statement of Procedure with Respect to Forinvestment facilities for foreign currency eign Relationships of Federal Reserve Banks holdings, U.S. Government securities may be dated January 1, 1944. purchased from foreign central banks under agreements for repurchase of such securities By unanimous vote, the Foreign within 30 calendar days. Currency Directive shown below was 6. All operations undertaken pursuant to the preceding paragraphs shall be reported reaffirmed. promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, Foreign Currency Directive the Vice Chairman of the Board of Governors, and such other member of the Board as Reaffirmed March 28, 1995 the Chairman may designate (or in the absence of members of the Board serving on 1. System operations in foreign currenthe Subcommittee, other Board members cies shall generally be directed at countering designated by the Chairman as alternates, disorderly market conditions, provided that and in the absence of the Vice Chairman of market exchange rates for the U.S. dollar the Committee, his alternate). Meetings of reflect actions and behavior consistent with the Subcommittee shall be called at the the IMF Article IV, Section 1. request of any member, or at the request of 2. To achieve this end the System shall: the Manager, System Open Market Account A. Undertake spot and forward pur- ("Manager"), for the purposes of reviewing chases and sales of foreign exchange. recent or contemplated operations and of B. Maintain reciprocal currency consulting with the Manager on other mat- ("swap") arrangements with selected forters relating to his responsibilities. At the eign central banks and with the Bank for request of any member of the Subcommittee, International Settlements. questions arising from such reviews and con- C. Cooperate in other respects with sultations shall be referred for determination central banks of other countries and with to the Federal Open Market Committee. international monetary institutions. 7. The Chairman is authorized: 3. Transactions may also be undertaken: A. With the approval of the Commit- A. To adjust System balances in light tee, to enter into any needed agreement or of probable future needs for currencies. understanding with the Secretary of the Trea- B. To provide means for meeting Syssury about the division of responsibility for tem and Treasury commitments in particular foreign currency operations between the Sys- currencies, and to facilitate operations of the tem and the Treasury; Exchange Stabilization Fund. B. To keep the Secretary of the Trea- C. For such other purposes as may be sury fully advised concerning System for- expressly authorized by the Committee. eign currency operations, and to consult with 4. System foreign currency operations the Secretary on policy matters relating to shall be conducted: foreign currency operations; A. In close and continuous consulta- C. From time to time, to transmit tion and cooperation with the United States appropriate reports and information to the Treasury; National Advisory Council on International B. In cooperation, as appropriate, with Monetary and Financial Policies. foreign monetary authorities; and 8. Staff officers of the Committee are C. In a manner consistent with the authorized to transmit pertinent informa- obligations of the United States in the tion on System foreign currency operations International Monetary Fund regarding to appropriate officials of the Treasury exchange arrangements under the IMF Department. Article IV. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 131 By unanimous vote, the Procedural 2. The Manager shall clear with the Com- Instructions with Respect to Foreign mittee (or with the Subcommittee, if the Subcommittee believes that consultation Currency Operations shown below were with the full Committee is not feasible in the amended to reflect the new title of Mantime available, or with the Chairman, if the ager, System Open Market Account. Chairman believes that consultation with the Subcommittee is not feasible in the time available): A. Any operation that would result in a Procedural Instructions with change in the System's overall open position Respect to Foreign Currency in foreign currencies exceeding $1.5 billion Operations since the most recent regular meeting of the Committee. B. Any swap drawing proposed by a Amended March 28, 1995 foreign bank exceeding the larger of (i) $200 In conducting operations pursuant to the million or (ii) 15 percent of the size of the authorization and direction of the Federal swap arrangement. Open Market Committee as set forth in 3. The Manager shall also consult with the Authorization for Foreign Currency the Subcommittee or the Chairman about Operations and the Foreign Currency Direc- proposed swap drawings by the System and tive, the Federal Reserve Bank of New York, about any operations that are not of a routine through the Manager, System Open Market character. Account ("Manager"), shall be guided by the following procedural understandings The Manager of the System Open with respect to consultations and clearances with the Committee, the Foreign Currency Market Account reported on develop- Subcommittee, and the Chairman of the ments in foreign exchange markets and Committee. All operations undertaken pursu- on System open market transactions in ant to such clearances shall be reported foreign currencies during the period promptly to the Committee. February 1, 1995, through March 27, 1. The Manager shall clear with the Sub- 1995. By unanimous vote, the Commitcommittee (or with the Chairman, if the tee ratified these transactions. Chairman believes that consultation with the Subcommittee is not feasible in the time The Manager also reported on develavailable): opments in domestic financial markets A. Any operation that would result in a and on System open market transactions change in the System's overall open position in government securities and federal in foreign currencies exceeding $300 million agency obligations during the period on any day or $600 million since the most February 1, 1995, through March 27, recent regular meeting of the Committee. B. Any operation that would result in a 1995. By unanimous vote, the Commitchange on any day in the System's net posi- tee ratified these transactions. tion in a single foreign currency exceeding The Committee then turned to a dis- $150 million, or $300 million when the cussion of the economic and financial operation is associated with repayment of outlook and the implementation of swap drawings. C. Any operation that might generate a monetary policy over the intermeeting substantial volume of trading in a particular period ahead. A summary of the ecocurrency by the System, even though the nomic and financial information availchange in the System's net position in that able at the time of the meeting and of currency might be less than the limits specithe Committee's discussion is provided fied in l.B. below, followed by the domestic policy D. Any swap drawing proposed by a foreign bank not exceeding the larger of directive that was approved by the Com- (i) $200 million or (ii) 15 percent of the size mittee and issued to the Federal Reserve of the swap arrangement. Bank of New York. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 82nd Annual Report, 1995 The information reviewed at this first two months of the year, remained meeting suggested that the expansion of high. economic activity had moderated con- Retail sales fell in February, reversing siderably in early 1995. Slower growth most of a sizable rise in January. The in consumer spending, associated in part February declines in sales were widewith a sharp decline in expenditures for spread, with slippage evident at most motor vehicles, and weakness in hous- types of retail outlets. Most indicators of ing purchases were factors in the mod- housing activity had weakened in recent eration. Despite signs of some weaken- months in lagged response to the earlier ing in final demand, however, further rise in mortgage interest rates. Housing sizable gains had been recorded in starts fell sharply in January and edged industrial production and payroll em- still lower in February; these declines ployment, and overall rates of resource more than erased the gains that had been utilization remained high. Broad indexes posted on balance over the closing of consumer and producer prices had months of 1994. A substantial drop in risen more rapidly on average over Janu- sales of existing homes in January (latary and February, but wages had shown est data) extended the trend that had no sign of an acceleration. been evident for some months. Nonfarm payroll employment in- Shipments of nondefense capital creased considerably over January and goods recorded another strong advance February, although the average monthly in February. Shipments of office and advance was somewhat smaller than that computing equipment rebounded in of 1994. Further brisk job gains were February from declines in December recorded in the January-February period and January, and demand for most other in manufacturing; hiring in retail and types of equipment remained brisk. wholesale trade and in the service- Business outlays for heavy trucks fell producing sector slowed a bit; and back slightly in February after a surge in construction payrolls changed little on January. While there were tentative balance. The average workweek of pro- signs in the recent orders data of some duction or nonsupervisory workers deceleration in business equipment remained at a high level over the two spending, the still-growing backlog of months. The civilian unemployment rate unfilled orders suggested further solid rose in January but fell back in February expansion in business spending on to its December level of 5.4 percent. equipment. Nonresidential construction The expansion in industrial produc- activity had been trending appreciably tion also moderated in January and higher over the past two years; however, February from the rapid pace of last a slowdown in spending by public utiliyear. Manufacturing production grew ties in December and January, in an less rapidly, with output gains down environment of uncertainty related to sharply in February for consumer dura- pending deregulation, and a third ble goods and construction supplies. straight monthly decline in permit issu- Mining production continued to be slug- ance for nonresidential structures in gish. By contrast, the output of utilities February pointed to some softening in surged during the January-February the uptrend. period as winter temperatures, which Business inventory investment surged had been unusually warm, moved back in January after a slowdown in Decemtoward normal. Capacity utilization ber; excluding a large increase in stocks rates, which were little changed over the of motor vehicles at the wholesale and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 133 retail levels, inventories rose in January picked up in Canada. Available data at about the average rate of the final suggested that in the first quarter ecothree quarters of 1994. In manufactur- nomic expansion had slowed in all of ing, inventory accumulation outpaced the major foreign industrial countries sales in January; the stocks-to-sales ratio except Japan, where growth appeared to edged higher but was still near historical be positive despite the Kobe earthquake. lows. At wholesale establishments, Consumer price increases in January inventory accumulation picked up in and February were a little larger than the January as a large rise in automotive average monthly rise in 1994. Food inventories more than offset a reduced prices were unchanged on balance over increase in stocks of other goods. The the two-month period, while energy inventory-to-sales ratio for the sector prices were up only slightly. Producer moved higher in January but remained prices of finished goods increased in well within its range of the last several January and February at the same rate as years. At the retail level, inventories consumer prices; producer price inflajumped in January after a slight decline tion for the two months also was higher in December; almost all the rise re- than in 1994, with a steep rise in gasoflected increased stocks of motor vehi- line prices in January contributing to the cles. The inventory-to-sales ratio for the pickup. Producer prices of intermediate retail sector as a whole was unchanged materials surged in the first two months in January and remained near the middle of this year after having accelerated of its range of recent years; at automo- sharply in the second half of 1994. Avertive dealerships, the inventory-to-sales age hourly earnings of private producratio rose sharply while elsewhere the tion or nonsupervisory workers were ratio edged lower. unchanged in February after a substan- The nominal deficit on U.S. trade in tial rise in January. For the two months goods and services widened sharply in combined, hourly earnings increased at January from its December level and its about the same average monthly pace as average rate in the fourth quarter; some in 1994. of the increase in the deficit was due to At its meeting on January 31trade with Mexico, but somewhat dis- February 1, 1995, the Committee torted seasonal adjustment factors also adopted a directive that called for inmay have been involved. The value of creasing somewhat the existing degree exports of goods and services declined of pressure on reserve positions, taking substantially in January after having account of a possible rise of Vi percentincreased strongly in November and age point in the discount rate. The direc- December. The value of imports rose tive approved by the Committee did not considerably in January, continuing the include a presumption about the likely pattern of the fourth quarter. The export direction of any further adjustments to losses and import gains in January were policy during the intermeeting period. distributed widely across major trade Accordingly, the directive stated that in categories. The pace of economic recov- the context of the Committee's long-run ery in the major foreign industrial coun- objectives for price stability and sustaintries appeared to have moderated in able economic growth, and giving carerecent months. In the fourth quarter, eco- ful consideration to economic, financial, nomic activity declined in Japan and and monetary developments, somewhat grew more slowly in most of the other greater or somewhat lesser reserve major industrial countries; growth had restraint would be acceptable during the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 82nd Annual Report, 1995 intermeeting period. The reserve condi- and post-World War II record lows tions associated with this directive were against these two currencies were expected to be consistent with moderate recorded. Declines in U.S. interest rates growth of M2 and M3 over coming and concerns about the persistence of months. large U.S. trade and fiscal deficits On the second day of the meeting, the appeared to have contributed to the dol- Board of Governors approved an lar' s drop. Continuing economic and increase of V2 percentage point in the financial problems in Mexico, which discount rate, to 5V4 percent. The rise resulted in further depreciation on balwas made effective immediately and ance of the Mexican peso against the was passed through fully to interest rates dollar, also seemed to add to negative in reserve markets. Open market opera- sentiment toward the dollar because the tions during the intermeeting period process of adjustment in the Mexican were conducted with a view to maintain- economy to the lower value of the peso ing the tighter policy stance adopted at was viewed as implying reduced the meeting and implemented immedi- imports from and increased exports to ately thereafter. The federal funds rate the United States. averaged a little less than 6 percent over M2 declined, and growth of M3 the intermeeting interval, and adjust- slowed in February after sizable January ment plus seasonal borrowing was a gains; data for the first part of March little below anticipated levels. pointed to some recovery in both aggre- Financial market participants gener- gates. M2's weakness in February partly ally had expected a firming in reserve reflected an unwinding of temporary market conditions, and consequently increases in January of its volatile commarket interest rates showed little imme- ponents, including demand deposits, diate reaction. Subsequently, most mar- overnight repurchase agreements, and ket interest rates declined considerably overnight Eurodollars; the weakness in response to both incoming data that also appeared to be associated with were seen as indicating an appreciable depositor efforts to obtain higher returns slowing in the pace of economic by shifting funds into market instruexpansion and statements by Federal ments. The slowdown in growth of M3 Reserve officials that were viewed as in February was entirely attributable to suggesting that the period of monetary the decline in M2; its non-M2 compopolicy tightening might be coming to a nent increased substantially further as close. The largest declines in yields banks continued to rely heavily on manwere concentrated in intermediate- and aged liabilities to fund loan growth. long-term obligations. Stronger-than- Expansion of total domestic nonfinanexpected earnings reports coupled with cial debt had picked up a little in recent heightened prospects for sustained, months. moderate economic expansion and con- The staff forecast prepared for this tinued low inflation boosted major in- meeting suggested that growth of ecodexes of equity prices to record levels. nomic activity was slowing and for In foreign exchange markets, the some period ahead would average a little trade-weighted value of the dollar in less than the rate of increase in the terms of the other G-10 currencies fell economy's potential output. The pace of substantially further. The dollar's the expansion seemed to have slackened decline was particularly sharp against somewhat more than had been anticithe Japanese yen and the German mark, pated at the last meeting; however, the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 135 recent declines in long-term interest early 1994 seemed to be showing rates and the rally in stock prices were through in interest-sensitive sectors, and expected to provide additional support those effects were expected to be reinfor aggregate demand later in the year. forced by some cutback in inventory Moreover, the substantial depreciation accumulation from the unsustainable of the dollar against the yen and several rates of previous quarters. Quarters of European currencies was acting to offset fairly slow growth were not unusual in a some of the effects on demand of the period of expansion. On the whole, howprevious tightening of reserve condi- ever, the economy appeared to retain tions. The forecast continued to antici- considerable forward momentum, with pate that in the period ahead consumer current imbalances seemingly of a relaspending would be restrained by smaller tively minor nature and in the process of gains in real incomes, the substantial being corrected. Moreover, the recent degree to which pent-up demands had declines in long-term interest rates, if been satisfied, and the lagged effects of these persisted, could provide fresh supearlier increases in interest rates on the port for interest-sensitive spending later demand for durable goods. Business in 1995 and in 1996. While opinions outlays for new equipment would decel- differed somewhat with respect to both erate substantially in response to slower the likely extent of the slowdown and growth of sales and profits. Homebuild- the prognosis for inflation, the members ing was projected to decline somewhat generally agreed that the economy further in the near term and to remain at appeared to be on a trajectory toward somewhat subdued levels for a time in a more sustainable path for economic reflection of the damping effects on activity. However, a number of memhousing demand of slower growth in bers expressed concern that the slowjobs and incomes and of the earlier rise down might not be sufficient to relieve in mortgage rates. Developments in the persisting pressures on labor and Mexico were likely to interrupt only capital resources, thereby portending briefly a strong uptrend in U.S. exports, higher inflation. based on sustained growth in the econo- In the course of the Committee's dismies of other U.S. trading partners. Con- cussion, members reported on widesiderable uncertainty continued to sur- spread signs that business activity, while round the federal fiscal outlook but, as still quite strong in many areas, was in the previous forecast, a moderate pace growing less rapidly on balance. Still, a of deficit reduction was assumed over number of factors pointed to continued the forecast horizon. In the staff's judg- solid expansion. Business sentiment was ment, the economy was operating generally described as quite positive, beyond its long-run, noninflationary though somewhat less ebullient than in capacity, and there remained a risk that earlier months. Likewise, recent surveys higher inflation could emerge if the suggested that consumer confidence expansion did not moderate sufficiently. remained very favorable, though down In the Committee's discussion of cur- slightly from recent peaks by most mearent and prospective economic develop- sures. In addition to the favorable recent ments, the members agreed that the pace developments in financial markets, bank of the economic expansion was moder- lending policies remained quite accomating, though the extent of the slow- modative, although business loan down was not yet clear. The effects of growth had slowed recently after a the policy tightening implemented since period of unusual strength. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 82nd Annual Report, 1995 In their review of developments in rates were having a mitigating effect. In key sectors of the economy, members some parts of the country, the weakness took note of the sluggishness in con- in housing construction was being counsumer spending that had emerged in tered by further improvement in nonresirecent months in much of the country. dential construction activity. In other To a considerable extent the recent areas where commercial real estate conweakness reflected a sharp reduction in ditions remained soft, declines in spending for motor vehicles, but there vacancy rates seemed to be preparing also were signs in the most recent data the way for a pickup in commercial of broader declines in spending, espe- building activity. cially for durable goods other than auto- Committee members anticipated that mobiles. Some reduction in spending for growth of business investment in plant durable goods could be expected in and equipment would moderate from the lagged response to the policy tightening extraordinary rate of the last two years over the past year, but a few members but that such investment would continue noted that unusual weather might have to support growth in aggregate final led to the temporary postponement of demand during the forecast period. The some discretionary purchases. In assess- demand for durable equipment was ing the recent spending patterns, it was expected to increase more gradually as difficult to determine whether they rep- the growth of economic activity slowed resented a temporary pause or a more and business profits tended to flatten prolonged pullback by consumers. On out, and the available data on equipment balance, however, growth in consumer expenditures thus far in 1995 appeared spending probably would slow some- to be in line with that expectation. Howwhat further to a rate more in line with ever, some anecdotal reports suggested the expansion in jobs and incomes. Con- that investment in plant and equipment sumer spending would tend to be sus- might be stronger than expected in an tained, however, by the ready availabil- environment of tight labor supply and ity of consumer financing and the rise in elevated levels of capacity utilization, bond and stock prices, which had intense desires to control costs and strengthened household balance sheets improve competitiveness, and a still and perhaps was helping to bolster con- relatively low user cost of capital. The sumer confidence. desire for additional production capacity The housing market had weakened was reflected in spending for the connoticeably according to incoming data struction of commercial and industrial and anecdotal reports from around the structures, which remained on an country. The decline in home sales that uptrend. began in the latter part of 1994 had The rapid rise in business inventories persisted, and housing starts had fallen in recent quarters had been sustainable sharply in the early part of the year as a in the context of briskly increasing final consequence of the weaker sales and a sales, but with some further accumulalarger inventory of unsold homes. Partly tion early in the first quarter and ecobecause of the higher mortgage rates nomic growth projected to moderate, the that had prevailed for some time, rate of inventory investment would have members anticipated still soft housing to adjust downward as well. While the demand, particularly for single-family timing and extent could not be anticihouses. There had been some reports pated with any precision, a short-term that recent declines in mortgage interest inventory correction nrocess might Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 137 already be under way, with firms initiat- stabilizing in Mexico, and more genering cutbacks to production schedules to ally the relatively robust growth proreflect smaller-than-expected gains in jected for the major trading partners of sales over recent months. Members the United States and the lower value of noted that inventory-to-sales ratios the dollar now prevailing were expected already were at generally low levels, to foster improvement in the nation's and they anticipated that any desired trade balance. adjustments to production would be Members noted that while the pace of made quickly. In the circumstances, the the expansion evidently had slowed, size of the inventory correction and its economic activity and utilization of effect on economic activity would be labor and other producer resources were limited. Moreover, reports of inventory still at very high levels. Prices of many shortages in some industries suggested materials inputs to the production prothat many firms might raise their desired cess had risen sharply, but thus far there inventory levels to protect against short- had been only a small pickup in confalls in materials needed in the produc- sumer prices. Likewise, the persisting tion process. tightness in many labor markets had The defeat of the balanced budget not to this point fostered appreciable amendment in Congress had clouded the increases in wages. The absence of a outlook for deficit reduction. None- significant rise in prices of finished theless, a moderately restrictive fiscal goods or in wages might reflect in some policy that would provide for some measure the lags in the inflation transprogress toward a balanced budget dur- mission process, the fruits of heavy ing the forecast period was seen as a business investments in new capacity reasonable assumption. One member and more productive equipment in observed that there was a risk of a more recent years, and perhaps structural restrictive fiscal policy arising out of the changes in business organization that dynamics of the current political debate. were raising the economy's capacity for In any event, any progress toward a sustained, noninflationary activity. balanced budget might be expected to Members were concerned, however, that have a favorable effect on domestic despite continuing competitive pressures financial markets and perhaps also on and some recent abatement in materials the dollar in foreign exchange markets. prices, business firms were reporting Members commented that consider- greater success in passing cost increases able uncertainty surrounded the outlook through to prices. The depreciation of for the external sector, but for now it the dollar also would add to inflationary seemed reasonable to forecast that this pressures in the economy. In these cirsector would make a small positive con- cumstances, the members generally contribution, on balance, to the growth of cluded that some increase in inflation economic activity over the forecast was likely in coming months. period. In the near term, economic de- In the Committee's discussion of velopments in Mexico were leading to monetary policy for the intermeeting lower U.S. exports and higher imports; period ahead, all the members endorsed anecdotal reports suggested that the a proposal to maintain an unchanged effects on trade flows and local business degree of pressure in reserve markets. activity tended to be felt most strongly The policy tightening that had been in states that border Mexico. However, implemented since early 1994 appeared there were signs that conditions were to be exerting a desired restraining effect Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 82nd Annual Report, 1995 on the growth of economic activity and tightening needed at some point to conassociated demands for goods and ser- tain inflation. In this connection a few vices. But the extent of the slowing in members indicated that further tightengrowth and its effects on inflationary ing might well be needed sooner rather pressures were not yet clear. On bal- than later. An asymmetric directive also ance, though, the available evidence would provide a clear signal of the tended to suggest that the economy Committee's intention to resist higher might be moving toward a growth path inflation. for economic activity that would be con- A few members preferred a symmetsistent with limiting the uptick in infla- ric directive. These members agreed that tion that was currently being expe- additional policy tightening might be rienced. In discussing their policy needed if inflation began to pick up. choices, several members noted the rela- However, they saw an undesirably tively steep decline in the value of the weaker economic performance as being dollar. However, they believed that pol- about equally likely, and in their view icy should not be directed toward the this balance in the risks to the outlook achievement of a specific level for the called for the adoption of a symmetric dollar but rather toward the implemen- directive. The Committee's determinatation of an effective anti-inflationary tion to keep inflation under control monetary policy, taking account of all would be appropriately conveyed, in the factors bearing on the economic out- their view, through future actions look. In current circumstances, and rather than through the adoption of a given the substantial uncertainties that tilt toward restraint. However, these were involved, the members believed members indicated that they could that it would be prudent to pause and accept an asymmetric intermeeting assess developments before taking any instruction. further policy action. At the conclusion of the Committee's With regard to possible adjustments discussion, all the members indicated to policy during the intermeeting period, that they preferred or could support a most members expressed a preference directive that called for maintaining the for an asymmetric directive tilted to- existing degree of pressure on reserve ward restraint. These members indicated positions and that included a bias that near-term developments were not toward the possible firming of reserve likely to call for an adjustment to policy conditions during the intermeeting in either direction. Nonetheless, with the period. Accordingly, in the context of economy expected to be operating in the Committee's long-run objectives for the neighborhood of its potential, the price stability and sustainable economic recent rise in inflation and the risk of an growth, and giving careful consideration unexpected impulse that could ratchet to economic, financial, and monetary inflation even higher suggested that an developments, the Committee decided asymmetric directive would be more that somewhat greater reserve restraint consistent with the Committee's objec- would be acceptable and slightly lesser tive of moving over time toward price reserve restraint might be acceptable stability. The economy retained consid- during the intermeeting period. The erable forward momentum and, as had reserve conditions contemplated at this often happened in the past, the recent meeting were expected to be consistent slowdown in growth could prove to with moderate growth of M2 and M3 be temporary, with additional monetary over coming months. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 139 At the conclusion of the meeting, the some rebound. Growth of total domestic Federal Reserve Bank of New York was nonfinancial debt has picked up a little in recent months. authorized and directed, until instructed 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 policy directive: of these objectives, the Committee at its meeting on January 31-February 1 estab- The information reviewed at this meeting lished ranges for growth of M2 and M3 suggests that the expansion of economic of 1 to 5 percent and 0 to 4 percent respecactivity has moderated considerably in early tively, measured from the fourth quarter of 1995. Nonfarm payroll employment rose 1994 to the fourth quarter of 1995. The Comappreciably further in January and February, mittee anticipated that money growth within but at a pace below the average monthly gain these ranges would be consistent with its in 1994; the civilian unemployment rate, broad policy objectives. The monitoring after rising in January, fell back in February range for growth of total domestic nonfinanto its December level of 5.4 percent. cial debt was lowered to 3 to 7 percent Advances in industrial production also mod- for the year. The behavior of the monetary erated in January and February, and capacity aggregates will continue to be evaluated utilization rates generally changed little from in the light of progress toward price level already high levels. Total retail sales were stability, movements in their velocities, and about unchanged over the two months. Hous- developments in the economy and financial ing starts have declined somewhat after post- markets. ing sizable gains on balance during the clos- In the implementation of policy for the ing months of 1994. Orders for nondefense immediate future, the Committee seeks to capital goods point to a still strong expan- maintain the existing degree of pressure on sion of spending on business equipment, but reserve positions. In the context of the with tentative signs of some deceleration; Committee's long-run objectives for price nonresidential construction has been trend- stability and sustainable economic growth, ing appreciably higher. The nominal deficit and giving careful consideration to ecoon U.S. trade in goods and services widened nomic, financial, and monetary develsharply in January from its average rate in opments, somewhat greater reserve restraint the fourth quarter. Broad indexes of con- would or slightly lesser reserve restraint sumer and producer prices increased faster might be acceptable in the intermeeting on average over January and February. period. The contemplated reserve condi- On February 1, 1995, the Board of Gov- tions are expected to be consistent with modernors approved an increase from 43A to erate growth in M2 and M3 over coming 5 lA percent in the discount rate, and in keep- months. ing with the Committee's decision at the January 31-February 1 meeting, the increase Votes for this action: Messrs. Greenspan, was allowed to show through fully to interest McDonough, Blinder, Hoenig, Kelley, rates in reserve markets. Nonetheless, most Lindsey, and Melzer, Ms. Minehan, market interest rates have declined some- Mr. Moskow, and Mses. Phillips and what since the Committee meeting; the Yellen. Votes against this action: None. largest declines have been concentrated in intermediate- and long-term obligations. It was agreed that the next meeting of In foreign exchange markets, the tradeweighted value of the dollar in terms of the the Committee would be held on Tuesother G-10 currencies was down substan- day, May 23, 1995. tially further over the intermeeting period. The meeting adjourned at 1:15 p.m. The Mexican peso has continued to depreciate against the dollar. M2 and M3 weakened in February, though Donald L. Kohn data for the first part of March pointed to Secretary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 82nd Annual Report, 1995 Meeting Held on Mr. Simpson, Associate Director, May 23, 1995 Division of Research and Statistics, Board of Governors Ms. Low, Open Market Secretariat A meeting of the Federal Open Market Assistant, Division of Monetary Committee was held in the offices of Affairs, Board of Governors the Board of Governors of the Federal Reserve System, in Washington, D.C., Messrs. Beebe, Goodfriend, Lang, and on Tuesday, May 23, 1995, at 9:00 a.m. Rosenblum and Mses. Tschinkel and White, Senior Vice Presidents, Federal Reserve Banks of Present: San Francisco, Richmond, Mr. Greenspan, Chairman Philadelphia, Dallas, Atlanta, and Mr. McDonough, Vice Chairman New York respectively Mr. Blinder Mr. McNees, Vice President, Federal Mr. Hoenig Reserve Bank of Boston Mr. Kelley Mr. Altig, Assistant Vice President, Mr. Lindsey Federal Reserve Bank of Mr. Melzer Cleveland Ms. Minehan Mr. Weber, Senior Research Officer, Mr. Moskow Federal Reserve Bank of Ms. Phillips Minneapolis Ms. Yellen Secretary's note. Advice had been Messrs. Boehne, Jordan, McTeer, and received that Ernest T. Patrikis had been Stern, Alternate Members of the elected by the board of directors of the Fed- Federal Open Market Committee eral Reserve Bank of New York as an alternate member of the Federal Open Market Messrs. Broaddus, Forrestal, and Parry, Committee for the period June 1, 1995, Presidents of the Federal Reserve through December 31, 1995, and that he had Banks of Richmond, Atlanta, and executed his oath of office. San Francisco respectively Mr. Kohn, Secretary and Economist Program for Safeguarding Mr. Bernard, Deputy Secretary FOMC Information Mr. Coyne, Assistant Secretary Mr. Gillum, Assistant Secretary At this meeting the Committee amended Mr. Mattingly, General Counsel Mr. Baxter, Deputy General Counsel its "Program for Security of FOMC Mr. Prell, Economist Information." The changes included an Mr. Truman, Economist increase in the number of staff at the Federal Reserve Banks who could be Messrs. Davis, Dewald, Hunter, given access to confidential Class I and Mishkin, Promisel, Siegman, Class II FOMC information. The Com- Slifman, and Stockton, Associate Economists mittee also liberalized its rule relating to attendance at FOMC meetings to allow Mr. Fisher, Manager, System Open first vice presidents of the Federal Market Account Reserve Banks to attend meetings on a rotating basis. Other changes of a tech- Mr. Ettin, Deputy Director, Division of nical or updating nature also were made Research and Statistics, Board of to the program. The Committee's brief Governors discussion of this organizational matter Mr. Madigan, Associate Director, Division of Monetary Affairs, was not recorded, in keeping with the Board of Governors decision made at the meeting on Jan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 141 uary 31-February 1, 1995, normally not nomic and financial information availto record discussions unrelated to mone- able at the time of the meeting and of tary policy. the Committee's discussion is provided By unanimous vote, the minutes of below, followed by the domestic policy the meeting of the Federal Open Market directive that was approved by the Com- Committee held on March 28, 1995, mittee and issued to the Federal Reserve were approved. Bank of New York. The Manager of the System Open The information reviewed at this Market Account reported on develop- meeting suggested that the expansion of ments in foreign exchange markets and economic activity had slowed consideron System foreign currency transactions ably further and that rates of resource during the period March 28, 1995, utilization had declined. Although busithrough May 22, 1995. By unani- ness investment in equipment and strucmous vote, the Committee ratified these tures had remained strong, overall final transactions. sales had expanded less rapidly and The Manager also reported on devel- inventories had continued to build. opments in domestic financial markets Manufacturing output appeared to be and on System open market transactions down appreciably, in large measure in government securities and federal reflecting cutbacks in motor vehicle proagency obligations during the period duction, and the slump in housing starts March 28, 1995, through May 22, 1995. since the turn of the year was depressing By unanimous vote, the Committee rati- construction activity. Broad indexes fied these transactions. of consumer and producer prices had The Manager requested a temporary increased a little faster thus far this year, increase of $2 billion, to $10 billion, in while advances in labor compensation the limit on intermeeting changes in out- costs had remained subdued. right System Account holdings of U.S. Nonfarm payroll employment posted government and federal agency securi- reduced gains in the first quarter and ties. He advised the Committee that the changed little in April; special factors current leeway of $8 billion might not and seasonal adjustment difficulties may be sufficient to accommodate the poten- have depressed reported job growth tially large need for additional reserves in April. Hiring in service-producing over the intermeeting period to meet an industries was down sharply from the anticipated seasonal rise in the domestic pace in previous months, with jobs in demand for currency as well as contin- personnel supply services falling for a ued currency outflows to foreign coun- second consecutive month after three tries. By unanimous vote, the Commit- years of rapid growth. Employment in tee amended paragraph l(a) of the manufacturing decreased further, and the Authorization for Domestic Open Mar- number of construction jobs contracted ket Operations to raise the limit to after a sizable weather-related surge in $10 billion for the intermeeting period March. Initial claims for unemployment ending with the close of business on insurance increased considerably in July 5, 1995. recent weeks, and the civilian unem- The Committee then turned to a dis- ployment rate rose to 5.8 percent in cussion of the economic and financial April. outlook and the implementation of Industrial production fell further in monetary policy over the intermeeting April, with manufacturing registering a period ahead. A summary of the eco- substantial decline. The drop in indus- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 82nd Annual Report, 1995 trial output largely reflected a cutback in ther in coming months, though perhaps the production of motor vehicles and at a somewhat slower rate. parts, but declines in output also were Business inventories surged again in evident in other cyclically sensitive sec- March, and the pace of inventory accutors, such as non-auto consumer dura- mulation over the first quarter was subbles and construction supplies. Produc- stantially higher than the average rate tion of business equipment other than for the second half of 1994. Much of the motor vehicles registered a small gain. first-quarter increase in stocks reflected Total utilization of industrial capacity a buildup in inventories of motor vehicontinued to decline in April; however, cles at the wholesale and retail levels. operating rates in manufacturing re- Non-auto stocks also increased at a brisk mained at relatively high levels. pace in the first quarter, accompanied Retail sales were down in April after by the emergence of scattered signs of having risen moderately over the first inventory imbalances in furniture, appliquarter; a steep drop in sales of motor ances, and apparel at the retail level and vehicles accounted for all of the April in construction supplies at earlier stages decline. Total expenditures on other of production and distribution. The types of goods edged higher in April, stock-to-sales ratio in manufacturing even though sales of apparel, furniture, was unchanged in March from the very and home appliances were noticeably low fourth-quarter level. At the wholeweaker. Housing starts changed little in sale level, the ratio of inventories to April after having declined sharply in sales rose in March but remained within the first quarter, and the inventory of the range of the past several years. new homes for sale remained relatively Inventory accumulation in the retail large. On the other hand, sales of both sector slowed in March despite a furnew and existing homes rose moder- ther rise in inventories of motor vehiately in March after sizable declines in cles. For the retail sector as a whole, the February, and recent surveys indicated inventory-to-sales ratio increased in some improvement in attitudes toward March to the top end of its range of the homebuying. past two years; when the motor vehicle Shipments of nondefense capital components of stocks and sales are goods remained on a strong uptrend in excluded, however, the ratio was near March, with outlays for office and com- the middle of its range in recent years. puting equipment registering another The nominal deficit on U.S. trade in sharp increase. Manufacturers of heavy goods and services was little changed in trucks continued to operate at capacity March from the February level and to meet demand; by contrast, business remained substantially narrower than in expenditures for motor vehicles report- January. On a quarterly average basis, edly plunged in April. Data on orders the trade deficit widened in the first for nondefense capital goods pointed to quarter as growth in the value of exports further strong expansion of spending slowed while the expansion in the value on business equipment in the months of imports continued unabated. A drop ahead, although gains appeared likely to in shipments to Mexico was among the be smaller than those of the past several factors holding down export growth in quarters. Nonresidential construction March. Data available for the first quarcontinued to rise in March, and data on ter indicated that economic recovery permits for new construction suggested continued in the major foreign industrial that building activity would advance fur- countries as a group but that the pace Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 143 varied significantly across countries. reserve conditions associated with this There were signs of sustained growth in directive were expected to be consistent the United Kingdom, slower growth in with moderate growth in the broader Canada, renewed recovery in Japan, and monetary aggregates over coming weakness in France and Italy. months. Inflation had picked up somewhat Open market operations during the in the early months of 1995. At the intermeeting period were directed consumer level, prices rose a little toward maintaining the existing degree more rapidly in the first quarter, despite of pressure on reserve positions. Adjustunchanged food prices and lower energy ment plus seasonal borrowing trended prices. In April, a surge in food prices higher over the period, reflecting a risand a rebound in energy prices contrib- ing need for seasonal credit at the beginuted to a further step-up in consumer ning of the planting season, while the inflation. At the producer level, prices of federal funds rate continued to average finished goods followed a roughly simi- close to 6 percent. lar pattern, increasing at a slightly faster Most market interest rates moved pace in the first quarter and then more lower over the intermeeting period in briskly in April. The April rise partly reaction to weaker-than-expected inreflected a sharp jump in the prices of coming economic data, which market finished energy goods, but prices of non- participants interpreted as signaling a energy, nonfood items also advanced at considerable slowing of the economic a somewhat faster rate. At earlier stages expansion and a growing likelihood that of production, prices of intermediate the next monetary policy move would materials continued to increase rapidly be in an easing direction. Market assessin April. By contrast, trends in labor ments that the prospects for major compensation costs remained subdued. reductions in budget deficits were Gains in hourly compensation of private improving also seemed to contribute to industry workers slowed further in the the drop in rates. In this environment, first quarter of 1995, with a continu- the release of data indicating large ing moderation in the cost of benefits increases in consumer and producer accounting for all of the deceleration in prices for April only temporarily intercompensation. rupted the decline in rates. Intermediate- At its meeting on March 28, 1995, the and long-term interest rates posted the Committee adopted a directive that largest declines over the intermeeting called for maintaining the existing de- period. gree of pressure on reserve positions but In foreign exchange markets, the that included a bias toward the possible trade-weighted value of the dollar in firming of reserve conditions during the terms of the other G-10 currencies intermeeting period. Accordingly, the declined substantially further over the directive stated that in the context of first half of the intermeeting period. In the Committee's long-run objectives for mid-April, the dollar reached a record price stability and sustainable economic low against the Japanese yen and growth, and giving careful consideration approached a record low against the to economic, financial, and monetary German mark. The dollar's weakness developments, somewhat greater reserve appeared to have been related in part to restraint would be acceptable or slightly further indications of softening ecolesser reserve restraint might be accept- nomic activity and related declines in able during the intermeeting period. The interest rates in the United States and to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 82nd Annual Report, 1995 increasing trade tensions with Japan. and bond markets were expected to pro- Late in the period, the dollar reversed its vide underlying support for aggregate course and moved up sharply against the demand later in the year and in 1996. yen and the mark; monetary easing The forecast continued to anticipate that abroad, improving prospects for reduc- consumer spending would be restrained tions in the U.S. budget deficit, and sta- by smaller gains in real incomes and the bilizing financial conditions in Mexico satisfaction of pent-up demands for appeared to contribute to the turnaround. motor vehicles and other durable goods. The dollar ended the intermeeting period Business outlays for new equipment higher on balance against the other G-10 were expected to decelerate substancurrencies. tially in response to the slower growth The growth of M2 picked up further of sales and profits. Homebuilding was in April, reflecting in part the need for projected to pick up somewhat in lagged additional liquid balances to make response to the recent decline in mortunusually heavy final tax payments; gage rates. Developments in Mexico these payments resulted from the might depress U.S. exports further, but stronger economy in 1994 and from new mainly in the very near term given the tax regulations allowing individuals to size of the adjustments already evident delay a larger portion of their tax pay- in the Mexican current account. With ments until April. The expansion of M2 this influence waning, sustained growth also appeared to be boosted by the in the economies of other U.S. trading increased relative attractiveness of small partners was expected to boost export time deposits and money market funds demand. Considerable uncertainty confollowing declines in market interest tinued to surround the fiscal outlook, rates. For the year through April, M2 but the forecast maintained the greater grew at a rate in the lower half of its degree of fiscal restraint that had been range for 1995 while M3 expanded at a assumed since early in the year. In the rate somewhat above its range. The per- staff's judgment, the prospects for some sisting strength of M3 in April largely easing of pressures on resources sugreflected the needs of commercial banks gested that price inflation would likely to fund continuing heavy credit demands moderate from its recently higher level. by households and businesses. Total In the Committee's discussion of curdomestic nonfinancial debt had grown at rent and prospective economic condia rate a little above the midpoint of its tions, members reported on statistical monitoring range in recent months. and anecdotal indications of further The staff forecast prepared for this slowing in the expansion of economic meeting suggested that growth of eco- activity and some related easing of presnomic activity was slowing somewhat sures on labor and other producer more than previously anticipated, with resources. A number commented that the recent plunge in motor vehicle sales they anticipated a relatively sluggish prompting a deeper-than-expected re- economic performance over coming duction in the production of cars and months as production was cut back to light trucks. Economic expansion would bring inventories into better balance average less than the rate of increase in with sales. However, underlying demand the economy's potential output for a was likely to remain sufficiently robust, number of months, but the favorable especially in light of developments in wealth and interest-cost effects of the financial markets, to avert a cumulative extended rally that had occurred in stock decline in business activity and, indeed, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 145 to return economic growth to a pace be expected to remain well below the broadly in line with potential. Members unsustainable pace experienced over the cited in particular the strength in busi- past year and perhaps settle into a ness fixed investment and the potential pattern where changes in inventories for improvement in housing activity and became a relatively neutral factor in the the trade balance as factors that should ongoing economic expansion. help to sustain the expansion. Nonethe- In their comments about broad factors less, the longer-run outlook remained underlying the economic outlook, memsubject to considerable uncertainty, bers reported that current business and especially given the undecided course of consumer sentiment remained generally fiscal policy and the ongoing inventory favorable across the nation. Despite the correction; the ultimate extent of that softening demand in some markets or correction and its effects on overall eco- industries, notably that for motor vehinomic performance were subject to a cles, business contacts continued to cyclical dynamic whose outcome could express optimism about the outlook for not be predicted with confidence. A their firms, though some of their comworsening in key measures of inflation, ments were tempered by greater caution including the consumer price index and than had been observed earlier. A numthe producer price index for finished ber of members referred to the general goods, was a disappointing—if not financial climate as an important eleunexpected—development. A number of ment in the outlook for sustained ecomembers expressed concern that the nomic expansion. They noted that the risks were still tilted in the direction of decline in interest rates had favorable some further step-up in inflation; how- implications for demand in interestever, others were more inclined to the sensitive sectors of the economy. The view that inflation was not likely to rise rise in equity prices also was contributmuch further in a climate of moderate ing to reductions in the cost of capital to growth in demand, intense competitive businesses, and banks continued to ease pressures in many markets, and rela- terms and standards on loans. In additively subdued increases in labor costs. tion, the rise in stock and bond prices Members commented that a reduction had increased the net worth of many in the rate of inventory investment was households, though some concern was likely to be the dominant influence on expressed about the sustainability of the the near-term performance of the econ- stock market's strong performance. omy. Some also saw a risk that a signifi- With regard to developments in key cantly greater-than-expected softening sectors of the economy, the slowdown in in inventory accumulation might have the growth of consumer spending was adverse, and possibly cumulative, somewhat more pronounced than anticieffects of a longer-term nature on pro- pated earlier. Some rebound in conduction and incomes and thus on con- sumer demand seemed likely and sumer and business spending. With the already appeared to be occurring in the exception of the motor vehicle industry, motor vehicle industry in May. Underhowever, current inventory levels gener- lying conditions for further growth in ally were quite low in relation to sales consumer spending were viewed as and potential inventory adjustments relatively favorable; these conditions were likely to be limited in size. Once included strengthened balance sheets further inventory adjustments were com- stemming from developments in finanpleted, the rate of accumulation could cial markets, continued growth of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 82nd Annual Report, 1995 incomes, and aggressive extensions of to purchase homes. Sizable inventories consumer credit by a number of lenders. of unsold new homes would probably In at least one view, however, consumer continue to damp construction activity credit had been growing at a pace that for some months, but contacts in the real could not be sustained, and the inevi- estate and mortgage finance industries table correction could coincide with and were more optimistic about the outlook exacerbate emerging weakness in con- for housing. sumer demand. On balance, growth in The foreign trade sector likewise was personal consumption expenditures was expected to make an appreciable contriseen as likely to continue over coming bution to the expansion of economic quarters but at a reduced pace given the activity in coming quarters. The robust apparent satisfaction of a large portion uptrend in U.S. exports during 1994 had of earlier pent-up demands for consumer been slowed to a considerable extent durables and some expected moderation thus far this year by the sharp adjustin the growth of jobs and incomes. ment in trade with Mexico, but in the Business investment remained on a view of several members that adjuststrong uptrend as numerous firms con- ment might now be largely completed. tinued to respond to the need to relieve In that event, gains in exports could be pressures on existing capacity and to expected to resume at a fairly brisk pace increase operating efficiencies in the despite indications of reduced economic face of vigorous competition. Rapid growth in some key foreign countries. growth in profits and a ready availability This assessment was supported by anecof financing also were cited as factors dotal reports of rising foreign demand tending to support business investment for some U.S. products in the context of spending. The increase in such spending the generally improved international was likely to moderate over the projec- competitive position of the United tion horizon, though to a still brisk pace, States. Concurrently, growth in imports as declining growth in demand and would tend to be held down by the proeasing pressures on capacity induced jected slowing in the expansion of growing caution in business investment domestic demand. On the negative side, decisions. Indeed, the growth in expen- some members referred to the possibilditures for producer durable equipment ity that a longer period might be needed already appeared to be moderating from to resolve the difficulties being experian extremely rapid pace, though non- enced by Mexico, and several expressed residential construction was reported to particular concern about the potential be posting solid gains in several parts of for relatively severe disruptions to trade the country. if current negotiations with Japan were Members also expected some not successfully concluded. strengthening in residential construction Fiscal policy was seen as a major following the large declines in mortgage uncertainty in the economic outlook. interest rates that had occurred since late Federal purchases of goods and services 1994. Housing construction had trended were expected to continue trending lower since the start of the year, but lower and the growth of transfer payseveral indicators pointed to a revival. ments was likely to be trimmed, but the The latter included surveys showing extent and timing of fiscal restraint improving homebuyer attitudes and could not be determined while federal builder assessments of the outlook for deficit reduction continued to be denew home sales, and rising applications bated in the Congress. In the view of at Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 147 least some members, however, a larger tinued to ease, and the dollar had fallen fiscal contraction than was commonly against the currencies of many major expected might well materialize, per- industrial countries. On balance, it haps starting later this year. The course appeared that the current configuration of fiscal legislation undoubtedly would of financial market conditions and decontinue to affect financial markets and, gree of monetary restraint was likely to in the opinion of some members, would be consistent with moderate expansion need to be taken into account in the in nominal GDP and prices following a formulation of monetary policy. period of some weakness in the econ- Concerning inflation, several mem- omy as inventory imbalances were corbers commented that the rise in con- rected. The risks of a different outcome, sumer prices and some other broad mea- in either direction, seemed to be reasonsures of inflation in recent months ably balanced. In the circumstances, appeared to reflect cyclical develop- because the dimensions of the near-term ments relating to the tightening of deceleration and the potential strength resource and product markets over the of underlying demand remained uncerpast year, including the partial pass- tain, the members concluded that it was through of sizable increases in prices at desirable to monitor developments careearlier stages of production. In addition, fully and wait for additional information higher import prices might have been before deciding on the next policy playing a role. A number of members move. expressed concern that, with the econ- With regard to the possible need to omy already producing at or even adjust policy during the intermeeting slightly above its sustainable potential, period, all the members were in favor of inflation pressures were likely to inten- shifting to an unbiased instruction that sify if the current pause in the expansion did not incorporate any presumption were to be followed by a period of with regard to the direction of potential above-average growth. On the other intermeeting changes. The members hand, members who saw the odds as agreed that no compelling case could be pointing to a more moderate rebound made at this point for potential adjustafter a period of relatively sluggish eco- ments to policy in either direction durnomic performance were inclined to the ing the period ahead, and retaining a view that an upward trend in inflation bias in the directive would give a miswas likely to be averted. In addition, the leading indication of the Committee's ongoing competitive pressures in many current intentions for the period. One markets, the restraint in compensation member expressed the view that the increases, and the continuing efforts to costs of being wrong currently seemed cut production costs would help to con- higher in the direction of accommodattain pressures on prices over time. ing too much inflation, though signs of a In the Committee's discussion of pol- possible cumulative deterioration in ecoicy for the intermeeting period ahead, all nomic activity could not be ignored the members endorsed a proposal to should they materialize. Another memmaintain the current stance of policy. ber, who saw the longer-term risks to The higher interest rates of 1994 clearly the economy as tilted to the downside of had damped demand, but since year-end current projections, indicated that while intermediate- and long-term market the recent performance of the economy rates had declined, stock market prices might argue for some easing of monehad risen, bank lending terms had con- tary policy, a steady policy course with- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 82nd Annual Report, 1995 out any bias in the intermeeting instruc- spending on business equipment; nonresition was appropriate for now in light of dential construction has continued to trend appreciably higher. The nominal deficit on the generally accommodative financial U.S. trade in goods and services widened in and banking markets. the first quarter from its average rate in the At the conclusion of the Committee's fourth quarter. Broad indexes of consumer discussion, all the members supported a and producer prices have increased faster on directive that called for maintaining the average thus far this year, while advances in labor compensation costs have remained existing degree of pressure on reserve subdued. positions and that did not include a pre- Intermediate- and long-term interest rates sumption about the likely direction of have declined considerably further since the any adjustments to policy during the Committee meeting on March 28, while intermeeting period. Accordingly, in the short-term rates have registered small context of the Committee's long-run decreases. In foreign exchange markets, the objectives for price stability and sus- trade-weighted value of the dollar in terms of the other G-10 currencies, after falling to tainable economic growth, and giving low levels, rose on balance over the intercareful consideration to economic, meeting period. financial, and monetary developments, M2 and M3 strengthened in March and the Committee decided that somewhat April. For the year through April, M2 greater or somewhat lesser reserve expanded at a rate in the lower half of its restraint would be acceptable during the range for 1995 and M3 grew at a rate somewhat above its range. Total domestic nonintermeeting period. The reserve condifinancial debt has grown at a rate a bit above tions contemplated at this meeting were the midpoint of its monitoring range in expected to be consistent with moderate recent months. growth in M2 and M3 over the months The Federal Open Market Committee ahead. seeks monetary and financial conditions that At the conclusion of the meeting, the will foster price stability and promote sustainable growth in output. In furtherance of Federal Reserve Bank of New York was these objectives, the Committee at its meetauthorized and directed, until instructed ing on January 31-February 1 established otherwise by the Committee, to execute ranges for growth of M2 and M3 of 1 to transactions in the System Account in 5 percent and 0 to 4 percent respectively, accordance with the following domestic measured from the fourth quarter of 1994 to the fourth quarter of 1995. The Committee policy directive: anticipated that money growth within these ranges would be consistent with its broad The information reviewed at this meeting policy objectives. The monitoring range for suggests that the expansion of economic growth of total domestic nonfinancial debt activity has slowed considerably further. In was lowered to 3 to 7 percent for the year. April, nonfarm payroll employment was The behavior of the monetary aggregates about unchanged after posting reduced gains will continue to be evaluated in the light of in the first quarter, and the civilian unem- progress toward price level stability, moveployment rate rose to 5.8 percent. Industrial ments in their velocities, and developments production fell in April, largely reflecting a in the economy and financial markets. cutback in the production of motor vehicles, In the implementation of policy for the and capacity utilization rates declined some- immediate future, the Committee seeks to what. Reflecting markedly weaker demand maintain the existing degree of pressure on for motor vehicles, total retail sales were reserve positions. In the context of the Comdown in April after rising moderately over mittee's long-run objectives for price stabilthe first quarter. Housing starts were ity and sustainable economic growth, and unchanged in April after declining sharply in giving careful consideration to economic, the first quarter. Orders for nondefense capi- financial, and monetary developments, sometal goods point to further strong expansion of what greater reserve restraint or somewhat Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 149 lesser reserve restraint would be acceptable Mr. Kohn, Secretary and Economist in the intermeeting period. The contemplated Mr. Bernard, Deputy Secretary reserve conditions are expected to be consis- Mr. Coyne, Assistant Secretary tent with moderate growth in M2 and M3 Mr. Gillum, Assistant Secretary over coming months. Mr. Mattingly, General Counsel Mr. Prell, Economist Votes for this action: Messrs. Greenspan, Mr. Truman, Economist McDonough, Blinder, Hoenig, Kelley, Lindsey, and Melzer, Ms. Minehan, Ms. Brown and Messrs. Davis, Dewald, Mr. Moskow, and Mses. Phillips and Hunter, Lindsey, Mishkin, Yellen. Votes against this action: None. Promisel, Siegman, and Slifman, Associate Economists It was agreed that the next meeting of Mr. Fisher, Manager, System Open the Committee would be held on Market Account Wednesday-Thursday, July 5-6, 1995. Mr. Madigan, Associate Director, The meeting adjourned at 12:15 p.m. Division of Monetary Affairs, Board of Governors Mr. Simpson, Associate Director, Donald L. Kohn Division of Research and Secretary Statistics, Board of Governors Ms. Johnson, Assistant Director, Division of International Finance, Meeting Held on Board of Governors Messrs. Clouse3 and Roberts,3 July 5-6, 1995 Economists, Divisions of Monetary Affairs and Research A meeting of the Federal Open Market and Statistics respectively, Board Committee was held in the offices of of Governors the Board of Governors of the Federal Ms. Low, Open Market Secretariat Reserve System, in Washington, D.C., Assistant, Division of Monetary on Wednesday, July 5, 1995, at Affairs, Board of Governors 2:30 p.m. and continued on Thursday, Mr. Connolly, First Vice President, July 6, 1995, at 9:00 a.m. Federal Reserve Bank of Boston Present: Messrs. Beebe, Goodfriend, Lang, Mr. Greenspan, Chairman Rosenblum, and Sniderman and Mr. McDonough, Vice Chairman Ms. Tschinkel, Senior Vice Mr. Blinder Presidents, Federal Reserve Banks Mr. Hoenig of San Francisco, Richmond, Mr. Kelley Philadelphia, Dallas, Cleveland, Mr. Lindsey and Atlanta respectively Mr. Melzer Ms. Krieger and Mr. Miller, Vice Ms. Minehan Presidents, Federal Reserve Banks Mr. Moskow of New York and Minneapolis Ms. Phillips respectively Ms. Yellen By unanimous vote, the minutes of Messrs. Boehne, Jordan, McTeer, and the meeting of the Federal Open Market Stern, Alternate Members of the Committee held on May 23, 1995, were Federal Open Market Committee approved. Messrs. Broaddus, Forrestal, and Parry, Presidents of the Federal Reserve 3. Attended portion of meeting relating to the Banks of Richmond, Atlanta, and Committee's review of the economic outlook and San Francisco respectively policy discussion. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 82nd Annual Report, 1995 The Manager of the System Open first quarter. Payrolls in the services Market Account reported on develop- industry continued to rise in May, but ments in foreign exchange markets and the pace of hiring was well below the on System foreign currency transactions average rate of increase over other during the period May 23,1995, through recent months. In manufacturing and July 5, 1995. By unanimous vote, the construction, employment contracted Committee ratified these transactions. further in May, although part of the job The Manager also reported on devel- decline in construction might have been opments in domestic financial markets temporary, reflecting heavy rains and and on System open market transactions floods in the South. The civilian unemin government securities and federal ployment rate edged lower in May, to agency obligations during the period 5.7 percent, but was somewhat above its May 23, 1995, through July 5, 1995. By average for the first quarter. unanimous vote, the Committee ratified Industrial production continued to these transactions. weaken in May, and incoming data sug- The Committee then turned to a dis- gested a further decline in June. Manucussion of the economic and financial facturing output fell in May for a fourth outlook, the ranges for growth of money consecutive month, reflecting another and debt in 1995 and 1996, and the cutback in the production of motor vehiimplementation of monetary policy over cles. Output of non-auto manufactured the intermeeting period ahead. A sum- goods was unchanged, with increases in mary of the economic and financial the production of nondurable consumer information available at the time of the goods and non-auto business equipment meeting and of the Committee's discus- offsetting declines in output elsewhere. sion is provided below, followed by the Utilization of manufacturing capacity domestic policy directive that was ap- dropped again in May but was still at a proved by the Committee and issued to relatively high level. the Federal Reserve Bank of New York. Nominal retail sales were about The information reviewed at this unchanged over April and May. Purmeeting suggested that the level of eco- chases at furniture and appliance stores nomic activity was about unchanged in were up slightly on balance over the two the second quarter. Consumer spending months. Sales at automotive dealerships apparently remained sluggish, and busi- and apparel outlets fell in April but ness spending on plant and equipment revived somewhat in May. Spending at rose less rapidly than in other recent building materials stores fell in both quarters. With final sales flagging, firms months. The retail sales reports, in comsought to hold down production and bination with data on consumer prices employment in order to keep inventories and unit motor-vehicle sales, suggested under control. Broad indexes of con- that inflation-adjusted spending for consumer and producer prices had increased sumer goods had changed little since the faster on balance thus far this year, but fourth quarter of last year. Housing signs of some moderation in inflation starts were unchanged on balance over were evident in recent price data. April and May; a reduction in starts of Growth of labor compensation costs single-family homes was offset by a rise remained subdued. in starts of multifamily units. Adverse Nonfarm payroll employment fell weather in some parts of the country substantially in May after a small might have contributed to the sluggishdecline in April and reduced gains in the ness in starts. Home sales were higher Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 151 in May: Sales of new homes turned up value of exports rose modestly from the sharply, and sales of existing homes also first-quarter level; increases in exports advanced somewhat. of aircraft and industrial supplies were Shipments of nondefense capital partially offset by declines in exports goods increased considerably in May of automotive products to Canada and after being unchanged in April. Mexico. Available data indicated that, Shipments of computing equipment on average, economic growth in the remained robust on balance over April major foreign industrial countries had and May, but growth of shipments of been sluggish in the first quarter and other business equipment slowed sig- apparently had remained so in the secnificantly. Sales of heavy trucks ond quarter; growth had been particurebounded strongly in May from an larly weak in Canada and Japan. April decline. Recent data on new Incoming data suggested that price orders for nondefense capital goods sug- inflation might be slowing a little after gested that spending on business equip- having picked up early in the year. Conment might moderate somewhat in the sumer prices rose a bit less in May; months ahead after an extended period energy prices recorded another sizable of rapid expansion. Nonresidential con- increase, but food prices changed little struction continued to trend appreciably and prices of other items advanced higher in April; particularly large gains more slowly. However, for the twelve were recorded in the public utility, months ended in May, prices of industrial, and institutional categories. nonfood, non-energy consumer items Business inventories grew at a little increased slightly more than in the preslower rate in April than in the first ceding twelve months. At the producer quarter. In manufacturing, inventory level, prices of finished goods were investment remained brisk in April unchanged in May, reflecting declines in but slowed somewhat in May; the the prices of finished foods and finished inventory-to-sales ratio for the two energy goods; excluding food and months was at the high end of the range energy, prices of finished goods rose in for the past year. At the wholesale level, May at the same rate as in April. For the the rate of increase in stocks in April year ending in May, producer prices equaled the first-quarter pace and the rose moderately after being essentially ratio of stocks to sales reached its high- unchanged in the previous year. At earest level in several years. Inventory lier stages of production, producer accumulation in the retail sector was prices grew at a considerably slower more moderate in April. More than half rate or declined in May, suggesting the rise occurred at automotive estab- some easing of cost pressures over the lishments. The inventory-to-sales ratio next few months. Average hourly comfor retailers other than auto dealers had pensation in the nonfarm business sector remained stable for a number of months accelerated in the first quarter of the and was near the middle of its range for year, owing in large part to temporary recent years. developments. Over the year ended The nominal deficit on U.S. trade in in March, this compensation measure goods and services widened substan- increased somewhat more than it had tially in April from its average rate for over the previous year. Average hourly the first quarter. The value of imports earnings declined in May, but the was up sharply, with increases posted in change in hourly earnings over the past nearly all major import categories. The twelve months was slightly larger than Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 82nd Annual Report, 1995 the advance over the preceding twelve- value of the dollar in terms of the other month period. G-10 currencies declined considerably At its meeting on May 23, 1995, the on balance. The dollar fell sharply in the Committee adopted a directive that week after the May meeting on further called for maintaining the existing news of weakening in the U.S. economy degree of pressure on reserve positions but rebounded somewhat at the end of and that did not include a presumption the month when concerted central-bank about the likely direction of any adjust- intervention was carried out. The dollar ments to policy during the intermeeting remained relatively stable over the balperiod. Accordingly, the directive stated ance of the period. that in the context of the Committee's Growth of M2 strengthened substanlong-run objectives for price stability tially in May and June. Downward and sustainable economic growth, and adjustments in returns on deposits and giving careful consideration to eco- retail money fund shares had lagged nomic, financial, and monetary devel- declines in market interest rates in opments, somewhat greater reserve recent months, and investors evidently restraint or somewhat lesser reserve responded by shifting funds from marrestraint would be acceptable during the ket instruments into these M2 assets. intermeeting period. The reserve condi- For the year through June, M2 expanded tions associated with this directive were at a rate in the upper half of its range for expected to be consistent with moderate 1995. M3 also accelerated in May and growth in the broader monetary aggre- June; and for the year through June, this gates over the months ahead. aggregate grew at a rate well above the Open market operations during the annual range set in February. The pickup intermeeting period were directed in M3 growth importantly reflected toward maintaining the existing degree more rapid inflows to institution-only of pressure on reserve positions. The money funds, whose yields also adjusted federal funds rate generally remained sluggishly to falling money market near 6 percent, but most short-term rates. Total domestic nonfinancial debt interest rates were down on balance in had grown at a rate in the upper half of response to incoming economic data, its monitoring range in recent months. particularly the employment report for The staff forecast prepared for this May, that were seen by market partici- meeting suggested that economic activpants as increasing the likelihood that ity would expand sluggishly over the monetary policy would be eased in the next few months as business firms near future. Longer-term interest rates adjusted production schedules to bring also declined in reaction to growing inventories into better alignment with indications that efforts to narrow sub- sales. Subsequently, as inventory posistantially the U.S. budget deficit might tions were corrected, and with underbe successful. Yields on corporate and lying support for final sales from the municipal obligations fell less than favorable wealth and interest-cost Treasury rates and risk spreads widened effects of the extended rally in the equity a little, particularly for junk bonds. and debt markets, the economy would Major indexes of equity prices rose over begin to expand at a moderate pace. The the intermeeting period, partly in forecast assumed a modest step-up response to lower interest rates. in the pace of consumer spending in In foreign exchange markets over the response to some diminution of conintermeeting period, the trade-weighted cerns about job prospects and incomes Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 153 as well as improved financial conditions and in turn on consumer spending and and household balance sheets. Home- business investment. Other downside building was projected to pick up some- risks included the adverse implications what in lagged response to the recent for exports of potentially less-thandecline in mortgage rates and the related projected expansion in a number of improvement in housing affordability. major foreign economies. Nonetheless, Business outlays for new equipment recent developments suggested that the were expected to slow from the very period of maximum risk to the domestic rapid pace of the past few years in expansion might have passed. With response to the slower growth of sales pressures on resources having diminand profits, but lower costs of capital ished and likely to ease somewhat furand the ready availability of financing ther and with labor costs remaining subwould help to sustain appreciable dued, the risk of continuing increases in growth in such investment. Export inflation had fallen considerably; indeed, expansion would pick up in response to in the view of many members inflation some anticipated strengthening in the should moderate over the projection economies of major U.S. trading part- period. ners. Considerable uncertainty contin- In keeping with the practice at meetued to surround the fiscal outlook, but in ings when the Committee sets its longlight of recent developments the fore- run ranges for the money and debt cast now reflected a greater degree of aggregates, the members of the Commitfiscal restraint. In the staff's judgment, tee and the Federal Reserve Bank presithe prospects for some easing of pres- dents not currently serving as members sure on labor and other resources sug- provided their individual projections of gested that price inflation likely would the growth in real and nominal GDP, the moderate from its recently higher level. rate of unemployment, and the rate of In the Committee's discussion of cur- inflation for the years 1995 and 1996. rent and prospective economic devel- The forecasts of the rate of expansion opments, members commented that the in real GDP for 1995 as a whole had apparent pause in the expansion was a central tendency of V/z to 2 percent, likely to prove temporary, and their fore- reflecting expectations of a pickup in casts generally pointed to an upturn growth to a moderate pace in the second in overall economic activity to a pace half of the year; for 1996, projections of in the neighborhood of the economy's growth in real GDP centered on a range potential by the latter part of this year of 2lA to 23/4 percent. With regard to the or early 1996. Many emphasized that expansion of nominal GDP, the growth the prospects for a strengthening econ- forecasts were concentrated in a range omy were enhanced by the drop in of 4lA to 43/4 percent for 1995 and 43A to intermediate- and long-term interest 53/s percent for 1996. The rate of unemrates and the rise in equity prices. In the ployment associated with these foreview of most members, however, the casts was expected to edge higher in the risks to the outlook were tilted to second half of this year to a consensus the downside. Several stressed that the range of 53/4 to 6x/s percent in the fourth ongoing adjustments to business inven- quarters of both 1995 and 1996. Projectories could prove to be more pro- tions of the rate of inflation, as meanounced and of longer duration than sured by the consumer price index, they anticipated, with negative reper- pointed to a small decline over the procussions on production and incomes jection horizon; the projections con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 82nd Annual Report, 1995 verged on rates of 3Vs to 33/s percent for vulnerable to adverse domestic or exter- 1995 and 2Vs to 3V4 percent for 1996. nal shocks. On balance, while the timing In the course of the discussion, mem- remained uncertain, a resumption of bers indicated that much of the eco- growth at a moderate rate was viewed as nomic information that had become a likely prospect, given the underlying available since the May meeting had strength of the economy. suggested a greater softening in the In their review of prospective develeconomy than they had anticipated and opments in key sectors of the economy, had raised concerns about the timing members noted that consumer expendiand strength of the upturn over coming tures had fallen short of earlier expectaquarters. However, the most recent data tions, but signs of some firming were and some of the anecdotal reports from visible, notably the indications of an around the country had a better tone. improvement in sales of motor vehicles Among the positive factors in the eco- since early spring. While a continued nomic outlook, members gave particular sluggish performance of the consumer emphasis to the favorable financial cli- sector could not be ruled out, the memmate, including the stimulative effects bers generally expected a resumption of of lower interest rates on interest- moderate growth in consumer spending. sensitive sectors of the economy, the The upturn undoubtedly would be limready availability of financing from mar- ited to some extent by the apparent ket sources and banking institutions, exhaustion of much of the earlier and the impact of rising equity and bond pent-up demands and perhaps by conprices on balance sheets. Business and cerns about job prospects and incomes, consumer sentiment also remained but the effects of reduced interest rates generally favorable, though anecdotal on borrowers and the wealth effects reports suggested a heightened degree from gains in values of financial assets of caution among business contacts in should help to sustain moderate growth. many parts of the nation. Members Moreover, if the strengthening in housobserved that the expansion did not ing activity materialized as projected, appear to have produced overall imbal- sales of consumer durables would be ances in the economy aside from an favorably affected. While consumer apparent overhang of inventories in confidence had declined earlier, recent some industries. The ongoing adjust- surveys indicated that confidence had ments needed to bring these inventories stabilized or even edged up more down to desired levels were seen as the recently and was in any event at relamost serious threat to the expansion. tively high levels in most parts of the Some members commented that the country. inventory correction in the second quar- Business fixed investment appeared ter appeared on the basis of the available to have moderated since earlier in the evidence to be less than was expected year, though expenditures for both proearlier and that the period of inventory ducer durable equipment and nonresiadjustment might therefore be more dential structures were still registering extended in time than they had antici- strong gains. Further moderation was pated. While such a development might anticipated over the course of coming not in itself be sufficient to tilt the econ- quarters in association with slower omy into recession, in the possible con- growth in business sales and decreased text of relatively sluggish growth in pressures on producer resources. While final demands, the economy would be some concern was expressed about the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 155 vulnerability of capital spending to a favorable effects on financial markets, downturn in the growth of sales, the thereby stimulating to an extent offsetmembers generally expected this sector ting increases in spending. Over the of the economy to remain a positive longer run, deficit reduction should factor in the expansion. The ready avail- enhance the performance and growth of ability of financing on favorable terms the economy, though monetary policyand the ongoing need to modernize makers would need to carefully monitor equipment and other producer resources possible transition effects. for competitive reasons, notably to take A considerable downside risk in the advantage of continuing improvements view of many members was the outlook in computer and other technologies, for exports. Economic activity in the should foster continued overall growth major foreign industrial nations had in business investment. Members also been more sluggish than anticipated durnoted that the strength in business prof- ing the first half of the year, and this its, though likely to moderate cyclically raised questions about the strength of at some point, remained a favorable the expansion in those countries and the factor undergirding business capital related prospects for faster growth in spending. U.S. exports. Most of the major econo- Housing activity had stagnated in mies in Latin America also were prorecent months, but this sector of the jected to strengthen, and indeed such economy also was expected to provide expectations were reflected in financial some stimulus to the expansion as home markets, but substantial problems buyers responded to reduced mortgage remained that could undermine the rates. Although the latest available data favorable outlook. On the positive side, indicated that housing starts were still members observed that U.S. exports relatively depressed, home sales and were now quite competitive in world mortgage loan applications for home markets, as evidenced by continuing purchases had strengthened recently. gains in exports to numerous countries, With some exceptions, building industry and such a perception was reinforced by contacts in local areas tended to confirm anecdotal reports of increasing foreign broader indications that improvement in sales of a variety of products by firms housing activity was occurring. Mem- around the country. On balance, some bers also noted that rising occupancy growth in exports remained a reasonable levels and rents should support fairly prospect but it might fall below current robust construction of multifamily hous- expectations. ing in many areas. The members generally agreed that With regard to the outlook for fiscal the inflation risks in the economy had policy, members gave considerable diminished, though some still saw the emphasis to recent developments in the potential for little or no progress in Congress that suggested there could be unwinding the recent uptick in inflation. greater deficit reduction over the years Many referred to indications of easing ahead than had been built into many pressures on resources in recent months, forecasts. The direct effects of deficit and they generally felt that such prescutbacks would tend to hold down the sures would be contained over the progrowth in final demand and act as a jection horizon if economic growth were restraining influence on overall eco- to materialize in line with their forenomic activity over the projection hori- casts. Developments seen as consistent zon. But those cutbacks also would have with such an expectation included per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 82nd Annual Report, 1995 sisting anecdotal reports of highly com- ated rates of M2 and M3 growth since petitive markets that made it very diffi- early spring that, for the year to date, cult for business firms to pass on cost had lifted the expansion of M2 to the increases or to raise profit margins. upper half of the Committee's range and Moreover, despite continuing reports of the expansion of M3 further above its labor scarcities in some areas and indus- range. According to a staff projection, tries, increases in nominal labor costs the growth of both aggregates was likely generally had remained subdued across to moderate over the balance of the year, the nation. Prices of many raw materials assuming an unchanged monetary poland semifinished goods had increased icy, as rates paid on various components sharply in earlier months and these of the aggregates were adjusted more increases would continue to put upward fully to the reductions in market interest pressure on the prices of finished goods, rates that had occurred since early in the but there recently had been signs of year. Even so, the projected growth of some abatement of inflation at the earlier the broad aggregates would remain well stages of production. Similarly, earlier above that experienced over the last sevdeclines in the foreign exchange value eral years. These developments implied of the dollar were placing upward pres- velocity behavior for these aggregates sure on the prices of many imported that was more in line with historical products, but the recent stability of the patterns after several years of prodollar promised a diminution of such nounced and atypical velocity increases. pressure over time. On balance, most of The members noted that financial innothe members believed that the under- vations, technical changes, and deregulying trend of inflation was now tilted lation had obscured historical distinctoward gradual deceleration in the con- tions among various financial instrutext of marginally higher rates of unem- ments and had affected the extent to ployed labor and other resources, but which holders might shift funds into they acknowledged that the risks to such or out of components of the monetary an outcome remained substantial. aggregates in response to changing In keeping with the requirements of interest rate patterns. As a result, subthe Full Employment and Balanced stantial uncertainty remained about pro- Growth Act of 1978 (the Humphrey- jections of money growth and the future Hawkins Act), the Committee at this relationships of money and debt to the meeting reviewed the ranges for growth basic objectives of monetary policy. in the monetary and debt aggregates that Against this background, members it had established in February for 1995, expressed somewhat differing views and it decided on tentative ranges for regarding appropriate ranges for the growth in those aggregates in 1996. The growth of M2 and M3 in 1995 and 1996. current ranges set in February for the With regard to M2, a majority of the period from the fourth quarter of 1994 members favored or could accept a proto the fourth quarter of 1995 included posal to maintain the existing 1 to 5 perexpansion of 1 to 5 percent for M2 and cent range for both years. These mem- 0 to 4 percent for M3. A monitoring bers noted that M2 growth was projected range for growth of total domestic non- to remain within the current range, financial debt had been set at 3 to 7 per- though in the upper half in 1995 and at cent for 1995. the top in 1996. While recognizing that In the Committee's discussion, the expansion at a rate above that range members took account of the acceler- could not be ruled out, especially for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 157 1996, they suggested that an increase in of unusual developments that had the range, at a time when substantial depressed M3 growth over much of the uncertainties continued to surround the 1990s. Those developments, which also relationship of M2 to broad measures of had served to curb M2 growth though economic performance, would imply a to a lesser extent, involved a reduced degree of confidence regarding the rela- role of banking institutions in the intertionship that the Committee did not pos- mediation of flows of funds between sess at this point. Moreover, if the more savers and borrowers. That reduced normal behavior of velocity over the role had been induced to a large degree past several quarters were to continue, a by balance sheet adjustments under- 1 to 5 percent range for growth of M2 taken in response to extraordinary likely would prove consistent with the strains experienced by banks and thrifts. Committee's ultimate objectives of sus- Against the background of favorable tained economic expansion and reason- economic developments, the financial able price stability. There was concern health of depository institutions had that an increase in the M2 range could improved markedly over the past few foster a misreading of the Committee's years, and the increased ability and intentions, especially if some easing in willingness of these institutions to serve policy were to be approved during this as financial intermediaries appeared to meeting, explanations of the technical be working toward strengthening the reasons notwithstanding. growth of M3 and lowering its velocity. Members preferring a somewhat In the circumstances, the members higher M2 range emphasized that expec- believed that the contemplated increase tations for growth of this aggregate in in the M3 range was essentially a tech- 1995 and 1996 were around the upper nical response to developments that end of the current range. In their view, were tending to restore both traditional under the Federal Reserve Act, the financing patterns and the historical Committee's target ranges—and nor- pattern of somewhat faster growth in mally their midpoints—should be con- M3 than in M2. In this respect, the sistent with the Committee's expecta- increase in the M3 range did not have tions for growth in nominal GDP and any implications for the underlying money. From this perspective, a higher thrust of monetary policy, though the M2 range was clearly defensible and the higher range could prove to be more reasons for it easily communicated. consistent over time with sustainable Indeed, a failure to adjust the range and noninflationary economic growth. upward could be interpreted by observ- As in the case of the current M2 range, ers as indicating an intent to tighten that conclusion assumed the eventual policy should M2 growth remain high in restoration of historic relationships relation to its current range. between M3 and measures of overall With regard to M3, all the members economic performance. indicated that they preferred or could The Committee was unanimous in its accept an increase in its range to 2 to view that the current monitoring range 6 percent for both years. The current for the growth of total domestic non- 0 to 4 percent range was quite low in financial debt should be retained for relation to the range for M2, judging by 1995 and extended to 1996. This view the average historical growth of this took into account staff projections indiaggregate relative to that of M2. The cating that the debt aggregate was likely range had been adopted in the light to grow at rates well within its 3 to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 82nd Annual Report, 1995 7 percent range—indeed, not far from The Committee voted to retain the the midpoint—in both years. 3 to 7 percent monitoring range for At the conclusion of this discussion, growth of total domestic nonfinancial the Committee voted to reaffirm the debt for 1995 and to extend that range range of 1 to 5 percent for growth of M2 on a tentative basis to 1996: in 1995 and to set the same range on a tentative basis for 1996: Votes for this action: Messrs. Greenspan, McDonough, Blinder, Hoenig, Kelley, Lindsey, and Melzer, Ms. Minehan, Mr. Votes for this action: Messrs. Greenspan, Moskow, and Mses. Phillips and Yellen. McDonough, Hoenig, Kelley, Lindsey, Votes against this action: None. and Melzer, Ms. Minehan, Mr. Moskow, and Ms. Phillips. Votes against this action: Mr. Blinder and Ms. Yellen. These votes constituted approval of the following paragraph for the directive that would be issued at the end of the Mr. Blinder and Ms. Yellen dissented meeting: on a technical judgment, not a policy difference. They noted that if growth in The Federal Open Market Committee the demand for M2 were close to hisseeks monetary and financial conditions that toric norms in 1995 or 1996, as indeed it will foster price stability and promote sushad been for some time, then the Com- tainable growth in output. In furtherance of mittee members' projections for nomi- these objectives, the Committee reaffirmed at this meeting the range it had established nal GDP would likely imply M2 growth on January 31-February 1 for growth of M2 near the top of, or even above, the curof 1 to 5 percent, measured from the fourth rent range. While the relationship quarter of 1994 to the fourth quarter of 1995. between the growth of M2 and that of The Committee also retained the monitoring nominal GDP remained subject to a range of 3 to 7 percent for the year that it had set for growth of total domestic nonfinancial great deal of uncertainty, they were perdebt. The Committee raised the 1995 range suaded that the range—in fact, the midfor M3 to 2 to 6 percent as a technical point of the range—should normally be adjustment to take account of changing interconsistent with members' forecasts of mediation patterns. For 1996, the Committee nominal GDP growth. This would be established on a tentative basis the same ranges as in 1995 for growth of the monetary truer to the spirit of the aggregates taraggregates and debt, measured from the geting provision in the Federal Reserve fourth quarter of 1995 to the fourth quarter Act. From this perspective, they viewed of 1996. The behavior of the monetary a higher M2 range for 1995 and 1996 as aggregates will continue to be evaluated clearly preferable in communicating the in the light of progress toward price level Committee's objectives for the econ- stability, movements in their velocities, and developments in the economy and financial omy and its expectations for money markets. growth. The Committee then voted to raise In the course of the Committee's disthe range for growth of M3 to 2 to cussion of its monetary growth ranges, 6 percent for 1995 and to extend that members commented on the failure of higher range provisionally to 1996: the monetary aggregates to provide a reliable nominal anchor for the conduct Votes for this action: Messrs. Greenspan, of monetary policy in recent years. McDonough, Blinder, Hoenig, Kelley, Moreover, the restoration of historic Lindsey, and Melzer, Ms. Minehan, Mr. Moskow, and Mses. Phillips and Yellen. relationships, or the emergence of new Votes against this action: None. but stable relationshios. between money Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 159 growth and measures of progress toward toward price stability over time. Several broad economic objectives could not be members also observed that any move predicted with any degree of confidence. toward less restraint should be cautious Some members expressed the view that at this point because easing would reprein these circumstances the Committee sent a change in the direction of policy needed to continue to look at potential and its repercussions on financial maralternative approaches to guide the for- kets, including the foreign exchange mulation of policy and to communicate markets, could be relatively pronounced. its intentions to the public, especially A few members preferred somewhat with respect to the Committee's objec- greater easing. They stressed that such a tive of promoting price stability over move was warranted by the recent pause time. in the expansion and the apparent vul- In the Committee's discussion of pol- nerability of the economy to a variety of icy for the intermeeting period ahead, downside risks. Indeed, a move from nearly all the members indicated that what they saw as a restrictive monetary they favored or could support a proposal policy toward a more neutral policy to ease slightly the current degree of stance was somewhat overdue in their pressure on reserve positions. Prefer- view. While they could support a slight ences for an unchanged policy stance adjustment to policy at this point, these and for somewhat greater easing also members were persuaded that the stance were expressed. In support of at least of monetary policy probably would slight easing, members commented that need to be eased by more than a slight they viewed current monetary policy as amount over time to accommodate the somewhat restrictive, judged in part by intermediate- and long-term needs of the level of the inflation-adjusted federal an expanding economy. Moreover, the funds rate. This degree of monetary risks of increasing inflationary pressures restraint had been appropriate early in appeared to be relatively remote in the the year when the economy was oper- context of the current and anticipated ating at or possibly beyond its long- performance of the overall economy. run potential and inflation pressures The declines in intermediate- and longappeared to be mounting. Some modest term interest rates were helping to supeasing was desirable now that the port the expansion, but those declines growth of the economy had slowed con- rested in part on market expectations siderably more than anticipated and of significant monetary policy easing; potential inflationary pressures seemed failure to ratify such expectations could to be in the process of receding. well result in at least a partial reversal of Although inflation was higher than in those desirably lower rates. 1994 and the economy was still operat- Members who leaned toward an ing at an elevated level, looking forward unchanged policy remained concerned many members saw prospects for about the persistence of inflationary declining inflation and the possibility of pressures and whether a somewhat shortfalls in economic growth. The easier policy stance would be consistent members agreed that under present eco- with the objective of capping inflation nomic conditions a slight easing of the and setting the stage for further progress stance of policy would incur little risk toward price stability. The available eviof stimulating increased inflation and dence on the economy's current perforwould be entirely consistent with their mance remained mixed, and most forecommitment to continued progress casts pointed to moderate strengthening Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 82nd Annual Report, 1995 ahead; in the circumstances an easing decided that slightly greater monetary move did not appear to be needed at restraint might be acceptable or slightly this time. One member emphasized that, lesser monetary restraint would be while the risks of greater inflation acceptable during the intermeeting seemed small, the costs of a policy error period. According to a staff analysis, the in the direction of too much easing reserve conditions contemplated at this would be high in terms of its effects meeting would be consistent with modon the credibility of the System's anti- erate growth in M2 and M3 over coming inflationary policy and the need to rein months. in inflationary growth next year. At the conclusion of the meeting, the Although their preference would be to Federal Reserve Bank of New York was wait for further evidence on the perfor- authorized and directed, until instructed mance of the economy, all but one of otherwise by the Committee, to execute these members indicated that, given the transactions in the System account in current uncertainties surrounding the accordance with the following domestic economic outlook and the small amount policy directive: of easing that was proposed, they would not dissent from the majority position. The information reviewed at this meeting With regard to possible adjustments suggests that the level of economic activity to policy during the intermeeting period, was about unchanged in the second quarter. Nonfarm payroll employment fell in April most of the members who favored some and May after posting reduced gains in the easing also preferred an asymmetric first quarter, and the civilian unemployment directive, including a marked preference rate, at 5.7 percent in May, was up somewhat on the part of those who supported from its first-quarter average. Industrial progreater easing than the majority. An duction continued to decline in May, reflectasymmetric directive was consistent ing another cutback in the production of motor vehicles, and capacity utilization with the view shared by most members was down somewhat further. Total retail that the risks to the expansion were sales have been sluggish on average in biased to the downside, but no member recent months. Housing starts were about expressed a strong presumption about unchanged over April and May, but sales of the likely need to ease policy during the new homes turned up sharply in May. Orders for nondefense capital goods have moderweeks ahead. The Committee would, of ated somewhat in recent months but still course, monitor and respond as needed point to considerable further expansion of to the incoming economic information. spending on business equipment; nonresi- At the conclusion of the Committee's dential construction has continued to trend discussion, all but one of the members appreciably higher. The nominal deficit on indicated that they favored or could U.S. trade in goods and services widened in April from its average rate in the first quarsupport a directive that called for some ter. Broad indexes of consumer and producer slight easing in the degree of pressure prices have increased faster on average thus on reserve positions and that included a far this year, though there were signs of bias toward possible further easing of some moderation in the most recent data; reserve conditions during the intermeet- advances in labor compensation costs have remained subdued. ing period. Accordingly, in the context of the Committee's long-run objectives Most interest rates have declined somewhat further since the Committee meeting on for price stability and sustainable eco- May 23. In foreign exchange markets, the nomic growth, and giving careful contrade-weighted value of the dollar in terms sideration to economic, financial, and of the other G-10 currencies declined considmonetary developments, the Committee erably over the intermeeting period. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 161 M2 and M3 strengthened substantially in should remain unchanged at this time. May and June. For the year through June, With the pace of economic activity M2 expanded at a rate in the upper half of its likely to return to trend growth later this range for 1995 and M3 grew at a rate well year and inflation expected to be higher above its range. Total domestic nonfinancial debt has grown at a rate in the upper half of this year and next than in 1994, he felt its monitoring range in recent months. an unchanged policy in the near term The Federal Open Market Committee would enhance the prospects of achievseeks monetary and financial conditions that ing the Committee's long-run objectives will foster price stability and promote susof sustainable economic growth and tainable growth in output. In furtherance of these objectives, the Committee reaffirmed price stability. at this meeting the range it had established It was agreed that the next meeting of on January 31-February 1 for growth of M2 the Committee would be held on Tuesof 1 to 5 percent, measured from the fourth day, August 22, 1995. quarter of 1994 to the fourth quarter of 1995. The meeting adjourned at 12:20 p.m. The Committee also retained the monitoring range of 3 to 7 percent for the year that it had set for growth of total domestic nonfinancial Donald L. Kohn debt. The Committee raised the 1995 range Secretary for M3 to 2 to 6 percent as a technical adjustment to take account of changing intermediation patterns. For 1996, the Committee established on a tentative basis the same ranges as in 1995 for growth of the monetary Meeting Held on aggregates and debt, measured from the August 22, 1995 fourth quarter of 1995 to the fourth quarter of 1996. The behavior of the monetary A meeting of the Federal Open Market aggregates will continue to be evaluated Committee was held in the offices of the in the light of progress toward price level stability, movements in their velocities, and Board of Governors of the Federal developments in the economy and financial Reserve System, in Washington, D.C., markets. on Tuesday, August 22, 1995, at In the implementation of policy for the 9:00 a.m. immediate future, the Committee seeks to decrease slightly the existing degree of pres- Present: sure on reserve positions. In the context of Mr. Greenspan, Chairman the Committee's long-run objectives for Mr. McDonough, Vice Chairman price stability and sustainable economic Mr. Blinder growth, and giving careful consideration to Mr. Hoenig economic, financial, and monetary develop- Mr. Kelley ments, slightly greater reserve restraint might Mr. Lindsey or slightly lesser reserve restraint would Mr. Melzer be acceptable in the intermeeting period. Ms. Minehan The contemplated reserve conditions are Mr. Moskow expected to be consistent with moderate Ms. Phillips growth in M2 and M3 over coming months. Ms. Yellen Votes for this action: Messrs. Greenspan, Messrs. Boehne, Jordan, McTeer, and McDonough, Blinder, Kelley, Lindsey, Stern, Alternate Members of the and Melzer, Ms. Minehan, Mr. Moskow, Federal Open Market Committee and Mses. Phillips and Yellen. Vote against this action: Mr. Hoenig. Messrs. Broaddus, Forrestal, and Parry, Presidents of the Federal Reserve Mr. Hoenig dissented because he Banks of Richmond, Atlanta, and believed the stance of monetary policy San Francisco respectively Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 82nd Annual Report, 1995 Mr. Kohn, Secretary and Economist The Manager of the System Open Mr. Bernard, Deputy Secretary Market Account reported on develop- Mr. Coyne, Assistant Secretary ments in foreign exchange markets Mr. Gillum, Assistant Secretary and on System foreign currency trans- Mr. Mattingly, General Counsel Mr. Baxter, Deputy General Counsel actions during the period July 6, 1995, through August 21, 1995. By unani- Ms. Brown and Messrs. Davis, Dewald, mous vote, the Committee ratified these Hunter, Lindsey, Mishkin, transactions. Promisel, Siegman, Slifman, and The Manager also reported on devel- Stockton, Associate Economists opments in domestic financial markets Mr. Fisher, Manager, System Open and on System open market transactions Market Account in government securities and federal Mr. Madigan, Associate Director, agency obligations during the period Division of Monetary Affairs, July 6, 1995, through August 21, 1995. Board of Governors By unanimous vote, the Committee rati- Mr. Simpson, Associate Director, fied these transactions. Division of Research and Statistics, Board of Governors The Committee then turned to a dis- Ms. Johnson, Assistant Director, cussion of the economic and financial Division of International Finance, outlook and the implementation of Board of Governors monetary policy over the intermeeting Mr. Ramm,4 Section Chief, Division period ahead. A summary of the ecoof Research and Statistics, nomic and financial information avail- Board of Governors able at the time of the meeting and of 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 Ms. Strand, First Vice President, Federal Reserve Bank of Bank of New York. Minneapolis The information reviewed at this meeting suggested that economic activ- Messrs. Beebe, Goodfriend, Rolnick, ity was expanding more rapidly after Rosenblum, and Sniderman and increasing at a sluggish pace in the Mses. Tschinkel and White, Senior Vice Presidents, Federal second quarter. Consumer spending Reserve Banks of San Francisco, appeared to be growing at a moderate Richmond, Minneapolis, Dallas, rate, housing demand seemed to be Cleveland, Atlanta, and rebounding sharply, and business invest- New York respectively ment remained on a solid uptrend. With efforts to adjust inventories still under Mr. Meyer, Vice President, Federal way, industrial production had changed Reserve Bank of Philadelphia little in recent months, and employment By unanimous vote, the minutes of gains had been modest. After increasing the meeting of the Federal Open Market at elevated rates in the early part of the Committee held on July 5-6, 1995, were year, consumer and producer prices had approved. risen more slowly in recent months. Advances in labor compensation costs remained subdued. Nonfarm payroll employment rose 4. Attended portion of meeting relating to the Committee's economic discussion. further in July after a modest second- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 163 quarter gain; the July advance was held puting equipment, continued to grow down by continuing employment losses rapidly in the second quarter. However, in manufacturing that were widespread business spending for transportation by industry. Outside of manufacturing, equipment, notably heavy trucks and payrolls continued to increase at a rela- aircraft, was lackluster. New orders for tively slow pace in July; reduced job nondefense capital goods edged lower growth in the services industry reflected in the second quarter after rising sharply smaller increases in employment at busi- early this year, although the elevated ness and health service establishments. level of order backlogs pointed to con- The civilian unemployment rate rose siderable further expansion of spending slightly in July, returning to its second- on business equipment over coming quarter average of 5.7 percent. months. Nonresidential construction Industrial production edged higher in activity posted a solid gain in the second July, but it was unchanged on balance quarter, and recent data on permits over the three months ending in July suggested further increases in building after declining in earlier months. Manu- activity in coming months. facturing output fell further in July; a Business inventory accumulation sharp contraction in the production of slowed markedly further in June, and motor vehicles and parts accounted for inventory-to-sales ratios for most types the entire decline. Within manufactur- of business establishments declined ing, output of business equipment other again. In manufacturing, the aggregate than motor vehicles continued to inventory-to-sales ratio was only a little advance as additional strong gains were above the historical low reached around recorded in the production of office and the end of 1994. In the wholesale sector, computing equipment. The output of the ratio of stocks to sales in June was non-auto consumer goods weakened; a slightly below the top of the range precutback in the production of home fur- vailing over the last year. At the retail nishings offset an increase in the manu- level, inventories changed little in June, facture of appliances. With capacity and the inventory-to-sales ratio for this continuing to expand rapidly, total utili- sector was near the middle of its range zation of industrial capacity dropped for recent years. somewhat further. The nominal deficit on U.S. trade in Despite edging down in July, revised goods and services widened in June, data for earlier months suggested that with exports declining marginally more total retail sales had risen appreciably than imports. For the second quarter as a on balance since early spring. The July whole, the deficit was substantially decline entirely reflected weakness in larger than in the first quarter. Exports motor vehicles; elsewhere, spending on were up considerably in the second furniture and appliances continued to quarter despite declines in automotive firm, and purchases of other durable products shipped to Canada and Mexico, goods and of apparel rose sharply. Hous- but imports rose even more, with ing market activity picked up consider- increases widely spread across most ably in June, with sales of both new and major trade categories. In the major existing homes increasing significantly. foreign industrial countries, economic Housing starts were up strongly in July growth appeared to have ranged from after changing little in previous months. weak to moderate in the second quarter, Shipments of nondefense capital and the limited available evidence suggoods, led by surging purchases of com- gested that subdued expansion contin- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 82nd Annual Report, 1995 ued into the third quarter. Economic growth, and giving careful consideration activity remained particularly weak in to economic, financial, and monetary Japan. In Europe, expansion apparently developments, slightly greater reserve was still under way, though somewhat restraint might or slightly lesser reserve unevenly across countries. restraint would be acceptable during the Consumer prices rose more slowly in intermeeting period. The reserve condi- June and July, with food and energy tions associated with this directive were price movements having little effect on expected to be consistent with moderate the overall index; price increases for growth in M2 and M3 over coming nonfood, non-energy items were some- months. what smaller than those seen earlier in Immediately after the meeting, open the year. Over the twelve-month period market operations were directed toward ended in July, however, this measure of implementing the slight easing in the consumer inflation rose at about the degree of reserve pressure that had been same rate as in the preceding twelve adopted by the Committee. Thereafter, months. Producer prices of finished operations were conducted with a view goods edged lower on balance in June to maintaining this slightly more accomand July, reflecting substantial declines modative reserve posture, and the fedin prices of finished energy goods. eral funds rate remained near 53A per- Excluding food and energy, producer cent over the intermeeting interval. prices rose more over the year ended in Adjustment plus seasonal borrowing July than over the preceding year. At averaged somewhat above anticipated earlier stages of production, increases in levels, largely reflecting heavy adjustproducer prices had diminished sharply ment borrowing activity on the August 2 in recent months, perhaps suggesting reserve settlement day when demands some abatement of pressures on produc- for excess reserves were unexpectedly tion capacity and prices. Total hourly large. compensation for private industry work- Treasury yields declined across the ers increased somewhat more in the sec- maturity spectrum in response to the ond quarter than in the first; however, announcement of the easing action on the rise in compensation costs for the July 6; market participants perceived the year ended in June was smaller than that policy move as an indication of the Fedfor the previous year, primarily reflect- eral Reserve's concern regarding the ing slower growth in costs of benefits. state of the economy and, based on his- Average hourly earnings grew faster in torical precedent, as likely the first in a July than in June; for the year ending in series of easing steps. Subsequently, July, earnings rose somewhat more than however, interest rates rebounded in in the preceding year. response to incoming economic data that At its meeting on July 5-6, 1995, the were seen as suggesting stronger eco- Committee adopted a directive that nomic performance and reduced chances called for some slight easing in the for further monetary policy easing. On degree of pressure on reserve positions balance, short-term market interest rates and that included a tilt toward possible posted mixed changes over the interfurther easing of reserve conditions dur- meeting period, while intermediate- and ing the intermeeting period. The direc- long-term rates rose appreciably. With tive stated that in the context of the unexpectedly favorable corporate earn- Committee's long-run objectives for ings reports outweighing the effects of price stability and sustainable economic higher interest rates, major indexes of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 165 equity prices were up moderately on inventory adjustment process appeared balance over the period. to be well under way, and moderate In foreign exchange markets, the expansion of final sales would be suptrade-weighted value of the dollar in ported by the favorable wealth and terms of the other G-10 currencies interest-cost effects of the extended rally appreciated substantially over the inter- in the debt and equity markets. In meeting period. The dollar's gain response to improved financial condioccurred partly in response to the tions and balance sheets, consumer improving outlook for the U.S. economy spending was anticipated to keep pace and the related rise in long-term interest with the growth of incomes. Homebuildrates in the United States. Declines in ing was expected to strengthen somelong-term yields in the major European what in response to the earlier decline in industrial countries probably contributed mortgage rates and the related improveto a higher value of the dollar in terms ment in housing affbrdability. Accompaof the German mark and most other nying slower growth of sales and profits, European currencies. In addition, the business investment in new equipment dollar appreciated sharply against the and structures was projected to slow Japanese yen, largely in response to from the very rapid pace of the past few actions by Japanese authorities to reduce years, although the lower cost of capital official interest rates, to encourage capi- and the ready availability of financing tal outflows from Japan, and to make would help to sustain appreciable expanlarge intervention purchases of dollars sion in such investment. Export growth during a period when the dollar already would pick up in response to some was rising against the yen. expected strengthening in the econo- M2 and M3 continued to register siz- mies of major trading partners. Considable increases in July and appeared to erable uncertainty surrounded the fiscal be expanding considerably further in outlook, but the staff continued to antici- August. The recent strength of M2 pate the greater degree of fiscal restraint seemed to reflect in part the relatively that had been projected at the time of the greater appeal of interest rates on M2 last Committee meeting. In the staff's assets in the wake of the declines in judgment, the prospects for some further market interest rates that had taken place easing of pressure on labor and other this year, particularly at longer maturi- resources suggested that price inflation ties. Robust M3 growth was associated likely would not deviate significantly with the continuing requirements of from recent trends. commercial banks for additional whole- In the Committee's discussion of cursale funds needed to meet persisting rent and prospective economic developstrong loan growth. For the year through ments, the members focused on recent July, M2 expanded at a rate in the upper indications of some strengthening in the half of its range for 1995, and M3 grew expansion of economic activity after a at a rate above its upwardly revised period of limited growth during the range. Total domestic nonfinancial debt spring. Further growth in final demand had been in the upper half of its moni- was generating an improvement in overtoring range in recent months. all business activity, despite a more The staff forecast prepared for this rapid adjustment in inventory investmeeting suggested that growth in eco- ment than many had expected. This nomic activity would pick up from the configuration suggested that the risks weak pace of the second quarter. The of recession or an extended period of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 82nd Annual Report, 1995 subpar growth were now reduced, and of attendant adjustments in market intersustained expansion at a moderate pace est rates and, more broadly, in the light was seen as the most likely course for of emerging economic conditions. A the economy. Although the risks to legislative package containing strong the economy now seemed to be more fiscal restraint measures would be evenly balanced than at the time of the expected to ease pressures in debt July meeting, they were still sizable in markets—indeed, enhanced prospects in both directions. In particular, uncer- this regard were probably already containties about federal budget policies tributing to reduced long-term interest and their effects on the economy rates. On the other hand, a package that remained substantial. With respect to included only modest deficit reduction prices, members noted that the recent might well lead to upward pressure on pause in the expansion had eased pres- interest rates. The continuing uncersures on resources, and the economy tainty concerning the size of future budappeared to be in a better position get deficits might be complicated by a to accommodate moderate growth over delay in passing appropriations legislathe forecast horizon without adding to tion in the months ahead, with poteninflation. Indeed, some members were tially dislocative effects on many federal optimistic that growth of the economy at government operations. Accordingly, a pace in line with their expectations federal budget developments were seen would be consistent with modest further as the major factor likely to bear on the decreases in inflation. Others expressed performance of the economy over comconcern, however, that the uncertain- ing months and quarters, and these ties surrounding the outlook for the developments might well differ consideconomy included questions about the erably from current forecasts. persistence of inflationary sentiment Members described current business and the prospects for further progress conditions across the nation as ranging toward stable prices over the next sev- from sluggish in some regions to robust eral quarters. in a number of others, with at least some Members gave particular attention to improvement occurring recently in the ongoing discussions involving the many parts of the country. There were Congress and the Administration regard- anecdotal reports of strengthening retail ing future federal budget deficits. There sales in numerous areas, with the was a great deal of political support for notable exception of motor vehicles, and reducing the federal deficit substantially of relatively high levels of confidence over the years ahead; indeed, in the view among consumers and many retailers. of one member the political dynamics Sustained growth in consumer spending might very well result in larger reduc- was seen as a reasonable expectation for tions than many now anticipated. None- the projection period through 1996. theless, the actual outcome remained However, diminished pent-up demands particularly uncertain. From the perspec- and possibly the increasing level of tive of its macroeconomic stabilization consumer indebtedness would tend to effects and its implications for monetary inhibit consumer spending, keeping its policy, enactment of legislation involv- growth below that in recent years. These ing substantial fiscal restraint would negative factors might be offset to some raise the issue of fiscal drag; however, extent by the wealth effects of the rise in the latter's impact on the economy stock market prices and by a higher would have to be judged in the context level of housing activity that should Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 167 help to support demands for household Members commented that the adjustdurables. ment in business inventories appeared to Members referred to recent indica- have progressed a considerable distance tions, including widespread anecdotal but probably was not yet completed for reports, of considerable gains in housing the business sector as a whole. Nonetheactivity after a period of pronounced less, inventory investment seemed likely weakness during the earlier months of to become a more neutral factor in the year. Homebuyers were reacting its effects on the overall economy as favorably to the declines in rates on desired inventory ratios were reached in fixed-rate mortgages from their highs an increasing number of industries. The around the turn of the year. Homebuild- recent tendency for order patterns to ers in a number of areas were reported stabilize was a tentative indication of to be optimistic about the outlook for such a development. In any event, the further gains in housing demand, at least recent upturn in final sales, apart from for single-family homes. The prospects its probable effects on desired inventory for multifamily construction seemed less levels, had allowed a larger-thanpromising; while robust activity charac- expected amount of inventory correcterized such construction in a number of tion to occur without preventing the areas, still high vacancy rates and asso- economy from regaining at least moderciated overbuilding across much of the ate expansionary momentum. nation suggested little, if any, overall The external sector of the economy impetus from this sector of the housing remained subject to particular uncerindustry. tainty. The members generally viewed The expansion in nonresidential con- some improvement in the country's net struction was projected to slow from export position as a reasonable expectaits pace in recent quarters in line with tion, but several questioned the potential more moderate growth in overall eco- for much expansion of exports to many nomic activity and reduced pressures of the nation's important trading parton capacity. Even so, with the slowing ners. While recent policy actions in occurring only gradually as projects Japan might have diminished concerns under construction were completed, this about the outlook for overall exports, a sector of the economy was expected to number of members indicated that they remain a positive factor in the overall continued to anticipate fairly limited expansion of economic activity over growth in foreign demands for U.S. the next several quarters. The members goods and services, with the result that also anticipated more moderate growth the external sector was likely in their in outlays for producers' durable equip- view to make a relatively small, if any, ment over the forecast horizon in contribution to the growth of the domesconjunction with slower growth in tic economy over the projection period. final sales. However, current trends Members generally viewed the nearpointed to further sizable increases in term outlook for inflation as more outlays for office and computing equip- encouraging than it had appeared to be ment, and such expenditures were earlier this year. The pause in the expanexpected to buttress still considerable sion during the spring had eased presoverall growth in spending for business sures on resources, as evidenced in part equipment, though at a pace well below by anecdotal reports of lessening labor the exceptional rate experienced in shortages in some areas and reduced use recent years. of overtime work by some firms, and the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 82nd Annual Report, 1995 higher rate of inflation experienced be needed later in the stance of moneduring the early months of the year tary policy—characterized by some seemed unlikely to persist. The mem- members as slightly to the restrictve side bers differed somewhat, however, in at least in terms of the inflation-adjusted their assessment of the longer-term federal funds rate—would have to be outlook for inflation. Some emphasized assessed in terms of its consistency with the reduction that had occurred in infla- the Committee's continuing objectives tionary pressures, and with labor costs of fostering price stability and promotremaining subdued they felt that eco- ing sustained economic growth. nomic growth in line with current fore- At the conclusion of the Committee's casts should prove compatible with discussion, all the members indicated moderating inflation over time. Further, that they would vote for a directive the recent appreciation of the dollar that called for maintaining the existing should contribute marginally to a more degree of pressure on reserve positions. favorable inflation outcome after some They also favored a directive that did lag. Other members expressed reser- not include a presumption about the vations about the prospects for an likely direction of any adjustments to improved inflation performance over policy during the intermeeting period. coming quarters. They cited indications Accordingly, in the context of the of persisting inflationary expectations Committee's long-run objectives for such as the recent weakness of the bond price stability and sustainable economic markets and survey results that pointed growth, and giving careful consideration to expectations of some rise in inflation to economic, financial, and monetary from current levels. They also referred developments, the Committee decided to the possibility that favorable labor that slightly greater or slightly lesser cost developments would not persist reserve restraint would be acceptable indefinitely in an economy that was during the intermeeting period. The operating in the vicinity of its potential. reserve conditions contemplated at this Turning to monetary policy for the meeting were expected to be consistent intermeeting period ahead, all the mem- with more moderate growth in M2 and bers accepted a proposal to maintain an M3 over the months ahead. unchanged degree of pressure in reserve At the conclusion of the meeting, the markets and to adopt a directive that Federal Reserve Bank of New York was was not biased in either direction with authorized and directed, until instructed regard to potential intermeeting adjust- otherwise by the Committee, to execute ments. For the near term, current trends transactions in the System Account in in economic activity and inflation accordance with the following domestic appeared favorable and likely to remain policy directive: so with an unchanged policy stance. A steady policy also seemed appropriate The information reviewed at this meeting pending a clearer assessment of the outsuggests a strengthening in the expansion of look for fiscal policy. Over the longer economic activity in the current quarter from term, the members generally believed the weak second-quarter pace. Nonfarm paythat consideration would need to be roll employment increased in June and July given to an adjustment in the Commit- after declining in May; the advance was held down by continuing employment losses in tee's policy stance, especially if substanmanufacturing. The civilian unemployment tial fiscal restraint were to be enacted. rate in July was at its second-quarter average The extent to which an adjustment might of 5.7 percent. Industrial production changed Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of the FOMC Meetings, September 169 little in recent months after falling earlier of the monetary aggregates and debt, meawhile capacity utilization was down some- sured from the fourth quarter of 1995 to the what further. Total retail sales have risen fourth quarter of 1996. The behavior of the appreciably on balance since early spring, monetary aggregates will continue to be but they edged down in July, reflecting evaluated in the light of progress toward weakness in motor vehicles. Housing starts price level stability, movements in their were up sharply in July after changing little velocities, and developments in the economy in previous months. Orders for nondefense and financial markets. capital goods still point to considerable In the implementation of policy for the further expansion of spending on business immediate future, the Committee seeks to equipment over coming months; nonresi- maintain the existing degree of pressure on dential construction has continued to trend reserve positions. In the context of the Comappreciably higher. The nominal deficit on mittee's long-run objectives for price stabil- U.S. trade in goods and services widened in ity and sustainable economic growth, and the second quarter from its average rate in giving careful consideration to economic, the first quarter. After increasing at elevated financial, and monetary developments, rates in the early part of the year, consumer slightly greater reserve restraint or slightly and producer prices have risen more slowly lesser reserve restraint would be acceptable in recent months. Advances in labor compen- in the intermeeting period. The contemplated sation costs have remained subdued. reserve conditions are expected to be consis- Short-term interest rates have posted tent with more moderate growth in M2 and mixed changes since the Committee meeting M3 over coming months. on July 5-6, while intermediate- and longterm rates have risen appreciably. In foreign Votes for this action: Messrs. Greenspan, exchange markets, the trade-weighted value McDonough, Blinder, Hoenig, Kelley, of the dollar in terms of the other G-10 Lindsey, and Melzer, Ms. Minehan, Mr. currencies appreciated substantially over the Moskow, and Mses. Phillips and Yellen. intermeeting period, with the gain occurring Votes against this action: None. since the beginning of August. M2 and M3 continued to register sizable It was agreed that the next meeting of increases in July and appeared to be expandthe Committee would be held on Tuesing considerably further in August. For the day, September 26, 1995. year through July, M2 expanded at a rate in the upper half of its range for 1995 and M3 The meeting adjourned at 12:25 p.m. grew at a rate above its upwardly revised range. Total domestic nonfinancial debt has Donald L. Kohn grown at a rate in the upper half of its Secretary monitoring range in recent months. The Federal Open Market Committee seeks monetary and financial conditions that Meeting Held on will foster price stability and promote sus- September 26, 1995 tainable growth in output. In furtherance of these objectives, the Committee at its meet- A meeting of the Federal Open Market ing in July reaffirmed the range it had estab- Committee was held in the offices of lished on January 31-February 1 for growth the Board of Governors of the Federal of M2 of 1 to 5 percent, measured from the fourth quarter of 1994 to the fourth quarter Reserve System, in Washington, D.C., of 1995. The Committee also retained the on Tuesday, September 26, 1995, at monitoring range of 3 to 7 percent for the 9:00 a.m. year that it had set for growth of total domestic nonfinancial debt. The Committee raised Present: the 1995 range for M3 to 2 to 6 percent as Mr. Greenspan, Chairman a technical adjustment to take account of Mr. McDonough, Vice Chairman changing intermediation patterns. For 1996, Mr. Blinder the Committee established on a tentative Mr. Hoenig basis the same ranges as in 1995 for growth Mr. Kelley Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 82nd Annual Report, 1995 Mr. Lindsey Ms. Low, Open Market Secretariat Mr. Melzer Assistant, Division of Monetary Ms. Minehan Affairs, Board of Governors Mr. Moskow Ms. Phillips Ms. Pianalto, First Vice President, Ms. Yellen Federal Reserve Bank of Cleveland Messrs. Boehne, Jordan, McTeer, and Stern, Alternate Members of the Messrs. Lang, Rolnick, and Sniderman Federal Open Market Committee and Ms. Tschinkel, Senior Vice Presidents, Federal Reserve Banks Messrs. Broaddus, Forrestal, and Parry, of Philadelphia, Minneapolis, Presidents of the Federal Reserve Cleveland, and Atlanta Banks of Richmond, Atlanta, and respectively San Francisco respectively Messrs. Cox, Hetzel, Judd, and Mr. Kohn, Secretary and Economist McNees, Vice Presidents, Federal Mr. Bernard, Deputy Secretary Reserve Banks of Dallas, Mr. Coyne, Assistant Secretary Richmond, San Francisco, and Mr. Gillum, Assistant Secretary Boston respectively Mr. Mattingly, General Counsel Mr. Prell, Economist Ms. Meulendyke, Adviser, Federal Mr. Truman, Economist Reserve Bank of New York Messrs. Davis, Dewald, Hunter, By unanimous vote, the minutes of Lindsey, Mishkin, Slifman, and the meeting of the Federal Open Market Stockton, Associate Economists Committee held on August 22, 1995, Mr. Fisher, Manager, System Open were approved. Market Account The Manager of the System Open Market Account reported on develop- Mr. Winn, Assistant to the Board, ments in foreign exchange markets since Office of Board Members, Board of Governors the August meeting. There were no Mr. Ettin, Deputy Director, Division of transactions in these markets for the Research and Statistics, Board of System Account during this period, and Governors thus no vote was required of the Mr. Madigan, Associate Director, Committee. Division of Monetary Affairs, The Manager also reported on devel- Board of Governors Mr. Simpson, Associate Director, opments in domestic financial markets Division of Research and and on System open market transactions Statistics, Board of Governors in government securities and federal Mr. Hooper and Ms. Johnson, Assistant agency obligations during the period Directors, Division of August 22,1995, through September 25, International Finance, Board of Governors 1995. By unanimous vote, the Committee ratified these transactions. Mr. Ramm,5 Section Chief, Division of The Committee then turned to a dis- Research and Statistics, Board of cussion of the economic and financial Governors outlook and the implementation of monetary policy over the intermeeting period ahead. A summary of the economic and financial information avail- 5. Attended portion of meeting relating to the Committee's economic discussion. able at the time of the meeting and of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of the FOMC Meetings, September 171 the Committee's discussion is provided the production of business equipment below, followed by the domestic policy recorded another robust gain. A steep directive that was approved by the Com- rise in electricity generation associated mittee and issued to the Federal Reserve with unusually hot weather over much Bank of New York. of the country more than offset a decline The information reviewed at this in mining production. Total utilization meeting suggested that economic activ- of industrial capacity moved higher in ity was expanding at a moderate rate in August but remained below the average the current quarter. Consumer spending rate for the first quarter. appeared to be advancing somewhat fur- Retail sales were up slightly on balther after a sizable gain in the second ance over July and August after having quarter; housing demand had strength- risen appreciably in the previous two ened in response to earlier reductions in months. Abstracting from the volatile mortgage rates; and business investment sales of motor vehicles during this remained on a solid uptrend. Although period, spending on goods changed little business efforts to pare inventories on balance over the two months, as apparently were still in progress, both increased outlays for durable goods production and employment were were offset by flagging purchases of advancing moderately. After having apparel. Spending on services rose in increased at elevated rates in the early July (latest data available), in part part of the year, consumer and producer because of elevated demand for energyprices had risen more slowly in recent related services during that month's months. unseasonably warm weather. Housing Private nonfarm payroll employment market activity increased further in July increased considerably in August after and August. Sales of both new and existchanging little in July. Much of the rise ing homes in July (latest data) reached reflected a pickup in hiring in the ser- their highest levels in more than a year, vices industry, notably in business ser- and housing starts edged up in August vices. Manufacturing payrolls were up after a substantial rise in July. modestly in August; the gain followed Shipments of nondefense capital substantial declines in the previous four goods fell appreciably in July after havmonths. Construction employment ing risen rapidly over the first half of the changed little on balance over July and year, and sales of heavy trucks also were August, with only small changes being down substantially. New orders for nonposted each month. The civilian unem- defense capital goods declined steeply ployment rate edged down to 5.6 per- in July; however, the still-large backlog cent in August, remaining in the narrow of outstanding orders, coupled with the range that had prevailed since late 1994. favorable effects on the user cost of Industrial production jumped in capital of lower interest rates and higher August to a level moderately above its equity prices this year, pointed to furaverage for the second quarter. Manu- ther substantial expansion of spending facturing output rose sharply, posting its on business equipment over coming first increase since January; a surge in months. Nonresidential construction the production of motor vehicles and posted another sizable gain in July. Outparts accounted for some of the advance, lays for office, industrial, and institubut the output of non-automotive con- tional structures registered healthy sumer goods in August more than increases, but other commercial buildreversed a sizable drop in July, and ing activity was unchanged. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 82nd Annual Report, 1995 Business inventory accumulation months ending in August, nonfood, nonslowed in June and July from a very energy prices rose by the same amount rapid rat£ earlier in the year; stockpiling as in the year-earlier period. At the procontinued at a brisk pace in manufactur- ducer level, prices of finished goods ing and wholesale trade, but retail stocks edged lower in August after being were drawn down. In manufacturing, unchanged in July. Although declines in stocks increased in July at about the prices of finished energy goods held average rate seen in the second quarter; down the overall index in both months, however, the stocks-to-shipments ratio prices of finished goods other than food rose somewhat, reflecting in part a and energy rose more slowly than in the reduction in shipments that might have early months of the year; for the twelve been exaggerated by difficulties of sea- months ending in August, nonfood, sonal adjustment. Wholesale inventories non-energy prices of finished goods also advanced at about the second- increased slightly more than in the comquarter pace, and the inventory-to-sales parable year-earlier period. ratio for this sector moved up to the At its meeting on August 22, 1995, upper end of its range for recent years. the Committee adopted a directive that At the retail level, reduced stocks at called for maintaining the existing automotive dealers accounted for much degree of pressure on reserve positions of the July decline in inventories; the and that did not include a presumption ratio of inventories to sales edged lower about the likely direction of any adjustbut remained near the middle of the ments to policy during the intermeeting range for recent years. period. The directive stated that in the The nominal deficit on U.S. trade in context of the Committee's long-run goods and services widened slightly in objectives for price stability and sustain- July from its average rate in the second able economic growth, and giving carequarter. The value of both exports and ful consideration to economic, financial, imports decreased. For exports, the larg- and monetary developments, slightly est decline was in aircraft and automo- greater reserve restraint or slightly lesser tive products. The decrease in imports reserve restraint would be acceptable was concentrated in automotive prod- during the intermeeting period. The ucts and gold. Available indicators of reserve conditions associated with this economic activity suggested that expan- directive were expected to be consistent sion was continuing in mcfct of the with more moderate growth of M2 and major foreign industrial countries in the M3 over coming months. third quarter and that the average rate of Open market operations were directed growth remained near the subdued pace toward maintaining the existing degree of the first half of the year. of pressure on reserve positions through- As in other recent months, consumer out the intermeeting period. Adjustment prices rose more slowly in August than plus seasonal borrowing and the federal in the early months of the year. Sizable funds rate generally were in line with declines in energy prices were a con- expectations, with the funds rate averagtributing factor, but price increases also ing close to 53/4 percent. Other market had moderated for nonfood, non-energy interest rates fell appreciably over much items; the moderation largely reflected a of the period, though these declines downturn in automobile finance charges were partially reversed near the end of and used-car prices along with smaller the period. Further evidence of subdued increases in airline fares. For the twelve price pressures, indications that the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of the FOMC Meetings, September 173 rebound in growth of GDP would be somewhat below the upper end of its modest, and increasing confidence that range for 1995 and M3 grew at a rate significant reductions in federal deficits appreciably above its range. Total might be in train contributed to the drop domestic nonfinancial debt had grown at in rates. The lower interest rates, opti- a rate around the midpoint of its monimistic assessments of corporate earn- toring range in recent months. ings, and the brisk pace of merger The staff forecast prepared for this announcements and share buybacks meeting suggested that growth in ecohelped lift major indexes of equity nomic activity over the forecast horizon prices to new record levels during the would be higher than the weak pace of period, though they ended the period the second quarter. The process of bringbelow those highs. ing inventories into better alignment In foreign exchange markets, the with sales was well under way, and the trade-weighted value of the dollar in favorable wealth and interest-cost terms of the other G-10 currencies effects of the extended rally in the debt declined over the intermeeting period. and equity markets would tend to sup- The dollar moved higher over most of port moderate expansion of final sales. the period, partly in response to mone- Consumer spending was expected to tary easing actions in Germany, which grow at a pace generally in line with were quickly followed by similar steps incomes; the favorable effects on spendin other European countries, and in ing of higher prices for financial assets Japan. The policy easing in Japan was held by households would be offset to a accompanied, inter alia, by statements degree in this forecast by less robust by U.S. and Japanese officials that they labor market conditions and the difficulwould welcome a weaker yen. The dol- ties that growing numbers of households lar reversed course late in the intermeet- would encounter in servicing their ing period, however, following the enlarged debts. Homebuilding was announcement of a new Japanese fiscal expected to be somewhat stronger in package and emerging uncertainties response to the earlier decline in mortabout the prospects for European mone- gage rates and the related improvement tary union. On balance over the period, in housing affordability. In anticipation the dollar moved lower against most of slower growth of sales and profits, European currencies while appreciating business investment in new equipment significantly further against the yen. and structures was projected to slow After further strong expansion in from the very rapid pace of the past few August, M2 and M3 appeared to be years, although the lower cost of capital growing at a somewhat more moderate and the ready availability of financing rate in September. The still-brisk would help to sustain appreciable expandemand for M2 assets was associated sion in such investment. Export growth with the lower market interest rates now would pick up in response to some prevailing and the related decline in the expected strengthening in the econoopportunity costs associated with hold- mies of major trading partners. A great ing these assets. The relatively robust deal of uncertainty surrounded the fiscal growth of M3 reflected inflows to outlook, but the staff continued to build institution-only money market funds as a considerable degree of fiscal restraint well as bank acquisitions of wholesale into its forecast. In the staff's judgment, funds to meet loan demand. For the year the prospects for some further easing of through August, M2 expanded at a rate pressures on labor and other resources Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 82nd Annual Report, 1995 suggested that price inflation likely ness confidence generally appeared to would not deviate significantly from have stayed high, but several members recent trends. indicated that they sensed from their In the Committee's discussion of contacts that business expectations were current and prospective economic devel- somewhat fragile and vulnerable to opments, members commented that the adverse developments. information available since the August In their discussion of developments in meeting had tended to confirm earlier key sectors of the economy, members indications of a pickup in the expansion generally viewed comparatively moderafter a period of sluggish growth during ate growth in consumer spending as a the spring. The economy did not display likely prospect over the forecast period. uniform strength across industries or After recording sizable gains in late regions, but it appeared on balance to spring, retail sales had been well mainhave considerable and desirable expan- tained in recent months, with some sionary momentum. Growth at a pace strengthening in the motor vehicles secaveraging close to, or perhaps slightly tor in August apparently carrying over below, the economy's potential was to September. Favorable factors in the viewed as the most likely prospect for outlook for consumer spending included the year ahead. The outlook for eco- the increases that had occurred in the nomic activity remained subject to a value of financial assets and the demand variety of uncertainties, including the for household appliances and other durastill unsettled course of the federal bud- bles that was expected to be generated get, and many members saw the risks of by stronger housing activity. On the a shortfall from expectations as slightly other hand, overall gains in consumer greater than those of significantly faster spending were likely to be restrained by growth. With regard to inflation, the cyclically waning pent-up demands for slower increases in key measures of consumer durables, especially motor consumer and producer prices since ear- vehicles; still widespread concerns lier in the year were a welcome devel- about job security associated with ongoopment, and a number of members ing business restructuring and downsizcommented that inflation was likely to ing activities; and higher consumer debt remain contained, given likely develop- loads. ments. Many expressed concern, how- Housing demand was continuing to ever, that significant further progress respond to more attractive mortgage toward achieving stable prices might not rates, as evidenced by nationwide data be made over the next year or two. and anecdotal reports from many parts In keeping with indicators of nation- of the country. Increases in construction wide economic performance, anecdotal activity were lagging the improvement and other reports on regional activity in housing demand and had been limited suggested somewhat uneven business thus far, but considerable strength in conditions in different parts of the coun- homebuilding activity could be expected try, but collectively the reports pointed over the next several months. The extent to moderate overall growth. Business of further lagged responses to reduced activity in most regions had tended to mortgage rates could not be foreseen improve or to remain firm during the with any degree of certainty, and in any summer months, though declining event housing demand would depend growth or very sluggish activity charac- on broad economic developments such terized some areas. The level of busi- as trends in employment and income. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of the FOMC Meetings, September 175 Housing activity appeared to have weak- any efforts to assess the potential dampened over recent months in one major ing influence of prospective fiscal policy market where economic conditions were were uncertainties regarding the time described as relatively sluggish. In many frame during which the new expenditure other areas, however, persons in the real and tax measures would be put in estate industry were reported to be opti- place—including the extent to which mistic about the outlook for housing. they would be implemented over the Business fixed investment remained a year ahead—and the effects of the new strongly positive factor in the economy fiscal measures on economic incentives and was expected to provide further and financial markets. Favorable busiimpetus to growth over the next several ness and financial market reactions quarters. The contribution of this sector would tend to mitigate, at least for a could be expected to lessen, however, as time, the restraining effects of fiscal capital spending was adjusted to expec- measures on aggregate demand. On the tations of a maturing expansion charac- other hand, if the deficit reduction terized by the emergence of slower measures that eventually were enacted growth in final demand and business were to fall substantially short of current profits. In particular, the outsized growth expectations, there would be adverse in business spending for equipment did repercussions in financial markets and not appear to be sustainable under fore- possibly on business confidence. seeable economic conditions. The nation's trade deficit was Diminished growth in inventories still expected to diminish somewhat over the seemed to be retarding the expansion in next several quarters and in the process overall business activity, as evidenced in to exert less restraint on domestic ecopart by continuing reports of efforts by nomic activity. The better trade perforvarious business firms to bring their mance was projected to result from a inventories into better balance with number of factors, including the sales. Nonetheless, such adjustments improved competitive position of U.S. now appeared to have been largely producers and the lagged effects of earcompleted, or were expected to be lier declines in the value of the dollar in completed over the months immediately foreign exchange markets. It also was ahead, so that inventory investment associated with forecasts of somewhat could be expected to have little effect on stronger growth in economic activity the course of the economy during 1996. abroad than in the United States. While It was noted, however, that projections there were continuing anecdotal reports of inventory behavior were subject to a of expanding export markets, some high degree of uncertainty. members expressed reservations about A number of members commented the extent to which the economies of that fiscal policy developments consti- major foreign trading partners would tuted a major uncertainty in the outlook strengthen over the forecast period and for economic activity. While measures the related prospects for growth of incorporating substantial reductions in foreign demand for U.S. goods and spending from current trends were services. widely expected to be enacted into law, Views on the outlook for inflation it was not possible to predict the out- centered on forecasts of little change or come of the continuing debate on the some slight decline in the rate of federal budget in the Congress and the increase in consumer prices over the Administration. Further complicating year ahead. The appreciable moderation Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 82nd Annual Report, 1995 in inflation in recent months had on rising costs through higher prices. It checked the deteriorating trend that also was possible that the rates of capacseemed to be emerging during the early ity utilization and employment associmonths of the year, but the members ated with a steady rate of inflation had generally believed that recent devel- changed in the direction of providing opments did not point to a significant the economy greater leeway to operate further decline in inflation. Pressures on at a somewhat higher level without genproducer resources had eased since the erating more inflation. early part of the year, but the labor mar- In the Committee's discussion of polket remained tight and capacity utiliza- icy for the intermeeting period ahead, all tion was still above its historical aver- the members supported a proposal to age. In this connection, a few members maintain an unchanged degree of prescommented that current forecasts were sure on reserve positions. The expansion subject to a range of error that included seemed for now to have a desirable and a risk of some intensification of infla- sustainable momentum that did not call tionary pressures. for any change in policy. Furthermore, One uncertainty bearing on the out- the outlook remained clouded by the look for inflation was the extent to uncertainties stemming from the ongowhich potentially greater pressures on ing federal budget debate. In any event, labor costs would be translated into the Committee would need to remain higher prices. Increases in labor ex- alert to a broader range of developments penses had been held down by markedly that might warrant a policy change at reduced advances in the costs of bene- some point. In this connection, several fits, notably medical benefits. The members expressed the opinion that economies from the latter source might policy might have to be eased eventuwell lessen over coming quarters as the ally in light of the downside risks that most easily implemented reductions in they saw in the economy and a current the costs of providing medical care were policy stance that they viewed as achieved. Moreover, the rise in worker slightly restrictive. However, the current compensation had been unusually performance of the economy suggested restrained in recent years in relation to that the timing of an easing action was the strong demand for workers, evi- not an immediate concern. Other memdently reflecting the effects of worker bers who preferred an unchanged policy concerns about job security in a period placed more emphasis on current foreof business restructurings and down- casts of little or no progress in reducsizings, but continued strength in the ing inflation from recent levels. They demand for labor might be expected thought it would be premature to ease to induce more rapid increases in labor policy without greater assurance that compensation over time. Some mem- inflation had been contained in the curbers commented, however, that the rent cyclical expansion and that prosunderlying factors affecting employment pects for significant further progress costs were not likely to change greatly toward the long-run objective of price over the forecast period. In addition, the level stability had improved. Indeed, prospect that intense competitive pres- the direction of the next policy move sures would persist in many markets was not clear in the view of some memunder projected economic conditions bers, and they believed that any eassuggested that business firms would ing should await a firm indication that continue to find it very difficult to pass the outlook for economic activity was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of the FOMC Meetings, September 177 becoming less favorable or that infla- The information reviewed at this meeting tion was decreasing more rapidly than suggests that economic activity is expanding at a moderate rate in the current quarter. expected. Nonfarm payroll employment increased With regard to possible adjustments considerably in August after essentially no to policy during the intermeeting period, growth in July; the civilian unemployment the members all endorsed a proposal to rate edged down to 5.6 percent in August. retain an intermeeting instruction in the Industrial production posted a large increase in August to a level moderately above the directive that did not incorporate any average of the second quarter. Total nominal bias concerning the direction of possible retail sales rose slightly on balance over July intermeeting policy changes. At this and August after registering appreciable juncture, there was no specific reason to gains in the prior two months. Housing starts anticipate developments that would call were up a little in August after increasing for an adjustment to policy during the sharply in July. Orders for non-defense capital goods have softened but still point to weeks ahead. While a change in policy substantial expansion of spending on busicertainly could not be ruled out, the ness equipment over coming months; nonreasons for the change likely would residential construction has been strong of involve sensitive issues that would war- late. The nominal deficit on U.S. trade in rant Committee consultation regardless goods and services widened slightly in July of the intermeeting instruction. from its average rate in the second quarter. After increasing at elevated rates in the early At the conclusion of the Committee's part of the year, consumer and producer discussion, all the members indicated a prices have risen more slowly in recent preference for a directive that called for months. maintaining the existing degree of pres- Market interest rates have fallen somesure on reserve positions and that did what since the Committee meeting on not include a presumption about the August 22. In foreign exchange markets, the trade-weighted value of the dollar in terms likely direction of any adjustments to of the other G-10 currencies has declined policy during the intermeeting period. over the intermeeting period, with most of Accordingly, in the context of the the decline occurring over the past several Committee's long-run objectives for days. price stability and sustainable eco- M2 and M3 continued to register sizable nomic growth, and giving careful con- increases in August but growth of those aggregates appears to have moderated somesideration to economic, financial, and what in September. For the year through monetary developments, the Commit- August, M2 expanded at a rate somewhat tee decided that slightly greater or below the upper end of its range for 1995 slightly lesser reserve restraint would and M3 grew at a rate appreciably above its be acceptable during the intermeeting range. Total domestic nonfinancial debt has period. The reserve conditions contem- grown at a rate around the midpoint of its monitoring range in recent months. plated at this meeting were expected The Federal Open Market Committee to be consistent with growth in M2 and seeks monetary and financial conditions that M3 over the balance of the year at a will foster price stability and promote suspace near that experienced in recent tainable growth in output. In furtherance of months. these objectives, the Committee at its meet- The Federal Reserve Bank of New ing in July reaffirmed the range it had established on January 31-February 1 for growth York was authorized and directed, until of M2 of 1 to 5 percent, measured from the instructed otherwise by the Committee, fourth quarter of 1994 to the fourth quarter to execute transactions in the System of 1995. The Committee also retained the Account in accordance with the follow- monitoring range of 3 to 7 percent for the ing domestic policy directive: year that it had set for growth of total domes- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 82nd Annual Report, 1995 tic nonfinancial debt. The Committee raised ment Act of 1946 and the Congressional the 1995 range for M3 to 2 to 6 percent as a Budget Act of 1974. The Federal technical adjustment to take account of Reserve had not yet been asked its views changing intermediation patterns. For 1996, of the bill, but testimony was likely at the Committee established on a tentative basis the same ranges as in 1995 for growth some point and a preliminary discussion of the monetary aggregates and debt, mea- would help to identify important issues. sured from the fourth quarter of 1995 to the The members had not had time to fourth quarter of 1996. The behavior of the review the bill in detail or to consider monetary aggregates will continue to be fully all its implications. Nonetheless, evaluated in the light of progress toward their initial reaction was favorable in price level stability, movements in their velocities, and developments in the economy regard to the overall thrust of the bill's and financial markets. monetary policy provisions. These In the implementation of policy for the would make clear that price stability immediate future, the Committee seeks to was the primary long-run objective of maintain the existing degree of pressure on monetary policy and would restructure reserve positions. In the context of the Comthe monetary policy reporting requiremittee's long-run objectives for price stability and sustainable economic growth, and ments to permit the Congress to carry giving careful consideration to economic, out its oversight responsibilities more financial, and monetary developments, effectively. Many members felt that in slightly greater reserve restraint or slightly the context of seeking and maintaining lesser reserve restraint would be acceptable price stability, monetary policy should in the intermeeting period. The contemplated have the flexibility to react to short-run reserve conditions are expected to be consistent with growth in M2 and M3 over the fluctuations in output and employment, balance of the year near the pace of recent and they believed the bill would be months. improved if its intent in this regard were clarified. A few members expressed Votes for this action: Messrs. Greenspan, strong reservations about the part of the McDonough, Blinder, Hoenig, Kelley, bill that would delete the employment Lindsey, and Melzer, Ms. Minehan, Mr. Moskow, and Mses. Phillips and Yellen. objectives set forth in the Employment Votes against this action: None. Act of 1946. It was agreed that the next meeting of the Committee would be held on Discussion of Proposed Legislation Wednesday, November 15, 1995. At this meeting, the Committee dis- The meeting adjourned at 1:20 p.m. cussed a bill, titled the "Economic Growth and Price Stability Act of Donald L. Kohn 1995," that recently had been introduced Secretary in the U.S. Senate. The bill would make price stability the primary long-run policy goal of the Federal Reserve and Meeting Held on require the Federal Reserve to establish November 15, 1995 a numerical definition of price stability and to implement a policy that would A meeting of the Federal Open Market effectively promote such stability over Committee was held in the offices of the time. It would repeal the Full Employ- Board of Governors of the Federal ment and Balanced Growth Act of 1978 Reserve System, in Washington, D.C., (the "Humphrey-Hawkins Act") and on Wednesday, November 15, 1995, at certain related provisions in the Employ- 9:00 a.m. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 179 Present: Mr. Ramm,6 Section Chief, Division of Mr. Greenspan, Chairman Research and Statistics, Board of Mr. McDonough, Vice Chairman Governors Mr. Blinder Ms. Low, Open Market Secretariat Mr. Hoenig Assistant, Division of Monetary Mr. Kelley Affairs, Board of Governors Mr. Lindsey Mr. Melzer Messrs. Beebe, Goodfriend, Lang, Ms. Minehan Rolnick, and Rosenblum, Senior Mr. Moskow Vice Presidents, Federal Reserve Ms. Phillips Banks of San Francisco, Ms. Yellen Richmond, Philadelphia, Minneapolis, and Dallas Messrs. Boehne, Jordan, McTeer, and respectively Stern, Alternate Members of the Federal Open Market Committee Messrs. Gavin and Kopcke and Mses. Krieger and Rosenbaum, Messrs. Broaddus, Forrestal, and Parry, Vice Presidents, Federal Reserve Presidents of the Federal Reserve Banks of St. Louis, Boston, Banks of Richmond, Atlanta, and New York, and Atlanta San Francisco respectively respectively Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Mr. Stevens, Consultant, Federal Mr. Coyne, Assistant Secretary Reserve Bank of Cleveland Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel By unanimous vote, the minutes of Mr. Baxter, Assistant General Counsel the meeting of the Federal Open Market Mr. Prell, Economist Committee held on September 26, 1995, Mr. Truman, Economist were approved. Messrs. Davis, Hunter, Lindsey, The Manager of the System Open Mishkin, Promisel, Siegman, Market Account reported on recent Slifman, and Stockton, Associate developments in foreign exchange mar- Economists kets and on System foreign currency Mr. Fisher, Manager, System Open transactions during the period Septem- Market Account ber 26, 1995, through November 14, 1995. By unanimous vote, the Commit- Mr. Winn, Assistant to the Board, tee ratified these transactions. Office of Board Members, Board of Governors The Manager also reported on devel- Mr. Ettin, Deputy Director, Division of opments in domestic financial markets Research and Statistics, Board of and on System open market transactions Governors in government securities and federal Mr. Madigan, Associate Director, agency obligations during the period Division of Monetary Affairs, September 26, 1995, through Novem- Board of Governors Mr. Simpson, Associate Director, ber 14, 1995. By unanimous vote, the Division of Research and Committee ratified these transactions. Statistics, Board of Governors By unanimous vote, the Committee Mr. Reinhart,6 Assistant Director, authorized the renewal for an additional Division of Monetary Affairs, one-year period of the System's recipro- Board of Governors cal currency ("swap") arrangements 6. Did not attend portion of meeting covering with foreign central banks and the Bank the monetary policy discussion. for International Settlements that were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 82nd Annual Report, 1995 due to mature on various dates in The information available at the time December 1995. The renewal encom- of the meeting was mixed, but on balpassed all the System's swap arrange- ance it suggested a more moderate rate ments except that with the Bank of of expansion of economic activity after Mexico, which is scheduled to mature a strong gain during the summer. Conon January 31, 1996, and will be consid- sumer spending had turned sluggish ered at a later meeting. The amounts and recently; but with order backlogs still maturity dates of the arrangements large, business spending for durable approved for renewal are shown in the equipment was continuing at a robust if table that follows: somewhat less rapid rate, and the sizable rise in housing starts in the third quarter presaged higher residential construction outlays. Appreciable increases in em- Amount of arrange- ployment and hours worked tended to ment Term Maturity confirm that the economy had continued Foreign bank (millions (months) date of to expand at a solid pace, although dollars manufacturing activity had weakened a equivalent) little. Consumer and producer prices had Austrian National risen more slowly on average in recent Bank 250 12 12/04/95 Bank of England 3,000 12/04/95 months after having increased at ele- Bank of Japan 5,000 12/04/95 vated rates in the early part of the year, Bank of Norway 250 12/04/95 Bank of Sweden 300 12/04/95 and growth in labor costs had slowed Swiss National Bank . 4,000 12/04/95 further. Bank for International Nonfarm payroll employment, though Settlements: Swiss francs 600 12/04/95 held down somewhat by the onset of a Other authorized European labor strike in the aircraft industry, currencies 1,250 12/04/95 increased in October at the average National Bank of monthly pace of the third quarter; in Belgium 1,000 12/18/95 addition, aggregate hours worked by Bank of Canada 2,000 12/28/95 National Bank of private production workers rose appre- Denmark 250 12/28/95 Bank of France 2,000 12/28/95 ciably further. Construction payrolls German Federal recorded another sizable advance. The Bank 6,000 12/28/95 Bank of Italy 3,000 12/28/95 rate of job growth in the services indus- Netherlands Bank 500 12/28/95 try slowed a little further, reflecting a decline in employment in personnel supply services after two months of strong The Committee then turned to a dis- advances. Manufacturing employment cussion of the economic and financial declined again. The civilian unemployoutlook and the implementation of ment rate edged down in October to monetary policy over the intermeeting 5.5 percent. period ahead. A summary of the eco- Industrial production fell somewhat nomic and financial information avail- in October after having risen appreciaable at the time of the meeting and of bly in the third quarter; most of the loss the Committee's discussion is provided reflected the strike in the aircraft indusbelow, followed by the domestic policy try, but motor vehicle production and directive that was approved by the Com- mining output also recorded substantial mittee and issued to the Federal Reserve declines. In contrast, production of Bank of New York. information processing equipment con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 181 tinued to rise at a rapid pace. Total utili- down in August and September after zation of industrial capacity contracted sizable buildups in earlier months; with in October, with declines widespread sales weak, the aggregate inventoryacross industries. sales ratio for the sector edged up in the Total nominal retail sales, which had third quarter and was at the upper end of expanded relatively briskly over the sec- its range for recent years. Retail invenond and third quarters, fell in October. tories expanded significantly in August As part of a pattern of widespread weak- (latest data available), but the stockness in October, purchases at furniture building was generally in line with sales and appliance stores were down appre- and the ratio of inventories to sales ciably after large gains in earlier remained near the middle of its range in months, and sales at general merchan- recent years. dise and apparel outlets reversed most The nominal deficit on U.S. trade in of their sizable September increases. goods and services narrowed markedly Housing demand and construction activ- in August; for July and August comity firmed in the third quarter: Sales of bined, the deficit was significantly both new and existing homes posted smaller than its average rate in the solid advances, and single-family hous- second quarter. The value of exports ing starts rose considerably, though mul- declined over the two-month period, tifamily starts remained sluggish. with increases in exports of computers Business investment in both equip- and agricultural products more than offment and structures expanded less rap- set by decreases in exports of aircraft, idly in the third quarter. Stepped-up gold, and service receipts. Imports fell shipments of nondefense capital goods more than exports; with the notable in August and September more than exception of computers and semiconoffset a sharp drop in shipments in July, ductors, declines were recorded in most but the quarterly average gain was sig- major import categories. Available data nificantly smaller than the increases indicated that economic expansion recorded in the previous two quarters. remained subdued in the major foreign Although orders for nondefense capital industrial countries. Growth continued goods also rose more slowly in the third to slow in the European economies other quarter, the still-sizable order backlogs than Italy, and the Japanese economy pointed to substantial expansion of showed little evidence of a sustained spending on business equipment in the recovery. near term. Nonresidential construction Consumer prices rose at a slightly increased appreciably further in the third faster rate in October; with a smaller quarter, reflecting a surge in office and increase in food prices offsetting higher institutional building activity. energy prices, the index for items other Available data suggested a reduction than food and energy also picked up a in business inventory accumulation in little. For the four months ending in August and September. In manufactur- October, prices for nonfood, non-energy ing, the pace of stockbuilding slowed items advanced at a rate well below that in the third quarter from the brisk of earlier in the year. Producer prices of rate of the first half of the year, leav- finished goods edged down in October, ing the factory stock-shipments ratio reflecting a further decline in the prices unchanged in the third quarter and a of finished energy goods. Excluding little above historic lows. In the whole- food and energy, producer prices were sale sector, inventories were drawn unchanged in October and increased at a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 82nd Annual Report, 1995 slower pace in the third quarter than in achieved over a period of years. The the first half of the year. Growth in total lower longer-term interest rates, coupled nominal hourly compensation of private with continuing reports of strong corpoindustry workers slowed in the third rate earnings, helped lift major indexes quarter and, on a year-over-year basis, of equity prices to new record levels continued to trend down; the decrease in during the period. In foreign exchange compensation growth over the past year markets, the trade-weighted value of the spanned most major occupations and dollar in terms of the other G-10 currenindustries. cies declined slightly over the intermeet- At its meeting on September 26, ing period. 1995, the Committee adopted a directive Expansion of the broad monetary that called for maintaining the existing aggregates weakened in October. M2 degree of pressure on reserve positions was unchanged in October after having and that did not include a presumption grown relatively rapidly in the third about the likely direction of any adjust- quarter and despite the persistence of ments to policy during the intermeeting low opportunity costs associated with period. The directive stated that in the holding M2 assets. For the year through context of the Committee's long-run October, M2 expanded at a rate in the objectives for price stability and sustain- upper half of the Committee's range for able economic growth, and giving care- this aggregate in 1995. Growth of M3 ful consideration to economic, financial, apparently was held down somewhat by and monetary developments, slightly the reduced need for additional bank greater reserve restraint or slightly lesser funding during a time of sluggish loan reserve restraint would be acceptable demand; for the year to date, M3 grew during the intermeeting period. The at a rate a little above its range. Total reserve conditions associated with this domestic nonfinancial debt had risen directive were expected to be consistent more slowly in recent months, reflecting with growth of M2 and M3 over the reduced expansion of both private and balance of the year at a pace near that federal borrowing. Nonetheless, for the experienced in recent months. year to date, this measure of debt Open market operations were directed remained around the midpoint of its toward maintaining the existing degree monitoring range. of pressure on reserve positions through- The staff forecast prepared for this out the intermeeting period. The federal meeting suggested that the growth of funds rate averaged close to 5% percent, economic activity would slow from the apart from a temporary rise around the strong third-quarter pace to a rate more end of the third quarter. Other short- in line with the increase in the econoterm market rates also changed little on my's potential. The forecast assumed balance; market participants continued that the favorable interest rate and to anticipate an easing of monetary wealth effects of the extended rally in policy at some point but apparently the debt and equity markets would proviewed the chances of near-term easing vide support for a moderate advance as small. Longer-term interest rates in final sales. Consumer spending was declined further over the intermeeting expected to expand at a rate generally in period, perhaps in response to a growing line with the growth of incomes; the conviction that inflation pressures would favorable effects of higher prices on remain subdued and that substantial financial assets held by households reductions in fiscal deficits would be would be offset to some extent by the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 183 difficulties of increasing numbers of country, inflation had been more subhouseholds in servicing their growing dued than many had expected over the debts. The greater affordability of hous- past several months. A number of meming stemming from the earlier decline bers commented that they saw a basis in in mortgage rates was projected to this development for mild optimism help sustain homebuilding activity at a about the outlook for inflation, but othrelatively high level. In anticipation of ers expressed concern that, in the conreduced growth in sales and profits, text of current forecasts for economic business investment in new equipment activity and relatively high levels of and structures was projected to slow resource use, progress toward lower appreciably from the very rapid pace of inflation was unlikely over the projecthe past few years. Strong export expan- tion period and indeed there was a risk sion would be associated with the of some modest deterioration in price improving outlook for the economies of performance. major trading partners. Although sub- In the course of the Committee's disstantial uncertainty still surrounded the cussion, members reported on uneven fiscal outlook, the forecast continued to business conditions in different parts of incorporate a considerable degree of the country and among industries. On fiscal restraint. In the staff's judgment, balance, modest to moderate growth wage and price inflation likely would appeared to characterize most regions, not deviate significantly from recent with overall levels of activity ranging levels. from relatively robust in some regions In the Committee's discussion, mem- to comparatively depressed in others. bers commented that recent statistical The mixed conditions were especially and anecdotal information pointed on notable in manufacturing where numerbalance to an appreciable slowing in the ous producers faced lagging demands economic expansion, which had dis- while others, particularly in high-tech played unexpected strength during the industries, found it difficult to satisfy summer months. There was some mix of strong demands for their products. More views among the members concerning generally, the industrial sector of the how far the slowing might proceed, economy had tended to stagnate for though they generally viewed moderate some time, including a slight decline growth as the most likely course for in manufacturing activity reported for the economy. A number of members October, but recent improvement in believed that growth around potential orders for steel was cited as a favorable was a probable outcome, with business if not decisive omen in the outlook for activity sustained in part by the favor- industrial production. In other sectors of able developments this year in the bond the economy, members observed that and stock markets. Other members tourism displayed considerable strength expressed concern about some signs of in many areas, while cattle operations further ebbing in the strength of final and energy production were adversely demands, and they envisaged the pos- affected by high production costs or low sible need for a policy adjustment at prices. some point to sustain continued moder- In their review of developments in ate growth. With regard to inflation, key demand sectors of the economy, members noted that despite generally members observed that consumer spendhigh levels of resource use, including ing appeared to be on a firm growth tight labor markets in many parts of the trend, though weakness in overall sales Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 82nd Annual Report, 1995 of motor vehicles in recent months and a impetus to the expansion over the next decline in total retail sales in October several quarters. Favorable factors in the had introduced a cautionary note. It was outlook for business capital spending suggested that the performance of retail included a desire to upgrade techsales during the holiday season would nological capabilities for competitive tend to set the tone for the longer-term reasons, strong business earnings and trend in such sales, and in this respect cash flows, and an ample availability of available data and anecdotal reports cov- financing on relatively liberal terms. ering the first part of November were Declining office vacancy rates in a numsomewhat promising. More generally, ber of areas would help to support office further growth in consumer spending, construction, and several members also though probably at a somewhat slower commented on the strength in commerpace than over the past year, appeared cial and other nonresidential building likely. Such growth would be supported activity in various parts of the country. by moderate expansion in incomes and Ongoing efforts by many business by the favorable effects on household firms to bring inventories into better wealth and confidence of the substantial alignment with sales had resulted in improvement in the value of financial declining inventory investment since assets this year and the ready availabil- earlier in the year. Some further invenity of financing on relatively attractive tory adjustments, notably in stocks of terms. Consumer confidence currently motor vehicles, were expected over seemed to be at a fairly high level, albeit coming months, though not at a pace not uniformly so across the country, and that would have a marked retarding at least for the quarters immediately effect on economic activity. Over much ahead, anticipated strength in home- of 1996, inventory investment was probuilding should induce spending for jected to be a more neutral factor in the many household durables. On the nega- economy, with accumulation proceeding tive side, some members emphasized at a pace in line with growth in final that the growth in consumer debt was sales, but the risks of unexpected devellikely to exert an increasingly inhibiting opments in this sector of the economy effect on consumer spending. Moreover, were always substantial. the satisfaction of earlier pent-up de- The outlook for fiscal policy remained mands might well limit sales of many obscured by the uncertain outcome of consumer durables, notably motor the current debate between the Congress vehicles, in coming quarters. In one and the Administration. While substanview, the projected growth in personal tial fiscal restraint aimed at eventually incomes and the increases that had balancing the budget appeared to be the occurred this year in the value of house- likely result, the timing of the implehold holdings of financial assets would mentation of various tax and expendiprovide relatively little stimulus to con- ture initiatives and the resulting extent sumer spending because the distribution of the fiscal restraint over the forecast of such gains was heavily tilted toward period could not be anticipated with any consumers in higher income or older degree of precision. For the nearer term, age groups. the ongoing shutdown of much of the Further sizable growth in business federal government presented a downfixed investment, but at a pace well side risk to the expansion whose effects below that experienced in recent years, would depend on the presently uncertain was expected to provide appreciable duration of the shutdown and the poten- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 1 85 tial unsettlement in financial markets economic expansion, many viewed as that might develop at some point. The more likely the prospect of little or no members generally believed, however, progress toward price stability over that in light of the underlying strength coming quarters, and some expressed of the economy, the retarding effects of concern about the potential for an likely federal budget developments upward drift in the rate of inflation. An would not be sufficient in themselves to underlying factor in the relatively favorarrest the expansion over the forecast able climate for inflation was the continperiod, at least if the federal government ued limited rise in the costs of worker shutdown were of relatively short dura- benefits. In the view of some members, tion and a federal debt default were however, benefit costs were likely to be averted. less well contained as time went on and The nation's foreign trade deficit had further major gains in curbing such costs worsened substantially during the past became more difficult to achieve. Moreseveral years, but current forecasts did over, worker willingness to accept relanot point to further deterioration over tively limited increases in wages and the projection period. An anticipated other compensation might well begin to firming in the economies of major U.S. erode as concerns about job security trading partners was expected to bolster tended to diminish after an extended exports. Several members questioned, period of relatively low unemployment. however, the extent to which forecasts On balance, recent experience had of strengthening economic activity were raised questions about the relationship likely to materialize in a number of between levels of resource use and inflathese countries, and they suggested that tion that warranted careful monitoring. the foreign sector might well remain a In the Committee's discussion of polsomewhat constraining factor in the per- icy for the intermeeting period ahead, all formance of the domestic economy. but one member favored or could accept Members welcomed the generally an unchanged policy stance. This policy favorable price and cost developments position took account of current indicaof recent months and the related indi- tions of a generally acceptable rate of cations that currently high levels of economic growth and the absence of resource use did not appear to be associ- any clear signs regarding the future ated with rising inflationary pressures. strength of the expansion in relation to Many emphasized the persistence of the economy's potential or the future subdued increases in labor costs, and a course of inflation. Several commented number provided supporting anecdotal that current monetary policy might be indications of relatively small advances viewed as somewhat restrictive, though in labor compensation in many parts of the degree of restraint was difficult to the country despite tight labor markets. calibrate and it did not appear as yet to The anecdotal reports also continued to be inhibiting declines in intermediatesuggest that strong competition was and long-term interest rates, increases holding down price inflation and that in stock prices, or the availability of producers were benefiting from soft financing from lending institutions. prices of industrial materials. While a Members expressed somewhat differnumber of members believed that these ing views regarding the stance of monedevelopments might augur a modest tary policy that was likely to prove condecline in inflation over the year ahead, sistent with the Committee's objectives given current forecasts of moderate over time. In the view of some, private Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 82nd Annual Report, 1995 spending was not likely to have suffi- particular fiscal policy agreement. Fiscal cient momentum to overcome the effects policy and any associated market reacof increased fiscal restraint if the current tions would be among the many factors stance of monetary policy were main- that would have to be taken into account tained. In the circumstances, an easing in the formulation of monetary policy. at some point would be needed to foster In the Committee's discussion of possustained economic growth at an accept- sible intermeeting adjustments to moneable pace and would be consistent with tary policy, a majority of the members progress toward the System's price expressed a preference for retaining a stability objective. For most of these symmetric directive. In their view, the members, however, the stronger-than- potential need to adjust policy during expected performance of the economy the relatively short intermeeting period in the third quarter had reduced the was remote, and some of these members urgency of such a policy move and had also believed that the direction of the created enough uncertainties to justify a next adjustment to policy was uncertain. careful appraisal of unfolding develop- A few also noted that the adoption of a ments before a decision was made to biased intermeeting instruction at this ease policy. In the view of one member, point might send an unintended message the probability of a shortfall from an regarding the prevailing view within the acceptable rate of economic expansion Committee concerning the risks to the was sufficiently high to require an expansion. The remaining members said immediate easing of policy. Other mem- that they preferred a directive that was bers believed that an unchanged policy tilted toward an easing policy action. was desirable under current conditions Such an instruction in the directive and that the direction and timing of the would be consistent with what they next policy move were more open to viewed as the most likely policy course question. Not only were recent data giv- over coming months. They agreed, howing an uncertain picture of the under- ever, that the current uncertainties surlying strength of aggregate demand, but rounding the economic outlook were not current forecasts generally did not point likely to be resolved during the weeks to progress toward the System's long- immediately ahead, and since no policy run goal of price stability. In this view, action was likely to be required in this therefore, the current stance of monetary period they could accept a symmetric policy, even if slightly restrictive, was directive. likely to be consistent with satisfactory At the conclusion of the Committee's economic growth over time, and it discussion, all but one of the members would provide better assurance of con- indicated that they could vote for a solidating gains against inflation and directive that called for maintaining the fostering some further moderation in existing degree of pressure on reserve price increases over coming years. With positions and that did not include a preregard to potential fiscal policy develop- sumption about the likely direction of ments, although an especially broad any adjustments to policy during the range of outcomes seemed possible, the intermeeting period. Accordingly, in the members agreed that the Committee context of the Committee's long-run could not freeze its policy options while objectives for price stability and sustainit awaited the outcome of a prolonged able economic growth, and giving carefederal budget debate nor could it com- ful consideration to economic, financial, mit itself to a specific response to a and monetary developments, the Com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 187 mittee decided that slightly greater or of M2 of 1 to 5 percent, measured from the slightly lesser reserve restraint would fourth quarter of 1994 to the fourth quarter of 1995. The Committee also retained the be acceptable during the intermeeting monitoring range of 3 to 7 percent for the period. The reserve conditions contemyear that it had set for growth of total domesplated at this meeting were expected to tic nonfinancial debt. The Committee raised be consistent with moderate growth in the 1995 range for M3 to 2 to 6 percent as a M2 and M3 over coming months. technical adjustment to take account of changing intermediation patterns. For 1996, The information reviewed at this meeting the Committee established on a tentative suggests a moderation in the expansion of basis the same ranges as in 1995 for growth economic activity after a strong gain in the of the monetary aggregates and debt, meathird quarter. Nonfarm payroll employment sured from the fourth quarter of 1995 to the increased further in October and the civilian fourth quarter of 1996. The behavior of the unemployment rate edged down to 5.5 per- monetary aggregates will continue to be cent. Industrial production fell somewhat in evaluated in the light of progress toward October after a moderate rise in the third price level stability, movements in their quarter. Total nominal retail sales were little velocities, and developments in the economy changed on balance over September and and financial markets. October. Single-family housing starts were In the implementation of policy for the up considerably in the third quarter. Orders immediate future, the Committee seeks to for nondefense capital goods point to sub- maintain the existing degree of pressure on stantial expansion of spending on business reserve positions. In the context of the Comequipment in the near term; nonresidential mittee's long-run objectives for price staconstruction has risen appreciably further. bility and sustainable economic growth, and The nominal deficit on U.S. trade in goods giving careful consideration to economic, and services narrowed over July and August financial, and monetary developments, from its average rate in the second quarter. slightly greater reserve restraint or slightly After increasing at elevated rates in the early lesser reserve restraint would be acceptable part of the year, consumer and producer in the intermeeting period. The contemplated prices have risen more slowly on average in reserve conditions are expected to be consisrecent months. tent with moderate growth in M2 and M3 Short-term market interest rates have over coming months. changed little on balance since the Committee meeting on September 26 while long- Votes for this action: Messrs. Greenspan, term rates have fallen somewhat. In foreign McDonough, Blinder, Hoenig, Kelley, and exchange markets, the trade-weighted value Melzer, Ms. Minehan, Mr. Moskow, and of the dollar in terms of the other G-10 Mses. Phillips and Yellen. Vote against currencies has declined slightly over the this action: Mr. Lindsey. intermeeting period. In October, M2 was unchanged and M3 growth moderated. For the year through Mr. Lindsey dissented because he October, M2 expanded at a rate in the upper believed that monetary policy should be half of its range for 1995 and M3 grew at a eased. The evidence suggested to him rate a little above its range. Growth in total that in the absence of an easing move domestic nonfinancial debt has slowed somethe underlying rate of nominal GDP what in recent months but for the year to date remains around the midpoint of its growth was likely to be lower than monitoring range. needed to maintain real GDP at or near The Federal Open Market Committee its potential. The intermediate forecast seeks monetary and financial conditions that was subject to a number of significant will foster price stability and promote susrisks: household balance sheets seemed tainable growth in output. In furtherance of unlikely to sustain the current rate of these objectives, the Committee at its meeting in July reaffirmed the range it had estab- durables expenditure for any extended lished on January 31-February 1 for growth period; government expenditures were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 82nd Annual Report, 1995 certain to be cut substantially; and with Messrs. Boehne, Jordan, McTeer, and fiscal contractions underway in Europe Stern, Alternate Members of the Federal Open Market Committee and Canada and severe financial stresses present in Japan and Mexico, he did not Messrs. Broaddus and Parry, Presidents see much likelihood of a substantial of the Federal Reserve Banks of expansion of exports. In keeping with Richmond and San Francisco his views, the financial markets were respectively signalling the likelihood that a weaker Mr. Guynn, President-elect, Federal pace of nominal GDP growth would Reserve Bank of Atlanta materialize. The yield curve was virtually flat, with government securities up Mr. Kohn, Secretary and Economist through relatively long maturities trad- Mr. Bernard, Deputy Secretary ing at yields below the current average Mr. Coyne, Assistant Secretary federal funds rate. Thus, markets would Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel be unlikely to find some easing inappro- Mr. Prell, Economist priate and over the intermediate horizon Mr. Truman, Economist would view the current level of shortterm rates as unsustainable. Ms. Browne and Messrs. Davis, It was agreed that the next meeting of Dewald, Lindsey, Mishkin, Promisel, Siegman, Slifman, and the Committee would be held on Tues- Stockton, Associate Economists day, December 19, 1995. The meeting adjourned at 1:35 p.m. Mr. Fisher, Manager, System Open Market Account Donald L. Kohn Secretary Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors Mr. Madigan, Associate Director, Division of Monetary Affairs, Meeting Held on Board of Governors December 19, 1995 Mr. Simpson, Associate Director, Division of Research and A meeting of the Federal Open Market Statistics, Board of Governors Committee was held in the offices of Mr. Ramm,7 Section Chief, Division of Research and Statistics, Board of the Board of Governors of the Federal Governors Reserve System, in Washington, D.C., Ms. Low, Open Market Secretariat on Tuesday, December 19, 1995, at Assistant, Division of Monetary 9:00 a.m. Affairs, Board of Governors Messrs. Beebe, Goodfriend, Lang, Present: Rosenblum, and Sniderman, Mr. Greenspan, Chairman Senior Vice Presidents, Federal Mr. McDonough, Vice Chairman Reserve Banks of San Francisco, Mr. Blinder Richmond, Philadelphia, Dallas, Mr. Hoenig and Cleveland respectively Mr. Kelley Ms. Rosenbaum, Vice President, Mr. Lindsey Federal Reserve Bank of Atlanta Mr. Melzer Ms. Minehan Mr. Moskow Ms. Phillips 7. Did not attend portion of meeting covering Ms. Yellen the monetary policy discussion. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December \ 89 Ms. Perelmuter, Assistant Vice February 1, 1995, would lapse on Jan- President, Federal Reserve Bank uary 31, 1996, in line with its original of New York terms. Mr. Weber, Senior Research Officer, The Committee then turned to a dis- Federal Reserve Bank of Minneapolis cussion of the economic and financial Mr. Evans, Senior Economist, outlook and the implementation of Federal Reserve Bank of Chicago monetary policy over the intermeeting period ahead. A summary of the eco- By unanimous vote, the minutes of nomic and financial information availthe meeting of the Federal Open Market able at the time of the meeting and of Committee held on November 15, 1995, the Committee's discussion is provided were approved. below, followed by the domestic policy The Report of Examination of the directive that was approved by the Com- System Open Market Account, con- mittee and issued to the Federal Reserve ducted by the Board's Division of Bank of New York. Reserve Bank Operations and Payment The information available at this Systems as of the close of business on meeting suggested that the expansion of September 29, 1995, was accepted. economic activity had slowed substan- The Manager of the System Open tially after a strong gain in such activity Market Account reported on develop- during the third quarter. Data on emments in foreign exchange markets dur- ployment and aggregate hours worked ing the period November 15, 1995, since late summer were consistent with through December 18, 1995. There were moderate further increases in overall no System open market transactions in economic activity. Industrial production foreign currencies during this period, had changed little on balance after and thus no vote was required of the a sizable rise in the third quarter. On Committee. the spending side, robust advances in The Manager also reported on devel- business fixed investment continued to opments in domestic financial markets provide considerable impetus to the and on System open market transactions economy. The available information on in government securities and federal consumer expenditures pointed to someagency obligations during the period what reduced gains in recent months, November 15, 1995, through Decem- and indicators of housing demand sugber 18, 1995. By unanimous vote, the gested on balance that activity in hous- Committee ratified these transactions. ing markets had tended to stabilize after By unanimous vote, the Committee several months of considerable strengthauthorized the renewal until Decem- ening. Consumer prices had risen relaber 13, 1996, of the System's regular tively slowly in recent months, while reciprocal currency ("swap") arrange- increases in labor compensation had ment of $3 billion with the Bank of remained comparatively subdued. Mexico and the System's participation Nonfarm payroll employment continin the North American Framework ued to grow at a pace roughly in line Agreement with the monetary authori- with the expansion of the labor force in ties of Canada and Mexico. Both were recent months, with gains concentrated due to terminate on January 31, 1996. in the private service-producing sectors. The additional temporary $3 billion The published information indicated swap arrangement with the Bank of some further declines in factory and Mexico, approved by the Committee on government jobs in October and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 82nd Annual Report, 1995 November. Although aggregate hours commercial structures posting sizable of private production workers fell in increases recently. Overall drilling and November, they remained appreciably mining activity also had continued to above their average level in the third move higher, led by increased exploraquarter. The unemployment rate edged tion for natural gas. up to 5.6 percent in November, equaling Total nominal retail sales rose considits average for the third quarter. erably in November, more than offset- Industrial production was little ting a drop in October; over the two changed on balance over October and months, retail sales advanced at a slower November after a sizable increase in the pace than the average rate in the second third quarter. A decline in October was and third quarters. Much of the Novemlargely accounted for by a strike at a ber increase reflected strong gains in major aircraft manufacturer; that strike, sales of consumer durables, including very recently settled, had also exerted a improved sales of motor vehicles. In slightly depressing effect on production the nondurables sector, a sizable rise in November. Production of motor vehi- in November about reversed a decline in cles and parts also fell, on net, in Octo- October. Recent surveys of consumer ber and November. Further growth sentiment pointed to generally positive outside the aircraft and motor vehicle attitudes. industries was paced by continuing After having recorded robust strength in the production of business advances during the third quarter, most equipment. Outside manufacturing, the indicators of housing activity suggested output of utilities was boosted in little further change more recently. November by demand associated with However, considerable strength in mortunusually cold weather. gage applications associated with lower Business fixed investment was con- mortgage rates, together with survey tinuing to grow at a rapid pace, with indications of an upturn in house-buying much of the strength stemming from intentions, pointed to strengthening the persisting and vigorous expansion housing construction over coming in spending for office and computing months. Housing starts were down in equipment. However, the recent gains in October, the latest month for which total business investment had moderated these data were available, after a large from the extraordinary pace evident in increase in the third quarter. 1994 and early 1995, and they also were Data for October indicated a sizable less widespread among major categories accumulation of business inventories. In of business equipment than they had manufacturing, stocks grew at a rate been earlier. New orders for nondefense only moderately below the brisk pace in capital goods other than computers and the third quarter, and the rise continued aircraft had leveled out, although ship- to be concentrated in the capital goods ments were being maintained at high industries. The aggregate ratio of invenlevels by still-large backlogs of unfilled tories to sales in manufacturing was orders. Producers of aircraft had re- somewhat above the lows in late 1994 ceived very sizable new orders recently, and early 1995. In the wholesale sector, but shipments of completed aircraft had a buildup in stocks of capital equipment been held back in recent months by the accounted for the bulk of the accumulastrike at a major firm. Outlays for non- tion in October, and the inventory-toresidential construction were continuing sales ratio in this sector remained on an to advance brisklv. with construction of uptrend. A sharp rise in retail inven- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 191 tones in October was led by a large and the component of this index excludincrease in stocks at auto dealers and at ing food and energy posted its largest general merchandise and apparel out- rise since January. At the same time, lets. The inventory-to-sales ratio for the prices of intermediate materials declined retail sector as a whole was at its high a bit further in November. According to for the year, but signs of overstocking, recent survey results, consumers now apart from motor vehicles, were limited. expected less inflation over the year After having strengthened apprecia- ahead and also over the next five to ten bly in the third quarter, federal govern- years. The available data on wages and ment purchases were now lagging and worker benefits continued on balance to exerting some retarding effect on overall display a relatively subdued trend of economic activity. The decline in fed- increases in labor compensation. eral purchases in part represented the At its meeting on November 15, transitory effects of government shut- 1995, the Committee adopted a directive downs and the restraining effects of that called for maintaining the existing spending cuts imposed by continuing degree of pressure on reserve positions resolutions and by curtailed appropria- and that did not include a presumption tions in bills that already had been about the likely direction of any adjustenacted into law. At the state and local ments to policy during the intermeeting government levels, however, available period. The directive stated that in the data pointed to continued, relatively context of the Committee's long-run strong growth in purchases. objectives for price stability and sustain- The nominal deficit on U.S. trade in able economic growth, and giving caregoods and services changed little in Sep- ful consideration to economic, financial, tember (latest data available). Measured and monetary developments, slightly on a quarterly average basis, however, greater reserve restraint or slightly lesser the deficit declined substantially in the reserve restraint would be acceptable third quarter, with the reduction about during the intermeeting period. The equally divided between a rise in the reserve conditions associated with this value of exports and a drop in the value directive were expected to be consistent of imports. Increases in exports were with moderate growth in M2 and M3 widespread among the major categories over coming months. of trade, while reductions in imports Open market operations were directed were concentrated in categories in which toward maintaining the existing degree there had been large gains in the second of pressure on reserve positions throughquarter. Available data pointed to sub- out the intermeeting period. The federal dued growth in most of the major for- funds rate averaged a bit above the eign industrial countries in the second expected rate of 53A percent over the half of 1995. period. The bunching of settlements of Consumer prices had risen more several Treasury issues that had resulted slowly on balance in recent months than from debt ceiling disruptions and the they had during the first half of the year. mid-December corporate tax date were In November, the total index for con- among the factors exerting pressure on sumer prices was unchanged, and con- the funds rate. Most other short-term sumer prices excluding food and energy interest rates fell slightly, and longerwere up only slightly. In contrast, pro- term interest rates extended earlier ducer prices of finished goods registered declines during the intermeeting period. a relatively large increase in November, Market expectations of some easing of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 82nd Annual Report, 1995 monetary policy appeared to be rein- The staff forecast prepared for this forced by market interpretations of the meeting suggested that the growth of incoming information as further evi- economic activity would slow substandence that overall demand would be tially from the very strong pace now restrained and that the risks of a pickup indicated for the third quarter. Although in inflationary pressures had diminished. this forecast did not differ significantly Over the intermeeting interval, major from that prepared for the November indexes of stock prices continued to meeting, less growth than expected earmove higher in concert with the rise in lier seemed likely in the current quarter. bond prices. Over the forecast horizon, however, the The sluggish performance of the economy was still projected to expand broad monetary aggregates since August at a pace that would keep activity close continued in November. Despite the per- to the economy's potential. The forecast sistence of low opportunity costs associ- anticipated that the expansion in conated with holding M2 assets, M2 growth sumer spending would slow a bit in was relatively modest in November after response to diminished gains in disposa slight contraction in October. M3 able income associated with less rapid growth slowed further in November, advances in spending in other sectors of partly as a result of a shift of funding by the economy. The rise that had occurred borrowers toward capital market instru- in the value of financial assets held by ments to take advantage of lower long- households would be a positive factor term market rates. Nonetheless, because helping to support consumer spending of robust expansion earlier in the year, but one that would be offset to a degree M2 remained in the upper half of its by the difficulties of an increasing num- 1995 range through November and M3 ber of households in servicing their expanded at a rate at the upper end of its growing debts. The greater affordability range. Growth of total domestic non- of housing stemming from the earlier financial debt had slowed somewhat in decline in mortgage rates was projected recent months, reflecting reduced expan- to help sustain homebuilding activity at sion of both private and federal borrow- a relatively high level. In the context of ing, and for 1995 to date, this debt mea- reduced growth in sales and profits, sure had grown at a rate around the business investment in new equipment midpoint of its monitoring range. and structures was projected to increase In foreign exchange markets, the more moderately after several years of trade-weighted value of the dollar in rapid advance. Although indications of terms of the other G-10 currencies rose excess inventories were limited, slower slightly further on balance over the growth in sales and ongoing efforts to intermeeting period. Declining interest reduce inventory costs were projected to rates in several major foreign industrial lead to smaller increases in stocks over countries, evidently induced by disap- the projection period. Exports were pointing economic growth in those expected to be bolstered to some extent countries, appeared to have a firming by the projected improvement in the effect on the dollar in relation to Euro- economies of major trading partners. pean currencies. The dollar changed Although a great deal of uncertainty still little against the Japanese yen over the surrounded the fiscal outlook, the foreperiod after a sharp advance earlier. The cast continued to incorporate an appre- Mexican peso appreciated a bit in rela- ciable degree of fiscal restraint. Given tion to the dollar over the oeriod. the nroiected outlook, rates of utilization Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 193 of labor and capital resources would In the Committee's discussion of reremain relatively high, and the under- gional developments, members reported lying trend of price inflation was seen as that anecdotal and other information unlikely to change significantly over the pertaining to regional activity suggested projection period. that the moderation in nationwide eco- In the Committee's discussion of cur- nomic growth was evident across most rent and prospective developments, of the nation, with the rate of expansion members noted that the information that ranging from slow to moderate in differhad become available since the Novem- ent areas of the country. Overall levels ber meeting tended to confirm earlier of business activity continued to vary indications that the economic expansion widely, from relatively weak in some had slowed appreciably from the brisk areas to comparatively robust in others. pace of the summer months. The mem- Conditions also were uneven across bers generally agreed that the most industries, particularly in manufacturlikely course for the economy remained ing, where flagging auto sales and some one of moderate growth. Expansion at further inventory accumulation conor near potential was seen as the most trasted sharply with brisk demand for a probable outcome, associated at least in range of producers durable goods, notapart with the favorable effects on busi- bly office and computing equipment, ness and consumer spending of lower and building products. Despite indicainterest rates, higher equity prices, and tions that job growth had been relatively an ample availability of credit. How- limited, labor markets remained tight ever, a number of members expressed in many parts of the country and there concern that the strength of final de- were more, albeit still limited, reports mands would not be sufficient to support of rising wage pressures; in some areas, growth near the economy's potential, however, labor market conditions absent a policy adjustment. One factor appeared to have eased somewhat that might retard growth was a higher recently. level of real short-term interest rates In their discussion of developments in owing to the favorable performance of key sectors of the economy, members inflation. Members noted that consumer commented that the data and the anecprice increases had remained relatively dotal information on consumer spending subdued and below expectations in had been mixed. For the holiday season, recent months, despite the generally reports indicated that retail sales had high levels of utilization of both labor been disappointing thus far, though sales and capital resources that had prevailed appeared to be holding up relatively well through much of the year. Several com- in some sections of the country and for mented that the effects of new technolo- higher-priced luxury items more genergies, gains in productivity, global com- ally. Consumers had remained very caupetitive pressures on businesses, and tious despite considerable promotional restraint in wage setting might imply sales activity, perhaps anticipating even that inflation would edge down further. more aggressive markdowns of prices as Others expressed concern that the pros- the shopping season neared its end. pects for further reductions in inflation Members noted that the reluctance of seemed quite limited in the context of consumers also might be reflecting a projected high levels of resource use, sense of continued job insecurity in including tight labor markets in many an environment of ongoing business parts of the country. restructuring and downsizing, higher Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 82nd Annual Report, 1995 debt service burdens and rising delin- lation more generally appeared to be quency rates, and the satisfaction of running somewhat ahead of sales. There pent-up demand for durable goods. were no indications that serious over- While these factors might be exerting an hangs were emerging, but there were inhibiting influence on consumers, the risks that efforts to hold down stocks members generally viewed moderate would damp production over the near growth in consumer spending as a rea- term. sonable expectation in the context of The outlook for fiscal policy continfurther projected expansion in dispos- ued to be clouded by the uncertainty able incomes. The increase in household surrounding the outcome of the debate wealth associated with the strong perfor- between the Congress and the Adminismance of the bond and stock markets tration. The members anticipated that might tend to boost consumer spending the result of the debate would be considrelative to disposable incomes, although erable fiscal restraint, but the timing of one member suggested that the highly tax and spending initiatives aimed at an concentrated nature of wealth holdings eventual balancing of the budget and the might limit any positive effect on aggre- extent of the fiscal contraction over time gate consumption. With regard to hous- could not be forecast with any precision. ing, members took note of the recent In the interim, much of the federal govdeclines in single-family housing starts ernment was closed, and while federal and sales after a strong third quarter. workers were expected to get paid even- They remarked, however, that some of tually, their spending and that of federal their contacts were anticipating that the contractors might be damped until the declines in mortgage interest rates over situation was resolved. The members recent months to their current relatively believed, however, that in light of the low levels would foster a wave of mort- plans being put forward, the fiscal drag gage refinancing and a pickup in hous- imposed by likely federal budget develing demand in the spring. opments would not be unusually large Business fixed investment was over the next few years. expected to grow at a pace appreciably In reviewing the outlook for inflation, below that observed in recent years but members referred to the generally favornonetheless to continue supplying con- able price and cost experience of recent siderable impetus to the expansion. months. Several pointed to subdued Strong profits and cash flows, along with increases in labor compensation and to the ample availability of financing on anecdotal indications that upward presattractive terms, were favorable factors sures on wages and benefits remained in the outlook; on the other hand, a scattered despite tightness in many labor weakening trend in final demand, nota- markets. In this environment, and with bly in consumer outlays, likely would the economy expected to expand at a have a negative effect on business capi- comparatively moderate pace over the tal spending. Several members reported forecast period, many members anticithat commercial and other nonresiden- pated that inflation would remain relatial construction activity remained brisk tively stable despite continuing high in various regions around the nation. levels of resource utilization, and some A number of members commented on believed that it might record a somebusiness inventory developments. Over- what improved performance. One arguall inventories of motor vehicles were ment advanced in support of a possibly on the high side, and inventory accumu- better performance was that the recent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 195 experience, which had been more favor- evident at current levels of resource utiable than expected given capacity lization and continuing business efforts utilization levels, was perhaps sugges- to expand capacity, suggested that there tive of the effects of rapid technological was little risk of a pickup in inflation. improvements on productivity, the Indeed, the favorable inflation experienhanced efficiencies from greater eco- ence over the last half year raised the nomic specialization around the world, possibility of continued modest price and the influence of heightened job inse- improvement. curity on wages and prices. Another was A number of members, though willthe possible effect on future wage ing to accept a slight easing, preferred demands of the lower inflation expecta- an unchanged policy stance. While tions that now prevailed. Although no inflation had slowed from the elevated member saw greater inflation as having pace observed in the early part of the a high probability, several did refer to year, there was little hard evidence to risks in that direction, including the pos- indicate that it would decline any further sibility of greater pressures on resources over the forecast horizon or that there stemming from faster than currently had been a significant increase in the anticipated economic growth. sustainable growth rate of the economy. In the Committee's discussion of pol- A few members also expressed concern icy for the intermeeting period ahead, about the possible repercussions in all the members either favored or could financial markets of an easing action accept a slight easing in the degree of that would follow an already strong rally pressure on reserve positions. One argu- in bond and stock prices. In the circumment cited in favor of some easing was stances, these members questioned that the policy stance, as indexed by the whether a somewhat easier policy stance prevailing real federal funds rate, was would prove consistent with the Combecoming somewhat restrictive as infla- mittee's objective of fostering further tion and inflationary expectations mod- progress toward price stability. Moreerated, leaving real short-term rates over, although the available evidence higher than anticipated. In addition, with on the economy's current performance markets expecting a reduction in the fed- remained mixed, the moderation in ecoeral funds rate in coming months, an nomic growth after the third-quarter unchanged policy was likely to lead to a surge did not seem at this time to signal backup in intermediate- and long-term a growing shortfall of the economy from rates. Although there was no sign that its potential. Instead, the economy was a cumulative deterioration in economic likely in this view to continue to grow performance was about to get under at a generally acceptable rate at or near way, the downside risks to the expan- capacity, and a few members saw some sion appeared to have increased and a potential for somewhat faster growth at modest easing would better position pol- a pace that over time could intensify icy to guard against the possibility that inflationary pressures. Accordingly, they over the longer term the expansion preferred to wait for further evidence on would begin to fall short of the econo- inflation trends and the performance of my 's potential, especially with fiscal the economy, but they indicated that policy likely to be at least moderately in light of the uncertainties that were restrictive. In any case, the recent slow- involved and the small amount of easing ing of the economic expansion, com- that was proposed they would not disbined with the wage and price restraint sent from the majority position. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 82nd Annual Report, 1995 With regard to possible adjustments in the third quarter. Nonfarm payroll employto policy during the intermeeting period, ment increased further in November, but the civilian unemployment rate edged up to all the members endorsed a proposal to 5.6 percent. Industrial production was little retain an intermeeting instruction in the changed on average over October and directive that did not incorporate any November after a moderate rise in the third presumption about the direction of a quarter. Total nominal retail sales rose somepossible intermeeting change. While what on balance over October and Novemsuch a change in policy could not be ber. Housing starts were down in October after a large increase in the third quarter. ruled out, the potential need for a further However, orders for nondefense capital intermeeting policy adjustment appeared goods point to substantial expansion of remote at this juncture. The risks to the spending on business equipment in the near outlook seemed generally in balance, term, and nonresidential construction has and the direction of the next policy risen appreciably further. Wage trends have move was not clear in the view of some been stable and consumer prices have risen relatively slowly on average in recent members. months. At the conclusion of the Committee's Most market interest rates have declined discussion, all the members indicated slightly since the Committee meeting on that they favored or could support a November 15. In foreign exchange markets, directive that called for some slight eas- the trade-weighted value of the dollar in ing in the degree of pressure on reserve terms of the other G-10 currencies has risen slightly on balance over the intermeeting conditions during the intermeeting period. period but that contained no presump- The substantial moderation in the growth tion about the likely direction of any of M2 and M3 since midsummer continued intermeeting policy change. Accord- in November; however, for the year through ingly, in the context of the Committee's November, M2 expanded at a rate in the long-run objectives for price stability upper half of its range for 1995 and M3 grew at a rate at the upper end of its range. Growth and sustainable economic growth, and in total domestic nonfinancial debt has giving careful consideration to ecoslowed somewhat in recent months but for nomic, financial, and monetary develop- the year to date remains around the midpoint ments, the Committee decided that of its monitoring range. slightly greater or slightly lesser mone- The Federal Open Market Committee tary restraint would be acceptable dur- seeks monetary and financial conditions that will foster price stability and promote susing the intermeeting period. A staff tainable growth in output. In furtherance of analysis indicated that the reserve conthese objectives, the Committee at its meetditions contemplated at this meeting ing in July reaffirmed the range it had estabwould be consistent with moderate lished on January 31-February 1 for growth growth of M2 and M3 over coming of M2 of 1 to 5 percent, measured from the fourth quarter of 1994 to the fourth quarter months. of 1995. The Committee also retained the The Federal Reserve Bank of New monitoring range of 3 to 7 percent for the York was authorized and directed, until year that it had set for growth of total domesinstructed otherwise by the Committee, tic nonfinancial debt. The Committee raised to execute transactions in the System the 1995 range for M3 to 2 to 6 percent as a technical adjustment to take account of Account in accordance with the followchanging intermediation patterns. For 1996, ing domestic policy directive: the Committee established on a tentative basis the same ranges as in 1995 for growth The information reviewed at this meeting of the monetary aggregates and debt, measuggests a substantial slowing in the expan- sured from the fourth quarter of 1995 to the sion of economic activity after a strong gain fourth quarter of 1996. The behavior of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 197 monetary aggregates will continue to be evaluated in the light of progress toward price level stability, movements in their velocities, and developments in the economy and financial markets. In the implementation of policy for the immediate future, the Committee seeks to decrease slightly the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater reserve restraint or slightly lesser reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with moderate growth in M2 and M3 over coming months. Votes for this action: Messrs. Greenspan, McDonough, Blinder, Hoenig, Kelley, Lindsey, and Melzer, Ms. Minehan, Mr. Moskow, and Mses. Phillips and Yellen. Votes against this action: None. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, January 30-31, 1996. The meeting adjourned at 1:05 p.m. Donald L. Kohn Secretary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

199 Consumer and Community Affairs In 1995 the Division of Consumer and which raised claims of alleged mortgage Community Affairs continued to address discrimination, to the Department of concerns about community development Housing and Urban Development and reinvestment, access to credit by (HUD) for investigation. The Board minorities and low-income households, improved the System's examination propossible discrimination in mortgage cess for fair lending, modifying statistilending, and the need to match its cal techniques that are used to test large consumer regulations to industry institutions for compliance; and took developments. steps with other agencies to achieve The Board joined in issuing revised more uniform enforcement and provide interagency regulations under the Com- greater clarity of legal standards for the munity Reinvestment Act (CRA) after industry. Acting on behalf of the Fedrulemaking that included the publication eral Financial Institutions Examination of two proposals. The new rules empha- Council and HUD, the Board met statusize performance in lending, service, tory deadlines for the early release of and investment; they will help promote Home Mortgage Disclosure Act stateconsistency in assessments and reduce ments for individual lenders and aggrecompliance burdens for many banks. In gate reports for metropolitan areas. the area of bank and bank holding com- From the data, the Board noted a marked pany applications, the Board acted on increase in lending to minority and lowa large number of cases that involved income homebuyers, although denial CRA protests or adverse CRA ratings, rates continued to show disparities or both, or involved fair lending and among racial and ethnic groups. noncompliance with consumer regu- These matters are discussed below, lations. Several of the applications along with other actions by the Board in involved proposed "mega mergers" that the areas of community affairs and conengendered great interest among mem- sumer protection. bers of the public, who voiced both strong support and opposition regarding CRA Reform the mergers. The Board approved them after extensive analyses, finding that In April the Board amended its Regulaconvenience and needs factors were tion BB (Community Reinvestment) in consistent with approval. a joint issuance with the three other In the fair lending area, the Board financial supervisory agencies that have adopted streamlined procedures for CRA responsibilities (the Federal Dereferring discrimination complaints to posit Insurance Corporation, the Office the Department of Justice; forwarded of the Comptroller of the Currency, and the results of a major investigation into the Office of Thrift Supervision). The a mortgage lender's "overages" prac- issuance marked an important step tices; and successfully concluded a joint toward a new agency approach for enforcement action that involved credit assessing the CRA performance of discrimination against Hispanic borrow- financial institutions and brought to cloers. The Board referred other cases, sure a rulemaking process begun in 1993 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 82nd Annual Report, 1995 at the direction of President Clinton. Board settled the procedures for the The President had asked the agencies to wholesale and limited-purpose bank reform the implementation of the act by designations and the strategic plan developing new regulations, supervisory approvals necessary for banks to qualify procedures, and standards for assessing for special examinations. a financial institution's CRA perfor- Some measures taken by the Federal mance. The goal was to orient assess- Reserve will assist both state member ment in CRA examinations more on banks and System examiners to impleresults than process, produce examina- ment the new CRA rules. Data-entry tions that are more predictable and con- software made available to institutions sistent, and make the law generally more will make it easier for them to collect effective while reducing its burden on information about small-farm and smallthe industry. business lending, required for banks The President had directed the agen- with more than $250 million in assets cies to consult with community groups and those affiliated with bank holding and the banking and thrift industries; companies with $1 billion or more in the new regulation takes account of an assets. The software has an export capaextensive outpouring of public views at bility that allows institutions to downhearings and in comment letters as well load and submit data on diskette for as the agencies' own experience with processing by the Federal Reserve. A the original assessment system. The computer-analysis system will enable regulation provides more direct guid- examiners to produce the performanceance to banks and thrift institutions on based analyses called for by the new the nature and extent of their CRA rules and assist them in preparing sumresponsibilities and the means by which maries of demographic, economic, and those obligations will be assessed and lending information that they will use in enforced. It creates a more quantitative examining small banks. Beginning in system for assessing CRA performance 1997, the system will incorporate data that includes measurements for lending, for large-bank examinations. service, and investment; requires institutions with assets of more than $250 mil- Fair Lending lion to collect additional data for smallbusiness and small-farm loans; and Under the Equal Credit Opportunity allows alternative bases of evaluation to Act, as amended in 1991, the Board is minimize the regulatory burden for cer- required to refer violations that constitain institutions. The rules establish a tute a "pattern or practice" of discrimistreamlined examination for small lend- nation to the U.S. Department of Justice. ers and allow any covered institution to The five referrals this year represent a operate under, and have performance substantial increase over 1994, when the measured against, its own strategic plan. Board referred one case. Justice officials In the fall, the agencies issued new returned four of the five 1995 cases to examination procedures, and by year- the Board for administrative handling, end they had held five week-long staff finding that the Board's enforcement training sessions in Boston, Atlanta, action alone was adequate. The remain- Chicago, Dallas, and San Francisco. ing case raised issues of potential dis- More than 1,100 examiners from the crimination in mortgage lending and OCC, the OTS, the FDIC, and the Fed- was under active investigation at eral Reserve took part. In December the year-end. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 201 In 1995 the Board addressed a lender was referred to the Department of practice that involves the application of Justice, where it was under review at "overages." The practice represents a year-end. form of tiered loan pricing in which individual loan officers exercise discre- Assessing Compliance tion, for any given loan transaction, in with Fair Lending Laws seeking interest rates or points above the institution's established minimums. The Board completed its first full year Often, the discretionary setting of rates of operating a specialized fair-lending is a form of incentive for loan officers, school for Federal Reserve examiners. who may receive a significant share of The two-week school covers an extenany overages obtained, as compensation sive range of conceptual topics and for increasing the lender's return on practical, hands-on classwork; a total of the loan. In May 1994 the Board had 109 examiners attended the three sesadvised state member banks that while sions offered during 1995. overages may not be inherently dis- In evaluating compliance with fair criminatory on a prohibited basis, bank lending laws, bank examiners assess management should be aware that such decisions in the context of the lending a program could, in some circumstances, institution's underwriting standards. result in illegal lending discrimination They look at a sample of approved and because of either disparate treatment or denied applications and check whether disparate impact. the institution, in applying its lending The Board dealt with two cases that criteria, has implemented standards involved discriminatory pricing. One consistently and fairly and whether any case, involving a state member bank, differential treatment warrants further had been referred to the Department of investigation. Justice in 1994; in October 1995, the Examiners also use data collected and Board acted in concert with Justice reported by banks and others under against the bank for what both agencies the Home Mortgage Disclosure Act regarded as a pattern or practice of (HMDA). Although the HMDA data do charging higher interest rates to His- not include the wide range of financial panic borrowers for consumer install- and property-related factors that lendment and single-payment loans. The ers consider in evaluating loan applica- Board issued a cease-and-desist order to tions, access to the lenders' files on loan bar the practice and required the bank to applications and to related information adopt a series of corrective measures; enables examiners to overcome many of concurrently, the bank and Justice the data's limitations. entered into a stipulated judgment that Since 1993 the banking agencies have enjoined future discrimination in rates used a computer-based system to obtain or other loan terms and conditions; the customized HMDA reports. Developed judgment also required the bank to in consultation among the agencies, the establish a $500,000 fund to compensate system gives examiners a more comvictims of the alleged discrimination. plete picture of an institution's mort- In the second case, the Board and a gage lending record than was readily Reserve Bank conducted an extensive available in the past. In 1994 the Federal review of possible discrimination in Reserve began using a statistical analymortgage loan transactions by a bank sis system to aid in the fair-lending holding company subsidiary. The matter examination of large-volume mortgage Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 82nd Annual Report, 1995 lenders. The system helps examiners Under HMDA, covered lenders subdetermine the significance of race in mit geographic information about the a bank's lending decisions through a property related to a loan or a loan appliregression analysis of the HMDA data cation. They report on the disposition of recorded by the institution on its loan- applications and, in most cases, about application register. Examiners supple- the race or national origin, income, and ment the results of that analysis with sex of applicants and borrowers. The other information drawn from actual Board processes the data and prepares loan files to identify specific cases that disclosure statements on behalf of HUD may need further review and possible and member agencies of the Federal discussions with bank management. To Financial Institutions Examination aid examiners in the field, the Board has Council (FFIEC).1 developed a sampling system to run on a In 1995 the FFIEC prepared nearly laptop computer. 39,000 disclosure statements for the The Board also continues to improve 9,858 lenders that reported HMDA data its automation capabilities for analyzing for calendar year 1994. (Overall, the HMDA data, making enhancements in 1994 data include a total of 12.2 million the application analysis and statistical reported loans and applications, a components that Reserve Banks use in 21 percent decrease from 1993 that is fair-lending examinations. Staff mem- largely attributable to a sharp decline in bers from FDIC regional offices also refinancing activity.)2 In July, individual have direct access to the HMDA analy- institutions made these disclosure statesis system. ments public, and in August, aggregate reports that contain data for all lenders in a given metropolitan statistical area HMDA Data and Lending (MSA) became available at a central Patterns depository in each of the nation's The Home Mortgage Disclosure Act 329 MSAs. To enhance public access to requires covered mortgage lenders in the HMDA data, the FFIEC also makes metropolitan areas to disclose data the information available on paper, regarding home purchase and home microfiche, magnetic reel and cartridge, improvement loans, including refinanc- PC diskette, and CD-ROM. ings. Depository institutions and mort- Lending institutions tend to specialize gage companies generally are covered if in different types of home loans. Deposithey are located in metropolitan areas tory institutions are the predominant and have assets of more than $10 mil- source of home improvement and multilion. Since January 1993, independent family loans. Mortgage companies mortgage companies with lower assets accounted for about 50 percent of the are also covered if they originated 100 home purchase loans reported in 1994 or more home purchase loans in the and about 80 percent of the governmentpreceding calendar year. One conse- backed loans. quence of the expanded coverage has been a significant increase in the num- 1. The member agencies are the Board, the ber of independent mortgage companies FDIC, the National Credit Union Administration, reporting data. In 1993, about 225 inde- the OCC, and the OTS. pendent mortgage companies reported 2. A summary of the 1994 HMDA data appears in a series of special tables included in the Federal data (covering 1992 loans); in 1995, Reserve Bulletin, vol. 81 (September 1995), more than 900 reported. pp. A68-A75. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 203 Mortgage originators—as well as white applicants. These rates were not institutions in the secondary market for much different from 1993. For neighbormortgages, such as the Federal National hoods, the data also show that the rate of Mortgage Association (Fannie Mae) and loan denial generally increased with an the Federal Home Loan Mortgage Cor- increase in the proportion of minority poration (Freddie Mac)—have in recent residents. years initiated a variety of affordable The data collected under HMDA do home loan programs intended to benefit not include the wide range of financial lower-income and minority households and property-related factors that lenders and neighborhoods. A year-to-year com- consider in evaluating loan applications. parison of the HMD A data suggests that Consequently, the data alone do not these programs may be making a differ- provide a sufficient basis for determinence. From 1992 to 1993 the number ing whether a lender is discriminating of conventional home purchase loans unlawfully. But because the data can be extended to lower-income borrowers supplemented by other information increased 38 percent compared with an available to the agencies, they are an 8 percent increase for higher-income important tool for enforcement of fair homebuyers. The trend continued into lending laws. 1994. The 1994 HMD A data show that The important uses of the HMDA the number of loans to lower-income data make accuracy a critical issue. The borrowers increased about 27 percent FFIEC's processing software is prowhile the number extended to higher- grammed to identify errors in the data income borrowers increased about submitted by lenders for correction 13 percent.3 before disclosure statements and reports Lending to minority homebuyers has for specific MSAs are prepared. Duralso increased markedly in recent years. ing the years that lenders have submit- Among racial or ethnic groups from ted their HMDA data in register format, 1993 to 1994, the number of loans to the quality has improved considerably. black applicants increased 55 percent, The proportion of 1994 loan records to Hispanic applicants 42 percent, and containing detected errors was less than to Asian applicants 19 percent. The 0.5 percent, down from about 4.4 perincrease for white applicants was 16 per- cent in 1991 (the first year for which cent over the same period. data were collected on a loan-by-loan The 1994 data continue to show rates basis). of credit denial that are higher for black and Hispanic loan applicants than for Asian and white applicants even when Other Uses of HMDA Data applicants are in the same income brackets. In 1994 the denial rates for conven- Since 1990 the HMDA data reported by tional home purchase loans overall were lenders have included information about 33 percent for black applicants, 25 per- the race, sex, and income of borrowers cent for Hispanic applicants, 12 percent and loan applicants. For loans sold, for Asian applicants, and 16 percent for lenders also identify secondary-market purchasers by type of entity. These expanded data provide opportunities to 3. Computations are adjusted to exclude the profile the characteristics of the boreffects, beginning with the 1993 data, of HMD A's rowers whose loans are purchased by expanded coverage of independent mortgage companies. secondary-market entities and of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 82nd Annual Report, 1995 neighborhoods in which those borrow- including data tape, CD-ROM, and PC ers reside.4 diskette.5 In carrying out a statutory responsibility to oversee housing activities by Community Development government-sponsored entities, HUD The implementation of new CRA uses the expanded HMDA data to help rules—with their increased emphasis on assess the efforts of Fannie Mae and community development lending, ser- Freddie Mac to attain HUD goals for vice, and investment—helped shape the supporting mortgages for low- and activities of the Federal Reserve's Commoderate-income families and for propmunity Affairs program during 1995. erties in central cities. HUD also makes The community affairs offices proextensive use of the HMDA data as one vided a variety of training workshops— component of its fair lending reviews. often in cooperation with consumer The data assist in the handling of loan compliance examiners—designed to applicants' and borrowers' allegations help bankers, community groups, and of lending discrimination filed with others understand and respond effec- HUD, the Department of Justice, or tively to the revised CRA regulation. with some state or local agencies, and The Federal Reserve Banks of Richin the agencies' targeting of lenders for mond" and San Francisco sponsored investigation. workshops throughout their Districts to explain the new rules. The Reserve Private Mortgage Insurance Banks at Kansas City, Chicago, and Atlanta held educational workshops or On behalf of the private mortgage insurinformational forums, and the remaining ance (PMI) industry, the FFIEC also Reserve Banks developed plans to hold compiles HMDA-like data pertaining similar programs early in 1996. to PMI applications. PMI typically is Because the new CRA regulation required by lenders when they extend emphasizes community development conventional mortgages with small lending and investment, the Reserve down payments. Banks' educational programs and infor- Working through their national trade mational materials continued to focus association, the Mortgage Insurance on these areas: Companies of America, the eight active PMI companies voluntarily submit their • The Atlanta, Richmond, Dallas, and data to the FFIEC, which prepares St. Louis Reserve Banks co-sponsored a company-specific disclosure statements major conference on rural economic for each of the firms and aggregate development reports for each MSA. These reports are • The Richmond, Dallas, and Boston available for public review at the central Reserve Banks sponsored community depositories where HMDA data are development training workshops available. The information is also avail- • The St. Louis, Philadelphia, and able from the FFIEC in other formats, Chicago Reserve Banks conducted edu- 4. See the discussion of secondary-market activity in Glenn B. Canner and Wayne Passmore, "Credit Risk and the Provision of Mortgages to 5. For an analysis of the 1994 private mortgage Lower-Income and Minority Homebuyers," Fed- insurance data, see the appendix to Canner and eral Reserve Bulletin, vol. 81 (November 1995), Passmore, "Credit Risk and the Provision of Mort- DD. 989-1016. gages," pp. 1007-16. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 205 cational programs about opportunities funds—that bankers can consider in for bank involvement in financing serving low- and moderate-income women-owned and minority-owned homebuyers. By year-end, more than small businesses, including "micro" 30,000 copies of the software had been businesses distributed nationwide by the Board and • The Kansas City Reserve Bank the Reserve Banks. The software also is conducted training programs in housing available for downloading from the finance techniques that help meet the Internet. needs of low- and moderate-income The Federal Reserve produced new families. and updated publications in 1995. The Board published Community Develop- Several Reserve Banks presented tar- ment Investments: A Guide for State geted training programs to meet special Member Banks and Bank Holding Comneeds of bankers in their Districts. The panies, an overview of the Federal Richmond Reserve Bank sponsored a Reserve's policies and guidelines on the forum on the operation of multibank formation of community development community development corporations; corporations (CDCs) and other uses and the Kansas City, Chicago, and of equity investments for community Dallas Reserve Banks conducted educa- development purposes. The guide retional sessions on fair lending. Overall places Community Development Investduring 1995, community affairs pro- ments, first published in 1991. The new grams sponsored or co-sponsored more publication covers changes to the Fedthan 200 conferences, seminars, and eral Reserve Act that authorize cominformational meetings on community munity development investments for development, fair lending, and related state member banks and a new Board community reinvestment topics. As part interpretation of Regulation Y for of their educational activities, the com- community development investments munity affairs staff members at the by bank holding companies. The Board Board and the Reserve Banks also made updated a companion publication, 400 presentations at conferences, semi- Directory: Bank Holding Company nars, and meetings sponsored by bank- Community Development Investments, ing, governmental, business, and com- which describes existing CDCs and munity organizations. other investments made by bank holding The Federal Reserve's community companies. affairs program undertook several spe- The Federal Reserve Bank of Dallas cial initiatives to help banks develop published Breaking Ground: A Begineffective programs to meet community ner's Guide for Nonprofit Developers, credit needs. The Federal Reserve Bank which provides basic information for of Atlanta, working with the Board, prospective nonprofit community develdeveloped software for personal com- opment groups about the planning, puters called "Partners: A Public Pri- financing, and development of affordvate Partnership Model for Home Mort- able housing. gage Lending." The software helps The Federal Reserve Bank of Philabankers determine borrowers' loan eligi- delphia published Small Business = Big bility and provides ten potential loan- Possibilities, which profiles the publicqualifying techniques—from borrower private partnerships of various financial self-help to loan subsidies and other institutions throughout the country that combinations of public and private help finance small businesses. Each Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 82nd Annual Report, 1995 profile describes a bank's involvement, educational and information products gives the total lending activity under that should be developed. Several the program, includes comments on the Reserve Banks prepared profiles of tarprofitability of the relationship for the geted communities to assist bankers, bank, and makes recommendations for community representatives, and others other banks that seek to develop a simi- interested in community credit needs: lar partnership program. The Federal Reserve Bank of Chi- • The Federal Reserve Bank of Richcago published Access to Credit: A mond published community profiles for Guide for Lenders and Women Owners the Prince George's County and Cumof Small Businesses, a collaborative berland areas in Maryland, the Raleigheffort with the Women's Business Durham area in North Carolina, and the Development Center of Chicago. The Norfolk-Virginia Beach-Newport News guide presents the views of women busi- area of Virginia ness owners and of lenders on the loan • The Federal Reserve Bank of Philaapplication process for small businesses delphia published a profile for the and gives recommendations that can Wilkes-Barre-Hazelton-Scranton area help foster successful lending relation- of Pennsylvania ships with small businesses. • The St. Louis Reserve Bank issued Community affairs newsletters further profiles for the metropolitan areas of expanded the Reserve Banks' reach in Little Rock, Arkansas; Jackson, Tenneshelping to inform financial institutions see; and Columbia, Missouri. For the about community development and rein- Lower Mississippi Delta region, the vestment issues and program opportuni- Reserve Bank issued a profile and also ties. The Federal Reserve Bank of Rich- produced a video highlighting economic mond began publishing Marketwise, a development projects in which banks in newsletter that covers a broad range of the region were participating community development and reinvest- • The San Francisco Reserve Bank ment topics. The Chicago Bank began published community profiles for Fresno issuing Economic Development News and Oakland and Views, a newsletter that focuses on • The Federal Reserve Bank of Kandevelopment issues for small and minor- sas City developed demographic analyity businesses and opportunities for ses for the metropolitan areas of Kansas banks. City, Oklahoma City, Omaha, and Each of the twelve Reserve Banks Denver now publishes one or more newsletters • The Federal Reserve Bank of New covering various aspects of bank in- York published a report that outlined the volvement in affordable housing and credit needs of Washington Heights, a community and economic development. Manhattan neighborhood, and convened These newsletters reach a combined cir- a forum with bankers and community culation of more than 55,000 bankers, groups to discuss community investcommunity representatives, government ment options for the area. officials, bank regulators, and others. The Reserve Banks' community Overall during 1995, the System's affairs programs continued their out- community affairs offices held more reach to help identify community devel- than 1,400 outreach meetings with bankopment and reinvestment needs and ers, community groups, business repreobtain guidance concerning the kinds of sentatives, and others. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 207 Community affairs programs continue mercial examiners understand various to meet a growing demand for technical aspects of affordable housing and the assistance and advice on community financing of community development development and reinvestment matters. projects. Board and Reserve Bank staff Technical assistance is aimed at helping members also helped conduct fair lendfinancial institutions and communities ing schools, joined in interagency efforts develop program responses to recog- to reform implementation of the CRA, nized needs and, in many cases, to assist and provided other briefings and educaindividual institutions in strengthening tional sessions for bank examiners. their CRA programs. The Federal Reserve Bank of San Francisco worked to foster the creation Other Regulatory Matters and growth of multibank loan consortia focusing on community reinvestment. The Board took the following other The Reserve Bank continued its efforts actions with regard to rulemaking and to help establish a statewide loan con- other responsibilities for the implemensortium for small businesses, the Cali- tation of consumer protection laws. fornia Economic Development Loan Initiative. That effort culminated in the formation of a $50 million statewide Regulation B loan pool involving about forty banks (Equal Credit Opportunity) and other corporations. The Reserve In April the Board published for com- Bank also provided organizational supment a proposal to amend Regulation B port for the formation of the Association to eliminate a general prohibition on of Reinvestment Consortia for Housing collecting data that relate to an appli- (ARCH) and helped launch the group's cant's race, color, sex, religion, or newsletter, Consortia News. The Fednational origin. If adopted, the rule eral Reserve Bank of Atlanta assisted a would allow, but not require, creditors number of state member banks with to collect these data for any credit prodissues related to community developuct. The prohibition against taking such ment corporations and investments in data into account in credit decisions tax-advantaged low-income housing would remain unchanged. At year-end projects. Overall during 1995, commuthe Board expected to take final action nity affairs programs responded to on the proposal early in 1996. almost 600 requests for technical assistance on community development and reinvestment matters. Regulation E In 1995 the Federal Reserve's Com- (Electronic Fund Transfers) munity Affairs program continued to support the System's supervisory re- In April the Board made final an amendsponsibilities for the CRA and for fair ment to Regulation E that had been lending laws. Board staff members adopted on an interim basis in Novemtaught sessions for consumer compli- ber 1994. The rule gives financial instiance examiners on how to conduct com- tutions more flexibility in identifying munity contacts and on bank involve- consumer accounts on receipts at automent in community development mated teller machines (ATMs). It elimifinance; and they presented seven half- nates the requirement that the receipts day training sessions to help senior com- uniquely identify the consumer, the con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 82nd Annual Report, 1995 sumer's account, or the ATM card. This amendments impose both new disclochange helps to protect consumers and sures and substantive limitations on financial institutions against fraudulent home mortgage loans bearing rates fund withdrawals. above a certain percentage or fees above a certain amount. New disclosures also apply to reverse mortgage transactions, Regulation M which provide periodic advances to the (Consumer Leasing) borrower and rely principally on the home's value for repayment. The disclo- In September the Board published prosures will assist consumers (elderly posed revisions to Regulation M followhomeowners, for the most part) in coming a review under the Board's Reguparing costs when shopping for reverse latory Planning and Review program. mortgages. The primary focus of the review is on The Riegle legislation of 1994 automobile leasing, and the proposed directed the Board to submit special changes include a new disclosure of the reports to the Congress about possible early termination charge; disclosure of amendments to the Truth in Lending the gross cost of a lease, the residual Act. In March the Board submitted a value, and an estimated lease charge; a report on consumers' ability to waive requirement that certain lease disclothe right of rescission when they refisures be segregated from other infornance or consolidate home-secured mation; and, to implement a statutory loans with new creditors. The Board change enacted in 1994, revised proconcluded that many consumers would visions for radio and television benefit from greater flexibility and supadvertising. ported amending the Truth in Lending At year-end, the Board was complet- Act so that consumers can waive the ing plans for focus group sessions in right of rescission more freely if the Washington, D.C., and Los Angeles to transaction involves no additional debt. obtain the views of consumers on The 1994 legislation also asked the the proposed disclosures. The Board Board to report on how existing rules believes the focus groups will assist governing credit advertising could be in identifying information needed by modified to increase consumer benefit consumers to make informed decisions and decrease creditor costs and whether about lease transactions. The comthe rules for radio advertisements could ment period on the Board's proposal, be modified without diminishing conscheduled to end in December, was sumer protection. In June the Board extended to mid-February to accommopublished a notice requesting public date the completion of the focus group comment on these issues; in September interviews. it submitted a report to the Congress recommending statutory amendments that could decrease creditor cost with- Regulation Z out decreasing consumer benefit. One (Truth in Lending) recommended change would allow In March the Board amended Regula- creditors to give abbreviated credit distion Z to implement changes made to closures in radio and television adverthe Truth in Lending Act by the Riegle tisements together with a toll-free num- Community Development and Regula- ber that consumers could call for further tory Improvement Act of 1994. The information about credit costs. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 209 Regulation DD such matters as the treatment of loan (Truth in Savings) prequalifications, participations, refinancings, home equity lines of credit, In January the Board requested commergers, and loan applications received ment on possible changes in the formula through brokers. The Board expects the for calculating an annual percentage commentary to reduce the burden of yield (APY). The Board adopted an compliance by clarifying difficult issues, interim rule for certain noncompoundproviding flexibility, and consolidating ing multiyear certificates of deposit; the the guidance previously contained in rule permits institutions to disclose an various sources. APY equal to the contract interest rate. In December the Board proposed an The Board deferred final action on the update to the official staff commentary January proposal, taking account of to Regulation DD (Truth in Savings). It pending legislation that would make addressed issues such as the timing by significant reductions in the requirewhich credited interest becomes part of ments of the Truth in Savings Act. principal and how leap years affect the calculation of the APY. In June the Board published an Interpretations update to the commentary to Regula- In 1995 the Board continued to offer tion B (Equal Credit Opportunity). The legal interpretations and guidance update addressed disparate treatment, through its official staff commentaries, special-purpose credit programs, credit which are a substitute for individual staff scoring systems, and discrimination interpretations. based on marital status. In December the In April the Board revised the official Board published proposed revisions for staff commentary to Regulation Z (Truth the 1996 update; they included guidance in Lending). The update gives guidance on such issues as the use of age in credit on the treatment of various fees and scoring systems, spousal signature rules, taxes associated with real estate loans and the signature rules for business and a creditor's responsibilities when credit. investigating a claim of the unauthorized use of a consumer's credit card. In Economic Effects of the December the Board proposed revisions Electronic Fund Transfer Act for the 1996 update; they provide guidance on amendments to Regulation Z In keeping with statutory requirements, affecting reverse mortgages and certain the Board monitors the effect of the mortgages bearing rates above a cer- Electronic Fund Transfer Act on complitain percentage or fees above a certain ance costs and consumer benefits related amount. The proposed revisions also to EFT services. Proposed revisions to address issues such as a credit card issu- Regulation E (Electronic Fund Transer's responsibilities when a cardholder fers) under the Board's Regulatory asserts a claim or defense relating to a Planning and Review program were merchant dispute. scheduled as of year-end for Board con- In July the Board published a pro- sideration in early 1996. posed staff commentary to Regula- The proposed revisions to Regulation tion C (Home Mortgage Disclosure); in E are limited because the current regula- December it published a final version. tion already follows closely the detailed The commentary provides guidance on requirements of the statute. Most Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 82nd Annual Report, 1995 revisions would clarify and simplify the Direct deposit is another widely used text of the regulation, reorganize and EFT service. More than half of all U.S. consolidate related material, and delete households with deposit accounts obsolete provisions. The commentary to receive some funds through direct Regulation E would be revised to follow deposit. Direct deposit is particularly the format of the commentaries of other widespread in the public sector: More regulations. These changes would re- than half of social security payments duce burden somewhat since they would and two-thirds of federal salary and make it easier for financial institutions retirement payments are made electronito understand and use the regulation cally. The use of direct deposit is less and commentary. The few substantive common in the private sector, but it has changes would not likely have much grown substantially in recent years. effect on regulatory burden. As a whole, Considering both public and private the proposed revisions would reduce payments, the proportion of households ongoing burden without reducing con- receiving direct deposits grew about sumer benefits. There would be some 5.4 percent per year during the 1990s. transaction cost of learning and imple- Point-of-sale (POS) systems account menting the revised regulation. for a small share of EFT activity, but Aside from regulatory changes that their use continued to grow rapidly in potentially benefit consumers or reduce 1995. The number of transactions on compliance burdens, the economic POS systems rose 36.9 percent, from effects of the Electronic Fund Transfer 47.2 million per month to 64.6 million Act generally increased because of con- per month; the number of POS terminals tinued growth in the use of EFT ser- rose 53.6 percent, to 528,700. vices. During the 1990s the proportion The incremental costs associated with of U.S. households using EFT services the EFT act are difficult to quantify has grown at an annual rate of about because it cannot be determined how 2.5 percent. About 85 percent of house- industry practices would have evolved holds with deposit accounts at financial in the absence of statutory requirements. institutions now have one or more EFT The benefits of the law are also difficult features on those accounts. to measure because they cannot be iso- Automated teller machines are the lated from consumer protections that most widely used EFT service. Nearly would have been provided even in the two-thirds of all households with absence of regulation. The available deposit accounts currently have ATM data provide no evidence of serious concards, and most of the nation's deposi- sumer problems with electronic transtory institutions offer customers access actions. In 1995 about 90 percent to their accounts through ATMs. Access of depository institutions examined by has been enhanced by the operation of federal agencies were in full compliance shared networks. Almost all ATMs in with Regulation E. Statistics indicate operation today participate in one or that among institutions examined, those more shared networks. The monthly not in full compliance generally had average number of ATM transactions fewer than five violations. The increased about 16.3 percent, from violations primarily involved failure 694.5 million in 1994 to 807.4 million to provide all required disclosures to in 1995. During the same period, the consumers. number of ATMs available to consum- The Board's database of consumer ers rose 12.6 percent to 122,700. complaints and inquiries is another Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 211 source of information on potential prob- ing school, and a class in CRA examinalems. In 1995, 38 complaints, of about tion techniques.7 1,200 investigated by the Federal During the reporting period, the Fed- Reserve, involved state member banks' eral Reserve System conducted three handling of electronic transactions. Two basic consumer compliance schools for of the EFT complaints involved a pos- a total of 96 students, three advanced sible violation of the act or regulation. consumer compliance schools for 51 students, and three fair lending schools for 113 students. Compliance Examinations Examiner training is supplemented by The Federal Reserve System has main- the Reserve Banks through departmentained a program of specialized exami- tal meetings and special training sesnations for compliance with consumer sions. In addition, the Board's resident protection laws since 1977. During the examiner program provides Federal 1995 reporting period (from July 1, Reserve examiners with the opportunity 1994, to June 30, 1995), the Federal to get a System perspective through Reserve examined 593 state member working at the Board for several weeks; banks and 238 foreign banking organi- they observe how the division operates, zations for compliance with consumer how policies are developed, and how the laws governing financial services.6 Board coordinates its activities with The compliance examinations are those of other agencies that supervise conducted by a consumer affairs unit financial institutions. within each of the twelve Federal The FFIEC is the interagency coordi- Reserve Banks. The Compliance Sec- nating body charged with developing tion of the Board's Division of Con- uniform examination principles, stansumer and Community Affairs reviews dards, and report forms. In 1995 the and coordinates compliance activities, member agencies of the FFIEC collaboproviding Reserve Banks with the infor- rated to revise examination procedures mation and assistance they need, and to reflect changes in consumer laws ensuring that the Reserve Banks take a and regulations. They adopted changes uniform approach to compliance exami- to examination procedures related to nations. New examiners in the Federal amendments to Regulation E (Electronic Reserve System attend the Board's Fund Transfers) and developed new three-week basic consumer compliance examination procedures for the revised school; examiners with eighteen to regulations that implement the CRA. twenty-four months of field experience attend the Board's week-long advanced Agency Reports on Compliance compliance school, two-week fair lend- with Consumer Regulations Data from the Board, other member 6. The Federal Reserve examines state- agencies of the FFIEC, and other federal chartered agencies and state-chartered uninsured supervisory agencies cover the complibranches of foreign banks, which are commercial ance of institutions with the Equal lending companies owned or controlled by foreign Credit Opportunity Act, the Electronic banks, and organizations operating under section 25 or 25(a) of the Federal Reserve Act (Edge Act and agreement corporations). Typically, in com- 7. The Board did not offer the advanced CRA parison with state member banks, these institu- examination techniques class during 1995. tions conduct relatively few activities that are cov- Instead, FRB examiners attended interagency ered by consumer protection laws. training for the revised CRA. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 82nd Annual Report, 1995 Fund Transfer Act, the Consumer Leas- sex, marital status, and age on credit ing Act, the Truth in Lending Act, the applications primarily for the purchase Community Reinvestment Act, the or refinancing of a principal residence Expedited Funds Availability Act, and • Give a statement of reasons for the prohibitions in Regulation AA on adverse action that is specific and indiunfair and deceptive practices. The cates the principal reasons for the credit degree of compliance with these laws denial or other adverse action. and regulations varied widely in 1995 but overall was little changed from The Board issued three written agree- 1994. The following section summa- ments, one cease-and-desist order, and rizes compliance data for the reporting one civil money penalty involving violaperiod July 1, 1994, to June 30, 1995.8 tions of Regulation B. The OTS issued eight formal enforcement actions involving Regulation B. The FDIC issued Equal Credit Opportunity Act thirteen formal enforcement actions (Regulation B) involving consumer compliance regula- The level of full compliance with the tions without distinguishing which of Equal Credit Opportunity Act (ECOA) those actions involved Regulation B. in 1995, 62 percent, was about the same The other agencies that enforce the as 1994's 61 percent. The agencies ECOA—the Farm Credit Administrareported that 74 percent of the institu- tion (FCA); the Department of Transtions examined in 1995 that were not in portation; the Small Business Adminisfull compliance with Regulation B had tration; the Grain Inspection, Packers between one and five violations (the and Stockyards Administration of the lowest-frequency category), compared Department of Agriculture; and the with 72 percent in 1994. The most fre- Securities and Exchange Commission— quent violations involved the failure to reported substantial compliance among take the following actions: the entities they supervise. The FCAs examination and enforcement activities • Provide a written notice of adverse did reveal violations of the ECOA that action that contains a statement of the resulted in one formal enforcement action taken, the name and address of action. The FCA reported that the most the creditor, an ECOA notice, and the frequent violation it found involved the name and address of the federal agency failure to provide applicants with timely that enforces compliance notification of action taken on loan • Notify the applicant of the action applications. The Federal Trade Comtaken within the time-frames specified mission (FTC) reported a continuation in the regulation of its work with other government agen- • Request information for monitoring cies and with creditor and consumer purposes about race or national origin, organizations to increase awareness of, and compliance with, the ECOA. 8. The federal agencies that supervise financial institutions do not use the same method to compile Electronic Fund Transfer Act compliance data. Consequently, the data in this (Regulation E) report, which are presented in terms of percentages of all financial institutions, represent general The five financial regulatory agencies conclusions. When overall levels of compliance reported that approximately 90 percent are discussed in terms of percentages of all financial institutions, the percentage shown is the mean. of examined institutions were in compli- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 213 ance with Regulation E, the same level which implements the Consumer Leasof compliance reported for 1994. During ing Act. As in the 1994 reporting period, 1995, financial institutions most fre- more than 99 percent of examined instiquently failed to comply with the fol- tutions were found to be in full complilowing provisions of Regulation E: ance with the regulation. The violations noted by the agencies involved the • Provide a notice of the procedures failure to adhere to specific disclosure for resolving alleged errors at least once requirements. each calendar year The Farm Credit Administration also • After receiving notice of an error, considers the institutions it supervises to investigate the alleged error in a prompt be in substantial compliance with the manner, determine whether an error ac- Consumer Leasing Act. It found no viotually occurred, and transmit the results lations of the act through its examinaof the investigation and determination to tion and enforcement activities. the consumer within ten business days The FTC issued one final consent • Provide a written statement outlin- order involving violations of the Coning the terms and conditions of the elec- sumer Leasing Act by three automobile tronic fund transfer service at the time a dealerships whose advertisements failed consumer contracted for an EFT service to make full disclosure of payment or before the first transfer was made terms. • Provide customers with a statement of all required information at least Truth in Lending Act quarterly, or monthly if EFT activity (Regulation Z) occurred. The FFIEC agencies reported that nearly The Board issued one written agree- 50 percent of examined institutions were ment involving violations of Regulation in full compliance with Regulation Z, a E, and the OTS issued one formal en- slight improvement over the 48 percent forcement action. The FTC reported that reported for 1994. The Board, the litigation continues regarding a telemar- NCUA, the FDIC, and the OCC showed keting company that allegedly failed to increases in compliance, while the OTS obtain written authorization from con- reported a decrease. Agencies indicated sumers for preauthorized transfers. The that, of the examined institutions not in SEC continues to examine for broker- full compliance, 58 percent were in the dealer compliance with the EFT Act, lowest-frequency category (between one but found no violations during 1995. and five violations), compared with The FDIC reported thirteen formal 56 percent in 1994. enforcement actions to deal with vio- The violations of Regulation Z most lations of Regulation E and other con- often observed were the failure to accusumer compliance regulations without rately disclose the finance charge or disspecifying how many of the thirteen close the payment schedule; to disclose involved electronic fund transfers. that the creditor has a security interest in the property being purchased or in other identified property; to provide a good Consumer Leasing faith estimate within three business (Regulation M) days; and to provide two copies of the The FFIEC agencies reported substan- notice of the right of rescission to tial compliance with Regulation M, borrowers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 82nd Annual Report, 1995 The Board issued one written agree- faceted program for enforcing and fosment, one cease-and-desist order, and tering better bank performance under one civil money penalty involving viola- the CRA: tions of Regulation Z, and the OTS issued fifteen formal enforcement • Examinations of institutions to actions. The FDIC reported thirteen for- assess compliance mal enforcement actions involving con- • Dissemination of information on sumer compliance regulations without community development techniques to distinguishing which of those actions bankers and the public through commuinvolved Regulation Z. nity affairs offices at the Reserve Banks Under the Interagency Enforcement • CRA analyses in processing appli- Policy on Regulation Z, 388 institutions cations from banks and bank holding supervised by the Board, the FDIC, the companies. OCC, and the OTS were required to refund $2.8 million on 17,110 accounts Under the provisions of the CRA, in 1995 for improper disclosures. In Federal Reserve examiners review the 1994, largely because of a single credit performance of state member banks in card issuer, $6.8 million was refunded helping to meet the credit needs of their on 137,504 accounts. communities. When appropriate, exam- The FTC issued three final consent iners suggest ways to improve CRA orders that alleged violations of the performance. During the 1995 reporting Truth in Lending Act. The cases period, the Federal Reserve conducted involved three automobile dealerships, 582 CRA examinations: 3 banks were three building firms, and a franchisor of rated as being in "substantial noncomvideo dating services and twenty-three pliance" with the CRA, 12 as "needs to of its franchisees. The FTC expects the improve" in meeting community credit respondents in the video case to make needs, 435 as "satisfactory," and 132 as refunds in excess of $200,000. "outstanding."9 The FTC also continued its consumer and business education efforts. To this Expedited Funds Availability Act end, the FTC completed a brochure (Regulation CC) about the new mortgage protections contained in the Truth in Lending Act and The FFIEC agencies reported that Regulation Z that pertain to home equity 76 percent of examined institutions were loans with rates above a certain percent- in full compliance with the Expedited age or fees above a certain amount. Funds Availability Act in 1995, about the same level as in 1994. Of the institutions not in full compliance, 78 percent Community Reinvestment Act were in the lowest-frequency category (Regulation BB) (between one and five violations). The Board assesses the CRA perfor- Among all institutions examined, the mance of state member banks during following five rules were the provisions regular compliance examinations and of Regulation CC most often violated: takes the CRA record into account, along with other factors, when acting on 9. Foreign banking organizations and Edge Act applications from state member banks and agreement corporations accounted for 238 of and bank holding companies. The Fedthe institutions examined for compliance with coneral Reserve System maintains a three- sumer laws; they are not subject to the CRA. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 215 • Follow special procedures for large CRA protests or adverse CRA ratings.10 deposits The System reviewed another twenty- • Adequately train employees and three cases that involved fair lending provide procedures to ensure compliance and other issues related to compliance • Provide the required second-day with consumer regulations.11 availability for specified items Among the seventy-five cases involv- • Provide adequate written notice ing CRA concerns, seventeen involved when the bank extends the time that adverse CRA ratings, fifty-three were funds will be unavailable based on protested on CRA grounds, and five a permitted exception, including the involved both adverse CRA ratings and reason for not providing normal protests. availability Several applications related to major • Provide immediate availability on bank mergers; all had been protested on $100 of deposits not subject to next-day CRA grounds. The Board approved the availability. mergers, finding in each case that convenience and needs factors were consistent The Board issued one cease-and- with approval. desist order and one civil money pen- In October the Board approved the alty, and the OTS issued two formal application of First Union Corporation enforcement actions. The FDIC reported (Charlotte, North Carolina) to acquire thirteen formal enforcement actions First Fidelity Bancorporation (Lawinvolving consumer compliance regula- renceville, New Jersey). With the acquitions without identifying the legislation sition, First Union became the sixth or regulations involved. largest banking organization in the nation. In November the Board approved the Unfair and Deceptive Acts application of NBD Bancorp (Detroit) or Practices to acquire First Chicago Corporation (Regulation AA) (Chicago), an acquisition that made NBD the seventh largest banking orga- The three financial regulatory agencies nization in the nation. with responsibility for enforcing Reg- In August the Federal Reserve held ulation AA's Credit Practices Rule public meetings in Boston, Hartford, and reported that more than 98 percent of Albany on an application by the Fleet examined banks were in full compliance Financial Group (Providence, Rhode with the regulation. The most frequent Island) to acquire Shawmut National violation involved the failure to provide Corporation (Hartford and Boston) amid a clear and conspicuous disclosure on protests against the acquisition. In cosigner liability. The Board issued one November the Board approved the cease-and-desist order and one civil application. With the acquisition of money penalty. Shawmut, Fleet became the dominant banking organization in New England Applications 10. These cases involved applications and requests for waiver of an application requirement. 11. Six cases involving CRA issues and five During 1995 the Federal Reserve Sysinvolving other compliance issues were withdrawn tem acted on seventy-five bank and bank during 1995. Twenty-three cases were pending as holding company cases that involved of year-end 1995. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 82nd Annual Report, 1995 and among the top ten in the country. application of Johnson International, The Board expressed concerns about a Inc. (Racine, Wisconsin), to acquire loan-pricing policy involving "over- Seaboard Savings Bank, F.S.B. (Stuart, ages" at one of Fleet's nonbanking sub- Florida). Johnson's lead bank had sidiaries because of its effect on minor- received three consecutive "unsatisfacity borrowers. tory" compliance ratings, the first in Also in November the Federal 1989 and the most recent in September Reserve held public meetings in New 1994. This application was the first to be York City on an application by Chemi- denied by the Board solely because of a cal Banking Corporation to acquire bank's compliance deficiencies. Chase Manhattan Corporation (both of In July the Board denied the applica- New York), for the largest U.S. bank tion of Totalbank Corporation of Florida merger to date. The meetings were con- (Miami) to acquire Florida International ducted jointly with the New York State Bank (Perrine, Florida). The Board Banking Department. At year-end the based the denial on the "less than satis- Board had not yet acted on the factory" CRA ratings received by Totalapplication.12 bank's two subsidiary banks from the In December the Board approved the FDIC and OCC respectively. application of NationsBank Corporation (Charlotte, North Carolina), the fourth Consumer Complaints largest banking organization in the country, to acquire Bank South Corpora- The Federal Reserve investigates comtion (Atlanta). plaints against state member banks, and During 1995 the Board denied two forwards to the appropriate enforcement applications on CRA or compliance agencies complaints that involve other grounds. In March the Board denied the creditors and businesses (see table). The Federal Reserve also monitors and analyzes complaints about unregulated 12. The Board approved the application on January 5, 1996. practices. Consumer Complaints to the Federal Reserve System Regarding State Member Banks and Other Institutions, by Subject, 1995 Subject State member Other Total banks institutions ' Regulation B (Equal Credit Opportunity) 70 38 108 Regulation E (Electronic Fund Transfers) 39 38 77 Regulation Q (Interest on Deposits) 1 2 3 Regulation Z (Truth in Lending) 207 218 425 Regulation BB (Community Reinvestment) 0 2 2 Regulation CC (Expedited Funds Availability) 16 33 49 Regulation DD (Truth in Savings) 27 44 71 Fair Credit Reporting Act 43 50 93 Fair Debt Collection Practices Act 11 10 21 Fair Housing Act 2 4 6 Flood insurance 0 1 1 Holder in due course 1 1 2 Real Estate Settlement Procedures Act 6 11 17 Unregulated practices 815 939 1,754 Total 1,238 1,391 2,629 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

Consumer and Community Affairs 217 Complaints about State lated lending practices (such as release Member Banks or use of credit information). Another 25 percent of the 1,238 complaints In 1995 the Federal Reserve received involved disputes about interest on 2,629 complaints: 2,193 by mail, 421 by deposits and general deposit account telephone, and 15 in person. The Fed- practices. The remaining 15 percent eral Reserve investigated the 1,238 com- concerned disputes about electronic plaints that were against state member fund transfers, trust services, and other banks. About 60 percent involved loan miscellaneous bank practices. functions (see table). Of these, 6 percent The System also received 2,463 inalleged discrimination on a prohibited quiries about consumer credit and bankbasis, and 54 percent concerned credit ing policies and practices. In responding denial on nonprohibited bases (such as to these inquiries, the Board and Federal length of residency) and other unregu- Reserve Banks gave specific explana- Consumer Complaints to the Federal Reserve System, by Function and Resolution, 1995 Loans Electronic Type of complaint Trust Total Deposits fund Other and resolution Discrimi- Other transfers services nation Complaints about state member banks, by resolution Insufficient information' 31 1 8 12 2 0 8 Information furnished to complainant2 67 2 42 15 1 1 6 Bank legally correct No reimbursement or accommodation 601 43 295 175 22 15 51 Reimbursement or accommodation— goodwill3 202 1 153 32 5 1 8 Bank error 161 5 100 32 4 2 18 Factual dispute 4 30 1 14 9 2 0 4 Possible bank violation5 21 3 10 6 2 0 0 Matter in litigation 6 9 2 16 0 0 0 Customer error 20 1 14 4 0 0 1 Pending, December 31 98 13 43 15 1 1 25 Total complaints, state member banks Number 1,238 72 680 306 39 16 217 Percent 100 6 54 25 3 2 10 Complaints referred to other agencies 1,391 52 695 373 38 16 217 Total 2,629 124 1,375 679 77 36 338 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

218 82nd Annual Report, 1995 tions of laws, regulations, and banking understanding between HUD and die practices and provided relevant printed federal bank regulatory agencies. In materials on consumer issues. 1995 the Federal Reserve referred twelve complaints about state member banks to HUD. Investigations completed Unregulated Practices for ten of the twelve complaints re- Under section 18(f) of the Federal Trade vealed no evidence of discrimination; Commission Act, the Board continued the remaining two complaints were to monitor complaints about banking pending at year-end. practices that are not subject to existing regulations and to focus on those com- Complaint Program Initiatives plaints that may be unfair or deceptive. Three categories accounted for 11 per- To gain a better understanding of the cent of the 1,754 complaints received type and scope of complaint activity at in 1995: problems involving credit card the federal level, the Board has underaccounts (61), interest rates and terms taken an exchange of complaint data of credit cards (78), and miscellaneous among the federal financial regulatory unregulated practices (59). Each of these agencies. During 1995 the Board joined categories accounts for a small number with the FDIC in analyzing the two (about 4 percent or less) of all consumer agencies9 respective systems for categocomplaints received by the System. rizing complaints and researched ways Many complaints about credit card to facilitate data exchange and analysis; accounts involved a variety of customer data exchange was expected to begin by service problems, including financial the second quarter of 1996. Work with institutions9 failing to close accounts as other agencies will follow. requested; sending periodic statements In 1995 the Consumer Complaints to the wrong address; and limiting the Section joined with the division's number of telephone inquiries made to Information Systems unit to develop the their service departments. Complaints Consumer Complaint Executive Inforabout issuers of credit cards covered mation System, a comprehensive system interest rate increases, allegations that that will consolidate all of the complaint banks are charging a higher-than-agreed program's current analysis tools. The interest rate on transferred account system, expected to be fully operational balances, and allegations that financial by mid-1996, will facilitate analysis of institutions did not keep their word on the types of discrimination complaints holding interest rates constant. Com- received by the Federal Reserve Sysplaints in the miscellaneous category tem; generate individualized response covered a wide range of issues including letters automatically; analyze data to the purchase of certificates of deposit determine complaint patterns and trends; check cashing, and the release of liens. and provide geographic and demographic analysis of data, along with other management tools. Complaints Referred to HUD In recent years the Federal Reserve The Federal Reserve continued to refer has received an increasing number of to the Department of Housing and consumer complaints about credit card Urban Development complaints that mail solicitations from financial allege violations of the Fair Housing institutions that consumers allege are Act, as required by a memorandum of misleading because they do not clearly Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 219 set out the interest rates being charged The program's most significant initiaand the credit limits offered. The Board tive to date is a nationwide campaign to has undertaken a study of the com- educate consumers about uninsured plaints received by the System as well products, especially mutual funds and as by the other federal financial regula- annuities, sold by financial institutions. tory agencies, state attorneys general, The project, carried out in cooperation and state banking departments. with the Federal Reserve Banks of To complement the data gathering, Minneapolis, Boston, Dallas, and Clevethe Board included questions on the Sur- land, and with assistance from the vey of Consumer Attitudes, conducted American Association of Retired Perby the University of Michigan's Survey sons, seeks to communicate the core Research Center, for two successive message that not all retail products months. These survey data will help offered by banks are insured. It offers a define consumers' understanding of the video and other resource materials to credit terms used in mail solicitations facilitate seminar presentations to conand identify problems they have sumers and training sessions for bankers experienced. Analysis of the survey data on guidelines issued by the federal bankand information from the state and fed- ing agencies. During 1995, sixty-four eral agencies is scheduled for comple- consumer seminars and forty-seven tion by mid-1996. banker training programs reached During 1995, individual staff mem- almost 4,800 consumers and nearly bers from the Reserve Banks' consumer 1,400 bankers. A series of town meetcomplaint sections continued to work at ings sponsored by the Securities and the Board for several weeks at a time Exchange Commission reached another to gain familiarity with operations in 2,150 consumers. More than 7,200 cop- Washington. Seven Reserve Banks par- ies of the video and more than 700 copticipated in the program. ies of the consumer seminar package have been distributed. The materials are available from the Board or electroni- Consumer Policies cally on the World Wide Web sites In 1995 the division formally estab- of the Minneapolis and Philadelphia lished a Consumer Policies program to Reserve Banks. explore alternatives to regulation for providing consumer protection in retail Consumer Advisory Council financial services. The program focuses on bringing research information to bear The Consumer Advisory Council met in more directly on the policymaking pro- March, June, and November to advise cess and is staffed by an economist with the Board on matters concerning conan academic background in methods of sumer credit protection laws and on information dissemination and in the other issues dealing with financial serstudy of consumer behavior. In its devel- vices to consumers. The council's thirty opment of strategies, the program will members come from consumer and target both lenders and consumers. Dur- community organizations, financial ining 1995 the program helped launch a stitutions, academia, and state and local focus-group project on consumer leas- government. Council meetings are open ing disclosures (as discussed above, in to the public. the section on proposed revisions to The council considered many topics Regulation M). during 1995. These included regulatory Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 82nd Annual Report, 1995 and legislative reform of the CRA; abuses that gave rise to the 1994 law other statutory amendments in omnibus had involved first mortgages and not burden-reduction bills; the potential just subordinate-lien transactions. Repimpact of technology on consumer resentatives of both industry and conbanking; use of mandatory arbitration sumer interests agreed that the proposed clauses in banks' agreements with con- legislative amendment creates a serious sumers; fair lending matters; the sale loophole in the Truth in Lending law. of uninsured investment products by The Board forwarded the council resoinsured depository institutions; the lution to the chairmen of the House waiver of consumers' right of rescission and Senate banking committees in for certain loans; Truth in Savings pro- November. posals on the calculation of the annual In regard to CRA reform, council percentage yields on deposit accounts; members discussed the fair assessment and the need for reconciling the require- of credit needs by financial institutions; ments that govern real estate mortgage the need for consistency among agentransactions under the Truth in Lending cies and examiners in rating instiand Real Estate Settlement Procedures tutions' CRA performance; and the Acts. extent to which the revised CRA At each of the three meetings, com- regulation will reduce regulatory burmittees and the full council discussed den and a perceived over-emphasis on various components of the Senate and documentation. House bills to reduce regulatory burden. Technology and consumer banking The views of industry concerning regu- was a major topic in November. Memlatory burden often diverged from those bers considered the potentially wider use of consumer and community groups. By of electronic cash, pilot projects for contrast, in November, members of the stored-value cards, and the lower operatcouncil's Consumer Credit Committee ing costs for institutions and greater offered, and the council unanimously flexibility for consumers that may flow adopted, a resolution suggesting that the from these electronic services. They also Congress drop a proposed amendment saw some potential drawbacks, such as to the Truth in Lending Act that would unequal access to the banking system exclude first-mortgage loans from provi- and the risk of loss from computer sions of the Home Ownership Equity breakdowns or security breaches. Protection Act of 1994. The 1994 law At all three meetings, the council requires special disclosures when lend- addressed matters regarding the Board's ers offer loans that bear interest rates proposed amendments to Regulation M, above a certain percentage or fees above primarily as it affects the consumer leas- $400, and sets substantive prohibitions ing of automobiles. Discussion centered against, among other things, balloon on the format of disclosures, means of payments and negative amortization. highlighting the most important items, In adopting the resolution, council and the best ways to convey information members expressed concern that, if about early-termination charges and enacted, the proposed legislation would about the choice between purchasing allow lenders to circumvent consumer and leasing an automobile. protections by replacing a homeowner's Roundtable discussions, known as the existing mortgage with a higher-cost Members Forum and held at each counloan that retained first-lien status. Coun- cil meeting, gave council members the cil members noted that many of the opportunity through the year to offer the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 221 Board their views on their industries or desire not to hinder the development of localities. these products by the application of the Electronic Fund Transfer Act, but it also suggested that the Congress should defer Testimony and Legislative the wholesale exemption of stored- Recommendations valued products from the act until some The Board twice testified before the basic analysis is conducted. Subcommittee on Financial Institutions and Consumer Credit of the House Recommendations Committee on Banking and Financial of Other Agencies Services: in March regarding CRA reform and in May regarding proposed Each year the Board asks for recommenlegislation on regulatory relief. In May dations that the federal supervisory the Board also testified before the agencies may have for amending the Subcommittee on Financial Institutions financial services laws or the impleand Regulatory Relief of the Senate menting regulations. Committee on Banking, Housing, and In 1995 the OCC suggested that the Urban Affairs on a wide range of Congress consider alternatives to make regulatory relief issues. In October consumer disclosures less burdensome the Board testified before the Subcom- for depository institutions and more benmittee on Domestic and International eficial to consumers than under current Monetary Policy of the House Com- laws. The OCC recommended also that mittee on Banking and Financial Ser- the Congress modify the ECOA provices on emerging electronic payment visions that require a referral to the technologies. Department of Justice when an agency The Board's testimony on burden finds a pattern or practice involving reduction supported efforts to reduce the violations of the nondiscrimination cost of complying with federal laws. rules. The OCC suggested either limit- The Board generally did not favor ing the mandate to refer cases—for proposals to substantially amend the example, to violations that involve par- CRA, believing that the interagency ticular prohibited bases—or alternaregulations adopted by the federal bank- tively, providing for waiver of referral if ing agencies in April 1995 ought to be a violation detected by the agency allowed to take effect. The Board also stemmed from an institution's selfdid not support a proposed transfer to assessment. the Board of rule writing authority for The FDIC reiterated support for prothe Real Estate Settlement Procedures posed amendments to the ECOA, EFT, Act, and it raised specific objections to Consumer Leasing, and Truth in Lendthe possibility of having to administer ing Acts pending in the Congress. The rules regarding prohibitions on kick- agency also noted its support, mentioned backs. The rule writing authority cur- in congressional testimony, for amendrently rests with HUD. ments to the Board's Regulation B that In regard to emerging technologies would permit creditors to request inforfor electronic payment systems such mation on race, color, national origin, as stored-value products, the Board sex, and religion from credit applicants. described some areas of concern, includ- Such information, the FDIC believes, ing the potential impact on monetary would enable institutions to review policy issues. The Board expressed a overall lending patterns to ensure that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 82nd Annual Report, 1995 customers are being treated in a fair, nondiscriminatory manner. The FDIC also expressed support for the Board's efforts to update and simplify the rules governing consumer lease transactions to reflect the marketplace more appropriately. The FTC endorsed both the regulatory review of lease disclosures now under way and an upcoming review of credit requirements under Regulation Z. The agency notes that consumer financing practices have changed considerably since 1981, when the Board last revised Regulation Z in its entirety following the enactment of the Truth in Lending Simplification and Reform Act of 1980. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

223 Litigation In 1995 the Board of Governors was a of a Board order, dated March 1, 1995, party in fifteen lawsuits filed that year approving notices by Bane One Corpoand was a party in seven other cases ration, Columbus, Ohio; CoreStates pending from previous years, for a total Financial Corp., Philadelphia, Pennsylof twenty-two cases. In 1994 the Board vania; PNC Bank Corp., Pittsburgh, had also been a party in a total of Pennsylvania; and KeyCorp, Cleveland, twenty-two lawsuits. Six of the fifteen Ohio, to acquire certain data processing lawsuits filed in 1995 raised questions assets of National City Corporation, under the Bank Holding Company Act. Cleveland, Ohio, through a joint venture A total of twelve cases were pending at (81 Federal Reserve Bulletin 491). The year-end 1995. case is pending. Jones v. Board of Governors, No. 95- 1142 (D.C. Circuit, filed March 3, Bank Holding Company Act— 1995), is a petition for review of a Board Review of Board Actions order, dated February 2, 1995, approv- Lee v. Board of Governors, No. 94-4134 ing applications by First Commerce (2d Circuit, filed August 22, 1995), is a Corporation, New Orleans, Louisiana, petition for review of two Board orders, to merge with City Bancorp, Inc., dated July 24, 1995, approving certain New Iberia, Louisiana, and First Banksteps of a corporate reorganization of shares, Inc., Slidell, Louisiana (81 Fed- U.S. Trust Corporation, New York, eral Reserve Bulletin 379). Petitioner's New York, and the acquisition of U.S. motion for injunctive relief and for a Trust by Chase Manhattan Corporation, stay of the Board's order was denied on New York, New York (81 Federal August 17, 1995. The case is pending. Reserve Bulletin 893). On Septem- Kuntz v. Board of Governors, No. 95ber 12, 1995, the court denied petition- 3044 (6th Circuit, filed January 12, er's motion for an emergency stay of the 1995) was a petition for review of a Board's orders. The case is pending. Board order, dated December 19, 1994, Jones v. Board of Governors, No. 95- approving an application by KeyCorp, 1359 (D.C. Circuit, filed July 17, 1995), Cleveland, Ohio, to acquire BankVeris a petition for review of a Board order, mont Corp., Burlington, Vermont (81 dated June 19, 1995, approving the Federal Reserve Bulletin 160). On Sepapplication by First Commerce Corpora- tember 21, 1995, the court granted the tion, New Orleans, Louisiana, to acquire Board's motion to dismiss. Lakeside Bancshares, Lake Charles, National Title Resource Agency v. Louisiana (81 Federal Reserve Bulletin Board of Governors, No. 94-2050 (8th 793). On November 15, 1995, the court Circuit, filed April 28, 1994), was a granted the Board's motion to dismiss petition for review of a Board order, the petition. The petitioner's motion for issued March 30, 1994, approving the reconsideration is pending. application of Norwest Corp., Minne- Money Station, Inc. v. Board of Gov- apolis, Minnesota, to acquire Double ernors, No. 95-1182 (D.C. Circuit, filed Eagle Financial Corp., Phoenix, Ari- March 30, 1995), is a petition for review zona, and its subsidiary, and thereby Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 82nd Annual Report, 1995 engage in title insurance agency activi- penalty assessment by the Board. On ties and real estate settlement services March 1, 1995, the court issued a stipu- (80 Federal Reserve Bulletin 453 lated order requiring the company to (1994)). On January 10, 1995, the court deposit $1 million into the registry of upheld the Board's order (1995 U.S. the court. App. Lexis 284, unpublished opinion). In DLG Financial Corp. v. Board of Governors, No. 94-891 (U.S. Supreme Court, filed November 14, 1994), appel- Litigation under the Financial lants sought review of an order of the Institutions Supervisory Act Fifth Circuit Court of Appeals (29 F.3d In Board of Governors v. Hotchkiss, 993) affirming both an asset freeze order Adversary No. 95-3146 (United States obtained by the Board in connection Bankruptcy Court, N.D. Ohio, filed with a pending enforcement action and May 1, 1995), the Board sought a deter- the district court's dismissal of appelmination that a restitution obligation lants' claims seeking an injunction and arising from a Board consent order was damages against the Board and the Fednondischargeable in bankruptcy (81 eral Reserve Bank of Dallas relating to Federal Reserve Bulletin 406). On the same enforcement action. On Feb- December 15, 1995, the court granted ruary 15, 1995, the Supreme Court disthe Board's motion for summary judg- missed appellants' petition for a writ of ment. The debtor filed a notice of appeal certiorari(115S. Ct. 1085). on December 22, 1995. In Cavallari v. Board of Governors, Board of Governors v. Scott, Misc. No. 94-4183 (2d Circuit, filed October No. 95-127 (LFO/PJA) (D. District of 17, 1994), a former outside counsel to a Columbia, filed April 14, 1995) is an national bank sought review of a Board application to enforce an administrative order of prohibition (80 Federal Reserve investigatory subpoena for documents Bulletin 1046 (1994)). The case was and testimony. On August 3, 1995, the consolidated with a petition for review magistrate judge issued an order grant- of orders issued by the Officew of the ing in part and denying in part the Comptroller of the Currency imposing a Board's application. The intervenor civil money penalty and cease and desist moved for reconsideration of a portion order against petitioner {Cavallari v. of the magistrate's ruling. The case is OCC, No. 94-4151). On May 11, 1995, pending. the court upheld the Board's prohibition In Board of Governors v. Din, No. order and the comptroller's civil money 95-1542 (J.C.L.) (D. New Jersey, filed penalty order and remanded to the March 30, 1995), the Board filed a peti- comptroller for further proceedings tion seeking to compel the defendant to regarding the order to cease and desist comply with an administrative subpoena (57 F.3d 137). duces tecum issued in connection with a In Board of Governors v. Pharaon, Board investigation. On April 26, 1995, No. 91-CIV-6250 (S.D. New York, the court granted the Board's petition. filed September 17, 1991), the Board In Board of Governors v. Interameri- sought to freeze the assets of an indicas Investments, Ltd., No. H-95-565 vidual pending the administrative adju- (S.D. Texas, filed February 24, 1995), dication of a civil money penalty assessthe Board sought to freeze certain assets ment by the Board. On September 17, of a company pending the admini- 1991, the court issued an order tempostrative adjudication of a civil money rarily restraining the transfer or disposi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 225 tion of the individual's assets. The order bank holding company. The case was has been extended by agreement. dismissed on August 24, 1995. In In re Subpoena Duces Tecum, Misc. No. 95-06 (D. District of Colum- Other Actions bia, filed January 6, 1995), the plaintiff Menick v. Greenspan, No. 95-CV- sought to enforce a subpoena for pre- 01916 (D. District of Columbia, filed decisional supervisory documents relat- October 10, 1995), is a complaint ing to an action by Bank of England alleging sex, age, and handicap dis- Corporation's trustee in bankruptcy crimination in employment. The case is against the Federal Deposit Insurance pending. Corporation. The case is pending. Kuntz v. Board of Governors, No. 95- Zemel v. Board of Governors, No. 1495 (D.C. Circuit, filed September 21, 95-5007 (D.C. Circuit, filed Decem- 1995), is a petition for review of a Board ber 30, 1994), was an appeal of a district order issued under the Federal Reserve court order dismissing an action against Act and the Bank Merger Act approving the Board under the Age Discrimination the application of the Fifth Third Bank, in Employment Act. On March 8, 1995, Cincinnati, Ohio, to acquire certain the court granted appellant's motion to assets and assume certain liabilities of withdraw the appeal and dismissed the twelve branches of PNC Bank, Ohio, action. N.A., Cincinnati, Ohio, and to establish In re Subpoena Duces Tecum, No. certain branches (81 Federal Reserve 94-MS-214 (D. District of Columbia, Bulletin 976). The case is pending. filed June 27, 1994), was a subpoena Vu Ti v. Board of Governors, No. CA enforcement action by the plaintiff in a 95-1663 (D. District of Columbia, filed securities fraud class action who was August 28, 1995), was a complaint seek- seeking examination reports and intering injunctive relief and damages from nal memos from the Board. On February the Board for alleged violations of plain- 1, 1995, the court granted the plaintiff's tiff's civil and constitutional rights stem- motion to compel, subject to the Board's ming from the cessation of her business right to claim privilege with respect to as a sidewalk vendor. On October 19, the documents sought. 1995, the plaintiff voluntarily dismissed Bennett v. Greenspan, No. 93-1813 the complaint. (D. District of Columbia, filed April 20, Beckman v. Greenspan, No. 95- 1993), was an employment discrimina- 35473 (9th Circuit, filed May 4, 1995), tion action. A jury verdict for the plainis an appeal of an order dismissing an tiff was rendered on October 13, 1994. action against the Board and others The Board's motion for a new trial on seeking damages for alleged violations the issue of damages was denied on of constitutional and common law January 9, 1995. rights. The case is pending. In re Subpoena Duces Tecum, No. 95-5034 (D.C. Circuit, filed January 26, 1995), was an appeal of a partial denial of plaintiff's motion to compel production of examination and other supervisory materials in connection with a shareholder derivative action against a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

227 Legislation Enacted Among the legislation enacted by the TILA limits lender liability for mort- Congress during 1995, the Truth in gage transactions consummated before Lending Act Amendments of 1995, the September 30, 1995, except where bor- Mexican Debt Disclosure Act of 1995, rowers sought to assert their legal rights and the Paperwork Reduction Act of before the dates specified in the act. For 1995 directly affect the Federal Reserve these transactions, creditors will have no System or the institutions it regulates. civil, administrative, or criminal liability, and borrowers will have no right to rescind their loans based on an inac- Truth in Lending Act curate finance charge disclosure if the Amendments of 1995 lender understated the finance charge by The Truth in Lending Act Amendments $200 or less or if the lender overstated of 1995 (TILA), Public Law 104-29, the actual finance charge. In addition, was enacted on September 30, 1995. for purposes of the borrower's right to TILA is intended to address concerns of rescind a mortgage loan, the disclosed mortgage lenders arising out of a 1994 finance charge will be considered accucourt decision, Rodash v. AIB Mortgage rate if it did not vary from the actual Co., 16 F.3d 1142 (11th Cir. 1994). charge by more than 1 percent of the In Rodash the U.S. Court of Appeals amount of credit extended for most refiruled that in connection with a mortgage nancings in which no new money is refinancing, the creditor incorrectly dis- advanced (or by more than Vi percent closed $22 in courier fees and a state for other rescindable mortgage loans). intangibles tax of approximately $200, The act is intended to prevent litigawith the result that both the finance tion concerning future mortgage loans charge and the annual percentage rate that involve relatively minor disclosure were understated. Because of these and violations and creates a separate set of other errors, the consumer was permit- tolerance rules for new loans secured ted to rescind the loan and recover all by real property or dwellings. For these fees and finance charges that had been transactions, the act considers the dispaid. A number of class action lawsuits closed finance charge to be accurate and filed subsequent to Rodash alleged vio- absolves lenders from any type of lialations for the failure to disclose certain bility if the disclosed amount is underfees as finance charges and sought the stated by $100 or less or if it is overremedy of rescission for thousands of stated. Borrowers who can establish a loans. Many of these lawsuits were put violation of the Truth in Lending Act on hold in May 1995, when the Con- under the new tolerance levels may, gress enacted a temporary moratorium however, receive larger damage awards on such litigation. The moratorium under the new law. If a borrower seeks expired October 1, 1995, and has now rescission after foreclosure proceedings been replaced by the TILA amendments. are initiated on the borrower's primary Those lawsuits will now proceed under dwelling, a lower tolerance will be the new law, which limits the lenders' applied to determine the borrower's liability. right to rescind the transaction. In such Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 82nd Annual Report, 1995 a case, the disclosed finance charge Mexican Debt Disclosure will be considered accurate if it is Act of 1995 understated by $35 or less or if it is The Mexican Debt Disclosure Act, Puboverstated. lic Law 104-6, was enacted on April 10, The act also provides greater clarity 1995. The act requires the Department with respect to the disclosure requireof the Treasury to provide detailed ments for mortgage transactions by monthly reports concerning all guaranlisting closing-related costs that are to tees issued to, and short-term and longbe excluded from the finance charge. term currency swaps with, the govern- Among these are fees imposed by thirdment of Mexico by the U.S. government, party closing agents that are neither including the Federal Reserve. The act required nor retained by the lender, fees requires the President to submit reports for preparing loan-related documents, semiannually to the House and Senate fees related to property inspections con- Banking committees describing changes ducted prior to closing, and taxes on in the Mexican economy, regulatory security instruments or documents eviactions taken by the Mexican governdencing indebtedness that are paid as a ment, and all outstanding loans, credits, precondition for recording the instruand guarantees provided to the Mexican ment. On the other hand, the act requires government by the U.S. government, the Board to promulgate a regulation including the Federal Reserve. The act that would include all mortgage broker also includes a provision for Presidenfees paid by a borrower in the finance tial certification of certain currency charge. swaps between Mexico and the United Finally, the act directs the Board States by either the Exchange Stabilizato report to the Congress within six tion Fund or the Federal Reserve. months with recommendations for statutory and regulatory changes necessary to assure that disclosed finance Paperwork Reduction charges more accurately reflect the Act of 1995 cost of credit. In the report, the Board must address the feasibility of includ- The Paperwork Reduction Act of 1995, ing in the disclosed finance charge Public Law 104-13, was enacted on all fees paid directly or indirectly by May 22, 1995, and took effect on the borrower and imposed directly or October 1, 1995. It reauthorizes and indirectly by the lender (other than amends the Paperwork Reduction Act of those payable in a strictly "cash" trans- 1980, which gave the White House action). The report must also address authority to review government paper- "abusive refinancing practices" used work requirements in order to reduce by lenders in order to avoid bor- the paperwork burdens imposed by the rowers' right of rescission. The act federal government on the public. The directs the Board to modify Regulation 1995 act reaffirms the authority of the Z within one year to implement the Office of Management and Budget report's recommendations in a manner (OMB) to review and approve federal consistent with the existing statutory requests for paperwork, and it reverses a provisions. 1990 Supreme Court decision that held Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 229 that the 1980 act did not apply to that under the 1980 act, the clearance requirements to disclose information to process for collection devices did not third parties. include devices designed to disclose The 1995 act reaffirms the authority information to parties other than the of the OMB's Office of Information and government. The 1995 act reverses Dole Regulatory Affairs (OIRA) to review and requires that both information coland approve federal requests for paper- lected directly from businesses and diswork. The act requires OIRA to assign closures that businesses must make to to all federal information requests a con- third parties be included in estimates of trol number. Once a control number is paperwork burdens. assigned, the director of OMB must take The act provides a six-year reauthoriaction on the proposed request within zation of appropriations for OIRA for sixty days. If OMB fails to take action fiscal years 1996-2001, at $8 million within sixty days, the control number per year. The act sets a goal of reducing expires within a year. The public is not federal paperwork burdens 10 percent in required to respond to a federal request fiscal 1996 and 1997 and 5 percent in for information unless it displays a valid each of the following years through control number. Individuals can point fiscal 2001. to the lack of a control number as a defense against a penalty assessment or similar action arising from the failure to comply with a request for information. The act also allows individuals to request a written determination from OMB as to whether a federal paperwork requirement complies with the act, and it gives the director of OMB authority to seek remedial action. The act gives OIRA the authority to establish standards to be used by federal regulators in estimating the burdens imposed on the public by proposed paperwork requirements and directs OIRA to work with OMB's federal procurement office to reduce burdens associated with federal contracting. The act also gives OIRA broader authority to establish governmentwide policy on information resources management and ties decisionmaking on such management to an agency's performance. Finally, the act overturns the 1990 Supreme Court decision in Dole v. United Steelworkers of America, 494 U.S. 26 (1990). In Dole the Court held Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

231 Banking Supervision and Regulation The U.S. commercial banking industry Federal Reserve issued advisories to its in 1995 booked its fourth consecutive examiners and regulated institutions outyear of record profits. Earnings growth lining the key elements of risk managewas fueled in part by a continued strong ment for both investments and end-user expansion in lending activity and by derivative activities. In addition, the increases in fee income and trading Federal Reserve initiated a formal superrevenue. Banks also benefitted from visory rating system for evaluating the favorable trends in overhead expense, in strength of an institution's entire risk part because of lower deposit insurance management process; beginning in premiums. Financial markets viewed 1996, formal ratings under the system these events favorably, with share prices will be fully incorporated into the superof the largest institutions increasing visory ratings of banks and bank holdmore rapidly than broad market indexes. ing companies. The favorable valuation also reflects Along with the other banking agenseveral large mergers during the year cies, the Federal Reserve in 1995 took that accentuated the trend toward con- steps to adjust and strengthen risk-based solidation in the industry. capital standards in several areas. In The number and assets of failed com- conjunction with an international agreemercial banks remained small in 1995, ment, the Board revised its capital reand those of problem banks declined quirements related to derivative instrusharply. These trends, combined with ments to recognize the effect of bilateral continued efforts by the industry to con- netting agreements and to refine the trol asset quality and to strengthen its assessment of credit exposure arising capital position, reflect favorably on the from certain derivative contracts. The industry's condition and its ability to Board further amended its capital stanmeet the nation's financial needs. dards to take account of interest rate Despite its general strength, the bank- risk, to reduce capital requirements for ing industry continues to face important certain assets sold with recourse, and to challenges. As underscored by the fail- determine a treatment for purchased ure of Barings PLC and serious losses mortgage servicing rights. Also in conat the U.S. offices of Daiwa Bank, the junction with other national authorities, application of sound risk management the Board published for comment a to expanding lines of business and prod- revised proposal to incorporate the maructs requires the careful attention of ket risk from trading activities into the institutions, especially in light of the capital standards. swift pace of financial and technological innovation and the increasing complex- Scope of Responsibilities for ity of many financial products. Accord- Supervision and Regulation ingly, the Federal Reserve in 1995 continued to place increasing supervisory The Federal Reserve is the federal emphasis on the importance of risk man- supervisor and regulator of all U.S. bank agement. Building upon earlier initia- holding companies and of statetives focusing on trading activities, the chartered commercial banks that are Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 82nd Annual Report, 1995 members of the Federal Reserve Sys- aries, and representative offices of fortem. In overseeing these organizations, eign banks in the United States. the Federal Reserve primarily seeks to The Federal Reserve exercises imporpromote their safe and sound operation tant regulatory influence over the entry and their compliance with laws and into, and the structure of, the US. bankregulations, including the Bank Secrecy ing system through its administration Act and consumer and civil rights laws.1 of the Bank Holding Company Act, the The Federal Reserve also examines the Bank Merger Act for state member following specialized activities of these banks, and the Change in Bank Control institutions: electronic data processing, Act for bank holding companies and fiduciary activities, mutual fund activi- state member banks. Also, the Federal ties, government securities dealing and Reserve is responsible for imposing brokering, municipal securities dealing, margin requirements on securities transsecurities clearing activities, and securi- actions. In carrying out these responsities underwriting and dealing through bilities, the Federal Reserve coordinates special subsidiaries. its supervisory activities with other fed- The Federal Reserve also has respon- eral and state regulatory agencies and sibility for the supervision of (1) all with the bank regulatory agencies of Edge Act corporations and agreement other nations. corporations, (2) the international operations of state member banks and U.S. Supervision for Safety bank holding companies, and (3) the and Soundness operations of foreign banking companies in the United States.2 The Foreign To ensure the safety and soundness of banking organizations, the Federal Bank Supervision Enhancement Act of Reserve conducts on-site examinations 1991 increased the Federal Reserve's and inspections and off-site surveillance authority over the establishment, examiand monitoring; it also undertakes ennation, and termination of branches, forcement and other supervisory actions. agencies, commercial lending subsidi- Examinations and Inspections 1. The Board's Division of Consumer and The on-site review of operations is an Community Affairs is responsible for coordinating integral part of ensuring the safety and the Federal Reserve's supervisory activities with regard to the compliance of banking organizations soundness of financial institutions. The with consumer and civil rights. To carry out this Federal Reserve conducts examinations responsibility, the Federal Reserve specifically of state member banks, branches and trains a number of its bank examiners to evaluate agencies of foreign banks, Edge Act corinstitutions with regard to such compliance. The porations, and agreement corporations; chapter of this REPORT covering consumer and community affairs describes these regulatory because the elements to be reviewed at responsibilities. Compliance with other statutes bank holding companies and their suband regulations, which is treated in this chapter, is sidiaries are different than they are in the responsibility of the Board's Division of Bankexaminations, the Federal Reserve coning Supervision and Regulation and the Reserve Banks, whose examiners check for safety and ducts what are termed inspections of soundness. holding companies and their subsidi- 2. Edge Act corporations are chartered by the aries. However, regardless of whether Federal Reserve, and agreement corporations are it is an examination or inspection, the chartered by the states, to provide all segments of review entails (1) an appraisal of the the U.S. economy with a means of financing international trade, especially exports. quality of the institution's assets, (2) an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 233 evaluation of management, including an ber banks and with directors of those assessment of internal policies, pro- that displayed significant weaknesses. cedures, risk management, controls, and operations, (3) an assessment of the key Bank Holding Companies financial factors of capital, earnings, asset and liability management, and At year-end 1995, the number of bank liquidity, and (4) a review for com- holding companies totaled 6,004, a pliance with applicable laws and decline of 15 from the preceding year. regulations. These organizations controlled about 7,577 insured commercial banks and held approximately 94 percent of the State Member Banks assets of all insured commercial banks At the end of 1995, 1,042 state-chartered in the United States. banks belonged to the Federal Reserve Federal Reserve guidelines call for System (excluding nondepository trust annual inspections of large bank holding companies and private banks), an companies and smaller companies with increase of 62 from year-end 1994. significant nonbank assets. Small com- These banks represented about 10 per- panies (those with assets of less than cent of all insured commercial banks $150 million) that do not have problems and held about 23 percent of all insured are selected for inspection on a sample commercial bank assets. basis, and medium-sized companies The guidelines for Federal Reserve ($150 million to $500 million in assets) examination are fully consistent with that do not have problems are inspected section 10 of the Federal Deposit Insur- on a three-year cycle. The inspection ance Act as amended by section 111 of focuses on the operations of the parent the Federal Deposit Insurance Corpo- holding company, its nonbank subsidiration Improvement Act of 1991 and aries, and the overall condition of the by the Riegle Community Development consolidated organization. and Regulatory Improvement Act of In judging the financial condition of 1994. A full-scope, on-site examination subsidiary banks, Federal Reserve exis required at least once during each aminers consult the examination reports twelve-month period for all depository of the federal and state banking authoriinstitutions; however, well-capitalized ties that have primary responsibility for and well-managed institutions with the supervision of these banks, thereby assets of less than $100 million may be minimizing duplication of effort and examined every eighteen months. reducing the burden on banking organi- In conformance with legislated and zations. In 1995 the Federal Reserve internal examination guidelines, state inspected 1,935 bank holding compamember banks were examined as re- nies. Altogether, Federal Reserve quired in 1995. Altogether, the Reserve examiners conducted 1,930 bank hold- Banks conducted 613 examinations ing company inspections, 97 of which (some of them jointly with the state were conducted off-site, and state agencies), and state banking depart- examiners conducted 80 independent ments conducted 339 independent re- inspections. During 1995, Reserve quired examinations. As required under Bank officials held 271 meetings with Federal Reserve examination guidelines, the boards of directors of bank hold- Reserve Bank officials held 238 meet- ing companies to discuss supervisory ings with directors of large state mem- concerns. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 82nd Annual Report, 1995 Enforcement Actions, In 1995 the staff of the Division of Civil Money Penalties, and Banking Supervision and Regulation Significant Criminal Referrals forwarded 703 criminal referrals to the Fraud Section of the Criminal Division In 1995 the Federal Reserve Banks ret of die Department of Justice for incluommeiided and members of the Board's sion in its significant referral tracking T staff initiated and worked on, 132 system. enforcement cases involving 298 separate actions such as written agreements, Specialized Examinations cease and desist orders, removal and prohibition orders, civil money penal- The Federal Reserve conducts specialties, and prompt corrective action direc- ized examinations of banking organitives. Of these, 63 cases involving 109 zations regarding electronic data proactions were completed by year-end. cessing, fiduciary activities, government Of particular note woe the actions securities dealing and brokering, municithat the Board of Governors, in conjunc- pal securities dealing, securities cleartion with other federal and state bank ing, and securities underwriting and supervisors, took against The Daiwa dealing through so-called section 20 Bank, Limited, which resulted in the subsidiaries. The Federal Reserve also bank's consent to terminate its UJSL reviews state member banks and bank activities. The Daiwa case is the first in holding companies mat act as transfer which the Board of Governors has exer- agents. cised its termination authority under the Foreign Bank Supervision Enhancement Act In other significant matters, the Electronic Data Processing Board of Governors assessed civil Under the Interagency EDP Examimoney penalties totaling $760,500 in nation Program, the Federal Reserve 1995, including $600,000 against one examines the electronic data processing individual for violations of the Bank (EDP) activities of state member banks, Holding Company Act and $85,000 U.S. branches and agencies of foreign against a group of individuals for viola- banks, Edge Act corporations, Agreetions of, among other things, federal ment corporations, and independent data consumer protection laws and regula- centers that provide EDP services to tions. The Board of Governors also these institutions. During 1995, the Fedworked in coordination with the Depart- eral Reserve conducted 341 EDP examiment of Justice to address alleged dis- nations. The Federal Reserve also was criminatory lending practices at a state the lead agency on one examination member bank. of large multiregiona) data processing All final enforcement orders issued servicers examined with the Federal by the Board of Governors and all writ- Deposit Insurance Corporation (FD1C), ten agreements executed by the Federal the Office of the Comptroller of the Cur- Reserve Banks in 1995 are available to rency (OCQ, and the Office of Thrift the public. Besides formal enforcement Supervision (OTS). actions, the Federal Reserve Banks completed 183 informal enforcement actions, such as memorandums of under- Fiduciary Activities standings commitment letters, and board The Federal Reserve has supervisory resolutions. responsibility for institutions that hold Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 235 more than $6.7 trillion of discretionary 1995 the Federal Reserve conducted and nondiscretionary assets in various seventy-seven examinations of brokerfiduciary capacities. This group of insti- dealer activities in government securitutions includes 316 state-chartered ties at state member banks and foreign member banks and trust companies, banks. 90 nonmember trust companies that are subsidiaries of bank holding companies, and 8 entities that are branches or agen- Municipal Securities Dealers cies of foreign banking organizations and Clearing Agencies or Edge Act corporation subsidiaries of The Securities Act Amendments of 1975 domestic banking institutions, made the Board responsible for super- On-site examinations are essential to vising state member banks and bank ensure the safety and soundness of holding companies that act as municipal financial institutions that have fiduciary securities dealers or as clearing agenoperations. These examinations com- cies, The Board supervises forty-four prise (1) an evaluation of management, banks that act as municipal securities policies, audit and control procedures, dealers and four clearing agencies that and risk management, (2) an assessment act as custodians of securities involved of the quality of trust assets, (3) an in transactions settled by bookkeeping assessment of earnings, (4) a review for entries. In 1995 die Federal Reserve conflicts of interest, and (5) a review for examined all four of the clearing agencompliance with laws, regulations, and cies and twenty-two of die banks that general fiduciary principles. During deal in municipal securities. 1995, Federal Reserve examiners conducted 181 on-site trust examinations of state member banks and trust compa- Securities Subsidiaries nies, branches and agencies of foreign of Bank Holding Companies banking organizations, and Edge Act Section 20 of the Banking Act of 1933 corporation subsidiaries of domestic (the Glass-Steagall Act) prohibits the banking institutions; together, these affiliation of a member bank with a cominstitutions held approximately $6.2 tril- pany that is "engaged principally99 in lion in fiduciary assets. underwriting or dealing in securities, The Board in 1987 approved proposals by banking organizations to underwrite Government Securities Dealers and deal on a limited basis in specified and Brokers classes of bank "ineligible" securities The Federal Reserve is responsible for (that is, commercial paper, municipal examining the government securities revenue bonds, conventional residential dealing and brokering of state member mortgage-related securities,, and securibanks and foreign banks for compliance tized consumer loans) in a manner conwith the Government Securities Act of sistent with section 20 of the Glass- 1986 and regulations of the Department Steagall Act and with the Bank Holding of Treasury. Forty state member banks Company Act At that time, the Board and five state branches of foreign banks limited revenues from these newly have notified the Board that they are approved activities to no more than currently government securities dealers 5 percent of total revenues for each or brokers mat are not otherwise exempt securities subsidiary. This limit was from Treasury's regulations. During subsequently increased in September Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 82nd Annual Report, 1995 1989 to 10 percent. To calculate the Surveillance and Monitoring 10 percent limit, the Board in January The Federal Reserve monitors the finan- 1993 adopted an optional indexed cial condition and performance of indirevenue test that reflects the changes in vidual banking organizations and of the the level and structure of interest rates banking system as a whole to identify since 1989. areas of supervisory concern. Reserve In January 1989 the Board approved banks and the Board use automated applications by five U.S. bank holding screening systems to identify organizacompanies to underwrite and deal in cortions with poor or deteriorating financial porate and sovereign debt and equity profiles and to identify adverse trends securities, subject, in each case, to affecting the banking system as a whole. reviews of managerial and operational Information from these systems is then infrastructure and other conditions and used in supervisory decisions such as requirements specified by the Board. allocating extra supervisory or examina- Four of these organizations subsetion resources to institutions with detequently received authorization to underriorating financial conditions. write and deal in all of these types of Among the automated screening syssecurities. tems is a model for estimating examina- At year-end 1995 thirty-seven bank tion ratings, which helps in tracking the holding companies had so-called section overall financial condition of individual 20 subsidiaries authorized to underwrite organizations. Another primary off site and deal in ineligible securities. Of monitoring tool is a model that identifies these, twenty could underwrite any debt banks with characteristics of organizaor equity security; three could undertions that have previously failed and that write any debt security; and fourteen could potentially encounter deterioracould underwrite only the limited types tion within two years. of debt securities approved by the Board To assist supervisory staff in evaluatin 1987. The Federal Reserve uses speing individual bank holding companies, cialized procedures for reviewing operathe Federal Reserve implemented a tions of these securities subsidiaries; it revised surveillance program that incorconducted thirty-two such inspections in porates results of the examination rating 1995. model and on-site examination ratings. The bank holding company surveillance Transfer Agents program also identifies companies displaying positions out of line with the Federal Reserve examiners also conbulk of other institutions with respect to duct examinations of state member banks and bank holding companies that tier 1 capital, return on average assets, are registered transfer agents. Among noncurrent assets, and investment activiother things, transfer agents counter- ties. In addition, the Federal Reserve sign and monitor the issuance of securi- produces and distributes the quarterly ties, register their transfer, and exchange Bank Holding Company Performance or convert such securities. During 1995, Report, which contains detailed finan- Federal Reserve examiners conducted cial information on the condition and on-site examinations at 68 of the 190 performance of each bank holding banks and bank holding companies company. registered as transfer agents with the Automated monitoring systems rely Board. heavily on the information in regulatory Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 237 reports filed by banking organizations. eration of the supervisory authorities of To ensure the timeliness and accuracy of the countries in which they took place; the reports, the Federal Reserve main- when appropriate, the examinations tains the Regulatory Reports Monitoring were coordinated with the Office of the System to track domestic and foreign Comptroller of the Currency. Also, exbanking organizations that file late or aminers made seventy-one visitations to inaccurately. overseas offices (a visitation is a more general form of review) to obtain current financial and operating information International Activities and, in some instances, to evaluate their The Federal Reserve is responsible for compliance with corrective measures or supervising the international activities test-check their adherence to safe and of various banking entities. sound practice. Edge Act and Agreement Corporations U.S. Activities of Foreign Banks Edge Act corporations are international Foreign banks continue to be significant banking organizations chartered by the participants in the U.S. banking system. Board to provide all segments of the As of year-end 1995, 274 foreign banks U.S. economy with a means of financing from 63 countries operated 474 stateinternational trade, especially exports. licensed branches and agencies (of An agreement corporation is a state- which 35 are insured by the Federal chartered company that enters into an Deposit Insurance Corporation) as well agreement with the Board not to exer- as 73 branches and agencies licensed by cise any power that is impermissible for the Office of the Comptroller of the Curan Edge Act corporation. In 1995 the rency (of which 8 have FDIC insur- Federal Reserve examined seventy-six ance). These foreign banks also directly Edge Act and agreement corporations, owned 10 Edge Act corporations and which together at year-end held about 6 commercial lending companies. In $33 billion in total assets. addition, they held an equity interest of at least 25 percent in 98 U.S. commercial banks. Altogether, these U.S. offices Foreign-Office Operations of foreign banks controlled approxiof U.S. Banking Organizations mately 21 percent of U.S. banking assets The Federal Reserve examines the inter- at year-end. These foreign banks also national operations of state member operated 141 representative offices. An banks, Edge Act corporations, and bank additional 109 foreign banks operated in holding companies, principally at the the United States solely through a repre- U.S. head offices of these organizations, sentative office. where the ultimate responsibility for the The Federal Reserve has broad foreign offices lies. In 1995 the Federal authority to supervise and regulate for- Reserve conducted full-scope and eign banks that engage in banking and targeted-scope examinations of five for- related activities in the United States eign branches of state member banks through branches, agencies, commerand sixty-four foreign subsidiaries of cial lending companies, representative Edge Act corporations and bank holding offices, Edge Act corporations, banks, companies. All of the examinations and certain nonbanking companies. The abroad were conducted with the coop- Federal Reserve conducted or partici- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 82nd Annual Report, 1995 pated with state and federal regulatory have multiple U.S. entities and is authorities in the examination of 804 intended to better coordinate the efforts such offices during 1995. of the various U.S. supervisory agencies. Before the enactment of the Foreign The second part of the program is a Bank Supervision Enhancement Act review of the financial and operational of 1991 (FBSEA), the Federal Reserve profile of each FBO to assess its general had residual authority to examine all ability to support its U.S. operations and branches, agencies, and commercial to determine what risks, if any, the lending subsidiaries of foreign banks in FBO poses through its U.S. operations. the United States. The International Together, the two processes will give Banking Act of 1978 instructed the Fed- critical information to the U.S. supervieral Reserve to use, to the extent pos- sors in a logical, uniform, and timely sible, the examination reports of other manner. state and federal regulators. FBSEA amended the International Banking Act and increased the Federal Reserve's Examination Manual authority with respect to these foreign Recently, the U.S. state and federal bank operations, including representa- banking agencies worked together to tive offices. The Federal Reserve has develop a manual for conducting indiacted to ensure that all state and feder- vidual examinations of the U.S. branches ally licensed branches and agencies and agencies of FBOs. The manual, receive an on-site examination at least completed in 1995, serves as a primary, once during each twelve-month period comprehensive reference for examinaeither by the Federal Reserve or a state tion guidelines and procedures both for or other federal regulators. examiners and for the foreign banking FBSEA requires Federal Reserve ap- community in the United States. A task proval of the establishment of branches, force was formed in October 1995 to agencies, commercial lending company review and, if necessary, revise the subsidiaries, and representative offices manual. by foreign banks in the United States. In 1995 the Federal Reserve approved Technical Assistance applications by fifteen banks from twelve foreign countries to establish In 1995, System staff members particibranches, agencies, and representative pated on a number of technical assisoffices. tance missions and training sessions on bank supervisory matters for central banks in Eastern Europe, Asia, the Joint Program for Supervising the Caribbean, Latin America, and coun- U.S. Operations of Foreign Banking tries of the former Soviet Union. Organizations In 1995 the Federal Reserve, in cooperation with the other federal and state Supervisory Policy banking supervisory agencies, formally adopted the joint program for supervis- The Board amended its guidelines on ing the U.S. operations of foreign bank- risk-based capital and released for pubing organizations (FBOs). The program lic comment other proposals in this area consists of two major parts. The first and in the areas of derivatives and interfocuses primarily on those FBOs that est rate and market risks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 239 Risk-Based Capital Standards its capital adequacy. The final rule formalizes the existing supervisory prac- The risk-based capital requirements tice of considering interest rate risk in adopted by the Board in 1989 remained the evaluation of an institution's capital in effect in 1995. These requirements adequacy and supplements that practice implement the international risk-based by identifying the use of economic value capital standards that were proposed by as a key consideration in the evaluation. the Basle Committee on Banking Regulation and Supervisory Practices (Basle Recourse. The Board adopted a final Supervisors' Committee) and endorsed amendment, effective March 22, 1995, by the Group of Ten (G-10) countries in reducing the capital requirements for July 1988.3 The standards include a low-level recourse transactions. The framework for calculating risk-adjusted amendment implements section 350 of assets and assigning assets to broad catethe Riegle Community Development gories based primarily on credit risk. and Regulatory Improvement Act of Banking organizations are expected to 1994, which requires the federal bankmaintain capital equal to at least 8 pering agencies to issue regulations limitcent of their risk-adjusted assets. ing the amount of risk-based capital an To supplement the risk-based capital insured depository institution can be standards, the Board in 1990 also issued required to hold for assets transferred leverage guidelines setting forth miniwith recourse; the limit is to be the mum ratios of capital to total assets to maximum amount of recourse for which be used in the assessment of an instituthe institution is contractually liable. tion's capital adequacy. Recourse transactions involving small Amendments business obligations. Section 208 of the Riegle community development act During 1995 the Board adopted amendrequires the federal banking agencies to ments to its risk-based and leverage revise the regulatory capital treatment capital guidelines in the following areas. applied to recourse transactions involving small business obligations. The Interest rate risk. On August 2, 1995, Board adopted a final rule implementing the Board, together with the FDIC and section 208, effective September 1, the OCC, issued a final rule implement- 1995. The amendment permits qualifying the portion of section 305 of the ing banking organizations to maintain Federal Deposit Insurance Corporation capital against only the amount of Improvement Act of 1991 dealing with retained recourse on the transferred interest rate risk. The final rule amends small business obligations rather than the risk-based capital standards to state on the entire amount of assets sold with explicitly that, effective September 1, recourse, provided certain conditions are 1995, the banking agencies will conmet. sider "a bank's exposure to declines in To qualify for the preferential capital the economic value of its capital due to treatment, the banking organization changes in interest rates" in evaluating transferring the small business obligations generally must be well capitalized, 3. The Group of Ten consists of Belgium, Canthe transfer of the small business obligaada, France, Germany, Italy, Japan, the Nethertions must meet the sale criteria outlined lands, Sweden, Switzerland, the United Kingdom, and the United States. under generally acceptable accounting Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

240 82nd Annual Report, 1995 principles, and the transferring organiza- the other regulatory banking agencies tion must establish noncapital reserves issued a final revision to their respective sufficient to meet its reasonably esti- risk-based capital standards that incormated liability under the recourse porated this modification. Claims on the arrangement. Furthermore, the aggre- central governments of the OECD-based gate amount of recourse that is retained group of countries continue to be eligenerally cannot exceed 15 percent of gible for preferential capital treatment, the institution's total risk-based capital. but under the revision, claims on any country in that group that has resched- Derivatives transactions. The Board uled its external sovereign debt will adopted a final rule, effective October 1, receive the standard capital treatment 1995, addressing issues relating to the for five years after the rescheduling. The capital treatment of off-balance-sheet revision to the agencies' risk-based capiderivative transactions. The final rule, tal standards, and the modification to the which implemented a revision to the accord on which it was based, were Basle accord, amended and expanded made to ensure that membership in the the set of conversion factors used to OECD-based group of countries coincalculate the potential future credit cides with relatively low transfer risk. exposure of derivative contracts. The The final revisions to the agencies' stanrule also permits institutions to rec- dards will become effective April 1, ognize the effects of bilateral netting 1996. arrangements when calculating the potential future exposure for derivative contracts subject to qualifying bilateral Proposed Rule netting arrangements. During 1995 the Board issued for public comment a proposed supplement to the Originated mortgage servicing rights. risk-based capital framework. The Board, along with the other federal banking agencies, adopted an interim Measure for market risk. On July 25, rule, effective August 1, 1995, amend- 1995, the Board, together with the ing the risk-based capital guidelines to Office of the Comptroller of the Curtreat originated mortgage servicing rency and the Federal Deposit Insurance rights the same as purchased mortgage Corporation, issued a proposal to incorservicing rights for regulatory capital porate into the risk-based capital ratios purposes. The interim rule was devel- a capital charge for the market risk in oped in response to the Financial foreign exchange and commodity activi- Accounting Standards Board's State- ties and in the trading of debt and equity ment of Financial Accounting Standards instruments. Under the proposal, certain No. 122, Accounting for Mortgage institutions with significant trading Servicing Rights, which eliminated the activity would calculate capital requireaccounting distinction between origi- ments for market risk using either their nated and purchased mortgage servicing internal risk measurement models, rights. subject to specified parameters, or risk measurement techniques developed by Country transfer risk. A modification supervisors. The proposal was based on to the Basle Accord that involves coun- a proposed supplement to the Basle try transfer risk was completed during accord that was issued in April 1995. 1995. The Federal Reserve Board and The comment period for the Board's Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 241 proposal ended in September 1995. A tution's risk management processes, final amendment is expected in 1996 including its internal controls. The ratand would be effective at the end of ing system takes effect in 1996 for all 1997. state member banks and bank holding companies regardless of size; it represents a natural extension of current pro- Risk Management Guidance cedures, which incorporate an assess- Throughout 1995 the Board continued ment of risk management and internal to focus on the adequacy of risk man- controls during each on-site, full-scope agement practices and controls at bank- examination. The specific rating of risk ing institutions. management and internal controls will be given significant weight when evaluating management under the bank and Securities and Derivatives Used bank holding company rating systems. for Nontrading Purposes The greater focus on risk manage- Recognizing the increased complexity ment recognizes the changes brought and sophistication of financial instru- about by new technologies, product ments and strategies, the Federal innovation, and the size and speed Reserve in March issued a supervisory of financial transactions but does not letter to guide banking institutions in diminish the importance of reviewing evaluating the risk management prac- capital adequacy, asset quality, earnings, tices they use in their acquisition and liquidity, and other areas relevant to the management of securities and off- evaluation of safety and soundness. The balance-sheet derivative contracts for rating of risk management will bring nontrading purposes. The guidance together and summarize many of the emphasized the importance of active findings examiners have long made in oversight by the board and senior their review of these areas with regard management, adequate risk management to an institution's process for managing policies and limits, appropriate risk and controlling risks. measurement and reporting systems, and comprehensive internal controls as key elements of sound risk management. In Derivatives Disclosures and Supervisory addition, as with all risk-bearing activi- Reporting ties, institutions were advised that they The Federal Reserve and the Basle should fully support the risk exposures Supervisors Committee have a number of nontrading activities with adequate of initiatives underway to ensure that capital. The guidance complements a institutions involved in derivatives and supervisory letter issued in 1993 on trad- capital markets activities follow safe and ing activities at banking institutions. sound management practices, maintain adequate capital levels, and report the results of these activities in a transparent Adequacy of Risk Management manner. In May 1995 the Basle Comand Internal Controls mittee on Banking Supervision and the In response to the continuing changes in Technical Committee of the Internathe nature of banking markets, the Fed- tional Organization of Securities Comeral Reserve introduced in November a missions (IOSCO) established a joint formal supervisory rating system for framework for supervisory information evaluating the adequacy of an insti- about the derivatives activities of banks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

242 82nd Annual Report, 1995 and securities firms. The joint frame- and recommendations that contributed work is part of a continuing effort to to the 1994 disclosures; it also reviews improve supervisors' access to, and the improvements since 1993 in qualitaevaluation of, timely and comprehen- tive and quantitative disclosures about sive information about institutions' the credit and market risks of derivates activities involving over-the-counter and and about the earnings effects of exchange-traded derivatives. derivatives. The framework has two main parts. In November 1995 another joint The first part summarizes the risks asso- report on the public disclosure of tradciated with derivatives and discusses ing and derivatives activities of banks qualitative and quantitative information and securities firms worldwide was that supervisors could obtain to assess issued by the Basle committee and these risks. The framework also dis- IOSCO. The report provides an overcusses earnings information that may be view of the disclosures about trading useful in conducting supervisory analy- and derivatives activities in the 1994 sis. The second part sets forth a com- annual reports of a sample of the largest mon minimum supervisory information internationally active banks and securiframework that focuses on information ties firms in the G-10 countries and useful for supervisors as they begin notes improvements since 1993.4 The assessing the extent of an institution's analysis builds, in part, upon a framederivatives activities and their effect on work used by the Federal Reserve in its credit risk profile. The Basle Com- analyzing the trading and derivatives mittee on Banking Supervision and disclosures of major U.S. banking IOSCO plan to update the joint super- organizations. visory information framework periodi- The report's analysis revealed that a cally and incorporate information about number of firms in the sample have market risk into the common minimum made general improvements as well as framework at a later stage. significant voluntary innovations in their Over the past few years, industry annual report disclosures. Many institugroups and regulators have been issuing tions, however, have continued to disaccounting standards and regulations close very little about their trading and regarding the derivatives activities and derivatives activities. The report makes disclosures made by banks. The main recommendations for further improvethrust of these efforts has been to make ments in disclosures of qualitative and derivatives activities more transparent, quantitative information about instiin that relevant information will be pre- tutions' involvement in trading and sented in a way that allows the public derivatives activities, including their risk and regulatory authorities to make in- exposures and risk management policies formed judgments about a company's and the derivatives activities' effects on derivatives activity. In 1995 the Divi- earnings. The Basle committee and sion of Banking Supervision and Regu- IOSCO are planning to repeat the analylation published an analysis of the sis in 1996 with the expectation that derivatives-related disclosures in the 1993 and 1994 annual reports of the top ten U.S. banks that deal in derivatives {Federal Reserve Bulletin, vol. 81, Sep- 4. The total sample consisted of seventy-nine institutions holding more than $12 trillion in total tember 1995, pp. 817-31). The article assets and more than $62 trillion in notional summarizes the accounting standards amounts of derivative instruments. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 243 disclosure practices across international nation as a condition to selling, and to financial markets will converge further. maintain a recordkeeping system for bank sales personnel comparable to the NASD's Central Registration Deposi- Retail Sales of Nondeposit tory for broker-dealer personnel. Investment Products National Information Center In January 1995 the Federal Reserve along with the other federal banking The Division of Banking Supervision agencies, entered into an Agreement in and Regulation has overall responsibil- Principal with the National Association ity for the management of the National of Securities Dealers (NASD). Pursu- Information Center (NIC). The NIC ant to the agreement, Federal Reserve contains data bases that are maintained examiners have been coordinating at the Board of Governors and made examinations of bank-affiliated broker- available to staff members at the Board, dealers with the NASD to the extent the Reserve banks, and other federal and practicable. The agreement is intended state banking supervisors. The NIC to avoid duplication of supervisory comprises structure data for banks, nonefforts, lessen the burden on the broker- banks, and bank holding companies; dealers, and enhance the overall super- international data for U.S. holding visory process. companies and foreign banking organi- In September the federal banking zations with activities in the United agencies issued an interpretaion of the States; financial information, such as February 1994 interagency statement Call Report data for banks and FR-Y entitled "Retail Sales of Nondeposit report data for bank holding companies; Investment Products." The interpreta- and supervisory information based on tion addresses the application of the inspections and examinations. statement to a bank's dealer and trust During 1995, development of the departments and to standalone bank- Supervisory Information System (SIS) affiliated broker-dealers. The interpreta- database was combined with that of the tion also allows an abbreviated form of Federal Reserve Examination Database the minimum disclosures to be used (FRED). The SIS contains all the superexclusively in advertisements and indi- visory information within the NIC struccates that the minimum disclosures are ture. FRED is an executive information not required in other signs used exclu- tool that facilitates fairly complex analysively to identify the location where sis of NIC information on a personal products are available. computer. The redesign effort currently In October the federal banking agen- under way and scheduled for complecies sent letters asking the New York tion in early 1997, will provide flexibil- Stock Exchange, the NASD, and the ity by enabling the System to use exist- Municipal Securities Rulemaking Board ing technology for future changes and to permit bank retail sales personnel to enhancements. take the securities industry's profes- To expand the use of NIC, training sional qualification examinations. In the seminars were conducted for staff memletters, the banking agencies indicated bers throughout the System, and new an intention to adopt rules requiring applications were developed to make the bank sales personnel to pass the appro- vast amount of NIC data more easily priate professional qualification exami- accessible to the staff. In addition, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

244 82nd Annual Report, 1995 efforts have been made to make the NIC provides training at basic, intermediate, data and software available to state and advanced levels. Classes may be banking agencies for their use as a conducted in Washington, D.C., or at supervisory tool. regional locations and may be held jointly with regulators of other financial institutions. Training is also provided to Staff Training staff members of the Division of Bank- The Supervisory Education Program ing Supervision and Regulation and staff trains staff members having supervisory members of other divisions who are or regulatory responsibilities at the engaged in System supervisory and Reserve Banks, at the Board of Gover- regulatory activities. Students from nors, and at state banking departments. supervisory counterparts in foreign The program covers the four disciplines countries also attend on a spaceof bank supervision: bank examinations, available basis. An objective of the bank holding company inspections, program is to provide students with an surveillance and monitoring activities, increased awareness and knowledge of and applications analysis. The program the total supervisory and regulatory pro- Number of Sessions of Training Programs for Banking Supervision and Regulation, 1995 Program Total Regional Schools or seminars conducted by the Federal Reserve Core Schools Introduction to examinations 9 Financial institution analysis 11 Loan analysis 10 Bank management 6 1 Effective writing for banking supervision staff 24 24 Management skills 23 20 Conducting meetings with management 25 25 Other Schools Real estate lending seminar 5 Specialized lending seminar 5 Senior forum for current banking and regulatory issues 2 Bank operations 5 Bank applications 2 Bank holding company inspection 11 Basic entry-level trust 1 Advanced trust 1 Consumer compliance examination I 3 Consumer compliance examination II 4 Community Reinvestment Act training 5 Fair lending 3 Advanced Electronic Data Processing examination 1 Electronic Data Processing continuing education 1 Capital markets seminar 12 Section 20 securities seminar 6 Internal controls 3 Seminar for senior supervisors of foreign central banks1 . Other agencies conducting courses2 Federal Financial Institutions Examination Council 78 Federal Deposit Insurance Corporation or Office of the Comptroller of the Currency Federal Bureau of Investigation3 NOTE. . . . Not applicable. 3. Co-sponsored by the Federal Reserve, Federal 1. Conducted jointly with the World Bank. Deposit Insurance Corporation, Office of Thrift Supervi- 2. Open to Federal Reserve employees. sion, Office of the Comptroller of the Currency, and the Resolution Trust Corporation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 245 cess, including the interrelationships of dent days of training was 27,856 in the four functional areas, thus providing 1995; 25,036 in 1994; 26,938 in 1993; a higher degree of cross training among and 20,555 in 1992. staff members. The Federal Reserve System also The System participates in training gave scholarship assistance to the states offered by the Federal Financial Insti- for training their examiners in Federal tutions Examination Council and, to a Reserve and FFIEC schools. Through limited extent, in the training offered this program 761 state examiners were by certain other regulatory agencies. trained; 430 in Federal Reserve courses, Activities include developing and imple- 304 in FFIEC programs, and 27 in other menting basic and advanced training in courses. During 1995 the Federal various emerging issues as well as in Reserve also continued its participation such specialized areas as trust activities, in joint core supervision schools with international banking, electronic data the FDIC. processing, activities of municipal secu- Every staff member wishing to obtain rities dealers, capital markets, payment an examiner's commission is required to systems risk, white collar crime, prepa- demonstrate mastery of the core curricuration and presentation of testimony, lum and of a specialty area by passing income property lending, management, the Core Proficiency Examination, and instructor training. The System also which includes a core content area and a co-hosts the World Bank Seminar for specialty (Safety and Soundness, Constudents from developing countries. sumer Affairs, Trust, or EDP). In 1995, During 1995 the Federal Reserve con- ninety-one people registered to take ducted a variety of schools and semi- the Core Proficiency Examination, and nars, and Federal Reserve staff members sixty-seven took it by year-end (see participated in several courses offered table). by or cosponsored with other agencies, as shown on the accompanying table. Federal Financial Institutions In 1995 the Federal Reserve trained Examination Council 3,943 persons in System schools, 1,246 in schools sponsored by the Federal In November 1995 the Federal Reserve Financial Institutions Examination and the other federal banking agencies Council (FFIEC), and 217 in other announced, under the auspices of the schools for a total of 5,406 students FFIEC, the planned full adoption of genincluding 206 representatives from for- erally accepted accounting principles eign central banks. The number of stu- (GAAP) as the reporting basis for the Status of Students Registered for the Core Proficiency Examination, 1995 Specialty area Student status Core Safety and Electronic data Consumer Trust soundness processing Registrants 91 77 12 1 1 In queue 24 20 3 0 1 Taken 67 57 9 1 0 Passed 65 39 9 1 Failed 2 18 0 0 NOTE. Students choose a test in one specialty area to accompany the core examination. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

246 82nd Annual Report, 1995 balance sheet, income statement, and trading revenues and net interest marrelated schedules in bank Call Reports, gins. The FFIEC also agreed to make effective with the March 1997 report additional refinements to this informadate. While the accounting principles tion as of the March 1996 report date in used for bank Call Report purposes have a manner consistent with certain aspects generally been based on GAAP, full of the Supervisory Information Frameadoption of GAAP as the reporting basis work issued jointly by the Basle Comin the basic schedules of the Call Report mittee on Banking Supervision and the will eliminate existing differences with Technical Committee of the Interna- GAAP. In addition, this change will tional Organization of Securities Combring the accounting principles used for missions on May 16, 1995. Similar disbank regulatory reports into conformity closures were instituted for regulatory with the GAAP reporting basis used in reports by bank holding companies filed bank holding company FR-Y reports, with the Federal Reserve. savings association Thrift Financial The FFIEC published final guidance Reports, and general purpose financial on the Financial Accounting Standards statements. Furthermore, this uniform Board's Statement of Financial reporting basis is consistent with the Accounting Standards No. 114, objectives of section 307 of the Riegle Accounting by Creditors for Impairment Community Development and Regula- of a Loan (SFAS 114), in February 1995 tory Improvement Act of 1994, which and developed instructions for the bank requires the federal banking agencies to Call Report on this standard. The guidwork jointly to develop a single form for ance clarifies that allowances calculated the filing of core information by banks, under SFAS 114 may continue to be savings associations, and bank holding included in tier 2 capital and reaffirms companies. existing supervisory policies on non- During 1995 the FFIEC implemented accrual of interest income and the a number of improvements to disclo- classification of certain troubled collatsures for off-balance-sheet derivatives eralized loans. The FFIEC also issued instruments. The FFIEC developed implementation guidance with respect instructions to the bank Call Report to SFAS 122, Accounting for Mortgage effective as of the March 1995 report Servicing Rights, and SFAS 115, date, to implement an enhanced frame- Accounting for Certain Investments in work for derivatives reporting. Under Debt and Equity Securities. the enhanced framework, banks report In December 1995 the FFIEC gross or notional amounts of derivative announced a number of revisions to the contracts by class of instrument, type of Call Report. Several items will be risk exposure, maturity, and use of the deleted, effective as of the March 31, instruments. Banks also report the gross 1996, reporting date, to reflect the positive and negative fair values of results of an annual review of the Call derivatives broken down by type of risk Reports. New items will be added to the exposure and use of the instruments. Call Report to permit the agencies to In addition, the FFIEC collected data monitor bank regulatory capital ratios on the net credit exposure from deriva- more effectively, to provide better data tives (reflecting legally enforceable on short-term liabilities and assets for bilateral netting contracts), on the poten- liquidity purposes, and to provide infortial future credit exposure from deriva- mation necessary for the supervision of tives, and on the effect of derivatives on bank activities in other areas. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 241 The FFIEC also announced it is directly through a branch or agency adopting a new trust income statement or indirectly through a subsidiary comin the Annual Report of Trust Assets mercial lending company. The Board (FFIEC 001), effective for the Decem- has established regulations for the ber 1996 report date. In addition, it interstate banking activities of these forrevised the supplement to die Report of eign banks and for foreign banks that Assets and Liabilities of US. Branches control a US. subsidiary commercial and Agencies of Foreign Banks (FFIEC bank. 002) to adopt certain derivatives disclosures and to maintain consistency with Bank Holding Company Act the bank Call Report By law a company must obtain the Federal Reserve's approval if it is to form a Regulation of the U.S. Banking bank holding company by acquiring Structure control of one or more banks. Moreover, The Board administers the Bank Hold- once formed, a bank holding company ing Company Act the Bank Merger Act, must receive the Federal Reserve's and the Change in Bank Control Act for approval before acquiring additional bank holding companies and state mem- banks or nonbanking companies. ber banks. In doing so. the Federal In reviewing an application or notice Reserve acts on a variety of proposals filed by a bank holding company, the that directly or indirectly affect the Federal Reserve considers the financial structure of US. banking at die local, and managerial resources of the appliregional, and national levels. The Board cant the Mure prospects of both the also has primary responsibility for regu- applicant and the firm to be acquired, lating the international operations of the convenience and needs of the comdomestic banking organizations and munity to be served, the potential public the overall U.S. banking operations of benefits, and the competitive effects of foreign banks, whether conducted the proposal. Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1995 Acton anandiar -auSilaoriity dclegatte«l by iae Bnamd of Govonoours Direct aotiotn toysfae Pmpmsi Bcaand *of GoveoMars Divi<§»oaa <o(f Bamkiimg Office Federal oftfhe Sopervisiaa m& Reserve Basaiks Approved; Denied Approved Demed Approved Approved PeoMtoed fcMmMum&iholding l omsapm^ 33 2 Q @ 5 253 47 140 (osauapamy 22 <o o © 14 m § m K&wmm^hmk (0 Q © <© 0 Q © 0 Acqmumm Bank 55 1 0 0 16 24S © 320 Newtek 183 2 0 0 29 1 386 601 Bwfc service ooapootoom ... 10 Q 19 0 0 153 © 153 Otto- 4 0 .34 I 0 0 0 39 Tefal 297 5 34 1 64 724 433 155* Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

248 82nd Annual Report, 1995 In 1995, the Federal Reserve acted on agencies have adopted standard termi- 1,558 bank holding company and nology for assessing competitive factors related applications or notices. The Fed- in merger cases. The Federal Reserve eral Reserve received 340 proposals to submitted 1,014 reports on competitive organize bank holding companies and factors to the other federal banking denied 2; approved all 105 proposals to agencies in 1995. merge existing bank holding companies; received 320 requests for acquisitions Change in Bank Control Act by existing bank holding companies and denied 1; received 601 requests by exist- The Change in Bank Control Act ing companies to acquire nonbank firms requires persons seeking control of a engaged in activities closely related to bank or bank holding company to obtain banking and denied 2; and approved approval from the appropriate federal 192 other applications. Data on these banking agency in advance of the transand related bank holding company deci- action. Under the act, the Federal sions are shown in the accompanying Reserve is responsible for reviewing table. changes in the control of state member banks and of bank holding companies. In so doing, the Federal Reserve must Bank Merger Act review the financial position, compe- The Bank Merger Act requires that all tence, experience, and integrity of the proposed mergers of insured depository acquiring person; consider the effect on institutions be acted upon by the appro- the financial condition of the bank or priate federal banking agency. If the bank holding company to be acquired; institution surviving the merger is a state and determine the effect on competition member bank, the Federal Reserve has in any relevant market. primary jurisdiction. Before acting on a The appropriate federal banking agenproposed merger, the Federal Reserve cies are required to publish notice of considers factors relating to the financial each proposed change in control and to and managerial resources of the appli- invite public comment, particularly from cant, the future prospects of the existing persons located in the markets served by and combined institutions, the conve- the institution to be acquired. The fednience and needs of the community to eral banking agencies are also required be served, and the competitive effects of to assess the qualifications of each perthe proposal. The Federal Reserve must son seeking control; the Federal Reserve also consider the views of certain other routinely makes such a determination agencies on the competitive factors and verifies information contained in the involved in the transaction. proposal. During 1995 the Federal Reserve In 1995, the Federal Reserve acted approved 133 merger applications. As on 148 proposed changes in control of required by law, each merger is state member banks and bank holding described in this REPORT (in table 16 of companies. the Statistical Tables chapter). When the FDIC, the OCC, or the OTS has jurisdic- Public Notice of Federal Reserve tion over a merger, the Federal Reserve Decisions is asked to comment on the competitive factors to ensure comparable enforce- Each decision by the Federal Reserve ment of the antitrust provisions of the that involves a bank holding company, act. The Federal Reserve and those bank merger, or a change in control is Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 249 effected by an order or announcement. Banking and Nonbanking Proposals Orders state the decision, the essential During 1995, the Board approved a varifacts of the application or notice, and ety of merger proposals involving some the basis for the decision; announceof the largest banking organizations in ments state only the decision. All orders the United States. Most of these proposand announcements are released immeals generated many comments from diately to the public; they are subsethe public, particularly with respect to quently reported in the Board's weekly the Community Reinvestment Act, fair H.2 statistical release and in the monthly lending, and competitive issues. For one Federal Reserve Bulletin. The H.2 of these proposals, the Board conducted release also contains announcements of public meetings in three separate cities. applications and notices received by the The meetings facilitated the receipt of Federal Reserve but not yet acted on. comments from the many parties interested in that transaction. For another proposal, to form the largest banking Timely Processing of Applications holding company in the U.S., the Board conducted a two-day public meeting in The Federal Reserve maintains target New York City; the proposal was penddates and procedures for the processing ing at year-end. of applications. These target dates pro- In 1995 the Board continued to mote efficiency at the Board and the approve proposals by domestic bank Reserve Banks and reduce the burden holding companies and by foreign bankon applicants. The time allowed for a ing organizations to engage in securities decision ranges from thirty to sixty days, underwriting and dealing activities. For depending on the type of application or the first time, the Board permitted a notice. During 1995, 90 percent of the bank holding company engaged in a decisions met this standard. limited number of section 20 activities (rather than all types of section 20 activities) to underwrite and deal in Delegation of Applications certain "private ownership" industrial revenue bonds. Historically, the Board has delegated During the year, the Board also certain regulatory functions—including approved a proposal by a U.S. bank the authority to approve, but not to deny, holding company to indirectly acquire certain types of applications—to the interests in partnerships that would Reserve Banks, to the Director of the invest in a variety of assets, including Board's Division of Banking Superdiscounted bank loans and other debt vision and Regulation, and to the Secinstruments that are (or are expected to retary of the Board. The delegation of be) in default of their original terms. responsibility for applications permits staff members at both the Board and the Reserve Banks to work more efficiently Applications by State by removing routine cases from the Member Banks Board's agenda. In 1995, 84 percent of the applica- State member banks must obtain the pertions processed were acted on under mission of the Federal Reserve to open delegated authority. The Board contin- new domestic branches, to make investued its efforts during the year to stream- ments in bank premises that exceed line its processing procedures. 100 percent of capital stock, and to add Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

250 82nd Annual Report, 1995 to their capital bases from sales of Foreign Branches subordinated debt. State member banks of Member Banks must also give six months' notice of Under provisions of the Federal Reserve their intention to withdraw from mem- Act and of the Board's Regulation K bership in the Federal Reserve, although (International Banking Operations), the notice period may be shortened or member banks must obtain Board eliminated in specific cases. approval to establish branches in foreign countries. In reviewing proposed for- Stock Repurchases by Bank eign branches, the Board considers the Holding Companies requirements of the law, the condition of the bank, and the bank's experience A bank holding company sometimes in international business. In 1995 the purchases its own shares from its share- Board approved the opening of 14 forholders. When the company borrows the eign branches of 5 banks. money to buy the shares, the transaction By the end of 1995, 110 member increases the debt of the bank holding banks were operating 761 branches in company and simultaneously decreases foreign countries and overseas areas of its equity. Relatively larger purchases the United States; 76 national banks may undermine the financial condition were operating 640 of these branches, of a bank holding company and its bank and 34 state member banks were operatsubsidiaries. The Federal Reserve may ing the remaining 121 branches. In addiobject to stock repurchases by holding tion, 27 nonmember banks were operatcompanies that fail to meet certain staning 41 branches in foreign countries. dards, including the Board's capital guidelines. In 1995 the Federal Reserve reviewed fifty-one proposed stock repur- Edge Act Corporations chases by bank holding companies, all and Agreement Corporations of which were handled, under delegated authority, either by the Reserve Banks Under sections 25 and 25 (a) of the Fedor by the Secretary of the Board. eral Reserve Act, Edge Act and agreement corporations may engage in international banking and foreign financial transactions. These corporations, which International Activities of U.S. are usually subsidiaries of member Banking Organizations banks, may (1) conduct a deposit and The Board has several statutory respon- loan business in states other than that sibilities in supervising the international of the parent, provided that the busioperations of U.S. banking organi- ness is strictly related to international zations. The Board must provide autho- transactions and (2) make foreign rization and regulation of foreign investments that are broader than those branches of member banks; of overseas of member banks because they can investments by member banks, Edge invest in foreign financial organizations, Act corporations, and bank holding such as finance companies and leascompanies; and of investments by bank ing companies, as well as in foreign holding companies in export trading banks. companies. In addition, the Board is In 1995 the Federal Reserve approved required to charter and regulate Edge one new Edge Act corporation and three Act corporations and their investments. agreement corporations. At vear-end. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 251 seventy-six Edge Act and agreement Enforcement of Other Laws corporations were operating with forty- and Regulations two domestic branches. Effective The Board is also responsible for the January 1, 1993, the Board, in line enforcement of various laws, rules and with the latest revision to Regulation K, regulations other than those specifirequires each Edge Act corporation cally related to bank safety and soundthat is "engaged in banking" to mainness and the integrity of the banking tain a minimum ratio of qualifying structure. total capital to weighted risk assets of 10 percent. Financial Disclosure by State Member Banks Foreign Investments State member banks must disclose cer- Under the Federal Reserve Act and the tain information of interest to investors Bank Holding Company Act, U.S. bankif they issue securities registered under ing organizations may engage in activithe Securities Exchange Act of 1934. ties overseas with the authorization This information includes financial of the Board. Significant investments reports and proxy statements. By statrequire advance review by the Board, ute, the Board's financial disclosure although pursuant to Regulation K, most rules must be substantially similar to foreign investments may be made under those issued by the Securities and general-consent procedures that involve Exchange Commission. At the end of only after-the-fact notification to the 1995, thirty-six state member banks, Board. most of which are small or mediumsized, were registered with the Board under the Securities Exchange Act. Export Trading Companies In 1982 the Bank Export Services Act Bank Secrecy Act amended section 4 of the Bank Holding Company Act to permit bank holding The Currency and Foreign Transactions companies, their subsidiary Edge Act or Reporting Act (the Bank Secrecy Act) agreement corporations, and bankers' was originally designed as a means to banks to invest in export trading compa- create and maintain records of various nies, subject to certain limitations and financial transactions that otherwise after Board review. The purpose of this would not be identifiable in an effort to amendment was to allow effective par- trace the proceeds of illegal activities. ticipation by bank holding companies in In recent years, the Bank Secrecy Act the financing and development of export has been regarded as a primary tool in trading companies. The Export Trading the fight against money laundering. The Company Act Amendments of 1988 records required to be reported and provide additional flexibility for bank maintained by financial institutions holding companies engaging in export under the Bank Secrecy Act provide law trading activities. Since 1982 the Fed- enforcement officials with useful data eral Reserve has acted affirmatively on for aiding in the detection and prevennotifications by forty-eight bank holding tion of unlawful activity. At the same companies. time, these records provide assistance Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

252 82nd Annual Report, 1995 in the determination of the safety and summit was to develop a coordinated soundness of financial institutions. hemispheric response to money launder- In 1995 the Federal Reserve acted as ing activities in the Americas. the lead regulatory agency in the development of new anti-money laundering Securities Regulation examination procedures as required by the provisions of section 404 of the Under the Securities Exchange Act of Riegle Community Development and 1934, the Board is responsible for reg- Regulatory Improvement Act of 1994. ulating credit in certain transactions These procedures were added to the involving the purchase or carrying of newly developed Federal Reserve Bank securities. The Board limits the amount Secrecy Act examination procedures. of credit that may be provided by securi- The Federal Reserve, through its use of ties brokers and dealers (Regulation T), these procedures and other off-sight by banks (Regulation U), and by other measures, continued its efforts to moni- lenders (Regulation G). Regulation X tor compliance with the requirements of applies these credit limitations, or marthe Bank Secrecy Act by the institutions gin requirements, to certain borrowers it supervises. and to certain credit extensions, such as During 1995 the Federal Reserve, credit obtained from foreign lenders by through its appointed representative, U.S. citizens. continued to provide expertise and guid- Several regulatory agencies enforce ance to the Bank Secrecy Act Advisory compliance with the Board's securities Council, a committee created by Con- credit regulations. The Securities and gressional mandate to propose addi- Exchange Commission, the National tional anti-money laundering measures Association of Securities Dealers, and to be taken under the Bank Secrecy Act. the national securities exchanges exam- Also, through the Special Investigations ine brokers and dealers for compliance and Examinations Section, the Federal with Regulation T. The federal banking Reserve has assisted in the investiga- agencies examine banks under their tion of money laundering activities and respective jurisdictions for compliance provided anti-money laundering train- with Regulation U. The compliance of ing to designated staff members at each other lenders with Regulation G is Reserve Bank. examined by the Board, the Farm Credit The Federal Reserve has also contin- Administration, the National Credit ued its extensive participation in the Union Administration, or the Office of Financial Action Task Force, which in Thrift Supervision, according to the 1995, provided anti-money laundering jurisdiction involved. At the end of training to numerous foreign govern- 1995, 743 lenders were registered under ments. A representative of the Federal Regulation G, and 226 came under the Reserve participated in the Financial Board's supervision. Of these 226, the Action Task Force examinations of the Federal Reserve regularly inspects 216 progress made in adopting and imple- either biennially or triennially, accordmenting anti-money laundering mea- ing to the type of credit they extend. The sures by foreign governments. Through others are exempted from periodic onits representative, the Federal Reserve site inspections by the Federal Reserve also participated in the Summit of the but are monitored through the filing Americas Working Level Conference on of periodic regulatory reports. During Money Laundering. The purpose of the 1995, Federal Reserve examiners Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 253 inspected 108 lenders for compliance rities. In 1995 the foreign list was with Regulation G. revised in February, May, August, and In general, Regulations G and U November. The November foreign list impose credit limits on loans secured by contained 701 foreign stocks. publicly held securities when the pur- In 1995 the Board published proposed pose of the loan is to purchase or carry amendments to Regulation T for public those or other publicly held equity secu- comment. The amendments are part of rities. Regulation T limits the amount the Board's periodic review of its reguof credit that brokers and dealers may lations and reflect consideration of the extend when the credit is used to pur- comments submitted in response to chase or carry publicly held debt or its earlier Advance Notice of Proposed equity securities. Collateral for such Rulemaking. Many of the proposed loans at brokers and dealers must be amendments feature increased reliance securities in one of the following catego- on rules of the Securities and Exchange ries: those traded on national securities Commission and self-regulatory organiexchanges, certain over-the-counter zations. Others would make Regula- (OTC) stocks that the Board designates tion T consistent with Regulation G and as having characteristics similar to Regulation U. those of stocks listed on the national Under section 8 of the Securities exchanges, or bonds that meet certain Exchange Act, a nonmember domestic requirements. or foreign bank may lend to brokers or The Federal Reserve monitors the dealers who post registered securities as market activity of all OTC stocks to collateral only if the bank has filed an determine which of them are subject to agreement with the Board that it will the Board's margin regulations. The comply with all the statutes, rules, and Board publishes the resulting List of regulations applicable to member banks Marginable OTC Stocks quarterly. In regarding credit on securities. The 1995 the OTC list was revised in Febru- Board processed seven new agreements ary, May, August, and November. The in 1995. November OTC list contained 4,253 In 1995 the Securities Regulation stocks. Section of the Board's Division of Pursuant to a 1990 amendment to Banking Supervision and Regulation Regulation T, the Board publishes a list issued twenty-four interpretations of the of foreign stocks that are eligible for margin regulations. Those that presented margin treatment at broker-dealers on sufficiently important or novel issues the same basis as domestic margin secu- were published in the Securities Credit Loans by State Member Banks totheir Executive Officers, 1994-95 Range of interest Period Number Amount (dollars) rates charged (percent) 1994 October 1-December 31 684 23,755,000 3.7-21.0 1995 January 1-March 31 655 15,881,000 3.0-21.0 April 1-June 30 725 20,246,000 5.0-18.3 July 1-September 30 726 18,386,000 5.5-19.2 SOURCE. Call Report. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 82nd Annual Report, 1995 Transactions Handbook, which is part of the Federal Reserve Regulatory Service. These interpretations serve as a guide to the margin regulations. Loans to Executive Officers Under section 22(g) of the Federal Reserve Act, state member banks must include in each quarterly Call Report all extensions of credit made by the bank to its executive officers since the date of the bank's previous report. The accompanying table summarizes this information. Federal Reserve Membership At the end of 1995, 3,965 banks were members of the Federal Reserve System, a decrease of 146 from the previous year-end. Member banks operated 38,129 branches on December 31, 1995, a net increase of 1,041 for the year. Member banks accounted for 38 percent of all commercial banks in the United States and for 67 percent of all commercial banking offices; these values matched those for year-end 1994. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

255 Regulatory Simplification In 1978 the Board of Governors estab- sary burden. The Board also took lished the Regulatory Improvement actions to provide safety and soundness Project in the Office of the Secretary to guidelines that set forth broad, principlehelp minimize the burdens imposed by based standards; to streamline the regulation. In 1986 the Board reaffirmed risk-based capital treatment of small its commitment to regulatory improve- business obligations transferred with ment, renaming the project the Regula- recourse; and to expand the ability of tory Planning and Review Section and U.S. banking organizations to invest in assigning supervision of its work to the foreign companies without advance Board's Committee on Banking Super- approval. vision and Regulation. The purposes of the regulatory im- Comprehensive Reviews provement and simplification function are to ensure that the economic conse- Section 3O3(a)(l) of the Riegle Comquences for small business are consid- munity Development and Regulatory ered when regulations are written, to Improvement Act of 1994 requires that afford interested parties the opportunity each federal banking agency, including to participate in designing regulations the Board, conduct a review of its reguand comment on them, and to ensure lations and written policies for purposes that regulations are written in simple of streamlining, improving efficiency, and clear language. Staff members reducing unnecessary costs, and removcontinually review regulations for their ing inconsistencies and outmoded or adherence to these objectives. duplicative requirements. The act also During 1995 the Board took a variety requires the agencies work jointly to of actions to reduce the regulatory bur- make regulations and guidelines impleden on supervised institutions. These menting common statutory and superactions included a major commitment to visory policies uniform. The Board and fulfill the mandate of section 303 of the the other agencies must report to the Riegle Community Development and Congress by September 1996 on the Regulatory Improvement Act, which progress they have made. requires reviews of all regulations and The Board has placed a high priority written policies. In addition, the Board on fulfillment of section 303's mandate took action to clarify recordkeeping and has devoted considerable resources requirements for wire transfers; to per- to the project. The Board contemplates a mit flexibility in consumer accounts comprehensive review of all its regulaon receipts at automated teller machines tions and written policies, including polin order to reduce fraud; to establish icy statements, Board interpretations, a "safe harbor" from the anti-tying Supervisory Letters, and the like. restrictions of the Bank Holding Com- Revised proposals for several Board pany Act; and to revise the Community regulations have already been issued Reinvestment Act regulations to empha- for comment, including Regulation T size performance, promote consistency (Securities Credit by Brokers and Dealin evaluations, and eliminate unneces- ers), Regulation E (Electronic Fund Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 82nd Annual Report, 1995 Transfers), Regulation M (Consumer uniquely identify the customer's account Leasing), Regulation U (Securities or card; this requirement had posed Credit by Banks), and Regulation K, security risks for consumers and finansubpart A (Investments by Foreign cial institutions by making accessible to Banking Organizations in U.S. Subsidi- criminals information that could be used aries). Interagency efforts to make com- to make fraudulent withdrawals. The mon regulations and guidelines uniform revised rule will help to reduce fraud are under way as are internal reviews of without compromising consumers' abilpolicies and related guidance. ity to identify transactions at ATMs. The Board had issued an interim rule to address this problem in November 1994. Recordkeeping Requirements for Certain Financial Records Exception to Anti-tying In January 1995 the Board, in conjunc- Restrictions tion with the Department of the Treasury, adopted a final rule that established In April the Board established a "safe enhanced recordkeeping requirements harbor" from the anti-tying restrictions related to certain funds transfers and of the Bank Holding Company Act and transmittals of funds (wire transfers) by Regulation Y. The safe harbor permits all financial institutions. The final rule any bank or nonbank subsidiary of a reflected modifications to the proposed bank holding company to offer a disrule which reduced the burden associ- count on any product or package of ated with the rule while maintaining its products if a customer maintains a miniusefulness to law enforcement agencies. mum combined balance in deposits and Subsequent to the adoption of the other products specified by the institurule, several banks expressed concerns tion. The Board believes such discounts that compliance would be complicated are proconsumer and not anticompetiby differences in the meanings of defini- tive and had previously granted a simitions in the rule and the Uniform lar exception by order to a particular Commercial Code. The Treasury and banking institution. the Board proposed amendments to the definitions and technical conforming CRA changes to conform the meanings of the definitions in order to reduce confusion The purpose of the Community Reinas to the applicability of the rule and to vestment Act (CRA) regulations is to reduce the cost of complying with its establish the framework and criteria by requirements. The Board approved the which the agencies assess an instituconforming changes in December. tion's record of helping to meet the credit needs of its community, including low- and moderate-income neighbor- ATM Transaction Receipts hoods, consistent with safe and sound In March the Board adopted a final rule operations, and to provide that the amending Regulation E to permit finan- assessment shall be taken into account cial institutions more flexibility in iden- in reviewing certain applications. tifying consumer accounts on receipts at In April the federal banking agencies automated teller machines (ATMs). The issued completely revised CRA regulaamendment eliminated the requirement tions, which emphasize performance that an electronic terminal receipt rather than process by requiring reports Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Regulatory Simplification 257 on loans rather than on outreach efforts. Capital Treatment of Certain The revisions also promote consistency Small Business Obligations in evaluations by recognizing that differ- To implement section 208 of the Riegle ent types of institutions (large retail and Community Development and Regulasmall financial institutions, wholesale tory Improvement Act of 1994, the and limited-purpose institutions, and Board amended the risk-based capital institutions electing strategic plans) treatment of certain small business oblirequire different standards. And the gations. Under the revised rule, adopted revisions reduce data collection and in August, qualifying institutions that reporting requirements for smaller transfer small business obligations with institutions. recourse would be required to maintain capital only against the amount of Safety and Soundness Guidelines recourse retained rather than the entire amount of assets sold. As required by section 132 of the Federal Deposit Insurance Corporation Improvement Act, the Board issued final De Novo Investments in Foreign guidelines and a final rule, effective Companies as of August, regarding standards for In December the Board amended Regusafety and soundness at state member lation K (International Banking Operabanks. The guidelines set forth broad, tions) to provide expanded general conprinciple-based standards that establish sent authority for de novo investments the objectives that proper operations in foreign companies by U.S. banking and management should achieve, while organizations that are strongly capitalleaving the methods for achieving those ized and well managed. The expanded objectives to each institution. The final general consent authority is designed to rule establishes deadlines for submispermit such organizations to make larger sion and review of safety and soundness investments without the need for compliance plans that may be required advance approval or review. for insured depositories that fail to meet Investments under the expanded the guidelines. authority are subject to an annual At the same time, the Board issued aggregate limit and a post-investment proposed guidelines for safety and notice requirement. In addition, the soundness standards relating to asset amended rule streamlines the processing quality and earnings. As amended by of notices for those investments that the Community Development Act, secrequire advance notice to the Board. • tion 132 no longer requires the agencies to prescribe quantitative standards in these areas but rather standards they deem appropriate. The agencies have proposed asset quality and earnings guidelines that emphasize monitoring, reporting, and preventive or corrective action. Final action on these proposed guidelines is expected in spring 1996. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

259 Federal Reserve Banks In 1995 the Federal Reserve Banks com- second phase of their plan to consolipleted their first full year of operation date data processing within FRAS. under a new inter-Bank management Eleven Reserve Banks converted to structure for financial services. Under the national funds transfer and account the new structure, a policy committee— balance monitoring applications, and chaired by the President of the Federal two Reserve Banks (Minneapolis and Reserve Bank of St. Louis, Thomas C. Kansas City) converted to the national Melzer—establishes strategic directions automated clearinghouse (Fed ACH) and policies, and a management com- application. Four Reserve Banks— mittee develops and implements busi- Boston, New York, Philadelphia, and ness plans and coordinates activities of San Francisco—completed their converthe product offices. A separate product sions to shared environments at FRAS office exists for each of the following for the processing of individual District services and is directed by the first vice applications. In 1996 the Reserve Banks president of the indicated Reserve Bank: plan to complete their conversion to Fed retail payments (Boston), wholesale ACH and begin their conversion to the payments (New York), cash and fiscal new book-entry securities transfer and agency operations (Philadelphia), and banking statistics applications. automation and accounting support ser- Also during 1995 the Federal Reserve vices (San Francisco). The new manage- Banks continued implementing the Sysment structure will guide the Reserve tem's new national communications Banks as the financial services environ- network, Fednet, which is replacing the ment continues to evolve. FRCS-80 backbone network and the In other developments during 1995, twelve District networks. Fednet is a the Reserve Banks completed the first single unified communications network phase of the transfer of mainframe that eliminates variations in the level of computer operations to the System's service provided at different points in consolidated data centers, managed by the System and improves the reliability, Federal Reserve Automation Services security, and disaster recovery capabili- (FRAS). These data centers, located at ties of the network. In 1995 the Reserve the Richmond and Dallas Reserve Banks Banks installed equipment to support and at the East Rutherford (New Jersey) communications among the Banks' local Operations Center of the New York applications, such as electronic mail. In Reserve Bank, now handle all Reserve addition, the Banks continued convert- Bank mainframe applications except the ing to Fednet those depository institu- Fedwire funds and book-entry securities tions using leased-line connections to transfer applications of the New York the Reserve Banks. The Reserve Banks Bank and the check applications of most expect to complete the conversions of Reserve Banks. The New York Bank institutions to Fednet during 1996. plans to convert its wholesale payment The remainder of this chapter details operations to FRAS in 1997. 1995 results in Federal Reserve Bank The Reserve Banks also completed priced services, currency and coin several significant milestones in the operations, and fiscal agency services, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 82nd Annual Report, 1995 and reports on examinations, income years, the Federal Reserve System has and expenses, holdings of securities and recovered 101.0 percent of its costs, loans, and major construction activity. including the PSAF. The revenue from priced services in 1995 was $738.8 million, other income Developments in was $26.4 million, and costs were Federal Reserve Services $764.8 million, resulting in net revenue The Monetary Control Act of 1980 of $0.4 million and a recovery rate of requires the Federal Reserve System to 100.1 percent of costs, including the establish fees that, over the long run, PSAF but before the cumulative effect recover all direct and indirect costs of of a change in accounting principle. The providing services to depository institu- one-time charge for the cumulative tions, as well as imputed costs, such as effect on previous years of the retroacthe income taxes that would have been tive application of the accrual method of paid and the pretax return on equity that accounting for postemployment and would have been earned had the ser- vacation benefits resulted in a net loss of vices been provided by a private firm. $19 million.2 In 1994 the System's These imputed costs are collectively revenue was $14.0 million less than referred to as the private sector adjust- total costs, resulting in a recovery rate ment factor (PSAF).1 Over the past ten of 98.2 percent. 1. The imputed costs that are part of the PSAF 2. See the pro forma statements at the end of are interest on debt, return on equity, income and this chapter. Other income is the revenue from sales taxes, and assessments for deposit insurance investment of clearing balances net of earnings from the Federal Deposit Insurance Corporation. credits, an amount known as net income on clear- In addition, assets and personnel costs of the ing balances. Total cost is the sum of operating Board of Governors that are directly related to expenses, imputed costs (interest on debt, interest priced services are allocated to the Reserve Banks' on float, sales taxes, and the Federal Deposit Insurpriced services. In the pro forma statements at the ance Corporation assessment), imputed income end of this chapter, expenses of the Board of taxes, and the targeted return on equity. Net reve- Governors are included in operating expenses, and nue is revenue plus net income on clearing balassets of the Board are part of long-term assets. ances minus total cost. Activity in Federal Reserve Priced Services, 1995, 1994, and 1993 Thousands of items except as noted Percentage change Service 1995 1994 1993 1994-95 1993-94 Commercial checks 15,465,209 16,479,161 19,008,808 -6.2 -13.3 Funds transfers 77,742 73,611 71,199 5.6 3.4 Securities transfers 3,689 3,693 3,638 -.1 1.5 Commercial ACH 2,125,445 1,805,095 1,544,848 17.8 16.8 Noncash collection 838 643 1,020 30.3 -37.0 Cash transportation 108 98 65 10.2 50.8 Definitive safekeeping 17 ... -100.0 NOTE. Amounts in bold are restatements due to a cial items processed*, in noncash collection, the number of change in definition (securities transfers) and an error in items on which fees are assessed; in cash transportation, previously reported data (cash transportation). the number of armored-carrier stops; and in definitive Activity in commercial checks is defined as the total safekeeping, the average number of issues or receipts number of commercial checks collected, including both maintained. The Federal Reserve withdrew from the processed and fine-sort items; in funds transfers and definitive safekeeping service in 1993. securities transfers, the number of transactions originated ... Not applicable. on line and off line; in ACH, the total number of commer- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 261 Check Collection transactions via electronic transmissions from depository institutions. Federal Reserve Bank operating During 1995 the Federal Reserve conexpenses and imputed costs for comtinued to implement computer software mercial check services in 1995 totaled that can capture and store check images. $559.8 million. Revenue from check Paying banks that use truncation or other operations totaled $553.4 million, and electronic check presentment products other income amounted to $20.6 milcan use imaging technology to verify lion, resulting in income before income signatures on checks, streamline the taxes of $14.2 million.3 The Reserve handling of inquiries, and provide cop- Banks handled 15.5 billion checks, a ies of checks in customers' statements decrease of 6.2 percent from the volume rather than physical checks. The Cleveof checks handled in 1994. The volume land and Dallas Banks and the Helena of checks deposited in fine-sort deposit Branch of the Minneapolis Bank introproducts, requiring the depositing bank duced image products during 1995. The to presort items by paying bank, Minneapolis Bank began offering these declined 16.5 percent; the volume of products during 1994. In addition, the checks deposited in other deposit prod- Boston Bank offers an image-enhanced ucts declined 3.5 percent. notification product for return items that The Reserve Banks continued to provides institutions with images of cerencourage the use of electronics to tain returned checks one day sooner than improve the efficiency of check processthey would otherwise be available. ing. During 1995 nearly 1 billion In August 1995 the Chicago Bank checks, or 6.5 percent of all checks preopened a satellite facility in Peoria, Illisented to paying banks, were presented nois, to reduce the cost and improve the electronically, an increase of approxiquality of its check collection service. mately 70 percent over the 1994 level. The Reserve Banks also continued to offer electronic information products Funds Transfer and Net Settlement that enable depository institutions to Federal Reserve Bank operating exprovide timely cash-management inforpenses and imputed costs for Fedwire mation to their corporate customers. funds transfer and net settlement ser- During the year, several additional vices totaled $78.7 million. Revenue Reserve Banks began to accept elecfrom Fedwire and net settlement operatronic cash letters from depositing institions totaled $87.8 million, and other tutions. Electronic cash letters are elecincome amounted to $2.7 million, resulttronic files of the detailed check listings ing in income before income taxes of and totals that depositors must provide $11.8 million. with every deposit. Their use streamlines check processing and reduces costs by automating information at an ear- Funds Transfer lier stage than otherwise possible. In The number of Fedwire funds transfers addition, by the end of the year, most originated increased 5.6 percent, to Reserve Bank offices were able to 77.7 million—75.9 million value (moneaccept requests for adjustments of check tary) transfers and 1.8 million nonvalue messages. During 1995 eleven Reserve Banks 3. See the pro forma income statement for Federal Reserve priced services, by service. completed the conversion to a new cen- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 82nd Annual Report, 1995 tralized Fedwire funds transfer applica- involving a service provider that is tion. The New York Bank implemented located outside the United States, pendthe new application in its local data ing completion of a broader supervisory center. This new application is expected review of related issues in early 1996. to improve processing throughput, reliability, and the Reserve Banks' disaster Net Settlement recovery capabilities. In addition, the Reserve Banks began The Federal Reserve provides net settledevelopment efforts to modify the Fed- ment services to more than 150 local, wire funds transfer and Fedline appli- private-sector clearing and settlement cations to accommodate the expanded arrangements and to four such arrangeformat for transfer messages approved ments that operate nationwide. These by the Board in late 1994. Depository arrangements enable participants to institutions must be able to receive funds settle their net positions either via Fedtransfers in the new format by June 1997 wire funds transfers using special settleand to send transfers by December 1997. ment accounts at Federal Reserve Banks The expanded format will reduce or via accounting entries, which are manual interventions in the transfer posted to participants' Federal Reserve process, eliminate the need to truncate accounts by Federal Reserve Banks. payment-related information when for- Two of the national arrangements, the warding payment orders through Fed- Clearing House Interbank Payments wire that were received via other large- System and the Participants Trust Comvalue transfer systems, and allow pany, process and net large-dollar transadditional information about the origina- actions, the former for interbank funds tor and beneficiary of a transfer to be transfers and the latter for the settlement included in the transfer message, as of mortgage-backed securities transacrequired by the new Bank Secrecy Act tions. The other two national arrangerules adopted by the Department of the ments, Visa ACH and the National Treasury. Clearing House Association, process In August 1995 the Board approved and net small-dollar transactions, the certain modifications to its Fedwire former for automated clearinghouse policy on third-party access to clarify its transactions and the latter for check payscope and to reduce the administrative ments. The majority of local clearing burden of several provisions. Some arrangements are check clearinghouses. depository institutions have entered into arrangements in which a third party Book-Entry Securities provides operating facilities for their Fedwire funds and securities transfer Federal Reserve Bank operating exservices. Under such arrangements, the penses and imputed costs for bookthird party's actions may result in a debit entry securities transfer services totaled to the institution's Federal Reserve $16.4 million. Revenue from book-entry account. The policy provides important securities operations totaled $15.4 milsafeguards both to depository institu- lion, and other income amounted to tions participating in third-party access $0.5 million, resulting in a net loss arrangements and to the Reserve Banks. before income taxes of $0.5 million. The At the time the Board clarified certain Federal Reserve Banks processed provisions of the policy, it also placed 3.7 million transfers of government a moratorium on any arrangements agency securities on the Fedwire book- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 263 entry securities transfer system during Automated Clearinghouse the year, a 0.1 percent decrease from 1994.4 Federal Reserve Bank operating In August 1995 the Board approved a expenses and imputed costs for autofirm closing time of 3:15 p.m. eastern mated clearinghouse (ACH) services time for the origination of transfers and totaled $69.0 million. Revenue from 3:30 p.m. eastern time for reversals, ACH operations totaled $73.4 million, both closing times to become effective and other income amounted to $2.3 mil- January 2, 1996. The Board believes lion, resulting in income before income that these new closing times will benefit taxes of $6.7 million. The Reserve market participants by reducing uncer- Banks processed 2.1 billion commercial tainty about the final closing time of the ACH transactions during the year, an system due to ad hoc operating hour increase of 17.8 percent over 1994 volextensions. Market participants, there- ume levels. fore, will be able to manage resources The development of software to and control costs more effectively than support ACH services in the Federal in the past. The Federal Reserve Banks, Reserve's new consolidated data prohowever, still retain the flexibility to cessing environment was completed. extend the closing time to facilitate the The new software incorporates a flow smooth functioning of the government processing concept and will provide a securities market and to minimize the number of new deposit and delivery systemic risk that may arise due to sig- options. It will also allow customers nificant operating problems at one or to trace ACH transactions or files of more depository institutions or major transactions electronically, check the dealers. Extensions are granted based on status of a file in process, and obtain established criteria with regard to the limited information from the Federal total value of unsent transfers and the Reserve's database on other ACH paramount of time required to resolve the ticipants. The Minneapolis and Kansas operational problems. City Banks began processing ACH Throughout 1995, development work transactions with the new software in continued on the new National Book- 1995. The remaining ten Districts are Entry Securities System, the centralized expected to convert to the new software application that will replace the two during 1996. securities applications the Reserve In August 1995 the Board requested Banks now use. The Reserve Banks plan comment on the benefits and costs of a to convert to the new application in policy to control access to the ACH 1996 and 1997. service by entities other than the institution whose Federal Reserve account 4. The revenues, expenses, and volumes re- will be debited. The proposed controls flected here are for transfers of securities issued by would apply to ACH credit transacfederal government agencies, government- tions sent by third-party processors sponsored enterprises, and international instituand respondent depository institutions tions such as the World Bank. The Fedwire securities transfer service also provides custody, transfer, directly to a Reserve Bank or private and settlement services for securities of the U.S. ACH operator. The proposed policy is Treasury. The Reserve Banks act as fiscal agents similar to the Fedwire third-party access when they transfer Treasury securities, and the policy and would help to ensure the Treasury Department assesses fees for the sersafety and soundness of the ACH vices. See the section on fiscal agency services in this chapter for more details. service. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

264 82nd Annual Report, 1995 Noncash Collection ated with priced services through fees for those services. Federal Reserve Bank operating expenses and imputed costs for noncash collection services totaled $4.8 million. Developments in Currency and Revenue from noncash operations Coin totaled $3.8 million, and other income The Federal Reserve's cost to print new amounted to $0.2 million, resulting in a currency in 1995 was $370 million. net loss before income taxes of $0.8 mil- Reserve Bank operating expenses for lion. The number of noncash collection processing and storing currency and items (maturing coupons and bonds) coin, including priced cash services, processed by the Reserve Banks totaled $259.6 million. The Federal increased 30.3 percent, to 838 thousand Reserve supplies currency and coin to items, in part because of a major comthe public through approximately 10,000 mercial provider's unexpected terminadepository institutions throughout the tion of its noncash collection services. United States. The value of currency The Reserve Banks continued to conand coin in circulation increased 5 persolidate noncash operations in 1995; by cent in 1995 and exceeded $420 billion year-end only two Federal Reserve sites by year-end. During 1995, the Reserve were processing noncash items—the Banks received more than 22.5 billion Cleveland Bank and the Jacksonville Federal Reserve notes in deposits from Branch of the Atlanta Bank. In addition, depository institutions and paid more the New York and Chicago Banks conthan 23.1 billion Federal Reserve notes tinued to present noncash items payable to depository institutions. through members of the clearinghouses The Federal Reserve Banks continued located in those two cities. converting their currency processing to the new ISS-3000 high-speed cur- Cash Services rency processing machines. At the end of 1995, 94 of these machines were in Federal Reserve Bank operating use at the Reserve Banks. The Federal expenses and imputed costs for cash ser- Reserve plans to install a total of 132 vices totaled $5.2 million. Revenue from processors and to complete the convercash operations totaled $5.0 million, and sion in 1997. other income amounted to $0.2 million, The Federal Reserve continued to resulting in a net loss before income work closely with Treasury and other taxes of $0.1 million. Special priced agencies to deter counterfeiting and cash services include cash transporta- laundering of U.S. currency. Circulation, coin wrapping services, and the tion of the new-design $100 notes is provision of nonstandard currency pack- expected to begin during the first quarter aging and nonstandard frequency of of 1996. access to services. Developments in Fiscal Agency Float Securities and Government Depository Services Federal Reserve float decreased in 1995 to a daily average of $338.8 million; it The Federal Reserve Act provides that, was $479 million in 1994. The Federal when required by the Secretary of the Reserve recovers the cost of float associ- Treasury, Federal Reserve Banks will Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 265 act as "fiscal agents" and "deposi- The Reserve Banks operate two booktories" of the United States. As fiscal entry securities systems for the custody agents of the Department of the Trea- and transfer of Treasury securities—the sury, Reserve Banks provide debt- Fedwire book-entry securities transfer related services, such as issuing, servic- system and Treasury Direct. Most booking, and redeeming marketable Treasury entry Treasury securities, 97.4 percent securities and U.S. savings bonds, and of the total par value outstanding at processing secondary market transfers year-end 1995, were maintained on Fedinitiated by depository institutions. As wire, and 2.6 percent of the total was depositories, Reserve Banks collect and maintained on Treasury Direct. disburse funds on behalf of the federal The Reserve Banks processed government. The Reserve Banks also 9.1 million Fedwire transfers of Treaprovide fiscal agency services on behalf sury securities, an increase of 2.5 perof several domestic and international cent over the 1994 level. In addition, the government agencies. Banks processed 40.4 million interest In 1995 the total cost of providing and principal payments for both Treafiscal agency and depository services to sury and agency securities, an increase Treasury amounted to $265.0 million. In of 6.3 percent over 1994 volume levels. addition, the Reserve Banks provide ser- Depository institutions are charged the vices to other government agencies, same transaction fees for sending and such as the processing of food cou- receiving Fedwire book-entry securities pons for the Department of Agriculture. transfers of Treasury securities as they The cost of providing such services are charged for transfers of government amounted to $46.3 million in 1995. agency securities. A portion of the Treasury security transfer fee is retained by the Federal Reserve to cover its settlement expenses and the remainder of the Fiscal Agency Securities Services fee is remitted to Treasury to cover its The Federal Reserve Banks handle mar- expenses. ketable Treasury securities and savings The Philadelphia Bank operates Treabonds and monitor collateral pledged by sury Direct, a system of book-entry depository institutions to the federal securities accounts for nondepository government. institutions and individuals planning to hold their Treasury securities to maturity. The Treasury Direct system con- Marketable Treasury Securities tains more than 1.7 million accounts. Reserve Bank operating expenses for During 1995 the Reserve Banks proactivities related to marketable Treasury cessed 1.6 million tenders from Treasecurities amounted to $55.3 million. sury Direct customers seeking to pur- The Reserve Banks processed more than chase Treasury securities in Treasury 1.2 million commercial tenders for gov- auctions, and they handled 3.5 million ernment securities in Treasury auctions. reinvestment requests. The volume of The volume of commercial tenders tenders decreased 8.5 percent, and decreased 7.3 percent between 1994 and the volume of reinvestment requests 1995. Starting in 1996, processing of decreased 17.9 percent relative to 1994. commercial tenders will be consolidated In addition, 14.6 million payments for at the New York, Chicago, and San discounts, interest, and redemption pro- Francisco Banks. ceeds were issued to investors. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

266 82nd Annual Report, 1995 Savings Bonds government with information about pay- Reserve Bank operating expenses for ments being issued. If a match occurs, savings bonds activities amounted to the program applies the payment to the $82.7 million. The Reserve Banks delinquent debt. printed and mailed a total of 122 million savings bonds on behalf of Treasury's Bureau of the Public Debt, an increase Depository Services of 35.9 percent over 1994 volume. The Banks processed 20 million original The Reserve Banks maintain Treasury's issue transactions. Redemption, reissue, checking account, accept deposits of and exchange transactions totaled federal taxes and fees, pay checks drawn 1.2 million, an increase of 32.8 percent on Treasury's account, and make elecover 1994. The Reserve Banks also tronic payments on behalf of the responded to 3 million service calls from Treasury. owners of savings bonds this year, an increase of 30.4 percent relative to 1994 Federal Tax Payments volume. The Reserve Banks completed their Reserve Bank operating expenses for consolidation of savings bond opera- federal tax payment activities were tions from twenty-five sites to five sites $35.8 million. The Reserve Banks pro- (Buffalo, Pittsburgh, Richmond, Minne- cessed 12.7 million advices of credit apolis, and Kansas City) during 1995. from depository institutions accepting All of these sites process savings bond tax deposits from businesses and inditransactions; only the Pittsburgh and viduals. The Reserve Banks also re- Kansas City sites print savings bonds. ceived a small portion of tax payments directly, representing about 1 percent of the total value. Depository institutions Other Initiatives that receive tax payments may place the The Reserve Banks monitor collateral funds in a Treasury tax and loan pledged by depository institutions that account, or remit the funds to a Reserve hold Treasury deposits, such as Trea- Bank. sury tax and loan account balances, The Reserve Banks continued workand other government agency deposits. ing with Treasury to automate the flow To ensure that the value of collateral of federal tax deposits (business tax paypledged is adequate, the Reserve Banks ments) as part of Treasury's Electronic began marking to market all physical Federal Tax Payment System (EFTPS). securities (including more thinly traded Tax payments made via EFTPS flow to instruments) pledged as collateral. The Treasury one day sooner than they do Reserve Banks plan to mark book-entry under the paper-based process, improvsecurities to market following comple- ing its investment opportunities and tion of the conversion to the National enabling it to manage its cash flows Book-Entry System. more efficiently. The Reserve Banks The Federal Reserve also worked have developed and implemented new with Treasury's Financial Management payment mechanisms for use by taxpay- Service to implement a Treasury Offset ers that must send their payments on Program on a pilot basis. This program the same day their tax liability is estabelectronically compares information lished. The Reserve Banks also have about delinquent debts owed to the U.S. supported Treasury's financial agents in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 267 developing ACH tax payment mecha- Reserve Banks to develop a system to nisms for EFTPS. capture and archive high-quality electronic images of government checks. The system, which is being developed at Payments Processed for Treasury the request of Treasury, will enhance the Operating expenses for government pay- truncation services the Reserve Banks ment operations amounted to $50.8 mil- provide to Treasury and improve their lion. During the year, Treasury contin- ability to research inquiries. The system ued to increase the proportion of its will be implemented over several years, payments made electronically. The vol- beginning in 1996. ume of ACH transactions processed for Treasury amounted to 598.9 million, an Services Provided to Other Entities increase of 4.3 percent over the 1994 level. The majority of government pay- When required to do so by the Secretary ments made via the ACH are for social of the Treasury or when required or security, pensions, and salaries. Trea- permitted to do so by federal statute, the sury also uses the ACH to make vendor Reserve Banks perform fiscal agency payments and has begun to experiment securities services and depository serwith using financial electronic data vices for other domestic and internainterchange for those payments. tional agencies. Depending on the The Reserve Banks processed authority under which services are pro- 460 million government checks, a vided, the Reserve Banks may (1) facilidecrease of 2.1 percent from the 1994 tate the issuance of government agency level. The Reserve Banks also issued book-entry securities that are eligible to fiscal agency checks, which are used be transferred over Fedwire,5 (2) proprimarily to pay semiannual interest on vide custody of the stock of unissued, registered, definitive Treasury notes and definitive securities, (3) maintain and bonds and Series H and HH savings update balances of outstanding bookbonds. They are also used to pay the entry and definitive securities for issuprincipal of matured securities and cou- ers, (4) perform various other securities pons and discounts to first-time purchas- servicing activities, and (5) maintain ers of government securities through funds accounts for some government Treasury Direct. All recurring Treasury agencies. Direct payments and many definitive securities interest payments are made Food Coupons via the ACH. Reserve Bank operating expenses for During 1995 the Federal Reserve food coupon services were $24.5 milworked with Treasury to develop Fedlion in 1995. The Reserve Banks Select checks, which will be introduced redeemed 4.0 billion food coupons, a in 1996. FedSelect checks permit Treadecrease of 6.5 percent from 1994. sury to guard against fraud by comparing checks presented for payment 5. Unlike Treasury securities, agency securities against information about checks issued cannot be purchased directly from a Federal by selected government agencies. The Reserve Bank. The issuers generally rely on syndi- Chicago Reserve Bank will be the pay- cates of securities dealers, including some commercial banks, to distribute original issues. As part ing bank for FedSelect checks. of this process, the Federal Reserve facilitates the In September 1995 the Board of Govissuance of securities, through Fedwire, from the ernors approved a proposal from the issuer to the syndicate members on original issue. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

268 82nd Annual Report, 1995 The Federal Reserve is assisting the To assess compliance with the poli- Departments of Agriculture and the cies established by the Federal Open Treasury in their efforts to replace paper Market Committee (FOMC), the divifood coupons with an electronic benefit sion also annually audits the accounts transfer system by developing settle- and holdings of the System Open Marment and reconciliation services. ket Account (SOMA) at the Federal Reserve Bank of New York and the foreign currency operations conducted by Examinations the Bank. The public accounting firm Section 21 of the Federal Reserve Act auditing the financial statements of the requires the Board of Governors to order Banks certifies the balance sheet for an examination of each Federal Reserve SOMA, for System foreign currency Bank at least once per year, and the operations, and for the foreign currency Board assigns this responsibility to its accounts distributed among the twelve Division of Reserve Bank Operations Reserve Banks. Division personnel foland Payment Systems. The division low up on the audit results. Copies of engaged a public accounting firm to the external audit reports are furnished audit the year-end financial statements to the FOMC as are reports on the diviof two or three Reserve Banks each year sion's follow-up. in addition to the combined financial statements of the Reserve Banks begin- Income and Expenses ning in 1995. In 1995 the year-end financial statements of the Atlanta and The accompanying table summarizes the St. Louis Reserve Banks were audited income, expenses and distribution of net by the public accounting firm, and earnings of the Federal Reserve Banks the year-end financial statements of the for 1995 and 1994. other ten Banks were audited by the Income was $25,395 million in 1995 division. and $20,911 million in 1994. Total ex- Income, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 1995 and 1994 Millions of dollars Item 1995 1994 Current income 25,395 20,911 Current expenses 1,818 1,796 Operating expenses' 1,568 1,572 Earnings credits granted 251 224 Current net income 23,577 19,115 Net addition to (deduction from, - ) current net income 896 2,398 Cost of unreimbursed services to Treasury 38 34 Assessments by the Board of Governors 531 515 For expenditures of Board 161 147 For cost of currency 370 368 Net income before payments to Treasury 23,903 20,964 Dividends paid 231 212 Transferred to surplus 283 282 Payments to Treasury (interest on Federal Reserve notes) 23,389 20,470 NOTE. Components may not sum to totals because of rounding. 1. Includes a net periodic credit for pension costs of $119.2 million in 1995 and $75.6 million in 1994. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 269 penses were $1,980 million ($1,568 mil- lion in 1994. The payments consist of lion in operating expenses, $251 million all net income after the deduction of in earnings credits granted to depository dividends and after the deduction of the institutions, and $161 million in assess- amount necessary to bring the surplus of ments for expenditures by the Board of the Banks to the level of capital paid-in. Governors). The cost of new currency In the Statistical Tables chapter of was $370 million. Revenue from finan- this REPORT, table 6 details income and cial services was $739 million. Unreim- expenses of each Federal Reserve Bank bursed expenses for services provided to for 1995, and table 7 shows a condensed Treasury amounted to $38 million.6 statement for each Bank for 1914-95. A The profit and loss account showed a detailed account of the assessments and net profit of $896 million. The profit expenditures of the Board of Governors was primarily a result of realized and appears in the next chapter—Board of unrealized gains on assets denominated Governors Financial Statements. in foreign currencies. Statutory dividends to member banks totaled Holdings of Securities and Loans $231 million, $19 million more than in 1994. The rise reflected an increase in Average daily holdings of securities and the capital and surplus of member banks loans during 1995 were $376,069 miland a consequent increase in the paid-in lion, an increase of $22,068 million capital stock of the Reserve Banks. from 1994 (see accompanying table). Payments to Treasury in the form of From 1994 to 1995, holdings of U.S. interest on Federal Reserve notes totaled government securities increased $23,389 million, up from $20,470 mil- $22,127 million, and loans decreased $59 million. Also during 1995, the average rate of 6. Fiscal agency and depository services are not interest increased from 5.44 percent to part of priced services (see note 4). The Reserve 6.34 percent on holdings of U.S. govern- Banks bill Treasury for the cost of certain serment securities and increased from vices, and the portions of the bills that are not paid are reported as unreimbursed expenses. 4.39 percent to 5.62 percent on loans. Securities and Loans of Federal Reserve Banks, 1993-95 Millions of dollars except as noted U.S. Item and year Total government Loans2 securities' Average daily holdings11 1993 320,528 320,347 181 1994 354,001 353,740 261 1995 376,069 375,867 202 Earnings 1993 16,896 16,891 6 1994 19,259 19,247 11 1995 23,837 23,826 11 Average interest rate (percent) 1993 5.27 5.27 3.08 1994 5.44 5.44 4.39 1995 6.34 6.34 5.62 1. Includes federal agency obligations. 3. Based on holdings at opening of business. 2. Does not include indebtedness assumed by the Federal Deposit Insurance Corporation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 82nd Annual Report, 1995 Volume of Operations Branch. Subsequently, the Atlanta Bank purchased property for the new building Table 9, in the Statistical Tables chapter, and retained design consultants for the shows the volume of operations in the Birmingham project. principal departments of the Federal Multiyear renovation programs con- Reserve Banks for the years 1992 tinued for the New York Bank's headthrough 1995. quarters building, the Kansas City Bank's Oklahoma City Branch, and the San Francisco Bank's Seattle, Portland, Federal Reserve Bank Premises and Salt Lake City Branches. Renova- Construction continued in 1995 on the tion projects for the cash departments new headquarters building for the at several Reserve Banks continued Minneapolis Bank and the expansion in preparation for installation of new and renovation of the headquarters currency-processing equipment. building of the Cleveland Bank. The Dallas Bank sold its old head- The Board approved new building quarters building. The Chicago Bank programs for the Atlanta Bank's head- leased a new satellite check processing quarters building and its Birmingham facility in Peoria, Illinois. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 271 Pro Forma Financial Statements for Federal Reserve Priced Services Pro Forma Balance Sheet for Priced Services, December 31, 1995, and 1994 Millions of dollars Item 1995 1994 Short-term assets (Note 1) Imputed reserve requirement on clearing balances 504.2 400.3 Investment in marketable securities ... 4,537.8 3,602.7 Receivables 63.7 60.6 Materials and supplies 10.6 10.2 Prepaid expenses 19.4 15.5 Items in process of collection 2,397.4 2,316.7 Total short-term assets 7,533.1 6,406.0 Long-term assets (Note 2) Premises 356.6 377.6 Furniture and equipment 170.3 168.4 Leases and leasehold improvements .. 24.2 8.6 Prepaid pension costs 242.1 205.4 Total long-term assets 793.1 760.0 Total assets 8,326.2 7,166.0 Short-term liabilities Clearing balances and balances arising from early credit of uncollected items 5,154.8 4,133.1 Deferred-availability items 2,284.5 2,186.6 Short-term debt 93.7 86.3 Total short-term liabilities 7,533.1 6,406.0 Long-term liabilities Obligations under capital leases 3.8 .6 Long-term debt 164.3 170.5 Accrued benefits cost 176.1 140.5 Total long-term liabilities 344.3 311.6 Total liabilities 7,877.4 6,717.6 Equity 448.8 448.4 Total liabilities and equity (Note 3) . 8,326.2 7,166.0 NOTE. Components may not sum to totals because of The priced services financial statements consist of these rounding. tables and the accompanying notes. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

272 82nd Annual Report, 1995 Pro Forma Income Statement for Federal Reserve PricedServices, 1995and 1994 Millions of dollars Item 1995 1994 Revenue from services provided to depository institutions (Note 4) 738.8 734.4 Operating expenses (Note 5) 655.2 693.0 Income from operations 83.6 41.4 Imputed costs (Note 6) Interest on float 19.0 18.6 Interest on debt 16.2 18.9 Sales taxes 22.1 10.8 FDIC insurance 6.3 63.7 15.8 64.1 Income from operations after imputed costs 19.9 -22.7 Other income and expenses (Note 7) Investment income on clearing balances ... 259.6 241.2 Earnings credits -233.2 26.4 208.4 32.8 Income before income taxes 46.3 10.1 Imputed income taxes (Note 8) 14.4 3.1 Income before cumulative effect of a change in accounting principle 31.9 7.0 Cumulative effect on previous years from retroactive application of accrual method of accounting for postemployment and vacation benefits net of $8.7 million tax) (Note 9) 19.4 Net income (Note 10) 12.6 7.0 MEMO: Targeted return on equity (Note 11).. 31.5 21.0 NOTE. Components may not sum to totals because of The priced services financial statements consist of these rounding. tables and the accompanying notes. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 273 Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 1995 Millions of dollars Com- Funds Book- Commercial transfer Noncash Cash Item Total entry mercial check and net collection services securities ACH collection settlement Revenue from operations 738.8 553.4 87.8 15.4 73.4 3.8 5.0 Operating expenses (Note 5) 655.2 507.4 73.8 15.3 64.5 4.1 5.1 Income from operations 83.6 46.0 14.0 .1 8.9 -.2 -.1 Imputed costs (Note 6) 63.7 52.4 4.9 1.1 4.5 .7 .1 Income from operations after imputed costs 19.9 -6.5 9.1 -1.0 4.4 -1.0 -.2 Other income and expenses, net (Note 7) 26.4 20.6 2.7 .5 2.3 .2 .2 Income before income taxes . 46.3 14.2 11.8 -.5 6.7 -.8 -.1 NOTE. Components may not sum to totals because of The priced services financial statements consist of these rounding. tables and the accompanying notes. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

274 82nd Annual Report, 1995 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 accrued postemployheld at Reserve Banks by depository institutions reflects a ment (see note 9) and postretirement benefits costs and treatment comparable to that of compensating balances obligations on capital leases. held at correspondent banks by respondent institutions. The reserve requirement imposed on respondent balances must be held as vault cash or as nonearning balances (4) REVENUE maintained at a Reserve Bank; thus, a portion of priced Revenue represents charges to depository institutions for services clearing balances held with the Federal Reserve priced services and is realized from each institution is shown as required reserves on the asset side of the through one of two methods: direct charges to an institubalance sheet. The remainder of clearing balances is tion's account or charges against its accumulated earnassumed to be invested in three-month Treasury bills, ings credits. shown as investment in marketable securities. Receivables are (1) amounts due the Reserve Banks for (5) OPERATING EXPENSES priced services and (2) the share of suspense-account and difference-account balances related to priced services. Operating expenses consist of the direct, indirect, and Materials and supplies are the inventory value of short- other general administrative expenses of the Reserve term assets. Banks for priced services plus the expenses for staff Prepaid expenses include salary advances and travel members of the Board of Governors working directly on advances for priced-service personnel. the development of priced services. The expenses for Items in process of collection is gross Federal Reserve Board staff members were $2.7 million in 1995 as well cash items in process of collection (CIPC) stated on a as in 1994. The credit to expenses under SFAS 87 (see basis comparable to that of a commercial bank. It reflects note 2) is reflected in operating expenses. adjustments for intra-System items that would otherwise The income statement by service reflects revenue, operbe double-counted on a consolidated Federal Reserve ating expenses, and imputed costs except for income balance sheet; adjustments for items associated with non- taxes. Total operating expense does not equal the sum of priced items, such as those collected for government operating expenses for each service because of the effect agencies; and adjustments for items associated with of SFAS 87. Although the portion of the SFAS 87 credit providing fixed availability or credit before items are related to the current year is allocated to individual serreceived and processed. Among the costs to be recovered vices, the amortization of the initial effect of implementaunder the Monetary Control Act is the cost of float, or net tion is reflected only at the System level. CIPC during the period (the difference between gross CIPC and deferred-availability items, which is the portion (6) IMPUTED COSTS of gross CIPC that involves a financing cost), valued at Imputed costs consist of interest on float, interest on debt, the federal funds rate. sales taxes, and the FDIC assessment. Interest on float is derived from the value of float to be recovered, either (2) LONG-TERM ASSETS explicitly or through per-item fees, during the period. Consists of long-term assets used solely in priced ser- Float costs include costs for checks, book-entry securivices, the priced-services portion of long-term assets ties, noncash collection, ACH, and funds transfers. shared with nonpriced services, and an estimate of the Interest is imputed on the debt assumed necessary to assets of the Board of Governors used in the development finance priced-service assets. The sales taxes and FDIC of priced services. Effective Jan. 1, 1987, the Reserve assessment that the Federal Reserve would have paid had Banks implemented the Financial Accounting Standards it been a private-sector firm are among the components of Board's Statement of Financial Accounting Standards the PSAF (see note 3). No. 87, Employers' Accounting for Pensions (SFAS 87). Float costs are based on the actual float incurred for Accordingly, the Reserve Banks recognized credits to each priced service. Other imputed costs are allocated expenses of $35.4 million in 1995 and $20.1 million in among priced services according to the ratio of operating 1994 and corresponding 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 1995 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 602.0 long-term debt and equity in a proportion equal to the Unrecovered float 14.0 ratio of long-term debt to equity for the fifty largest bank Float subject to recovery 588.0 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 58.5 sists of the taxes that would have been paid and the return As-of adjustments 243.2 on capital that would have been provided had priced Direct charges 108.4 services been furnished by a private-sector firm. Other Per-item fees 157.9 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 275 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- 1995 1994 week closing float and interterritory check float, which may be recovered from depositing institutions through Net income 12.6 7.0 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 SFAS87 -10.4 -10.5 billing the institution directly. Float recovered through Deferred costs of automation per-item fees is valued at the federal funds rate and has consolidation -.1 13.6 been added to the cost base subject to recovery in 1995. Cumulative effect of retroactive application (7) OTHER INCOME AND EXPENSES ofSFAS 112 andSFAS43 19.4 ^___ Consists of investment income on clearing balances and Adjusted net income 21.5 10.1 the cost of earnings credits. Investment income on clearing balances represents the average coupon-equivalent yield on three-month Treasury bills applied to the total (11) RETURN ON EQUITY clearing balance maintained, adjusted for the effect of The after-tax rate of return on equity that the Federal reserve requirements on clearing balances. Expenses for Reserve would have earned had it been a private business earnings credits granted to depository institutions on their firm, as derived from the PSAF model (see note 3). This clearing balances are derived by applying the average amount is adjusted to reflect the recovery of $0.1 million of automation consolidation costs for 1995 and the deferfederal funds rate to the required portion of the clearing ral of $13.6 million of such costs for 1994. The Reserve balances, adjusted for the net effect of reserve require- Banks plan to recover these amounts, along with a finance ments on clearing balances. charge, by the end of the year 2001. After-tax return on Because clearing balances relate directly to the Federal equity has not been allocated by service because it relates Reserve's offering of priced services, the income and cost to the organization as a whole. 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) POSTEMPLOYMENT AND VACATION BENEFITS Effective Jan. 1, 1995, the Reserve Banks implemented SFAS 112, Employers' Accounting for Postemployment Benefits, and SFAS 43, Accounting for Compensated Absences. Accordingly, in 1995 the Reserve Banks recognized a one-time cumulative charge of $28.1 million to reflect the retroactive application of these changes in accounting principles. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 277 Board of Governors Financial Statements The financial statements of the Board were audited by Price Waterhouse, independent public accountants, for 1995 and 1994. Price Waterhouse LLP REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Governors of the Federal Reserve System We have audited the accompanying balance sheets of the Board of Governors of the Federal Reserve System (the Board) as of December 31, 1995 and 1994, and the related statements of revenues and expenses and fund balance and of cash flows for the years then ended. These financial statements are the responsibility of the Board's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards and Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Board as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Notes 1 and 3 to the financial statements, the Board implemented Statement of Financial Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits, effective January 1, 1994. In accordance with Government Auditing Standards, we have also issued a report dated March 25, 1996 on our consideration of the Board's internal control structure and a report dated March 25, 1996 on its compliance with laws and regulations. March 25, 1996 Arlington, Virginia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 82nd Annual Report, 1995 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEET As of December 31, 1995 1994 ASSETS CURRENT ASSETS Cash $16,142,195 $14,949,285 Accounts receivable 1,900,155 1,898,061 Prepaid expenses and other assets 1,225,022 1,665,345 Total current assets 19,267,372 18,512,691 PROPERTY, BUILDINGS, AND EQUIPMENT, NET (Note 4) 59,781,623 54,839,623 Total assets $79,048,995 $73,352,314 LIABILITIES AND FUND BALANCE CURRENT LIABILITIES Accounts payable $ 7,580,371 $ 5,450,877 Accrued payroll and related taxes 4,868,497 3,920,065 Accrued annual leave 6,601,004 6,223,919 Capital lease payable (current portion) 75,840 3,119,522 Unearned revenues and other liabilities 2,184,882 1,852,614 Total current liabilities 21,310,594 20,566,997 CAPITAL LEASE PAYABLE (non-current portion) 232,638 303,358 ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (Note 3) 17,074,588 16,274,446 ACCUMULATED POSTEMPLOYMENT BENEFIT OBLIGATION (Note 3) 1,093,400 1,320,018 FUNDBALANCE 39,337,775 34,887,495 Total liabilities and fund balance $79,048,995 $73,352,314 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 279 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENT OF REVENUES AND EXPENSES AND FUND BALANCE For the years ended December 31, 1995 1994 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $161,347,900 $146,866,100 Other revenues (Note 5) 10,240,830 9,134,248 Total operating revenues 171,588,730 156,000,348 BOARD OPERATING EXPENSES Salaries 100,412,576 93,823,248 Retirement and insurance contributions 16,394,955 16,147,049 Contractual services and professional fees 11,240,373 7,426,406 Depreciation and net losses on disposals 7,525,971 7,081,892 Travel 4,920,996 4,774,914 Postage and supplies 4,523,272 4,163,095 Utilities 4,155,038 4,158,650 Repairs and maintenance 3,689,603 3,794,986 Equipment and facilities rental 3,853,657 3,348,643 Software 3,362,342 3,017,536 Printing and binding 3,144,178 2,697,789 Other expenses (Note 5) 3,915,489 3,423,987 Total operating expenses 167,138,450 153,858,195 BOARD OPERATING REVENUES OVER EXPENSES 4,450,280 2,142,153 ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 370,206,037 368,187,989 Expenses for currency printing, issuance, retirement, and shipping 370,206,037 368,187,989 CURRENCY ASSESSMENTS OVER (UNDER) EXPENSES — — TOTAL REVENUES OVER EXPENSES BEFORE EFFECT OF CHANGES IN ACCOUNTING 4,450,280 2,142,153 Less: Effect on prior years (to December 31, 1993) of change in accounting for postemployment benefits (Note 3) — 965,000 TOTAL REVENUES OVER EXPENSES 4,450,280 1,177,153 FUND BALANCE, Beginning of year 34,887,495 33,710,342 FUND BALANCE, End of year $ 39,337,775 $ 34,887,495 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 82nd Annual Report, 1995 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENT OF CASH FLOWS Increase (Decrease) in Cash For the years ended December 31, 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES Board operating revenues over expenses $ 4,450,280 $1,177,153 Adjustments to reconcile operating revenues over expenses to net cash provided by operating activities: Effect of change in accounting for postemployment benefits — 965,000 Depreciation and net losses on disposals 7,525,971 7,081,892 Increase in accrued postretirement benefits 800,142 393,704 (Decrease) increase in accrued postemployment benefits (226,618) 355,018 Decrease (increase) in accounts receivable, and prepaid expenses and other assets 438,229 (877,486) Increase in accrued annual leave 377,085 352,276 Increase in accounts payable 2,129,494 142,701 Increase in payroll payable 948,432 1,201,553 Increase in unearned revenue and other liabilities 332,268 347,951 Net cash provided by operating activities 16,775,283 11,139,762 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals of furniture and equipment 12,112 27,081 Capital expenditures (15,594,485) (8,404,272) Net cash used in investing activities (15,582,373) (8,377,191) NET INCREASE IN CASH 1,192,910 2,762,571 CASH BALANCE, Beginning of year 14,949,285 12,186,714 CASH BALANCE, End of year $16,142,195 $14,949,285 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 281 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOTES TO FINANCIAL STATEMENTS for future payments to retirees under these programs, and it is not accountable for the assets of the plans. (1) SIGNIFICANT ACCOUNTING POLICIES (3) OTHER BENEFIT PLANS Board Operating Revenues and Expenses— Assessments made on the Federal Reserve Banks for Employees of the Board may also participate in the Board operating expenses and capital expenditures are Federal Reserve System's Thrift Plan. Under the Thrift calculated based on expected cash needs. These assess- Plan, members may contribute up to a fixed percentage of ments, other operating revenues, and operating expenses their salary. Board contributions are based upon a fixed are recorded on the accrual basis of accounting. percentage of each member's basic contribution and were Issuance and Redemption of Federal Reserve Notes— $4,320,400 in 1995 and $3,969,700 in 1994. The Board incurs expenses and assesses the Federal The Board also provides certain defined benefit health Reserve Banks for the costs of printing, issuing, shipping, and life insurance for its active employees and retirees and retiring Federal Reserve Notes. These assessments under Federal and Board sponsored programs. The net and expenses are separately reported in the statements of periodic postretirement benefit cost for 1995 and 1994 revenues and expenses because they are not Board operat- included the following components: ing transactions. Property, Buildings and Equipment—The Board's 1995 1994 property, buildings and equipment are stated at cost less Service cost (benefits accumulated depreciation. Depreciation is calculated on a attributed to employee straight-line basis over the estimated useful lives of the services during the assets, which range from 4 to 10 years for furniture and year) $ 418,649 $ 260,677 equipment and from 10 to 50 years for building equip- Interest cost on accumulated ment and structures. Upon the sale or other disposition of postretirement benefit a depreciable asset, the cost and related accumulated obligation 1,441,350 1,191,213 depreciation are removed from the accounts and any gain Amortization of gains or loss is recognized. and losses (80) 6,542 Accounting Changes—Effective January 1, 1994, the Board adopted Statement of Financial Accounting Stan- Net periodic postretirement dards No. 112, Employers' Accounting for Postemploy- benefit cost $1,859,919 $1,458,432 ment Benefits (FAS 112). Under this accounting method, the Board records the cost of these benefits during the Although postretirement benefits are recorded using employee's years of service rather than the previous the accrual basis of accounting in accordance with FAS pay-as-you-go method. 106, the Board's current policy is to fund the cost of these benefits on a pay-as-you-go basis. The FAS 106 accumulated postretirement benefit obli- (2) RETIREMENT BENEFITS gation at December 31, 1995 and 1994, is comprised of: Substantially all of the Board's employees participate in the Retirement Plan for Employees of the Federal 1995 1994 Reserve System (System Plan). The System's Plan is a Retirees $11,455,617 $11,301,461 multiemployer plan which covers employees of the Fed- Fully eligible active plan eral Reserve Banks, the Board, and the Plan Administraparticipants 2,947,889 2,419,656 tive Office. Employees of the Board who entered on duty Other active plan prior to 1984 are covered by a contributory defined beneparticipants 3,510,808 4,392,114 fits program under the Plan. Employees of the Board who entered on duty after 1983 are covered by a non- 17,914,314 18,113,231 contributory defined benefits program under the Plan. Unrecognized net loss (839,726) (1,838,785) Contributions to the System's Plan are actuarially determined and funded by participating employers at amounts Liability for accumulated prescribed by the Plan's administrator. Based on actuarial postretirement benefit calculations, it was determined that employer funding obligation $17,074,588 $16,274,446 contributions were not required for the years 1995 and 1994, and the Board was not assessed a contribution for The liability for the accumulated postretirement benefit these years. Excess Plan assets will continue to fund obligation and the net periodic benefit cost was deterfuture years' contributions. The Board is not accountable mined using an 8.75-percent discount rate. Unrecognized for the assets of this plan. losses of $839,726 result from larger than estimated 1995 A relatively small number of Board employees partici- and 1994 cash outlays. Under FAS 106, the Board may pate in the Civil Service Retirement System (CSRS) or have to record some of these unrecognized losses in the Federal Employees' Retirement System (FERS). The operations in future years. The assumed health care cost Board matches employee contributions to these plans. trend rate for measuring the increase in costs from 1995 These defined benefits plans are administered by the to 1996 was 10.0 percent. These rates were assumed to Office of Personnel Management. The Board's contribu- gradually decline to an ultimate rate of 6.5 percent in the tions to these plans totaled $802,200 and $838,800 in year 2004 for the purpose of calculating the Decem- 1995 and 1994 respectively. The Board has no liability ber 31, 1995, accumulated postretirement benefit obliga- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

282 82nd Annual Report, 1995 tion. The effect of a 1-percent increase in the assumed For the years health care cost trend rate would increase the accumu- ended December 31, lated postretirement benefit obligation by $2,493,223 at 1995 1994 December 31, 1995, and the net periodic benefit cost by Other Revenues $253,220 for the year. The assumed salary trend rate for Data processing measuring the increase in postretirement benefits related revenue $ 4,100,517 $4,058,655 to life insurance was an average of 5.5 percent. National The above accumulated postretirement benefit obliga- Information tion is related to the Board sponsored health benefits and Center 2,070,267 2,031,876 life insurance programs. The Board has no liability for Subscription future payments to employees who continue coverage revenue 1,648,931 1,547,628 under the federally sponsored programs upon retiring. Reimbursable Contributions for active employees participating in fed- services to erally sponsored programs totaled $3,477,300 and other agencies . 383,752 441,316 Miscellaneous 2,037,363 1,054,773 $3,510,500 in 1995 and 1994 respectively. Total other The Board provides certain postemployment benefits to revenues $10,240,830 $9,134,248 eligible employees after employment but before retirement. Effective January 1, 1994, the Board adopted Other Expenses Statement of Financial Accounting Standards No. 112, Tuition, registration, Employers' Accounting for Postemployment Benefits and membership (FAS 112), which requires that employers providing fees $ 1,413,233 $1,116,155 postemployment benefits to their employees accrue the Cafeteria operations, net 788,506 708,394 cost of such benefits. Prior to January 1994, postemploy- Subsidies and ment benefit expenses were recognized on a pay-ascontributions ... 755,857 676,989 you-go basis. A one-time charge for the adoption of FAS Miscellaneous 957,893 922,449 112 of $965,000 was recognized as the cumulative effect Total other of a change in accounting principle in 1994. expenses $ 3,915,489 $3,423,987 (4) PROPERTY, BUILDINGS AND EQUIPMENT (6) COMMITMENTS The following is a summary of the components of the Board's fixed assets, at cost, net of accumulated The Board has entered into several operating leases to depreciation. secure office, training, and warehouse space for periods ranging from two to ten years and, in December 1994, a As of December 31, capital lease for a new mainframe computer. Minimum 1995 1994 future commitments under those leases having an initial Land and or remaining noncancelable lease term in excess of one improvements ... $ 1,301,314 $ 1,301,314 year at December 31, 1995, are as follows: Buildings 65,298,136 65,171,774 Furniture and Operating Capital equipment 52,215,976 45,742,097 19% 3,672,449 75,840 118,815,426 112,215,185 1997 3,666,027 75,840 Less accumulated depreciation 59,033,803 57,375,562 1998 3,720,255 75,840 Total property, 1999 3,702,391 80,958 buildings and afterl999 21,136,430 — equipment $ 59,781,623 $ 54,839,623 $35,897,552 $308,478 Rental expenses under the operating leases were (5) OTHER REVENUES AND OTHER EXPENSES $3,301,186 and $2,987,500 in 1995 and 1994 respectively. The following are summaries of the components of Other Revenues and Other Expenses. (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 1995 and 1994, the Board paid $269,040 and $197,200 respectively, in assessments for operating expenses of the Council. These amounts are included in subsidies and contributions for 1995 and 1994. During 1995 and 1994, the Board paid $126,900 and $125,900 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

284 82nd Annual Report, 1995 1. Detailed Statement of Condition of All Federal Reserve Banks Combined, December 31, 1995 Thousands of dollars ASSETS Gold certificate account 11,050,060 Special drawing rights certificate account 10,168,000 Coin 424,452 Loans and securities Loans to depository institutions 135,440 Federal agency obligations Bought outright 2,633,995 Held under repurchase agreement 1,100,000 U.S. Treasury securities Bought outright Bills 183,115,712 Notes 151,013,150 Bonds 44,068,604 Total bought outright 378,197,466 Held under repurchase agreement 12,762,000 Total securities 390,959,466 Total loans and securities 394,828,901 Items in process of collection Transit items 4,179,015 Other items in process of collection 1,101,279 Total items in process of collection 5,280,294 Bank premises Land 166,903 Buildings (including vaults) 882,954 Building machinery and equipment 230,523 Construction account 128,934 Total bank premises 1,242,411 Less depreciation allowance 283,562 958,849 Bank premises, net 1,125,753 Other assets Furniture and equipment 1,192,205 Less depreciation 671,613 Total furniture and equipment, net 520,592 Denominated in foreign currencies1 21,099,289 Interest accrued 4,101,149 Premium on securities 5,410,827 Overdrafts 22,920 Prepaid expenses 865,525 Suspense account 13,398 Real estate acquired for banking-house purposes 11,507 Other 312,533 Total other assets 32,357,740 Total assets 455,235,200 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 285 ..—Continued LIABILITIES Federal Reserve Notes Outstanding (issued to Federal Reserve Banks) 481,044,070 Less held by Federal Reserve Banks -80,108,642 Total Federal Reserve notes, net 400,935,428 Deposits Depository institutions 29,611,156 U.S. Treasury, general account 5,979,193 Foreign, official accounts 386,182 Other deposits Officers' and certified checks 25,622 International organizations 114,289 Other2 794,904 Total other deposits 934,815 Deferred credit items 5,049,121 Other liabilities Discount on securities 3,613,735 Sundry items payable 95,718 Suspense account 15,153 All other 682,621 Total other liabilities 4,407,226 Total liabilities 447,303,121 CAPITAL ACCOUNTS Capital paid in 3,966,402 Surplus 3,966,402 Other capital accounts3 0 Total liabilities and capital accounts 455,235,925 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 $7,316.6 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

286 82nd Annual Report, 1995 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1995 and 1994 Millions of dollars Total Boston Item 1995 1994 1995 1994 ASSETS Gold certificate account 11,050 11,051 575 553 Special drawing rights certificate account 10,168 8,018 511 511 Coin 424 320 17 15 Loans To depository institutions 135 223 Other 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 2,634 3,637 130 190 Held under repurchase agreements 1,100 1,025 0 0 U.S. Treasury securities Bought outright' 378,197 364,519 18,600 19,082 Held under repurchase agreements 12,762 9,565 0 0 Total loans and securities 394,829 378,969 18,736 19,278 Items in process of collection 5,280 5,199 299 293 Bank premises 1,126 1,076 94 93 Other assets Denominated in foreign currencies2 21,099 22,031 799 797 Mother 11,258 10,231 459 450 Interdistrict Settlement Account 0 0 7,063 -2,202 Total assets 455,235 436,896 28,552 19,788 LIABILITIES Federal Reserve notes 400,935 381,505 26,175 17,747 Deposits Depository institutions 29,611 30,789 1,414 1,214 U.S. Treasury, general account 5,979 7,161 0 0 Foreign, official accounts 386 250 5 5 Other 935 774 33 31 Total deposits 36,911 38,973 1,452 1,250 Deferred credit items 5,049 4,459 359 284 4,407 4,592 225 228 Other liabilities and accrued dividends3 47^02 429,529 28,211 19,509 Total liabilities CAPITAL ACCOUNTS 3,966 3,683 171 139 Capital paid in 3,966 3,683 171 139 Surplus 0 0 0 0 Other capital accounts Total liabilities and capital accounts 455,235 436,896 28,552 19,788 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) 481,044 454,642 31,502 22,868 Less: Held by Bank 80,109 73,137 5,327 5,121 Federal Reserve notes, net 400,935 381,505 26,175 17,747 Collateral for Federal Reserve notes Gold certificate account 11,050 11,051 Special drawing rights certificate account 10,168 8,018 Other eligible assets 0 0 U.S. Treasury and federal agency securities 379,717 362,437 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 287 2.—Continued New York Philadelphia Cleveland Richmond 1995 1994 1995 1994 1995 1994 1995 1994 4,273 4,134 433 393 621 660 862 902 3,903 2,808 413 303 584 556 790 652 20 19 26 19 24 17 71 56 0 0 1 17 0 0 0 0 0 0 0 0 0 0 0 0 1,047 1,344 114 142 152 229 202 291 1,100 1,025 0 0 0 0 0 0 150,316 134,693 16,408 14,256 21,802 22,978 29,047 29,138 12,762 9,565 0 0 0 0 0 0 165,225 146,627 16,523 14,416 21,954 23,207 29,249 29,428 764 649 254 332 265 269 552 392 146 137 49 47 66 46 127 134 5,654 6,267 923 737 1,476 1,449 1,698 1,481 5,378 4,160 413 353 524 529 907 902 -26,517 5,853 -237 2,232 220 -1,332 3,822 -867 158,846 170,653 18,797 18,833 25,734 25,400 38,077 33,080 139,004 151,608 16,223 16,733 23,524 22,542 34,912 28,847 8,658 7,105 1,702 1,491 1,161 1,814 1,555 2,782 5,979 7,161 0 0 0 0 0 0 283 149 6 5 10 9 11 9 433 261 29 26 40 41 86 70 15,353 14,677 1,737 1,523 1,211 1,864 1,652 2,862 734 551 251 32 232 222 592 447 1,642 1,843 206 183 250 257 338 332 156,733 168,678 18,416 18,511 25,217 24,885 37,494 32,487 1,057 988 190 161 259 258 292 296 1,057 988 190 161 259 258 292 296 0 0 0 0 0 0 0 0 158,846 170,653 18,797 18,833 25,734 25,400 38,077 33,080 167,545 174,495 19,585 18,463 26,869 26,124 41,346 35,331 28,541 22,888 3,362 1,690 3,344 3,581 6,435 6,484 139,004 151,608 16,223 16,773 23,524 22,542 34,912 28,847 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

288 82nd Annual Report, 1995 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1995 and 1994—Continued Millions of dollars Atlanta Chicago Item 1995 1994 1995 1994 ASSETS Gold certificate account 556 542 1,220 1,217 Special drawing rights certificate account 523 318 1,079 1,036 Coin 66 46 35 23 Loans To depository institutions 28 18 Other 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 122 163 304 411 Held under repurchase agreements 0 0 0 0 U.S. Treasury securities Bought outright' 17,558 16,293 43,602 41,758 Held under repurchase agreements 0 0 0 0 Total loans and securities 17,689 16,484 43,906 42,193 Items in process of collection 688 753 519 509 Bank premises 77 64 110 112 Other assets Denominated in foreign currencies2 1,954 2,073 2,401 2,527 All other 460 423 1,119 1,069 Interdistrict Settlement Account 13,362 1,871 -3,016 -1,048 Total assets 35,375 22,573 47374 47,638 LIABILITIES Federal Reserve notes 31,186 18,053 41,758 42,265 Deposits Depository institutions 2,481 3,018 3,539 3,397 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 13 13 16 16 Other 21 29 160 148 Total deposits 2,515 3,060 3,716 3,561 Deferred credit items 660 561 463 496 236 217 492 479 Other liabilities and accrued dividends3 34,597 21,891 46,428 46,800 Total liabilities CAPITAL ACCOUNTS 389 341 473 419 Capital paid in 389 341 473 419 Surplus 0 0 0 0 Other capital accounts 35,375 22,573 47,374 47,638 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 36,869 23,368 48,453 48,257 Federal Reserve notes outstanding (issued to Bank) 5,683 5,315 6,695 5,992 Less: Held by Bank Federal Reserve notes, net 31,186 18,053 41,758 42,265 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 289 2.—Continued St. Louis Minneapolis Kansas City Dallas San Francisco 1995 1994 1995 1994 1995 1994 1995 1994 1995 1994 484 429 203 230 382 436 405 453 1,036 1,102 490 168 180 186 342 199 376 377 977 904 20 23 20 21 41 22 49 28 37 33 9 89 4 11 3 20 0 0 103 33 0 0 0 0 0 0 0 0 0 0 121 145 48 80 101 156 85 138 209 343 0 0 0 0 0 0 0 0 0 0 17,308 14,497 6,828 8,028 14,451 15,637 12,262 13,786 30,016 34,373 0 0 0 0 0 0 0 0 0 0 17,437 14,731 6,879 8,119 14,555 15,813 12,348 13,924 30,328 34,749 220 195 450 380 361 370 333 513 574 544 30 30 54 46 55 54 158 157 159 156 486 481 563 589 797 830 1,414 1,594 2,935 3,207 408 334 180 196 352 361 319 343 739 1,111 357 4,308 -1,082 -1,897 -2,610 -1,929 3,287 -1,303 5,351 -3,685 19,932 20,698 7,448 7,870 14,276 16,154 18,689 16,086 42,137 38,122 18,427 19,229 5,990 6,553 12,267 13,948 15,570 12,917 35,901 31,024 876 941 741 612 1,119 1,336 2,178 2,140 4,188 4,938 0 0 0 0 0 0 0 0 0 0 3 3 4 4 5 5 9 10 20 21 30 22 2 15 26 23 21 26 55 80 909 966 746 631 1,150 1,365 2,208 2,176 4,262 5,039 195 158 412 380 361 358 258 332 533 640 205 175 102 110 194 205 161 168 357 395 19,736 20,528 7,250 7,673 13,972 15,876 18,196 15,592 41,053 37,098 98 85 99 98 152 139 98 85 99 98 152 139 0 0 0 0 0 0 19,932 20,698 7,448 7,870 14,276 16,154 20,751 21,908 7,143 8,043 13,880 15,280 2,324 2,679 1,153 1,491 1,613 1,333 18,427 19,229 5,990 6,553 12,267 13,948 ot ot NO NO O 247 542 512 247 542 512 0 0 0 18,689 16,086 42,137 38,122 19,726 16,819 47,377 43,685 4,156 3,902 11,476 12,662 15,570 12,917 35,901 31,024 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

290 82nd Annual Report, 1995 3. Federal Reserve Open Market Transactions, 1995 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 30,150 Redemptions 0 Others within 1 year Gross purchases .. 0 Gross sales 0 Maturity shift 2,835 Exchanges -737 Redemptions 621 1 to 5 years Gross purchases . 0 Gross sales 0 Maturity shift -2,145 Exchanges 737 5 to 10 years Gross purchases . Gross sales Maturity shift Exchanges 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 oooo oooo 0 0 0 0 31,530 36,449 0 0 0 0 0 0 5,872 4,802 -6,025 -2,096 0 0 0 0 0 0 -5,872 -4,802 3,606 1,050 0 0 0 0 0 0 1,720 1,046 0 0 0 700 0 0 0 0 621 0 163,615 178,877 164,526 176,232 32,201 1,300 39,756 3,310 oooo 0 0 30,983 0 0 0 2,993 0 370 2,549 0 -All 0 839 0 -2,516 0 1,138 0 0 0 0 4,526 0 0 0 370 168,800 148,306 170,724 147,616 22,070 36,314 16,477 39,157 Net change in U.S. Treasury securities -9,087 634 3,669 2,004 FEDERAL AGENCY OBLIGATIONS Outright transactions Gross purchases 0 0 0 0 Gross sales 0 0 0 0 Redemptions 91 55 83 20 Repurchase agreements Gross purchases 5,243 25 4,926 4,415 Gross sales 4,948 1,345 3,821 5,020 Net change in agency obligations 204 -1,375 1,022 -625 Total net change in System Open Market Account. -8,883 -741 4,691 1,379 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 291 3.—Continued May June July Aug. Sept. Oct. Nov. Dec. Total 0 4,470 0 433 409 1,350 4,271 0 10,933 0 0 0 0 0 0 0 0 0 31,663 42,983 25,213 39,195 30,333 29,397 39,057 31,535 398,488 0 0 0 0 0 900 0 0 0 0 0 0 0 0 0 0 390 390 0 0 0 0 0 0 0 0 0 7,174 2,177 2,063 7,805 0 1,745 6,108 0 43,574 -7,374 -1,392 -562 -5,599 0 -2,049 -4,937 0 30,771 0 0 300 0 485 0 0 0 1,776 0 0 0 0 100 0 0 2,317 4,966 0 0 0 0 0 0 0 0 0 -6,694 -2,177 -2,063 -3,379 0 -1,745 -5,292 0 -34,646 5,374 1,392 562 4,905 0 2,049 3,237 0 22,912 0 0 0 0 0 0 400 0 1,239 0 0 0 0 0 0 0 0 0 1,248 0 0 -319 0 0 -816 0 -3,093 2,000 0 0 1,800 0 0 1,700 0 8,266 0 0 0 0 100 0 0 1,884 3,122 0 0 0 0 0 0 0 0 0 -1,728 0 0 -525 0 0 0 0 -2,253 0 0 0 1,100 0 0 0 0 1,800 0 4,470 0 433 609 1,350 4,671 4,591 20,650 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,385 0 0 2,376 155,027 170,083 166,674 179,571 195,830 216,755 226,340 227,858 2,197,736 153,534 171,959 163,490 185,711 198,587 213,161 228,419 228,071 2,202,030 35,158 40,989 8,527 4,130 43,286 28,825 44,569 34,325 331,694 34,377 28,196 24,851 1,075 39,896 32,980 39,876 20,311 320,262 2,274 15,387 -13,141 -2,651 1,241 -597 7,285 18,392 25,410 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 30 262 333 122 46 83 120 58 1,303 6,155 1,941 711 1,610 1,434 3,740 3,763 2,888 36,851 5,955 2,180 1,172 1,510 1,459 3,605 3,973 1,788 36,776 170 -501 -794 -22 -71 52 -330 1,042 -1,228 2,444 14,886 -13,935 -2,673 1,170 -545 6,955 19,434 24,182 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

292 82nd Annual Report, 1995 4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31, 1993-95 Millions of dollars December 31 Change Description 1995 1994 1993 1994-95 1993-94 U.S. TREASURY SECURITIES Heldoutright1 390,534 372,561 339,583 17,973 32,978 By remaining maturity Bills 1-91 days 101,564 98,129 90,186 3,435 7,943 92 days to 1 year 93,888 87,291 6,597 9,542 77,749 Notes and bonds 1 year or less 41,419 34,978 35,423 6,441 -445 More than 1 year through 5 years 85,273 90,031 79,826 -4,758 10,205 More than 5 years through 10 years ... 31,469 27,552 24,659 3,917 2,893 More than 10 years 36,921 34,845 31,739 2,076 3,106 By type Bills 195,451 185,420 167,936 10,031 17,484 Notes 151,013 144,143 132,076 6,870 12,067 Bonds 44,069 42,998 39,572 1,071 3,426 Repurchase agreements 12,762 9,565 12,187 3,197 -2,622 MSPs, foreign accounts 12,336 8,041 7,568 4,295 473 MSPs, in the market 0 0 0 0 0 FEDERAL AGENCY SECURITIES Held outrightl 2,634 3,637 4,638 -1,003 -1,001 By remaining maturity 1 year or less 1,241 1,737 1,823 -496 -86 More than 1 year through 5 years 841 1,387 2,105 -546 -718 More than 5 years through 10 years 527 488 569 39 -81 More than 10 years 25 25 142 0 -117 By issuer Held outright 2,634 3,637 4,638 -1,003 -1,001 Federal Farm Credit Banks 912 1,050 1,201 -138 -151 Federal Home Loan Banks 230 796 1,249 -566 ^53 Federal Land Banks 66 66 66 0 0 Federal National Mortgage Association .. 1,425 1,725 2,005 280 -280 Washington Metropolitan Area Transit Authority 117 -117 Repurchase agreements 1,100 1,025 1,025 75 0 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 293 5. Number and Annual Salaries of Officers and Employees of Federal Reserve Banks, December 31, 1995 President Other officers Employees Total Federal Reserve Bank (including Number branches) Salary Num- Salaries Salaries Num- Salaries (dollars) ber (dollars) Full- Part- (dollars) ber (dollars) time time Boston 177,550 58 5,918,100 1,086 171 45,761,370 1,316 51,857,020 New York 228,500 204 25,046,545 3,822 82 163,937,766 4,109 189,212,811 Philadelphia 203,700 57 5,453,575 1,146 47 38,860,303 1,251 44,517,578 Cleveland 183,000 49 4,848,200 1,315 85 42,970,608 1,450 48,001,808 Richmond 178,500 76 6,902,900 1,850 173 59,858,472 2,100 66,939,872 Atlanta 235,900 75 7,049,030 >,157 39 69,229,567 2,272 76,514,497 Chicago 202,650 102 9,843,700 \>,131 57 79,497,277 2,291 89,543,627 St. Louis 209,500 49 4,436,500 ,068 75 34,509,764 1,193 39,155,764 Minneapolis 192,300 49 4,750,300 1,130 123 38,619,581 1,303 43,562,181 Kansas City 178,700 58 5,311,800 1,529 84 50,253,075 1,672 55,743,575 Dallas 180,000 58 5,370,200 1,425 40 48,596,612 1,524 54,146,812 San Francisco 253,200 88 9,628,650 2,310 85 94,112,208 2,484 103,994,058 Federal Reserve Automation Service 27 2,898,100 537 7 26,849,461 571 29,747,561 Total 2,423,500 950 97,457,600 21,506 1,068 793,056,064 23,536 892,937,164 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

294 82nd Annual Report, 1995 6. Income and Expenses of Federal Reserve Banks, 1995 Dollars Item1 Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 11,349,948 145,809 1,579,408 167,833 231,626 U.S. Treasury and federal agency securities 23,825,601,437 1,184,564,568 9,387,450,289 996,324,388 1,400,033,105 Foreign currencies 783,871,627 29,585,740 211,055,484 33,744,503 54,586,655 Priced services 738,797,407 61,548,708 96,356,576 38,662,623 47,415,071 Other 35,527,940 515,639 26,462,928 991,072 438,273 Total 25,395,148,359 1,276,360,464 9,722,904,685 1,069,890,419 1,502,704,729 CURRENT EXPENSES Salaries and other personnel expenses 968,128,041 55,139,483 205,557,300 48,956,743 51,899,768 Retirement and other benefits 138,881,982 16,273,037 56,769,196 16,005,925 15,147,167 Fees 36,130,198 1,163,407 5,988,921 588,000 2,032,139 Travel 47,286,944 2,384,408 7,231,579 2,237,368 2,671,641 Software expenses 51,796,738 1,300,525 10,387,125 1,337,081 1,487,121 Postage and other shipping costs 78,135,828 35,936,275 6,352,209 1,656,413 2,626,454 Communications 9,983,821 458,023 2,092,635 393,221 756,508 Materials and supplies 59,351,008 3,134,005 10,944,955 3,571,298 3,537,614 Building expenses Taxes on real estate 25,095,917 3,772,154 4,291,798 1,657,086 1,505,371 Property depreciation 51,644,631 4,039,266 8,212,326 2,158,300 2,426,453 Utilities 30,947,281 2,381,156 6,494,577 2,814,936 1,751,924 Rent 31,739,518 663,440 13,743,277 221,589 441,602 Other 25,938,497 739,704 5,394,249 1,619,909 789,985 Equipment Purchases 8,653,193 297,107 1,655,641 350,719 344,003 Rentals 32,090,834 92,543 3,078,045 262,241 198,822 Depreciation 127,989,785 3,746,454 20,609,132 4,142,431 4,285,426 Repairs and maintenance 74,418,077 4,179,819 11,487,781 3,256,305 4,047,469 Earnings-credit costs 250,683,017 19,801,408 45,987,802 24,315,650 13,122,317 Other 46,475,891 2,507,778 8,749,609 1,423,912 3,591,833 Shared costs, net3 3 -605,677 5,555,695 11,180,471 13,880,868 Recoveries -52,196,489 -9,535,620 -6,882,913 -3,077,231 -2,213,989 Expenses capitalized4 -3,344,060 -354,300 -14,711 -362,799 -363,558 Total 2,039,830,657 147,51435 433,686,229 124,709,567 123,966,938 Reimbursements -221,414,464 -10,451,456 -47,916,037 -17,792,525 -21,703,945 Net expenses 1,818,416,193 137,062,939 385,770,192 106,917,042 102,262,993 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 295 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 233,225 296,332 821,393 2,206,149 3,549,681 932,451 238,496 947,547 1,837,407,739 1,085,721,714 2,720,699,403 1,040,740,827 454,144,885 935,626,475 803,700,261 1,979,187,783 62,370,529 72,651,254 89,218,527 17,979,885 20,913,371 29,612,743 52,808,155 109,344,779 59,431,061 92,040,767 96,210,847 32,433,193 41,884,798 47,833,700 49,092,547 75,887,514 924,425 864,332 913,388 250,227 569,679 130,305 570,964 2,896,709 1,960^66,979 1,251,574,400 2,907,863,558 1,093,610,281 521,062,414 1,014,135,673 906,410,424 2,168,264,332 106,646,102 85,655,367 97,590,887 40,903,885 47,920,038 59,552,454 57,111,863 111,194,149 25,375,363 20,652,836 25,435,940 12,662,623 12,531,510 13,237,536 16,585,562 27,422,316 14,243,792 1,611,612 2,547,564 1,126,686 2,132,592 1,104,111 1,531,867 2,059,506 5,314,603 4,705,313 5,363,017 2,358,518 2,703,371 3,168,019 2,902,295 6,246,812 25,183,132 2,113,727 2,351,304 1,210,305 1,436,032 906,578 1,328,665 2,755,142 3,611,750 4,804,949 5,081,700 2,297,289 4,144,871 4,151,687 2,621,280 4,850,951 1,096,701 1,023,563 799,531 515,636 606,336 853,606 763,458 624,604 6,422,274 6,637,680 6,064,032 3,546,451 2,495,238 3,748,721 3,325,978 5,922,763 2,118,757 1,436,029 3,880,511 274,503 883,944 820,780 2,169,453 2,285,531 5,560,945 4,667,368 5,758,396 2,353,903 893,817 3,425,073 5,194,383 6,954,402 3,186,670 2,139,027 2,274,857 1,535,718 930,089 1,455,091 2,401,667 3,581,569 9,660,016 3,018,379 2,041,116 412,137 719,963 346,758 317,572 153,669 3,070,816 2,171,524 4,969,644 966,527 750,253 831,412 2,108,088 2,526,386 1,235,572 865,135 1,302,065 302,156 607,249 450,392 500,299 742,855 25,691,114 756,675 759,321 117,205 285,091 207,533 152,341 489,904 59,276,234 7,042,557 8,414,165 2,415,271 2,977,140 2,441,689 4,982,796 7,656,491 18,189,163 7,835,346 7,580,366 2,025,822 2,735,265 2,137,790 3,064,515 7,878,435 19,231,275 22,887,466 41,724,211 6,860,237 6,146,680 11,465,246 18,070,847 21,069,881 5,368,152 4,454,651 5,616,837 2,112,438 1,526,323 2,988,114 3,117,136 5,019,110 -130,330,534 17,262,583 23,247,676 11,726,256 7,645,698 17,396,930 14,257,400 8,782,638 -13,366,485 -2,331,474 -3,895,273 -1,258,831 -850,823 -575,482 -4,569,120 -3,639,247 -387,955 -493,096 -171,501 -134,306 -346,125 -544,483 -117,618 -53,607 196,397,456 198,917,216 248,736,365 94,330,429 98,874,552 129,569,555 137,820,724 224,524,258 -24,785,030 -13,758,203 -17,416,606 -9,189,092 -14,231,742 -17,715,058 -8,878,049 -17,576,720 171,612,426 185,159,013 231,319,759 85,141,337 84,642,810 111,854,497 128,942,675 206,947,539 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

296 82nd Annual Report, 1995 6. Income and Expenses of Federal Reserve Banks, 1995—Continued Dollars Item1 Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 23,576,732,165 1,139,297,525 9,456,351,521 962,973,377 1,400,441,737 Additions to and deductions from (-) current net income5 Profits on sales of U.S. Treasury and federal agency securities 6,264,277 253,285 2,973,126 345,705 267,913 Net profit on foreign exchange 1,004,671,984 38,032,962 269,388,856 43,940,036 70,243,911 Other additions 146,749 2,725 54,636 599 13,175 Total additions 1,011,083,011 38,288,972 272,416,618 44,286,340 70,524,999 Deductions -114,925,903 -3,310,102 -15,759,940 -5,026,076 -4,090,845 Total deductions -114,925,903 -3,310,102 -15,759,940 -5,026,076 -4,090,845 Net addition to or deductions from (-) current net income 896,157,108 34,978,870 256,656,678 39,260,264 66,434,154 Cost of unreimbursed Treasury services .. . ... 38,369 263 2,017 434 3 416,012 2 101 899 2 183 009 Assessments by Board Board expenditures6 161,347,900 6,256,100 43,172,300 7,147,800 11,216,100 Cost of currency 370,202,935 17,221,230 147,117,303 16,276,500 21,874,736 Net income before payment to U.S. Treasury 23,902,969,175 1,148,781,632 9,519,302,585 976,707,442 1,431,602,046 Dividends paid 230,527,278 9,461,492 61,464,192 10,795,852 15,514,258 Payments to U.S. Treasury (interest on Federal Reserve notes) 23,389,366,647 1,107,918,189 9,388,855,493 936,813,240 1,414,849,038 Transferred to surplus 283,075,250 31,401,950 68,982,900 29,098,350 1,238,750 Surplus, January 1 3,683,326,700 139,436,350 987,632,750 161,092,850 257,528,050 Surplus, December 31 3,966,401,950 170,838,300 1,056,615,650 190,191,200 258,766,800 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 $119,217,028. 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 297 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 1,788,754,554 1,066,415,387 2,676,543,799 1,008,468,944 436,419,604 902,281,176 777,467,749 1,961,316,793 426,981 320,687 734,844 390,338 44,434 158,280 109,757 238,928 80,828,706 93,016,566 114,291,538 23,123,372 26,801,887 37,964,390 67,326,215 139,713,545 8,156 24,943 6,738 1,267 170 0 31,201 3,138 81,263,843 93,362,196 115,033,120 23,514,978 26,846,490 38,122,670 67,467,173 139,955,612 -6,941,624 -24,164,016 -6,740,193 -4,069,780 -19,832,670 -3,299,300 -15,036,655 -6,654,703 -6,941,624 -24,164,016 -6,740,193 -4,069,780 -19,832,670 -3,299,300 -15,036,655 -6,654,703 74,322,219 69,198,180 108,292,927 19,445,198 7,013,820 34,823,370 52,430,519 133,300,909 5,276,706 3,426,379 3,890,671 2,114,326 2,641,117 2,910,429 2,613,099 5,778,183 12,737,000 14,966,500 18,572,800 3,729,600 4,262,200 6,092,400 10,755,300 22,439,800 27,991,998 17,518,905 41,012,869 18,659,898 6,355,547 13,534,714 12,534,061 30,105,174 1,817,071,069 1,099,701,783 2,721,360,385 1,003,410,318 430,174,560 914,567,003 803,995,808 2,036,294,545 17,570,732 21,940,216 27,267,891 5,343,579 5,862,866 8,645,518 14,866,370 31,794,310 1,804,318,337 1,029,816,767 2,640,392,094 984,871,839 423,620,594 893,335,785 789,512,588 1,975,062,684 -4,818,000 47,944,800 53,700,400 13,194,900 691,100 12,585,700 -383,150 29,437,550 296,334,000 341,017,100 419,015,350 84,774,850 98,261,800 139,184,950 246,831,200 512,217,450 291,516,000 388,961,900 472,715,750 97,969,750 98,952,900 151,770,650 246,448,050 541,655,000 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

298 82nd Annual Report, 1995 7. Income and Expenses of Federal Reserve Banks, 1914-95 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 -6,314,7% 741,436 1922 50,498,699 28,836,504 -4,441,914 722,545 1923 50,708,566 29,061,539 -8,233,107 702,634 1924 38,340,449 27,767,886 -6,191,143 663,240 1925 41,800,706 26,818,664 ^,823,477 709,499 1926 47,599,595 24,914,037 -3,637,668 721,724 1,714,421 1927 43,024,484 24,894,487 -2,456,792 779,116 1,844,840 1928 64,052,860 25,401,233 -5,026,029 697,677 805,900 1929 70,955,4% 25,810,067 -4,861,642 781,644 3,099,402 1930 36,424,044 25,357,611 -93,136 809,585 2,175,530 1931 29,701,279 24,842,964 311,451 718,554 1,479,146 1932 50,018,817 24,456,755 -1,413,192 728,810 1,105,816 1933 49,487,318 25,917,847 -12,307,074 800,160 2,504,830 1934 48,902,813 26,843,653 -4,430,008 1,372,022 1,025,721 1935 42,751,959 28,694,%5 -1,736,758 1,405,898 1,476,580 1936 37,900,639 26,016,338 485,817 1,679,566 2,178,119 1937 41,233,135 25,294,835 -1,631,274 1,748,380 1,757,399 1938 36,261,428 25,556,949 2,232,134 1,724,924 1,629,735 1939 38,500,665 25,668,907 2,389,555 1,621,464 1,356,484 1940 43,537,805 25,950,946 11,487,697 1,704,011 1,510,520 1941 41,380,095 28,535,547 720,636 1,839,541 2,588,062 1942 52,662,704 32,051,226 -1,568,208 1,746,326 4,826,492 1943 69,305,715 35,793,816 23,768,282 2,415,630 5,336,118 1944 104,391,829 39,659,4% 3,221,880 2,2%,357 7,220,068 1945 142,209,546 41,666,453 -830,007 2,340,509 4,710,309 1946 150,385,033 50,493,246 -625,991 2,259,784 4,482,077 1947 158,655,566 58,191,428 1,973,001 2,639,667 4,561,880 1948 304,160,818 64,280,271 -34,317,947 3,243,670 5,186,247 1949 316,536,930 67,930,860 -12,122,274 3,242,500 6,304,316 1950 275,838,994 69,822,227 36,294,117 3,433,700 7,315,844 1951 394,656,072 83,792,676 -2,127,889 4,095,497 7,580,913 1952 456,060,260 92,051,063 1,583,988 4,121,602 8,521,426 1953 513,037,237 98,493,153 -1,058,993 4,099,800 10,922,067 1954 438,486,040 99,068,436 -133,641 4,174,600 6,489,895 1955 412,487,931 101,158,921 -265,456 4,194,100 4,707,002 1956 595,649,092 110,239,520 -23,436 5,339,800 5,603,176 1957 763,347,530 117,931,908 -7,140,914 7,507,900 6,374,195 1958 742,068,150 125,831,215 124,175 5,917,200 5,973,240 1959 886,226,116 131,848,023 98,247,253 6,470,600 6,384,083 1960 1,103,385,257 139,893,564 13,874,702 6,533,700 7,455,011 1961 941,648,170 148,253,719 3,481,628 6,265,100 6,755,756 1962 1,048,508,335 161,451,206 -55,779 6,654,900 8,030,028 1963 1,151,120,060 169,637,656 614,835 7,572,800 10,062,901 1964 1,343,747,303 171,511,018 725,948 8,655,200 17,229,671 1965 1,559,484,027 172,110,934 1,021,614 8,576,396 23,602,856 1966 1,908,499,8% 178,212,045 9%,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 299 7.—Continued Payments to U.S. Treasury Transferred Transferred Dividends Interest on to surplus to surplus paid Franchise Under Federal Reserve (section 13b) (section 7) tax section 13b notes 217,463 1,742,775 6,804,186 1,134,234 1,134,234 5,540,684 48,334,341 5,011,832 2,703,894 70,651,778 5.654,018 60,724,742 82,916,014 6,119,673 59,974,466 15,993,086 6,307,035 10,850,605 -659,904 6.552.717 3.613.056 2,545,513 6,682,496 113,646 -3,077,962 6,915,958 59,300 2,473,808 7,329,169 818,150 8,464,426 7,754,539 249,591 5,044,119 8,458,463 2,584,659 21,078,899 9,583,911 4,283,231 22,535,597 10,268,598 17,308 -2,297,724 10,029,760 -7,057,694 9,282,244 2,011,418 11,020,582 8,874,262 -916,855 8,781,661 -60,323 6,510,071 8,504,974 297,667 27,695 607,422 7,829,581 227,448 102,880 352,524 7,940,966 176,625 67,304 2,616,352 8,019,137 119,524 ^19,140 1,862,433 8,110,462 24,579 ^25,653 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 -^65,822,800 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

300 82nd Annual Report, 1995 7. Income and Expenses of Federal Reserve Banks, 1914-95—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 ^9,615,790 35,234,499 31,454,740 1973. 5,016,769,328 416,879,377 -80,653,488 44,411,700 33,826,299 1974. 6,280,090,965 476,234,586 -78,487,237 41,116,600 30,190,288 1975. 6,257,936,784 514,358,633 -202,369,615 33,577,201 37,130,081 1976. 6,623,220,383 558,128,811 7,310,500 41,827,700 48,819,453 1977. 6,891,317,498 568,851,419 -177,033,463 47,366,100 55,008,163 1978. 8,455,309,401 592,557,841 -633,123,486 53,321,700 60,059,365 1979. 10,310,148,406 625,168,261 -151,148,220 50,529,700 68,391,270 1980... 12,802,319,335 718,032,836 -115,385,855 62,230,800 73,124,423 1981... 15,508,349,653 814,190,392 -372,879,185 63,162,700 82,924,013 1982... 16,517,385,129 926,033,957 -68,833,150 61,813,400 98,441,027 1983... 16,068,362,117 1,023,678,474 -400,365,922 71,551,000 152,135,488 1984... 18,068,820,742 1,102,444,454 -412,943,156 82,115,700 162,606,410 1985... 18,131,982,786 1,127,744,490 1,301,624,294 77,377,700 173,738,745 1986... 17,464,528,361 1,156,867,714 1,975,893,356 97,337,500 180,779,673 1987... 17,633,011,623 1,146,910,699 1,796,593,917' 81,869,800 170,674,979 1988... 19,526,431,297 1,205,960,134 -516,910,320 84,410,500 164,244,653 1989... 22,249,275,725 1,332,160,712 1,254,613,3652 89,579,700 175,043,736 1990... 23,476,603,651 1,349,725,812 2,099,328,4722 103,752,200 193,006,998 1991... 22,553,001,815 1,429,322,157 405,729,3202 109,631,000 261,316,379 1992... 20,235,027,938 1,474,530,523 -987,787,6872 128,955,300 295,400,692 1993... 18,914,250,574 1,657,799,914 -230,267,9192 140,465,600 355,947,291 1994... 20,910,742,377 1,795,328,343 2,363,862,097 146,866,100 368,187,068 1995... 25,395,148,359 1,818,416,193 857,787,845 161,347,900 370,202,935 Total, 1914-95. 392,244,535,021 28,599,119,876 7,762,488,695 2,151,612,508 3,986,616,067 Aggregate for each Bank, 1914-95 Boston 20,998,174,659 1,884,922,025 259,842,767 78,673,886 232,958,032 New York 124,710,601,541 5,848,718,027 2,247,319,208 574,799,086 1,227,870,745 Philadelphia 15,107,244,229 1,578,058,352 286,880,662 98,491,218 162,246,929 Cleveland 25,565,854,197 1,813,282,376 408,915,257 151,625,690 248,926,866 Richmond 31,017,849,656 2,431,492,140 475,958,494 125,774,976 350,237,963 Atlanta 17,095,830,663 2,614,161,751 705,494,009 177,636,860 210,715,683 Chicago 53,180,957,665 3,711,918,763 938,788,259 285,232,172 515,268,991 St. Louis 13,176,746,441 1,446,652,343 159,668,433 61,166,472 149,406,841 Minneapolis 7,336,239,151 1,340,467,212 199,958,251 62,065,415 73,168,166 Kansas City 15,937,281,891 1,834,636,831 274,644,567 87,651,309 168,121,665 Dallas 20,484,315,458 1,762,687,946 614,561,745 146,908,073 202,042,792 San Francisco 47,633,439,470 3,108,224,871 1,190,457,043 301,587,351 445,651,394 Total 392,244,535,021 28,599,119,876 * 7,762,488,695 2,151,612,508 3,986,616,067 NOTE. Components may not sum to totals because of 3. The $4,095,074,149 transferred to surplus was rounding. reduced by direct changes of $500,000 for charge-off 1. For 1987 and subsequent years, includes the cost of on Bank premises (1927), $139,299,557 for contributions services provided to the Treasury by Federal Reserve to 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 (1955), leavment was not received. ing a balance of $3,966,401,948 on December 31, 1995. 4. See note 2, table 6. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 301 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 20,470,010,815 282,121,700 230,527,278 23,389,366,647 283,075,250 3,393,029,751 149,138,300 2,188,893 357,630,247,822 -3,657 4,095,074,149 3 135,469,012 7,111,395 280,843 18,737,533,697 135,411 180,933,125 928,684,134 68,006,262 369,116 117,992,137,332 -433,412 1,093,872,221 168,264,402 5,558,901 722,406 13,175,970,600 290,661 204,521,422 251,261,123 4,842,447 82,930 23,232,757,333 -9,906 272,000,593 192,926,894 6,200,189 172,493 28,089,679,070 -71,517 297,395,808 265,386,408 8,950,561 79,264 14,130,160,343 5,491 394,228,440 444,721,439 25,313,526 151,045 48,649,083,797 11,682 488,044,504 98,490,163 2,755,629 7,464 11,474,873,104 -26,515 103,089,378 94,609,092 5,202,900 55,615 5,857,734,012 64,874 102,830,113 136,341,949 6,939,100 64,213 13,822,269,464 -8,674 155,910,600 220,733,658 560,049 102,083 18,515,061,737 55,337 250,725,528 456,141,475 7,697,341 101,421 43,952,987,331 -17,089 551,522,417 3,393,029,751 149,138,300 2,188,893 357,630,247,822 -3,657 4,095,074,149 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

302 82nd Annual Report, 1995 Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks and Branches, December 31, 1995 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 89,499,467 7,135,909 118,708,877 94,278,515 NEW YORK. 20,330,426 112,200,615 47,198,929 179,729,970 142,563,924 Buffalo 887,844 2,693,268 2,844,131 6,425,243 3,923,917 PHILADELPHIA 2,251,556 56,966,200 6,340,260 65,558,016 47,863,835 CLEVELAND . 2,298,644 41,553,212 6,967,450 50,819,306 42,956,601 Cincinnati 2,246,599 13,978,275 8,245,465 24,470,339 11,147,920 Pittsburgh 1,658,376 10,114,189 4,544,546 16,317,111 12,324,775 RICHMOND. 6,111,681 58,755,396 16,463,414 81,330,490 68,482,713 5,708,457 Baltimore 6,476,335 27,100,992 3,842,189 37,419,516 27,742,419 Charlotte 3,129,645 27,402,251 4,737,485 35,269,381 30,303,237 ATLANTA... 606,107 31,994,103 4,074,600 36,674,810 30,582,687 4,338,155 Birmingham.. 3,197,830 1,905,770 2,073,625 7,177,226 5,030,154 Jacksonville.. 1,665,439 16,395,261 2,851,236 20,911,935 17,421,848 48,365 Miami 3,810,291 12,214,625 2,726,244 18,751,160 13,486,293 Nashville .... 592,342 1,744,568 2,363,763 4,700,673 2,317,883 New Orleans. 3,497,233 5,257,082 2,815,718 11,570,034 8,125,940 CHICAGO. 4,565,008 114,242,044 13,591,362 132,398,414 101,919,572 Detroit 797,734 4,588,589 3,426,327 8,812,650 7,970,420 ST. LOUIS. 700,378 16,477,933 5,298,206 22,476,517 18,606,504 Little Rock. 1,148,492 2,357,733 1,003,022 4,509,247 3,525,112 Louisville.. 700,075 2,859,819 1,131,238 4,691,132 3,423,449 Memphis... 1,135,623 4,216,382 2,280,473 7,632,478 4,890,611 MINNEAPOLIS. 8,628,088 46,785,831 7,753,083 63,167,001 43,977,410 Helena 1,954,514 9,085,286 513,922 11,553,722 10,475,336 KANSAS CITY. 2,048,446 24,473,922 8,117,503 34,639,871 27,956,190 Denver 3,187,962 5,462,145 3,311,080 11,925,187 8,353,012 Oklahoma City.. 646,386 3,290,083 8,254 3,944,722 2,610,446 Omaha 6,534,583 10,987,009 1,401,083 18,922,675 16,078,958 1,412,500 DALLAS 28,512,492 107,368,368 19,588,532 155,469,391 145,236,494 El Paso 262,477 1,969,950 404,946 2,637,373 2,266,079 Houston 2,205,500 4,266,808 1,264,396 7,736,704 7,091,760 San Antonio . 482,284 2,437,084 1,669,052 4,588,420 3,051,025 SAN FRANCISCO. 15,599,928 70,806,647 18,068,955 104,475,531 80,875,608 Los Angeles 3,891,887 51,184,892 8,876,766 63,953,546 52,544,944 Portland 2,248,415 7,784,968 2,328,714 12,362,097 11,092,575 Salt Lake City 494,556 4,893,058 2,490,226 7,877,841 6,415,939 Seattle 324,772 6,609,964 2,771,072 9,705,808 7,838,694 Total 166,903,447 1,011,887,789 230,523,179 1,409,314,414 1,125,752,800 11,507,476 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 303 9. Operations in Principal Departments of Federal Reserve Banks, 1992-95 Operation 1995 1994 1993 1992 Millions of pieces (except as noted) Loans (thousands) 6 8 6 8 Currency received and counted 22,594 20,166 20,768 20,166 Currency verified and destroyed 8,911 7,244 7,376 7,506 Coin received and counted 7,578 6,950 7,690 8,660 Checks handled U.S. government checks 460 470 480 493 Postal money orders 203 200 192 181 All other 15,465 16,479 19,009 19,053 Government securities transfers' 13 13 12 12 Transfer of funds 76 72 70 68 Automated clearinghouse transactions Commercial 2,125 1,805 1,545 1,327 Government 599 574 555 531 Food stamps redeemed 3,954 4,229 4,198 4,183 Millions of dollars Loans 22,854 22,853 20,760 29,427 Currency received and counted 345,318 277,685 290,989 277,681 Currency verified and destroyed 113,828 76,620 79,599 96,744 Coin received and counted 1,112 1,045 1,143 1,275 Checks handled U.S. government checks 490,299 504,479 534,236 588,311 Postal money orders 24,835 23,764 22,207 20,188 All other 11,567,820 12,079,107 14,066,518 13,241,785 Government securities transfers' 149,764,431 144,702,226 146,220,304 139,675,710 Transfer of funds 222,954,083 211,201,540 207,629,814 199,175,034 Automated clearinghouse transactions Commercial 8,076,660 7,420,499 6,710,035 6,530,731 Government 1,117,452 948,984 885,011 859,774 Food stamps redeemed 20,862 21,867 21,661 21,452 1. Beginning with the 1994 Annual Report, "Govern- change was made to enable consistent time series reportment securities transfers" replaced the previous time ing for the fiscal area, where complex definitional changes series that included "Issues, redemptions, and exchanges have occurred over the reported years. of U.S. Treasury and federal agency securities." This Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

304 82nd Annual Report, 1995 10. Federal Reserve Bank Interest Rates on Loans to Depository Institutions, December 31, 1995 Extended credit3 Adjustment Seasonal Reserve Bank credit' credit2 First thirty days After thirty days of borrowing of borrowing All Federal Reserve Banks 5.25 5.75 5.25 6.25 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 201.3(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 305 1. Reserve Requirements of Depository Institutions, December 31, 1995 Requirements Type of deposit Percentage of deposits Effective date Net transaction accounts' $0 million-$52.0 million2 3 12-19-95 More than $52.0 million3 10 12-19-95 Nonpersonal time deposits 4 0 12-27-90 Eurocurrency liabilities5 0 12-27-90 NOTE. Required reserves must be held in the form of liabilities subject to a zero percent reserve requirement deposits with Federal Reserve Banks or vault cash. Non- each year for the succeeding calendar year by 80 percent member institutions may maintain reserve balances with a of the percentage increase in the total reservable liabilities Federal Reserve Bank indirectly, on a pass-through basis, of all depository institutions, measured on an annual basis with certain approved institutions. For previous reserve as of June 30. No corresponding adjustment is made in requirements, see earlier editions of the Annual Report or the event of a decrease. Effective December 19, 1995, the the Federal Reserve Bulletin. Under the Monetary Con- exemption was raised from $4.2 million to $4.3 million. trol Act of 1980, depository institutions include commer- The exemption applies only to accounts that would be cial banks, mutual savings banks, savings and loan asso- subject to a 3 percent reserve requirement. ciations, credit unions, agencies and branches of foreign 3. The reserve requirement was reduced from 12 perbanks, and Edge Act corporations. cent to 10 percent on April 2, 1992, for institutions that 1. Transaction accounts include all deposits against report weekly, and on April 16, 1992, for institutions that which the account holder is permitted to make withdraw- report quarterly. als by negotiable or transferable instruments, payment 4. For institutions that report weekly, the reserve reorders of withdrawal, and telephone and preauthorized quirement on nonpersonal time deposits with an original transfers for the purpose of making payments to third maturity of less than 1V2 years was reduced from 3 perpersons or others. However, money market deposit cent to 1V2 percent for the maintenance period that began accounts (MMDAs) and similar accounts subject to the December 13, 1990, and to zero for the maintenance rules that permit no more than six preauthorized, auto- period that began December 27, 1990. The reserve rematic, or other transfers per month, of which no more quirement on nonpersonal time deposits with an original than three may be checks, are savings deposits, not trans- maturity of 1 Vi years or more has been zero since Octoaction accounts. ber 6, 1983. 2. The Monetary Control Act of 1980 requires that the For institutions that report quarterly, the reserve reamount of transaction accounts against which the 3 per- quirement on nonpersonal time deposits with an original cent reserve requirement applies be modified annually by maturity of less than 1V2 years was reduced from 3 per- 80 percent of the percentage change in transaction cent to zero on January 17, 1991. accounts held by all depository institutions, determined as 5. The reserve requirement on Euroccurency liabilities of June 30 each year. Effective December 19, 1995 for was reduced from 3 percent to zero in the same manner institutions reporting quarterly and weekly, the amount and on the same dates as the reserve requirement on was decreased from $54.0 million to $52.0 million. nonpersonal time deposits with an original maturity of Under the Garn-St Germain Depository Institutions less than 1V2 years (see note 4). Act of 1982, the Board adjusts the amount of reservable Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

306 82nd Annual Report, 1995 12. Initial Margin Requirements under Regulations T, U, G, and X Percent of market value Short sales, Effective date T only' 1934, Oct. 1 .. 25-45 1936, Feb. 1 .. 25-55 Apr. 1 .. 55 1937, Nov. 1.. 40 50 1945, Feb. 5 .. 50 50 July 5 ... 75 75 1946, Jan. 21 .. 100 100 1947, Feb. 21.. 75 75 1949, Mar. 3... 50 50 1951, Jan. 17.. 75 75 1953, Feb. 20.. 50 50 1955, Jan. 4 ... 60 60 Apr. 23.. 70 70 1958, Jan. 16 .. 50 50 Aug. 5... 70 70 Oct. 16.. 90 90 1960, July 28 .. 70 70 1962, July 10. 50 50 1963, Nov. 6.. 70 70 1968, Mar. 11. 70 50 70 June 8.. 80 60 80 1970, May 6.. 65 50 65 1971, Dec. 6.. 55 50 55 1972, Nov. 24.. 65 50 65 1974, Jan. 3 ... 50 50 50 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 307 13. Principal Assets and Liabilities and Number of Insured Commercial Banks in the United States, by Class of Bank, June 30, 1995 and 1994 Millions of dollars, except as noted Member banks Nonmember Item Total banks Total National State 1995 ASSETS Loans and investments 2,989,950 2,223,301 1,663,696 559,605 766,648 Gross loans 2,203,551 1,660,229 1,272,736 387,493 543,322 Net loans 2,198,915 1,657,617 1,270,711 386,905 541,298 Investments 786,399 563,072 390,961 172,112 223,327 U.S. Treasury and federal agency securities 320,388 207,085 151,774 55,311 113,303 Other 466,011 355,987 239,186 116,801 110,024 Cash assets, total 197,464 157,071 117,407 39,664 40,393 LIABILITIES Deposits, total 2,425,001 1,775,412 1,325,357 430,055 669,589 Interbank 38,389 31,305 21,844 9,461 7,084 Other transaction 770,200 574,715 428,590 146,125 195,485 Other nontransaction 1,892,167 1,341,251 1,022,098 319,154 550,916 Equity capital 328,472 245,865 180,470 65,394 82,607 Number of banks 10,090 3,923 2,931 992 6,167 1994 ASSETS Loans and investments 2,791,623 2,045,608 1,584,368 461,240 746,015 Gross loans 1,960,814 1,451,045 1,145,627 305,417 509,770 Net loans 1,955,881 1,448,064 1,143,321 304,743 507,817 Investments 830,809 594,563 438,740 155,823 236,246 U.S. Treasury and federal agency securities 348,062 229,200 175,765 53,435 118,862 Other 482,747 365,363 262,975 102,388 117,383 Cash assets, total 191,826 152,671 113,515 39,156 39,155 LIABILITIES Deposits, total 2,352,643 1,691,922 1,317,010 374,912 660,721 Interbank 38,627 31,381 22,708 8,673 7,246 Other demand 782,177 581,697 447,663 134,064 200,481 Other time and savings 1,828,585 1,286,004 1,012,930 273,074 542,581 Equity capital 299,581 222,192 167,130 55,062 77,385 Number of banks 10,644 4,139 3,174 965 6,505 NOTE. Components may not sum to totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

308 82nd Annual Report, 1995 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-95, and Month-End 1995 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- Total o B u o tr u i g g h h t t r u c H e h n p e a d u l s e d r e r - Loans Float' ot A he ll r2 R F a O e e ss s d th e e e r e t r v s a r 3 e l Total s G to o c l k d 4 c r i i e c a g r a c h t t i - t e f s - s r i t e o a n n u n g c t d - 5 y agree- count ment 1918 239 239 0 1,766 199 294 0 2,498 2,873 1,795 1919 300 300 0 2,215 201 575 0 3,292 2,707 1,707 1920 287 287 0 2,687 119 262 0 3,355 2,639 1,709 1921 234 234 0 1,144 40 146 0 1,563 3,373 1,842 1922 436 436 0 618 78 273 0 1,405 3,642 1,958 1923 134 80 54 723 27 355 0 1,238 3,957 2,009 1924 540 536 4 320 52 390 0 1,302 4,212 2,025 1925 375 367 8 643 63 378 0 1,459 4,112 1,977 1926 315 312 3 637 45 384 0 1,381 4,205 1,991 1927 617 560 57 582 63 393 0 1,655 4,092 2,006 1928 228 197 31 1,056 24 500 0 1,809 3,854 2,012 1929 511 488 23 632 34 405 0 1,583 3,997 2,022 1930 739 686 43 251 21 372 0 1,373 4,306 2,027 1931 817 775 42 638 20 378 0 1,853 4,173 2,035 1932 1,855 1,851 4 235 14 41 0 2,145 4,226 2,204 1933 2,437 2,435 2 98 15 137 0 2,688 4,036 2,303 1934 2,430 2,430 0 7 5 21 0 2,463 8,238 2,511 1935 2,431 2,430 1 5 12 38 0 2,486 10,125 2,476 1936 2,430 2,430 0 3 39 28 0 2,500 11,258 2,532 1937 2,564 2,564 0 10 19 19 0 2,612 12,760 2,637 1938 2,564 2,564 0 4 17 16 0 2,601 14,512 2,798 1939 2,484 2,484 0 7 91 11 0 2,593 17,644 2,963 1940 2,184 2,184 0 3 80 8 0 2,274 21,995 3,087 1941 2,254 2,254 0 3 94 10 0 2,361 22,737 3,247 1942 6,189 6,189 0 6 471 14 0 6,679 22,726 3,648 1943 11,543 11,543 0 5 681 10 0 12,239 21,938 4,094 1944 18,846 18,846 0 80 815 4 0 19,745 20,619 4,131 1945 24,252 24,252 0 249 578 2 0 15,091 20,065 4,339 1946 23,350 23,350 0 163 580 1 0 24,093 20,529 4,562 1947 22,559 22,559 0 85 535 1 0 23,181 22,754 4,562 1948 23,333 23,333 0 223 541 1 0 24,097 24,244 4,589 1949 18,885 18,885 0 78 534 2 0 19,499 24,427 4,598 1950 20,778 20,725 53 67 1,368 3 0 22,216 22,706 4,636 1951 23,801 23,605 196 19 1,184 5 0 25,009 22,695 4,709 1952 24,697 24,034 663 156 967 4 0 25,825 23,187 4,812 1953 25,916 25,318 598 28 935 2 0 26,880 22,030 4,894 1954 24,932 24,888 44 143 808 1 0 25,885 21,713 4,985 1955 24,785 24,391 394 108 1,585 29 0 26,507 21,690 5,008 1956 24,915 24,610 305 50 1,665 70 0 26,699 21,949 5,066 1957 24,238 23,719 519 55 1,424 66 0 25,784 22,781 5,146 1958 26,347 26,252 95 64 1,296 49 0 27,755 20,534 5,234 1959 26,648 26,607 41 458 1,590 75 0 28,771 19,456 5,311 1960 27,384 26,984 400 33 1,847 74 0 29,338 17,767 5,398 1961 28,881 30,478 159 130 2,300 51 0 31,362 16,889 5,585 1962 30,820 28,722 342 38 2,903 110 0 33,871 15,978 5,567 1963 33,593 33,582 11 63 2,600 162 0 36,418 15,513 5,578 1964 37,044 36,506 538 186 2,606 94 0 39,930 15,388 5,405 Digitized for FRASER For notes see end of table. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 309 14.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with Federa1 ReserveBanks Other reserves 7 Cur Re- Trea- Other Federal rency sury Federal quired Reserve in cash Reserve clear- lia- With Curcir- hold- ac- ing bilities c t u io la n - ings6 T s r u e r a y - F ei 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 d s n e e r k r v a s e l r c e a o n n i c d n y 8 qu R ir e e - d9 c E es x s - 9 4,951 288 51 96 25 118 0 0 1,636 0 1,585 51 5,091 385 51 73 28 208 0 0 1,890 0 1,822 68 5,325 218 57 5 18 298 0 0 1,781 0 0 0 4,403 214 96 12 15 285 0 0 1,753 0 1,654 99 4,530 225 11 3 26 276 0 0 1,934 0 0 0 4,757 213 38 4 19 275 0 0 1,898 0 1,884 14 4,760 211 51 19 20 258 0 0 2,220 0 2,161 59 4,817 203 16 8 21 272 0 0 2,212 0 2,256 -AA 4,808 201 17 46 19 293 0 0 2,194 0 2.250 -56 4,716 208 18 5 21 301 0 0 2,487 0 2,424 63 4,686 202 23 6 21 348 0 0 2,389 0 2,430 -41 4,578 216 29 6 24 393 0 0 2,355 0 2,428 -73 4,603 211 19 6 22 375 0 0 2,471 0 2,375 96 5,360 222 54 79 31 354 0 0 1,961 0 1,994 -33 5,388 272 8 19 24 355 0 0 2,509 0 1,933 576 5,519 284 3 4 128 360 0 0 2,729 0 1,870 859 5,536 3,029 121 20 169 241 0 0 4,096 0 2,282 1,814 5,882 2,566 544 29 226 253 0 0 5,587 0 2,743 2,844 6,543 2,376 244 99 160 261 0 0 6,606 0 4,622 1,984 6,550 3,619 142 172 235 263 0 0 7,027 0 5,815 1,212 6,856 2,706 923 199 242 260 0 0 8,724 0 5,519 3,205 7,598 2,409 634 397 256 251 0 0 11,653 0 6,444 5,209 8,732 2,213 368 1,133 599 284 0 0 4,026 0 7,411 6,615 11,160 2,215 867 774 586 291 0 0 12,450 0 9,365 3,085 15,410 2,193 799 793 485 256 0 0 13,117 0 11,129 1,988 20,499 2,303 579 1,360 356 339 0 0 12,886 0 11,650 1,236 25,307 2,375 440 1,204 394 402 0 0 14,373 0 12,748 1,625 28,515 2,287 977 862 446 495 0 0 15,915 0 14,457 1,458 28,952 2,272 393 508 314 607 0 0 16,139 0 15,577 562 28,868 1,336 870 392 569 563 0 0 17,899 0 16,400 1,499 28,224 1,325 1,123 642 547 590 0 0 20,479 0 19,277 1,202 27,600 1,312 821 767 750 106 0 0 16,568 0 15,550 1,018 27,741 1,293 668 895 565 714 0 0 17,681 0 16,509 1,172 29,206 1,270 247 526 363 746 0 0 20,056 0 19,667 389 30,433 1,270 389 550 455 111 0 0 19,950 0 20,520 -570 30,781 761 346 423 493 839 0 0 20,160 0 19,397 763 30,509 796 563 490 441 907 0 0 18,876 0 18,618 258 31,158 767 394 402 554 925 0 0 19,005 0 18,903 102 31,790 775 441 322 426 901 0 0 19,059 0 19,089 -30 31,834 761 481 356 246 998 0 0 19,034 0 19,091 -57 32,193 683 358 272 391 1,122 0 0 18,504 0 18,574 -70 32,591 391 504 345 694 841 0 0 18,174 310 18,619 -135 32,869 377 485 217 533 941 0 0 17,081 2,544 18,988 637 33,918 422 465 279 320 1,044 0 0 17,387 2,544 18,988 96 35,338 380 597 247 393 1,007 0 0 17,454 3,262 20,071 645 37,692 361 880 171 291 1,065 0 0 17,049 4,099 20,677 471 39,619 612 820 229 321 1,036 0 0 18,086 4,151 21,663 574 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

310 82nd Annual Report, 1995 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-95 and Month-End 1995—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- Total ou B t o ri u g g h h t t 10 r u c H e h n p e a d u l s e d r e r - Loans Float1 ot A he ll r2 R F a e e s d s se e e r t r v s a 3 e l Total stock4 c r i i e c a g r a c h t t i - t e f s - s r i t o e n a n u n g c t d - 5 y agree- count ment '' 1965 40,768 40,478 290 137 2,248 187 0 43,340 13,733 5,575 1966 44,316 43,655 661 173 2,495 193 0 47,177 13,159 6,317 1967 49,150 48,980 170 141 2,576 164 0 52,031 11,982 6,784 1968 52,937 52,937 0 186 3,443 58 0 56,624 10,367 6,795 1969 57,154 7,1543 0 183 3,440 64 2,743 64,584 10,367 6,852 1970 62,142 62,142 0 335 4,261 57 1,123 67,918 10,732 400 7,147 1971 70,804 69,481 1,323 39 4,343 261 1,068 76,515 10,132 400 7,710 1972 71,230 71,119 111 1,981 3,974 106 1,260 78,551 10,410 400 8,313 1973 80,495 80,395 100 1,258 3,099 68 1,152 86,072 11,567 400 8,716 1974 85,714 84,760 954 299 2,001 999 3,195 92,208 11,652 400 9,253 1975 94,124 92,789 1,335 211 3,688 1,126 3,312 102,461 11,599 500 10,218 1976 104,093 100,062 4,031 25 2,601 991 3,182 110,892 11,598 1,200 10,810 1977 111,274 108,922 2,352 265 3,810 954 2,442 118,745 11,718 1,250 11,331 1978 118,591 117,374 1,217 1,174 6,432 587 4,543 131,327 11,671 1,300 11,831 1979 126,167 124,507 1,660 1,454 6,767 704 5,613 140,705 11,172 1,800 13,083 1980 130,592 128,038 2,554 1,809 4,467 776 8,739 146,383 11,160 2,518 13,427 1981 140,348 136,863 3,485 1,601 1,762 195 9,230 153,136 11,151 3,318 13,687 1982 148,837 144,544 4,293 717 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 r 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 r 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 r 1994 378,746 368,156 10,590 223 740 0 33,441 413,150 11,051 8,018 22,912 1995 394,693 380,831 13,862 136 231 0 33,483 428,543 11,050 10,168 23,951 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 311 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- hold- ac- ing bilities With Curc t u io la n - ings6 T s r u e r a y - e F i o g r n - Other counts3 a b n a c l- es ca a p n it d al3 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 Ex- Banks 42,056 760 668 150 355 211 0 0 18,447 4,163 22,848 -238 44,663 1,176 416 174 588 -147 0 0 19,779 4,310 24,321 -232 47,226 1,344 1,123 135 563 -773 0 0 21,092 4,631 25,905 -182 50,961 695 703 216 747 -1,353 0 0 21,818 4,921 27,439 -700 53,950 596 1,312 134 807 0 0 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 9812 72,497 317 2,542 251 1,41913 0 0 2,669 27,060 6,781 35,268 -1,360 79,743 185 2,113 418 1,27513 0 0 2,935 25,843 7,370 37,011 -3,798 86,547 483 7,285 353 1,090 0 0 2,968 26,052 8,036 35,197 -1,10314 93,717 460 10,393 352 1,357 0 0 3,063 25,158 8,628 35,461 -1,535 103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,615 -1,265 114,645 240 4,1% 368 1,256 0 0 4,275 31,152 10,538 42,694 -893 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 -1,442 154,908 429 5,033 328 1,033 0 436 4,990 26,053 16,666 41,391 1,328 171,935 479 3,661 191 851 0 1,013 5,392 20,413 17,821 39,179 -945 183,796 513 5,316 253 867 0 1,126 5,952 20,693 197,488 550 9,351 480 1,041 0 1,490 5,940 21 Ml 211,995 447 7,588 287 917 0 1,812 6,088 46,295 230,205 454 5,313 244 1,027 0 1,687 7,129 40,097 247,649 395 8,656 347 548 0 1,605 7,683 37,742 260,456 r 450 6,217 589 1,298 0 1,618 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 r 636 17,697 968 1,706 0 3,945 r 8,113 25,467' 334,706 r 508 7,492 206 372 0 5,897 r 7,984 26,181r 365,299 r 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 26,550 424,192 270 5,979 386 932 0 5,171 12,342 24,441 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

312 82nd Annual Report, 1995 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-95, and Month-End 1995—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- Total o B ut o r u ig g h h t t l0 r u c H e h n p e a d u l s e d r e r - Loans Float1 ot A he ll r2 R F a e e s d s se e e r t r v s a 3 e l Total stock4 c r i i e c a g r a c h t t i - t e f s - s r i t o e a n n u n g c t d - 5 y agree- count ment '' 1995 Jan. ... 369,863 366,533 3,330 77 636 0 33,738 404,314 11,050 8,018 23,073 Feb. ... 369,122 369,122 0 54 2,371 0 34,209 405,756 11,050 8,018 23,138 Mar. ... 373,813 367,115 6,698 84 62 0 35,495 409,454 11,053 8,018 23,234 Apr. ... 375,192 371,942 3,250 156 298 0 35,799 411,445 11,055 8,018 23,304 May ... 377,636 373,405 4,231 169 1,174 0 33,915 412,894 11,054 8,018 23,359 June ... 392,522 375,737 16,785 217 357 0 34,988 428,084 11,054 8,018 23,498 July .... 378,587 378,587 0 248 202 0 34,480 413,517 11,053 10,518 23,568 Aug. ... 375,914 372,759 3,155 269 90 0 31,529 407,802 11,053 10,518 23,682 Sept. ... 377,084 370,564 6,520 421 196 0 32,580 410,282 11,051 10,168 23,769 Oct. ... 376,539 374,039 2,500 124 1,007 0 32,391 410,061 11,051 10,168 23,825 Nov. ... 383,494 376,511 6,983 55 487 0 31,054 415,090 11,050 10,168 23,895 Dec. ... 394,693 380,831 13,862 136 231 0 33,483 428,543 11,050 10,168 23,951 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 313 14.—Continued Factors absorbing reservefunds Deposits, other Member bank than reserves, with Federal Reserve Banks Other Cur- Re- Trea- Other Federal rency sury Federal quired Reserve in cash Reserve clear- liacir- hold- ac- ing bilities With Curcula- Trea- For- bal- Federal rency Re- Extion ings6 sury eign ances capital3 R B e a s n er k v s e c a o n in d 8 quired9 cess9-12 396,041 335 13,964 185 308 0 4,159 12,854 18,609 397,753 340 6,891 188 325 0 4,038 13,710 24,716 401,630 361 4,543 370 398 0 3,925 14,449 26,084 405,285 356 8,242 166 339 0 3,905 13,095 22,433 411,104 322 4,646 227 215 0 4,133 12,181 22,497 410,483 319 20,977 168 242 0 4,274 13,519 20,672 409,508 306 11,207 190 304 0 4,178 12,671 20,293 410,984 316 4,767 166 298 0 4,535 11,438 20,551 409,275 322 8,620 201 332 0 4,556 13,088 18,877 411,767 314 7,018 275 375 0 4,753 13,073 17,531 416,682 276 5,703 194 282 0 4,870 12,697 19,500 424,192 270 5,979 386 932 0 5,171 12,342 24,441 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

314 82nd Annual Report, 1995 15. Number of Banking Offices in the United States, December 31, 1994 and 1995 Commercial banks State-chartered Type of office, Total Member3 Nonmember banks2 number, and change Total Non- Non- Total National State Insured Insured insured insured BANKS Number, Dec. 31, 1994 .. 11,352 10,820 4,111 3,127 984 6,401 308 532 0 Changes during 1995 New banks 128 125 49 38 11 61 15 3 0 Ceased banking operation -64 -57 -33 -26 -7 -13 -11 -7 0 Banks converted into branches4 -597 -580 -260 -221 -39 -320 0 -17 0 Other5 14 15 98 -6 104 -85 2 -1 0 Net change -519 -497 -146 -215 69 -357 6 -22 0 Number, Dec. 31,1995 .. 10,833 10,323 3,965 2,912 1,053 6,044 314 510 0 BRANCHES AND ADDITIONAL OFFICES Number, Dec. 31, 1994 .. 58,322 55,196 37,088 28,694 8,394 18,021 87 3,126 0 Changes during 1995 De novo 2,614 2,367 1,649 1,350 299 716 2 247 0 Banks converted into branches . ... 597 587 371 276 95 216 0 10 0 Discontinued -1,407 -1,319 -1,045 -776 -269 -271 -3 -88 0 Other5 241 147 66 56 10 81 o 94 o Net change5 2,045 1,782 1,041 906 135 742 -1 263 0 Number, Dec. 31, 1995 .. 60,367 56,978 38,129 29,600 8,529 18,763 86 3,389 0 NOTE. Preliminary. Final data will be available in the 2. Formerly called mutual savings banks. Annual Statistical Digest, 1995, forthcoming. 3. Includes noninsured trust companies that are mem- 1. Includes nondeposit trust companies, private banks, bers of the Federal Reserve System. industrial banks, and nonbank banks. Member institutions 4. Includes eight banks that converted to thrift instituare those that are members of the Federal Reserve tion branches. System. 5. Includes interclass changes and sales of branches. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 315 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1995 Citizens Commercial & Savings Bank, Flint, South Trust Bank of West Florida, St. Peters- Michigan to merge with Bank One banks of burg, Florida to acquire assets and liabilities Fenton (N.A.), Ypsilanti (N.A.), East Lansing, of the Tampa & New Port Richey branches and Sturgin, Michigan1 of Anchor Savings Bank, F.S.B., Hewlett, New York SUMMARY REPORT BY THE ATTORNEY GENERAL (11-23-94) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (12-21-94) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (1-6-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $1.3 billion; the targets (1-11-95) have assets of $691.1 million. The parties operate The applicant has assets of $827.7 million; the in the same market. The banking factors and con- targets have assets of $180.8 million. The parties siderations relating to the convenience and needs operate in the same market. The banking factors of the community are consistent with approval. and considerations relating to the convenience and needs of the community are consistent with Triangle East Bank, Raleigh, North Carolina to approval. merge with Standard Bank and Trust Company, Dunn, North Carolina First Interstate Bank of Commerce, Billings, SUMMARY REPORT BY THE ATTORNEY GENERAL Montana to merge with First Citizens Bank of (12-14-94) Bozeman, Bozeman, Montana The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (12-21-94) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (1-10-95) cantly adverse to competition. The applicant has assets of $312.3 million; the target has assets of $88.3 million. The parties BASIS FOR APPROVAL BY THE FEDERAL RESERVE operate in the same market. The banking factors (1-12-95) and considerations relating to the convenience The applicant has assets of $780.5 million; the and needs of the community are consistent with target has assets of $40.6 million. The parties do approval. not operate in the same market. The banking factors and considerations relating to the convenience Triangle East Bank, Raleigh, North Carolina and needs of the community are consistent with to merge with Columbus National Bank, approval. Whiteville, North Carolina SUMMARY REPORT BY THE ATTORNEY GENERAL Crestar Bank, Richmond, Virginia to merge with (12-14-94) TideMark Bank, Newport News, Virginia The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (12-6-94) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (1-10-94) cantly adverse to competition. The applicant has assets of $312.3 million; the target has assets of $58.9 million. The parties do BASIS FOR APPROVAL BY THE FEDERAL RESERVE not operate in the same market. The banking fac- (1-19-95) tors and considerations relating to the convenience The applicant has assets of $12.6 billion; the target and needs of the community are consistent with has assets of $482.2 million. The parties operate in approval. the same market. The banking factors and considerations relating to the convenience and needs of the community are consistent with approval. 1. The institution or group of institutions named before the italicized words is referred to subsequently as the applicant, and the institution Triangle East Bank, Raleigh, North Carolina or group of institutions named after the italicized to merge with Unity Bank & Trust Company, words is referred to subsequently as the target. Rocky Mount, North Carolina Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

316 82nd Annual Report, 1995 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1995—Continued SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (12-14-94) (2-10-95) The proposed transaction would not be signifi- The applicant has assets of $4.2 billion; the target cantly adverse to competition. has deposits of $3.2 million. The parties operate in the same market. The banking factors and consid- BASIS FOR APPROVAL BY THE FEDERAL RESERVE erations relating to the convenience and needs of (1-23-95) the community are consistent with approval. The applicant has assets of $312.3 million; the target has assets of $180.6 million. The parties do not operate in the same market. The banking fac- Minden Bank & Trust Company, Minden, tors and considerations relating to the convenience Louisiana to acquire assets and liabilities of the and needs of the community are consistent with 1633 North Market Street, 3400 Line Avenue, approval. and 6250 Hearne Avenue branches (all of Shreveport) of Hibernia National Bank, New Orleans, Louisiana BancFirst, Oklahoma City, Oklahoma to merge with State National Bank, Marlow, Oklahoma SUMMARY REPORT BY THE ATTORNEY GENERAL (2-15-95) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (12-14-94) cantly adverse to competition. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (2-15-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $172.5 million; the (1-24-95) targets have assets of $42.3 million. The parties The applicant has assets of $870.0 million; the operate in the same market. The banking factors target has assets of $101.0 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. Farmers Trust Bank, Lebanon, Pennsylvania to acquire assets and liabilities of the Schaeffer- The Callaway Bank, Fulton, Missouri to merge stown branch of Meridian Bank, Reading, with Steedman Bank, Mokane, Missouri Pennsylvania SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (2-1-95) (2-1-95) The proposed transaction would not be signifi- The proposed transaction would not be significantly adverse to competition. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (1-27-95) (2-17-95) The applicant has assets of $120.0 million; the The applicant has assets of $152.7 million; the target has assets of $12.1 million. The parties do target has assets of $315.0 thousand. The parties not operate in the same market. The banking fac- operate in the same market. The banking factors tors and considerations relating to the convenience and considerations relating to the convenience and needs of the community are consistent with and needs of the community are consistent with approval. approval. Centura Bank, Rocky Mount, North Carolina Bank of Great Neck, Great Neck, New York to to acquire assets and liabilities o/the Fayetteville acquire assets and liabilities of the Great Neck branch of Progressive Savings & Loan, Ltd., branch of North Fork Bank, Mattituck, Lumberton, North Carolina New York SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (2-1-95) (12-14-94) The proposed transaction would not be signifi- The proposed transaction would not be significantly adverse to competition. cantly adverse to competition. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 317 16.—Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (2-23-95) cantly adverse to competition. The applicant has assets of $120.2 million; the BASIS FOR APPROVAL BY THE FEDERAL RESERVE target has assets of $29.1 million. The parties (3-2-95) operate in the same market. The banking factors The applicant has assets of $259.6 million; the and considerations relating to the convenience target has assets of $57.4 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 Enterprise Bank and Trust Company, Winston- approval. Salem, North Carolina to acquire assets and liabilities o/the Danbury branch of First Union First Interstate Bank of California, Los Ange- National Bank of North Carolina, Charlotte, les, California to merge with First Trust Bank, North Carolina Ontario, California SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (1-25-95) No report received. Request for report on the The proposed transaction would not be signifi- competitive factors was dispensed with, as authocantly adverse to competition. rized by the Bank Merger Act, to permit the Federal Reserve System to act immediately to safe- BASIS FOR APPROVAL BY THE FEDERAL RESERVE guard the depositors of First Trust Bank.2 (2-24-95) The applicant has assets of $48.9 million; the BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3-3-95) target has assets of $9.3 million. The parties The applicant has assets of $25.9 billion; the target operate in the same market. The banking factors has assets of $198.0 million. The State has recomand considerations relating to the convenience mended immediate action by the Federal Reserve and needs of the community are consistent with System to prevent the probable failure of the approval. target. Pace American Bank, Lawrenceville, Virginia Premier Bank, North, Haysi, Virginia to acquire to acquire assets and liabilities of the Alberta, assets and liabilities of the Coeburn and Big Bedford, Big Island, Brodnax, Chase City, Stone Gap branches of NationsBank of Vir- Chatham, Crewe, Drakes Branch, and Victoria ginia, N.A., Richmond, Virginia branches of NationsBank of Virginia, N.A., SUMMARY REPORT BY THE ATTORNEY GENERAL Richmond, Virginia (2-15-95) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (1-25-95) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (3-23-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $97.9 million; the (2-24-95) targets have assets of $49.8 million. The parties The applicant has assets of $58.4 million; the operate in the same market. The banking factors targets have assets of $157.7 million. The parties and considerations relating ,to the convenience operate in the same markets. 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. Merchants Bank, Vicksburg, Mississippi to merge with Bank of Edwards, Edwards, Mississippi First United Bank, Boca Raton, Florida to merge with Jupiter Tequesta National Bank, 2. In such cases hereafter, the entry for the Tequesta, Florida summary report by the Attorney General will read, SUMMARY REPORT BY THE ATTORNEY GENERAL "Request for report dispensed with as authorized (2-1-95) by the Bank Merger Act." Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

318 82nd Annual Report, 1995 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1995—Continued SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- No report received. Request for report on the cantly adverse to competition. competitive factors was dispensed with, as autho- BASIS FOR APPROVAL BY THE FEDERAL RESERVE rized by the Bank Merger Act, to permit the Fed- (4-19-95) eral Reserve System to act immediately to safe- The applicant has assets of $725.0 million; the guard the depositors of Bank of Edwards. target has assets of $595.8 million. The parties BASIS FOR APPROVAL BY THE FEDERAL RESERVE operate in the same market. The banking factors (3-31-95) and considerations relating to the convenience The applicant has assets of $174.0 million; the and needs of the community are consistent with target has assets of $14.8 million. The State has approval. recommended immediate action by the Federal Reserve System to prevent the probable failure of Centura Bank, Rocky Mount, North Carolina the target. to merge with First Southern Savings Bank, Inc., SSB, Asheboro, North Carolina Community Bank and Trust, Neosho, Missouri SUMMARY REPORT BY THE ATTORNEY GENERAL to merge with State Bank of Seneca, Seneca, (4-26-95) Missouri The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (3-22-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (4-21-95) cantly adverse to competition. The applicant has assets of $4.3 billion; the target has assets of $317.0 million. The parties operate in BASIS FOR APPROVAL BY THE FEDERAL RESERVE the same market. The banking factors and consid- (4-14-95) erations relating to the convenience and needs of The applicant has assets of $127.9 million; the the community are consistent with approval. target has assets of $21.0 million. The parties operate in the same market. The bank factors and Premier Bank, Inc., Wytheville, Virginia to considerations relating to the convenience and acquire assets and liabilities of the Fries, Galax, needs of the community are consistent with Independence, and Rural Retreat branches approval. of NationsBank of Virginia, N.A., Richmond, Virginia First Community Bank, Glasgow, Montana SUMMARY REPORT BY THE ATTORNEY GENERAL to merge with Citizens First National Bank of (2-15-95) Wolf Point, Wolf Point, Montana The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (4-7-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (4-24-95) cantly adverse to competition. The applicant has assets of $195.8 million; the BASIS FOR APPROVAL BY THE FEDERAL RESERVE targets have assets of $63.4 million. The parties (4-14-95) operate in the same market. The banking factors The applicant has assets of $72.2 million; the and considerations relating to the convenience target has assets of $13.3 million. The parties do and needs of the community are consistent with not operate in the same market. The banking fac- approval. tors and considerations relating to the convenience and needs of the community are consistent with Vail Bank, Vail, Colorado to merge with Snow approval. Bank, N.A., Dillon, Colorado SUMMARY REPORT BY THE ATTORNEY GENERAL Fifth Third Bank of Northeastern Ohio, Cleve- (3-27-95) land, Ohio to merge with Falls Savings Bank, The proposed transaction would not be signifi- F.S.B., Cuyahoga Falls, Ohio cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3-16-95) (4-28-95) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 319 16.—Continued The applicant has assets of $88.0 million; the the same market. The banking factors and considtarget has assets of $32.0 million. The parties do erations relating to the convenience and needs of not operate in the same market. The banking fac- the community are consistent with approval. tors and considerations relating to the convenience and needs of the community are consistent with West One Bank, Idaho, Boise, Idaho to acquire approval. assets and liabilities o/the Burley, Idaho, branch of Washington Federal Savings and Loan Asso- Westamerica Bank, San Rafael, California ciation, Seattle, Washington to merge with CapitolBank, Sacramento, SUMMARY REPORT BY THE ATTORNEY GENERAL California (5-26-95) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (5-5-95) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (6-1-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $4.4 billion; the target (5-2-95) has assets of $5.3 million. The parties do not The applicant has assets of $1.8 billion; the target operate in the same market. The banking factors has assets of $139.0 million. The parties operate in and considerations relating to the convenience the same market. The banking factors and consid- and needs of the community are consistent with erations relating to the convenience and needs of approval. the community are consistent with approval. United Jersey Bank, Hackensack, New Jersey Manufacturers and Traders Trust Company, to merge with New Jersey Savings Bank, Somer- Buffalo, New York to acquire assets and liabili- ville, New Jersey ties of the Saugerties, Niagara Falls, Pough- SUMMARY REPORT BY THE ATTORNEY GENERAL keepsie, and LaGrangeville branches of The (5-5-95) Chase Manhattan Bank, N.A., New York, The proposed transaction would not be signifi- New York cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (4-26-95) (6-9-95) The proposed transaction would not be signifi- The applicant has assets of $12.4 billion; the target cantly adverse to competition. has assets of $507.3 million. The parties operate in BASIS FOR APPROVAL BY THE FEDERAL RESERVE the same market. The banking factors and consid- (5-4-95) erations relating to the convenience and needs of The applicant has assets of $8.8 billion; the targets the community are consistent with approval. have assets of $89.3 million. The parties operate in the same markets. The banking factors and consid- First Citizens Bank & Trust Company, erations relating to the convenience and needs of Lawrenceville, Virginia to acquire assets and the community are consistent with approval. liabilities of the Clifton Forge branch of Crestar Bank, Richmond, Virginia The Fifth Third Bank, Cincinnati, Ohio to SUMMARY REPORT BY THE ATTORNEY GENERAL acquire assets and liabilities of the Lebanon (5-26-95) branch of Bank One Dayton, N.A., Dayton, The proposed transaction would not be signifi- Ohio cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5-26-95) (6-21-95) The proposed transaction would not be signifi- The applicant has assets of $58.4 million; the cantly adverse to competition. target has assets of $24.7 million. The parties do BASIS FOR APPROVAL BY THE FEDERAL RESERVE not operate in the same market. The banking fac- (5-31-95) tors and considerations relating to the convenience The applicant has assets of $9.2 billion; the target and needs of the community are consistent with has assets of $18.0 million. The parties operate in approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

320 82nd Annual Report, 1995 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1995—Continued Westamerica Bank, San Rafael, California SUMMARY REPORT BY THE ATTORNEY GENERAL to merge with Novato National Bank, Novato, (5-5-95) California The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (6-15-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (7-3-95) cantly adverse to competition. The applicant has assets of $41.1 million; the target has assets of $21.0 million. The parties BASIS FOR APPROVAL BY THE FEDERAL RESERVE operate in the same market. The banking factors (6-21-95) and considerations relating to the convenience The applicant has assets of $2.0 billion; the target and needs of the community are consistent with has assets of $93.5 million. The parties operate in approval. the same market. The banking factors and considerations relating to the convenience and needs of the community are consistent with approval. Texas State Bank, McAllen, Texas to acquire assets and liabilities of the Roma and Rio Princess Anne Bank, Virginia Beach, Virginia Grande City branches of First National Bank to acquire assets and liabilities of three branches of South Texas, San Antonio, Texas of Cenit Bank, F.S.B., Norfolk, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL (6-15-95) SUMMARY REPORT BY THE ATTORNEY GENERAL (5-26-95) The proposed transaction would not be signifi- The proposed transaction would not be signifi- cantly adverse to competition. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7-19-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE (6-29-95) The applicant has assets of $539.0 million; the The applicant has assets of $81.2 million; the targets have assets of $87.0 million. The parties do targets have assets of $89.6 million. The parties not operate in the same market. The banking facoperate in the same market. The banking factors tors and considerations relating to the convenience and considerations relating to the convenience and needs of the community are consistent with and needs of the community are consistent with approval. approval. Bank of Naples, Naples, Florida to merge with Sterling Bank & Trust Co., Baltimore, Mary- Fifth Third Trust Company and Savings Bank, land to acquire assets and liabilities of the F.S.B., Naples, Florida Annapolis branch of First Union National Bank SUMMARY REPORT BY THE ATTORNEY GENERAL of Maryland, Rockville, Maryland (6-15-95) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (5-26-95) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (7-20-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $56.9 million; the (6-29-95) target has assets of $75.7 million. The parties The applicant has assets of $76.4 million; the operate in the same market. The banking factors target has assets of $13.0 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. First Virginia Bank-Colonial, Richmond, Virginia to acquire assets and liabilities of the four Terrace Bank of Florida, Tampa, Florida to Richmond, Virginia, branches of Citizens Fedmerge with University State Bank, Tampa, eral Bank, a Federal Savings Bank, Miami, Florida Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 321 16.—Continued SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (6-15-95) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (7-31-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $2.0 billion; the target (7-20-95) has assets of $13.4 million. The parties operate in The applicant has assets of $379.3 million; the the same market. The banking factors and considtargets have assets of $200.4 million. The parties erations relating to the convenience and needs of operate in the same market. The banking factors the community are consistent with approval. and considerations relating to the convenience and needs of the community are consistent with Orrstown Bank, Orrstown, Pennsylvania to approval. acquire assets and liabilities of the Path Valley Road branch of Dauphin Deposit Bank and Cortland Savings and Banking Company, Cort- Trust Company, Harrisburg, Pennsylvania land, Ohio to acquire assets and liabilities of the SUMMARY REPORT BY THE ATTORNEY GENERAL North Bloomfield branch of Bank One, Young- (7-20-95) stow n, N.A., Youngstown, Ohio The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (7-20-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (8-2-95) cantly adverse to competition. The applicant has assets of $128.5 million; the BASIS FOR APPROVAL BY THE FEDERAL RESERVE target has assets of $14.0 million. The parties (7-28-95) operate in the same market. The banking factors The applicant has assets of $317.7 million; the and considerations relating to the convenience target has assets of $13.5 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 Triangle Bank, Raleigh, North Carolina to approval. merge with The Village Bank, Chapel Hill, North Carolina First State Bank of Taos, Taos, New Mexico SUMMARY REPORT BY THE ATTORNEY GENERAL to merge with First Bank of Grants, Grants, (8-7-95) New Mexico The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (6-30-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (8-11-95) cantly adverse to competition. The applicant has assets of $637.8 million; the BASIS FOR APPROVAL BY THE FEDERAL RESERVE target has assets of $61.7 million. The parties do (7-28-95) not operate in the same market. The banking fac- The applicant has assets of $203.4 million; the tors and considerations relating to the convenience target has assets of $40.5 million. The parties do and needs of the community are consistent with not operate in the same market. The banking fac- approval. tors and considerations relating to the convenience and needs of the community are consistent with The Fifth Third Bank, Cincinnati, Ohio to approval. acquire assets and liabilities of twelve branches of PNC Bank, Ohio, N.A., Cincinnati, Ohio Westamerica Bank, San Rafael, California to SUMMARY REPORT BY THE ATTORNEY GENERAL acquire assets and liabilities of the Point Arena (6-30-95) branch of Bank of America NT&SA, San Fran- The proposed transaction would not be significisco, California cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (8-28-95) (8-23-95) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

322 82nd Annual Report, 1995 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1995—Continued The applicant has assets of $9.2 billion; the targets considerations relating to the convenience and have assets of $257.7 million. The parties operate needs of the community are consistent with in the same markets. The banking factors and approval. considerations relating to the convenience and needs of the community are consistent with FCNB Bank, Frederick, Maryland to acquire approval. assets and liabilities of the Monrovia branch of Laurel Federal Savings Bank, Laurel, Triangle Bank, Raleigh, North Carolina to Maryland acquire assets and liabilities of four branches of NationsBank, N.A. (Carolines), Charlotte, SUMMARY REPORT BY THE ATTORNEY GENERAL (8-7-95) North Carolina The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (8-28-95) The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9-8-95) cantly adverse to competition. The applicant has assets of $444.7 million; the BASIS FOR APPROVAL BY THE FEDERAL RESERVE target has assets of $6.0 million. The parties oper- (8-29-95) ate in the same market. The banking factors and The applicant has assets of $699.5 million; the considerations relating to the convenience and targets have assets of $48.8 million. The parties 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 approval. Elkridge Bank, Elkridge, Maryland to merge with Laurel Federal Savings Bank, Laurel, Maryland First Commercial Bank, Arlington, Virginia to merge with Bank First, N.A., McLean, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL (8-7-95) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (8-7-95) cantly adverse to competition. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9-8-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $85.1 million; the (8-29-95) target has assets of $107.6 million. The parties do The applicant has assets of $60.9 million; the not operate in the same market. The banking factarget has assets of $20.2 million. The parties tors 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. Marine Midland Bank, Buffalo, New York to Bank of Oakfield, Oakfield, Wisconsin to merge with United Northern Federal Savings acquire assets and liabilities of the Van Dyne Bank, Watertown, New York branch of M&I Central State Bank, Ripon SUMMARY REPORT BY THE ATTORNEY GENERAL Wisconsin (6-30-95) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (8-28-95) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (9-11-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $18.6 billion; the target (9-5-95) has assets of $85.2 million. The parties operate in The applicant has assets of $19.1 million; the the same market. The banking factors and considtarget has assets of $2.3 million. The parties oper- erations relating to the convenience and needs of ate in the same market. The bankine factors and the communitv are consistent with aDoroval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 323 16.—Continued Crestar Bank (MD), Bethesda, Maryland to Bank One, Cincinnati, Ohio, N.A., Cincinnati, acquire assets and liabilities of The Chase Ohio Manhattan Bank of Maryland, Baltimore, SUMMARY REPORT BY THE ATTORNEY GENERAL Maryland (10-20-95) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (8-28-95) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (10-23-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $8.8 billion; the targets (9-22-95) have assets of $135.0 million. The parties operate The applicant has assets of $1.1 billion; the tar- in the same market. The banking factors and conget has assets of $454.7 million. The parties oper- siderations relating to the convenience and needs ate in the same market. The banking factors of the community are consistent with approval. and considerations relating to the convenience and needs of the community are consistent with Vectra Bank, Denver, Colorado to merge with approval. First National Bank of Denver, Denver, Colorado Valliwide Bank, Fresno, California to merge SUMMARY REPORT BY THE ATTORNEY GENERAL with El Capitan National Bank, Sonora, (2-1-95) California The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (8-7-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (10-26-95) cantly adverse to competition. The applicant has assets of $334.0 million; the BASIS FOR APPROVAL BY THE FEDERAL RESERVE target has assets of $47.0 million. The parties (9-22-95) operate in the same market. The banking factors The applicant has assets of $1.1 billion; the target and considerations relating to the convenience has assets of $131.8 million. The parties do not 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 Byron Center State Bank, Byron Center, Michiapproval. gan to acquire assets and liabilities of"the Moline branch of First of America Bank-Michigan, Security Savings Bank, Farnhamville, Iowa N.A., Grand Rapids, Michigan to acquire assets and liabilities of the Harcourt SUMMARY REPORT BY THE ATTORNEY GENERAL and Lehigh branches of Boatmen's Bank of (8-7-95) Fort Dodge, Fort Dodge, Iowa The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (8-7-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (10-27-95) cantly adverse to competition. The applicant has assets of $192.2 million; the target has assets of $11.3 million. The parties BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9-29-95) operate in the same market. The banking factors The applicant has assets of $21.5 million; the and considerations relating to the convenience targets have assets of $3.1 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 Fleet Bank-NH, Nashua, New Hampshire to approval. merge with Shawmut Bank NH, Manchester, New Hampshire The Fifth Third Bank, Cincinnati, Ohio to SUMMARY REPORT BY THE ATTORNEY GENERAL acquire assets and liabilities of seven branches of (10-31-95) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

324 82nd Annual Report, 1995 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1995—Continued The proposed transaction would not be signifi- operate in the same market. The banking factors cantly adverse to competition. and considerations relating to the convenience and needs of the community are consistent with BASIS FOR APPROVAL BY THE FEDERAL RESERVE approval. (11-14-95) The applicant has assets of $1.8 billion; the target has assets of $1.5 billion. The parties operate in Republic Security Bank, West Palm Beach, the same market. The banking factors and consid- Florida to merge with Banyan Bank, Boca erations relating to the convenience and needs of Raton, Florida the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (10-20-95) Fleet Bank, Albany, New York to merge with The proposed transaction would not be signifi- Shawmut Bank New York, N.A., Schenectady, cantly adverse to competition. New York BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (11-22-95) (10-31-95) The applicant has assets of $276.0 million; the The proposed transaction would not be signifitarget has assets of $48.0 million. The parties cantly adverse to competition. operate in the same market. The banking factors BASIS FOR APPROVAL BY THE FEDERAL RESERVE and considerations relating to the convenience (11-14-95) and needs of the community are consistent with The applicant has assets of $14.8 billion; the target approval. has assets of $1.7 billion. The parties operate in the same market. The banking factors and consid- Tri-County Bank, Brown City, Michigan to erations relating to the convenience and needs of acquire assets and liabilities o/the Yale and Peck the community are consistent with approval. branches of NBD Bank, Detroit, Michigan BancFirst, Oklahoma City, Oklahoma to merge SUMMARY REPORT BY THE ATTORNEY GENERAL with Bank of Johnston County, Tishomingo, (11-29-95) Oklahoma The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (10-20-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (11-29-95) cantly adverse to competition. The applicant has assets of $55.1 million; the targets have assets of $24.8 million. The parties BASIS FOR APPROVAL BY THE FEDERAL RESERVE operate in the same market. The banking factors (11-16-95) and considerations relating to the convenience The applicant has assets of $966.2 million; the and needs of the community are consistent with target has assets of $10.6 million. The parties do approval. not operate in the same market. The banking factors and considerations relating to the convenience and needs of the community are consistent with Republic Security Bank, West Palm Beach, approval. Florida to acquire assets and liabilities of one branch of Century Bank, F.S.B., Sarasota, Fayette Bank, Uniontown, Pennsylvania to Florida merge with The Huntington National Bank of SUMMARY REPORT BY THE ATTORNEY GENERAL Pennsylvania, Uniontown, Pennsylvania (11-29-95) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (11-7-95) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (11-30-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $274.0 million; the (11-21-95) target has assets of $32.6 million. The parties The applicant has assets of $273.0 million; the operate in the same market. The banking factors tareet has assets of $108.0 million. The oarties and considerations relating to the convenience Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 325 16.—Continued and needs of the community are consistent with and needs of the community are consistent with approval. approval. Triangle Bank, Raleigh, North Carolina to BancFirst, Oklahoma City, Oklahoma to merge acquire assets and liabilities of the Benson, Clay- with City Bank & Trust Company, Oklahoma ton, Havelock, and Mount Olive branches of City, Oklahoma First Union National Bank of North Carolina, SUMMARY REPORT BY THE ATTORNEY GENERAL Charlotte, North Carolina (11-29-95) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (11-7-95) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (12-5-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $977.0 million; the (12-1-95) target has assets of $139.0 million. The parties The applicant has assets of $770.2 million; the operate in the same market. The banking factors targets have assets of $56.7 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. Wellington State Bank, Wellington, Texas to acquire assets and liabilities of the Childress and Citizens Bank of Talladega, Talladega, Ala- Memphis branches of Bank of America Texas, bama to merge with Talladega Federal Savings N.A., Irving, Texas and Loan Association, Talladega, Alabama SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (11-7-95) (9-29-95) The proposed transaction would not be signifi- The proposed transaction would not be signifi- cantly adverse to competition. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (12-6-95) (12-1-95) The applicant has assets of $69.0 million; the The applicant has assets of $28.4 million; the targets have assets of $18.1 million. The parties target has assets of $35.0 million. The parties operate in the same market. The banking factors operate in the same market. The banking factors and considerations relating to the convenience and considerations relating to the convenience and needs of the community are consistent with and needs of the community are consistent with approval. approval. First United Bank, Boca Raton, Florida to Barnett Bank of Polk County, Lakeland, merge with The American Bank of the South, Florida to merge with First Federal Savings & Merritt Island, Florida Loan Association of Lake Wales, Lake Wales, SUMMARY REPORT BY THE ATTORNEY GENERAL Florida (9-29-95) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (11-7-95) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (12-11-95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $307.0 million; the (12-1-95) target has assets of $166.5 million. The parties do The applicant has assets of $946.9 million; the not operate in the same market. The banking factarget has assets of $132.2 million. The parties tors 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. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

326 82nd Annual Report, 1995 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1995—Continued The Fifth Third Bank of Northern Kentucky, The Fifth Third Bank of Northeastern Ohio, Inc., Florence, Kentucky to merge with Ken- Cleveland, Ohio to merge with First Nationwide tucky Enterprise Bank, F.S.B., Newport, Bank, F.S.B., Dallas, Texas Kentucky SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (12-13-95) (11-29-95) The proposed transaction would not be signifi- The proposed transaction would not be signifi- cantly adverse to competition. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE BASIS FOR APPROVAL BY THE FEDERAL RESERVE (12-26-95) (12-21-95) The applicant has assets of $1.0 billion; the target The applicant has assets of $976.3 million; the has assets of $1.4 billion. The parties operate in target has assets of $268.4 million. The parties the same market. The banking factors and considoperate in the same market. The banking factors erations relating to the convenience and needs of and considerations relating to the convenience the community are consistent with approval. and needs of the community are consistent with approval. Southeastern Bank of Florida, Alachva, Florida to acquire assets and liabilities of the Yulee, Cal- Bank of Essex, Tappahannock, Virginia to lahan and Hilliard branches of Compass Bank, acquire assets and liabilities of the West Point Jacksonville, Florida branch of First Union National Bank of SUMMARY REPORT BY THE ATTORNEY GENERAL Virginia, Roanoke, Virginia (12-13-95) The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (12-13-95) The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (12-28-95) The applicant has assets of $40.0 million; the BASIS FOR APPROVAL BY THE FEDERAL RESERVE (12-21-95) targets have assets of $26.0 million. The parties operate in the same market. The banking factors The applicant has assets of $91.8 million; the and considerations relating to the convenience target has assets of $17.2 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 Mergers Approved Involving Wholly Owned approval. Subsidiaries of the Same Bank Holding Company Sulphur Springs State Bank, Sulphur Springs, The following transactions involve banks that are Texas to merge with Colonial Bank of Green- subsidiaries of the same bank holding company. In ville, Greenville, Texas each case, the summary report by the Attorney SUMMARY REPORT BY THE ATTORNEY GENERAL General indicates that the transaction would not (11-29-95) have a significantly adverse effect on competition The proposed transaction would not be signifi- because the proposed merger is essentially a corcantly adverse to competition. porate reorganization. The Board of Governors, the Federal Reserve Bank, or the Secretary of the BASIS FOR APPROVAL BY THE FEDERAL RESERVE Board of Governors, whichever approved the (12-21-95) application, determined that the competitive The applicant has assets of $317.7 million; the effects of the proposed transaction, the financial target has assets of $81.7 million. The parties and managerial resources and prospects of the operate in the same market. The banking factors banks concerned, as well as the convenience and and considerations relating to the convenience needs of the community to be served were consisand needs of the community are consistent with tent with approval. approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 327 16.—Continued Assets Date of Institution' (millions approval of dollars) Integra Bank-Pittsburgh, Wheeling, West Virginia 7,500 2-8-95 Merger Integra Bank-North, Titusville, Pennsylvania 3,300 Integra Bank-South, Uniontown, Pennsylvania 2,500 Premier Bank-North (formerly Dickenson-Buchanan Bank), Haysi, Virginia 2-22-95 Merger Premier Bank-Central (Pound branch), (formerly Peoples Bank, Inc.), Honaker, Virginia 10 Firstar Bank Illinois, Naperville, Illinois 2,780 3-1-95 Merger All American Bank, Chicago, Illinois 73 Colonial Bank, Chicago, Illinois 329 Community Bank & Trust Company of Edgewater, Chicago, Illinois 70 Michigan Avenue National Bank, Chicago, Illinois 224 First Colonial Bank Southwest, Burbank, Illinois 42 First Colonial Bank of McHenry County, Crystal Lake, Illinois 48 First Colonial Bank of Downers Grove, Downers Grove, Illinois 37 York State Bank, Elmhurst, Illinois 152 Fox Lake State Bank, Fox Lake, Illinois 94 First Colonial Bank-High wood, High wood, Illinois 102 First Colonial Bank-Mundelein, Mundelein, Illinois 89 First Colonial Bank of DuPage County, Naperville, Illinois 59 First Colonial Bank-Northwest, Niles, Illinois 88 First Colonial Bank-Northlake, Northlake, Illinois 46 Avenue Bank of Oak Park, Oak Park, Illinois 151 First Colonial Bank-Rosemont, Rosemont, Illinois 117 First Colonial Bank of Lake County, Vernon Hills, Illinois 56 Old Kent Bank, Elmhurst, Illinois 1,900 3-2-95 Merger Edgewood Bank, Countryside, Illinois 196 Fifth Third Bank of Northeastern Ohio, Cleveland, Ohio De novo 3-8-95 Merger Fifth Third Bank (certain assets), Cincinnati, Ohio 725 Shelby County State Bank, Shelbyville, Illinois 95 3-10-95 Merger Strasburg, State Bank, Strasburg, Illinois 17 Commercial Bank of Fremont, Fremont, California 112 3-22-95 Merger Alameda First National Bank (two Fremont branches), Alameda, California 39 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

328 82nd Annual Report, 1995 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) Concord Commercial Bank, Concord, California 53 3-22-95 Merger Alameda First National Bank (Concord branch), Alameda, California 25 The Bank of San Ramon Valley, San Ramon, California 85 3-22-95 Merger Alameda First National Bank (San Ramon branch), Alameda, California 13 Fifth Third Bank of Central Indiana, Indianapolis, Indiana 583 3-30-95 Merger Fifth Third Bank of Southeastern Indiana, Greensburg, Indiana 394 ValliWide Bank, Fresno, California 739 5-3-95 Merger Community First Bank, Bakersfield, California 176 First Interstate Bank of Commerce, Billings, Montana 789 5-18-95 Merger First National Park Bank in Livingston, Livingston, Montana 54 First American Bank Valley, Grand Forks, North Dakota 164 5-25-95 Merger First American Bank and Trust of Graf ton, Graf ton, North Dakota . 112 First American Bank of Larimore, Larimore, North Dakota 31 Old Kent Bank, Grand Rapids, Michigan 8,720 6-1-95 Merger First National Bank in Macomb County, Mount Clemens, Michigan 531 Home Bank, Guntersville, Alabama 84 6-2-95 Merger Bank of Albertville, Albertville, Alabama 39 First Bank of Arkansas, Jonesboro, Arkansas 243 6-13-95 Merger First Bank of Arkansas, Trumann, Arkansas 58 Mercantile Bank of Kansas City, Kansas City, Missouri 777 6-14-95 Merger Citizens-Jackson County Bank, Warrensburg, Missouri 537 1st Source Bank, South Bend, Indiana 1,540 6-19-95 Merger 1st Source Bank of Starke County, Hamlet, Indiana 43 M&I Marshall & Ilsley Bank, Milwaukee, Wisconsin 3,882 7-28-95 Merger M&I South Shore Bank, Cudahy, Wisconsin 99 The Provident Bank, Cincinnati, Ohio 5,000 7-31-95 Merger Heritage Savings Bank, Cincinnati, Ohio 51 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 329 16.—Continued Assets Date of Institution' (millions approval of dollars) Rolling Hills Bank & Trust, Atlantic, Iowa 27 9-22-95 Merger Griswold State Bank, Griswold, Iowa 12 Signet Bank-Virginia, Richmond, Virginia ... 7,000 10-2-95 Merger Signet Bank-Maryland, Baltimore, Maryland 3,500 BankWest, Goodland, Kansas ... 48 10-21-95 Merger BankWest, St. Francis, Kansas .. 21 Rapides Bank and Trust Company, Alexandria, Louisana 460 10-26-95 Merger Central Bank, Alexandria, Louisana 59 First Virginia Bank-Colonial, Richmond, Virginia 604 10-26-95 Merger First Virginia Bank-Southside, Farmville, Virginia 118 The Northern Trust Company, Chicago, Illinois 15,671 11-21-95 Merger Northern Trust Bank-O'Hare, N.A., Chicago, Illinois 621 Northern Trust Bank-Lake Forest, N.A., Chicago, Illinois 682 Northern Trust Bank-DuPage, Chicago, Illinois 384 Marine Midland Bank, New York, New York 18,844 11-21-95 Merger Hang Seng Bank Limited (two branches), New York, New York 417 Baylake Bank-Kewaunee, Kewaunee, Wisconsin 64 11-30-95 Merger Baylake Bank, Sturgeon Bay, Wisconsin 245 Hawkeye Bank, Des Moines, Iowa 271 11-30-95 Merger Hawkeye Bank of Ankeny, Ankeny, Iowa 41 First Community Bank of Mercer County, Inc., Princeton, West Virginia De novo 12-13-95 Merger First Community Bank, Inc. (certain assets), Princeton, West Virginia 434 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

330 82nd Annual Report, 1995 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 The following transactions have no significant Board of Governors, the Federal Reserve Bank, or effect on competition; they simply facilitate the the Secretary of the Board, whichever approved acquisition of the voting shares of a bank (or the application, determined that the proposal banks) by a holding company. In such cases, the would, in itself, have no adverse competitive 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 United Valley Bank, Philadelphia, Pennsylvania 112 3-1-95 Merger UVB Interim Bank, Philadelphia, Pennsylvania Republic Bank, Philadelphia, Pennsylvania 106 3-3-95 Merger Republic Interim Bank, Philadelphia, Pennsylvania Montour Bank, Danville Pennsylvania 41 6-26-95 Merger Montour Interim Bank, Danville, Pennsylvania New U.S. Trust Company of New York, New York, New York 7-24-95 Merger United States Trust Company of New York, New York, New York ... 2,753 Community Bank of the Islands, Sanibel, Florida 85 9-15-95 Merger Interim Bank of the Islands Sanibel Florida Southern Financial Bank, Warrenton, Virginia 9-28-95 Merger Southern Financial Federal Savings Bank, Warrenton, Virginia 158 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

332 82nd Annual Report, 1995 Board of Governors of the Federal Reserve System December 31,1995 Members Term expires January 31, ALAN GREENSPAN, of New York, Chairmanl 2006 ALAN S. BLINDER, of New Jersey, Vice Chairmanl 1996 SUSAN M. PHILLIPS, of Iowa 1998 LAWRENCE B. LINDSEY, of Virginia .. 2000 EDWARD W. KELLEY, JR., of Texas 2004 JANET L. YELLEN, of California 2008 Officers OFFICE OF BOARD MEMBERS OFFICE OF THE SECRETARY Joseph R. Coyne, Assistant to the Board William W. Wiles, Secretary Donald J. Winn, Assistant to the Board Jennifer J. Johnson, Deputy Secretary Theodore E. Allison, Assistant to the Board Barbara R. Lowrey, Associate Secretary for Federal Reserve System Affairs and Ombudsman Lynn Fox, Deputy Congressional Liaison Bob Stahly Moore, Special Assistant DIVISION OF INTERNATIONAL FINANCE to the Board Edwin M. Truman, Staff Director Winthrop P. Hambley, Special Assistant Larry J. Promisel, Senior to the Board Associate Director Diane E. Werneke, Special Assistant Charles J. Siegman, Senior to the Board Associate Director Portia W. Thompson, Equal Employment Dale W. Henderson, Associate Director Opportunity Programs Adviser David H. Howard, Senior Adviser Donald B. Adams, Assistant Director LEGAL DIVISION Thomas A. Connors, Assistant Director J. Virgil Mattingly, Jr., General Counsel Peter Hooper III, Assistant Director Scott G. Alvarez, Associate General Karen H. Johnson, Assistant Director Counsel Catherine L. Mann, Assistant Director Richard M. Ashton, Associate Ralph W. Smith, Jr., Assistant Director General Counsel Oliver Ireland, Associate General Counsel DIVISION OF MONETARY AFFAIRS Donald L. Kohn, Director Kathleen M. O'Day, Associate General David E. Lindsey, Deputy Director Counsel Brian F. Madigan, Associate Director Robert deV. Frierson, Assistant General Richard D. Porter, Deputy Associate Counsel Director Katherine H. Wheatley, Assistant General Vincent R. Reinhart, Assistant Director Counsel Normand R.V. Bernard, Special Assistant to the Board 1. The designations as Chairman and Vice Chairman expire on March 2, 1996, and June 24, 1998, respectively, unless the service of these members of the Board shall have terminated sooner. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 333 Board of Governors—Continued DIVISION OF RESEARCH DIVISION OF CONSUMER AND STATISTICS AND COMMUNITY AFFAIRS Michael J. Prell, Director Griffith L. Garwood, Director Edward C. Ettin, Deputy Director Glenn E. Loney, Associate Director David J. Stockton, Deputy Director Dolores S. Smith, Associate Director Martha Bethea, Associate Director Maureen P. English, Assistant Director William R. Jones, Associate Director Irene Shawn McNulty, Assistant Director Myron L. Kwast, Associate Director Patrick M. Parkinson, Associate Director DIVISION OF FEDERAL RESERVE BANK Thomas D. Simpson, Associate Director OPERATIONS AND PAYMENT SYSTEMS Lawrence Slifman, Associate Director Clyde H. Farnsworth, Jr., Director Martha S. Scanlon, Deputy David L. Robinson, Deputy Director Associate Director (Finance and Control) Peter A. Tinsley, Deputy Louise L. Roseman, Associate Director Associate Director Charles W. Bennett, Assistant Director Flint Brayton, Assistant Director Jack Dennis, Jr., Assistant Director David S. Jones, Assistant Director Earl G. Hamilton, Assistant Director Stephen A. Rhoades, Assistant Director Jeffrey C. Marquardt, Assistant Director Charles S. Struckmeyer, Assistant Director John H. Parrish, Assistant Director Alice Patricia White, Assistant Director Florence M. Young, Assistant Director Joyce K. Zickler, Assistant Director John J. Mingo, Senior Adviser OFFICE OF STAFF DIRECTOR Glenn B. Canner, Adviser FOR MANAGEMENT S. David Frost, Staff Director DIVISION OF BANKING SUPERVISION Sheila Clark, Equal Employment AND REGULATION Opportunity Programs Director Richard Spillenkothen, Director Stephen C. Schemering, Deputy Director OFFICE OF THE CONTROLLER Don E. Kline, Associate Director George E. Livingston, Controller William A. Ryback, Associate Director Stephen J. Clark, Assistant Controller Frederick M. Struble, Associate Director (Programs and Budgets) Herbert A. Biern, Deputy Associate Darrell R. Pauley, Assistant Controller Director (Finance) Roger T. Cole, Deputy Associate Director James I. Garner, Deputy Associate Director DIVISION OF HUMAN Howard A. Amer, Assistant Director RESOURCES MANAGEMENT Gerald A. Edwards, Jr., Assistant Director David L. Shannon, Director Stephen M. Hoffman, Jr., Assistant John R. Weis, Associate Director Director Anthony V. DiGioia, Assistant Director Laura M. Homer, Assistant Director Joseph H. Hayes, Jr., Assistant Director James V. Houpt, Jr., Assistant Director Fred Horowitz, Assistant Director Jack P. Jennings, Assistant Director Michael G. Martinson, Assistant Director Rhoger H Pugh, Assistant Director Sidney M. Sussan, Assistant Director Molly S. Wassom, Assistant Director William C. Schneider, Jr., Project Director, Digitized for FRASER National Information Center http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

334 82nd Annual Report, 1995 Board of Governors—Continued DIVISION OF INFORMATION DIVISION OF SUPPORT SERVICES RESOURCES MANAGEMENT Robert E. Frazier, Director Stephen R. Malphrus, Director George M. Lopez, Assistant Director Marianne M. Emerson, Assistant Director David L. Williams, Assistant Director Po Kyung Kim, Assistant Director Raymond H. Massey, Assistant Director GENERAL OpnCE OF THE INSPECTOR Edward T. Mulrenin, Assistant Director Brent L Bowen Inspector Gmeml Day W. Radebaugh, Jr., Assistant Director* Donald L Robinson Assistant lnspector Elizabeth B. Riggs, Assistant Director General Richard C. Stevens, Assistant Director Barry R. Snyder, Assistant Inspector General Federal Open Market Committee December 31,1995 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 THOMAS M. HOENIG, President, Federal Reserve Bank of Kansas City EDWARD W. KELLEY, JR., Board of Governors LAWRENCE B. LINDSEY, Board of Governors THOMAS C. MELZER, President, Federal Reserve Bank of St. Louis CATHY E. MINEHAN, President, Federal Reserve Bank of Boston MICHAEL H. MOSKOW, President, Federal Reserve Bank of Chicago SUSAN M. PHILLIPS, Board of Governors JANET L. YELLEN, Board of Governors Alternate Members EDWARD G. BOEHNE, President, Federal Reserve Bank of Philadelphia JERRY L. JORDAN, President, Federal Reserve Bank of Cleveland ROBERT D. MCTEER, JR., President, Federal Reserve Bank of Dallas ERNEST T. PATRIKIS, First Vice President, Federal Reserve Bank of New York GARY H. STERN, President, Federal Reserve Bank of Minneapolis Officers DONALD L. KOHN, THOMAS C. BAXTER, JR., Secretary and Economist Deputy General Counsel NORMAND R.V. BERNARD, MICHAEL J. PRELL, Deputy Secretary Economist JOSEPH R. COYNE, EDWIN M. TRUMAN, Assistant Secretary Economist GARY P. GILLUM, LYNN E. BROWNE, Assistant Secretary Associate Economist J. VIRGIL MATTINGLY, JR., THOMAS E. DAVIS, General Counsel Associate Economist Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 335 Federal Open Market Committee—Continued WILLIAM G. DEWALD, LARRY J. PROMISEL, Associate Economist Associate Economist WILLIAM C. HUNTER, CHARLES J. SIEGMAN, Associate Economist Associate Economist DAVID E. LINDSEY, LAWRENCE SLIFMAN, Associate Economist Associate Economist FREDERICK S. MISHKIN, DAVID J. STOCKTON, Associate Economist Associate Economist PETER R. FISHER, Manager, System Open Market Account During 1995 the Federal Open Market Com- ings (see Minutes of Federal Open Market mittee held eight regularly scheduled meet- Committee Meetings in this REPORT.) Federal Advisory Council December 31,1995 Members District 1—MARSHALL N. CARTER, Chairman and Chief Executive Officer, State Street Bank and Trust Company, Boston, Massachusetts District 2—WALTER V. SHIPLEY, Chairman and Chief Executive Officer, Chemical Banking Corporation, 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—ROGER L. FITZSIMONDS, Chairman and Chief Executive Officer, Firstar Corporation, Milwaukee, Wisconsin District 8—ANDREW B. CRAIG III, Chairman, President, and Chief Executive Officer, Boatmen's Bancshares, Inc., St. Louis, Missouri District 9—RICHARD M. KOVACEVICH, Chairman, President, and Chief Executive Officer, Norwest Corporation, Minneapolis, Minnesota District 10—CHARLES E. NELSON, Chairman, Chief Executive Officer, and President, Liberty Bank and Trust Company of Oklahoma City, N.A., Oklahoma City, Oklahoma District 11—CHARLES R. HRDLICKA, Chairman and Chief Executive Officer, Victoria BankShares, Inc., Victoria, Texas District 12—EDWARD A. CARSON, Chairman and Chief Executive Officer (Retired), First Interstate Bancorp, Los Angeles, California Officers ANTHONY P. TERRACCIANO, President MARSHALL N. CARTER, 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

336 82nd Annual Report, 1995 Federal Advisory Council—Continued Directors FRANK V. CAHOUET RICHARD G. TILGHMAN CHARLES E. RICE The Federal Advisory Council met on Feb- from each of the twelve Federal Reserve ruary 2-3, May 4-5, September 7-8, and Districts, is required by law to meet in Wash- November 2-3, 1995. The Board of Gov- ington at least four times each year and is ernors met with the council on Febru- authorized by the Federal Reserve Act to ary 3, May 5, September 8, and Novem- consult with, and advise, the Board on all ber 3, 1995. The council, which is composed matters within the jurisdiction of the Board, of one representative of the banking industry Consumer Advisory Council December 31,1995 Members D. DOUGLAS BLANKE, Director of Consumer Policy, Office of the Attorney General, St. Paul, Minnesota THOMAS R. BUTLER, President and Chief Operating Officer, NOVUS Services, Inc., Riverwoods, Illinois ROBERT A. COOK, Partner, Venable, Baetjer, and Howard, Baltimore, Maryland ALVIN J. COWANS, President and Chief Executive Officer, McCoy Federal Credit Union, Orlando, Florida MICHAEL FERRY, Staff Attorney, Consumer Unit, Legal Services of Eastern Missouri, Inc., St. Louis, Missouri ELIZABETH G. FLORES, Senior Vice President, Laredo National Bank, Laredo, Texas EMANUEL FREEMAN, President, Greater Germantown Housing Development Corporation, Philadelphia, Pennsylvania NORMA L. FREIBERG, Community Activist, New Orleans, Louisiana DAVID C. FYNN, Regulatory Risk Manager, National City Corporation, Cleveland, Ohio LORI GAY, Executive Director, Los Angeles Neighborhood Housing Services, Los Angeles, California ROBERT G. GREER, Vice Chairman, Northern Trust Bank of Texas, N.A., Houston, Texas KENNETH R. HARNEY, Journalist, Washington Post Writers Group, Chevy Chase, Maryland GAIL K. HILLEBRAND, Litigation Counsel, West Coast Regional Office, Consumers Union of U.S., Inc., San Francisco, California 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 TERRY JORDE, President and Chief Executive Officer, Towner County State Bank, Cando, North Dakota EUGENE I. LEHRMANN, President, American Association of Retired Persons, Madison, Wisconsin RONALD A. PRILL, Vice President, Credit, Dayton Hudson Corporation, Minneapolis, Minnesota Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 337 Consumer Advisory Council—Continued LISA RICE-COLEMAN, Executive Director, Fair Housing Center, Toledo, Ohio JOHN R. RINES, President, General Motors Acceptance Corporation, Detroit, Michigan JULIA M. SEWARD, Vice President and Corporate Community Reinvestment Officer, Signet Bank, Richmond, Virginia ANNE B. SHLAY, Associate Director, Institute for Public Policy Studies, Temple University, Philadelphia, Pennsylvania REGINALD J. SMITH, President, United Missouri Mortgage Company, Kansas City, Missouri JOHN E. TAYLOR, President and Chief Executive Officer, The National Community Reinvestment Coalition, 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, Director, Economic Development, New Community Corporation, Newark, New Jersey Officers JAMES L. WEST, Chairman KATHARINE W. MCKEE, Vice Chairman President, Jim West Associate Director, Financial Group, Inc., Center for Community Self-Help, Tijeras, New Mexico Durham, North Carolina 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 23, June 29, and November 2, 1995. 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 31,1995 Members E. LEE BEARD, President and Chief Executive Officer, First Federal Savings and Loan Association of Hazleton, Hazleton, Pennsylvania JOHN E. BRUBAKER, formerly President and Chief Executive Officer, Bay View Federal Bank, A FSB, San Mateo, California MALCOLM E. COLLIER, Chairman and Chief Executive Officer, First Federal Savings Bank, Lake wood, Colorado GEORGE L. ENGELKE, JR., President and Chief Executive Officer, Astoria Federal Savings and Loan Association, Lake Success, New York BEVERLY D. HARRIS, President, Empire Federal Savings and Loan Association, Livingston, Montana DAVID F. HOLLAND, Chairman, President, and Chief Executive Officer, Boston Federal Savings Bank, Burlington, Massachusetts Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

338 82nd Annual Report, 1995 Thrift Institutions Advisory Council—Continued CHARLES JOHN KOCH, President and Chief Executive Officer, Charter One Bank, F.S.B., Cleveland, Ohio JOSEPH C. SCULLY, Chairman and Chief Executive Officer, St. Paul Federal Bank for Savings, Chicago, Illinois STEPHEN D. TAYLOR, formerly 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 LARRY T. WILSON, President and Chief Executive Officer, Coastal Federal Credit Union, Raleigh, North Carolina WILLIAM W. ZUPPE, President and Chief Operating Officer, Sterling Savings Association, Spokane, Washington Officers CHARLES JOHN KOCH, President STEPHEN D. TAYLOR, Vice President The members of the Thrift Institutions credit unions, savings and loan associations, Advisory Council met with the Board of and savings banks, consults with, and Governors on March 10, June 2, Septem- advises, the Board on issues pertaining to the ber 15, and December 1, 1995. The council, thrift industry and on various other matters which is composed of representatives from within the Board's jurisdiction. Officers of Federal Reserve Banks and Branches December 31,1995 Chairman l President Vice President BANK or Branch Deputy Chairman First Vice President in charge of Branch BOSTON2 Jerome H. Grossman Cathy E. Minehan William C. Brainard Paul M. Connolly NEW YORK2 Maurice R. William J. McDonough Greenberg Ernest T. Patrikis John C. Whitehead Buffalo Joseph J. Castiglia CarlW. Turnipseed3 PHILADELPHIA James M. Mead Edward G. Boehne Donald J. Kennedy William H. Stone, Jr. CLEVELAND2 A. William Reynolds Jerry L. Jordan G. Watts Sandra Pianalto Humphrey, Jr. Cincinnati John N. Taylor, Jr. Charles A. Cerino3 Pittsburgh Robert P. Bozzone Harold J. Swart3 RICHMOND2 Henry J. Faison J. Alfred Broaddus, Jr. Claudine B. Malone Walter A. Varvel Baltimore Michael R. Watson William J. Tignanelli3 Charlotte James 0. Roberson DanM. Bechter3 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 339 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 James M. McKee3 Hugh M. Brown Jack Guynn Birmingham Patricia B. Compton FredR.Herr3 Jacksonville Lana Jane Lewis-Brent James D. Hawkins3 Miami Michael T. Wilson James T. Curry III Nashville James E. Dalton, Jr. Melvyn K. Purcell New Orleans Jo Ann Slaydon Robert J. Musso CHICAGO2 Robert M. Healey Michael H. Moskow Richard G. Cline William C. Conrad Detroit John D. Forsyth David R. Allardice3 ST. LOUIS Robert H. Quenon Thomas C. Melzer John F. McDonnell James R. Bowen Little Rock Janet M. Jones Karl W. Ashman Louisville Daniel L. Ash Howard Wells Memphis Woods E. Eastland John P. Baumgartner MINNEAPOLIS... Gerald A. Gary H. Stern Rauenhorst Colleen K. Strand Jean D. Kinsey Helena Matthew J. Quinn John D. Johnson KANSAS CITY... Herman Cain Thomas M. Hoenig A. Drue Jennings Richard K. Rasdall Denver Sandra K. Woods CarlM. Gambs3 Oklahoma City .... Ernest L. Holloway Mark L. Mullinix Omaha LeRoy W. Thorn Harold L. Shewmaker DALLAS Cece Smith Robert D. McTeer, Jr. Roger R. Tony J. Salvaggio Hemminghaus El Paso W. Thomas Beard III Sammie C. Clay Houston Isaac H. Kempner III Robert Smith III3 San Antonio Carol L. Thompson James L.Stull4 SAN FRANCISCO Judith M. Runstad Robert T. Parry James A. Vohs Patrick K. Barron Los Angeles Anita E. Landecker John F. Moore4 Portland Ross R. Runkel Raymond H. Laurence 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 ford, New Jersey; Columbus, Ohio; Charleston, West month in the Federal Reserve Bulletin. Virginia; Culpeper, Virginia; Columbia, South Carolina; 1. The Chairman of a Federal Reserve Bank serves, by Indianapolis, Indiana; Milwaukee, Wisconsin; Des statute, as Federal Reserve Agent. Moines, Iowa; and Peoria, Illinois. 2. Additional offices of these Banks are located at 3. Senior Vice President. Lewiston, Maine; Windsor Locks, Connecticut; Utica at 4. Executive Vice President Oriskany, New York; Jericho, New York; East Ruther- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

340 82nd Annual Report, 1995 Conference of Chairmen Sandra Pianalto, First Vice President of the Federal Reserve Bank of Cleveland, served The chairmen of the Federal Reserve Banks as its vice chair. Joanna O. Kolson, of the are organized into the Conference of Chair- Federal Reserve Bank of Dallas, served as its men, which meets to consider matters of secretary and Martha Maher, of the Federal common interest and to consult with, and Reserve Bank of Cleveland, served as its advise, the Board of Governors. Such meet- assistant secretary. ings, attended also by the deputy chairmen, On October 10, 1995, the conference were held in Washington on May 31 and elected Sandra Pianalto as its chair for 1996 June 1, and on November 29 and 30, 1995. and Colleen K. Strand, First Vice President The members of the Executive Commit- of the Federal Reserve Bank of Minneapolis, tee of the Conference of Chairmen during as its vice chair. 1995 were Jerome H. Grossman, chairman; Cece Smith, vice chair; and A. William Reynolds, member. Directors On November 30, 1995, the conference elected its Executive Committee for 1996; The following list of directors of Federal it named Cece Smith as chair, A. William Reserve Banks and Branches shows for each Reynolds as vice chairman, and John F. director the class of directorship, the direc- McDonnell as the third member. tor's principal organizational affiliation, and the date the director's term expires. Each Conference of Presidents Federal Reserve Bank has a nine-member board: three Class A and three Class B direc- The presidents of the Federal Reserve Banks tors, who are elected by the stockholding are organized into the Conference of Presi- member banks, and three Class C directors, dents, which meets periodically to consider who are appointed by the Board of Govermatters of common interest and to consult nors of the Federal Reserve System. with, and advise, the Board of Governors. Class A directors represent the stockhold- Robert D. McTeer, President of the Fed- ing member banks in each Federal Reserve eral Reserve Bank of Dallas, served as chair- District. Class B and Class C directors repreman of the conference in 1995, and Thomas sent the public and are chosen with due, but M. Hoenig, President of the Federal Reserve not exclusive, consideration to the interests Bank of Kansas City, served as its vice chair- of agriculture, commerce, industry, services, man. Helen E. Holcomb, of the Federal labor, and consumers; they may not be offi- Reserve Bank of Dallas, served as its sec- cers, directors, or employees of any bank or retary. David A. Sapenaro, of the Federal bank holding company. In addition, Class C Reserve Bank of Kansas City, served as its directors may not be stockholders of any assistant secretary until September 18, 1995, bank or bank holding company. and Esther L. George, of the same Reserve For the election of Class A and Class B Bank, served as its assistant secretary for the directors, the Board of Governors classifies balance of the year. the member banks of each Federal Reserve District into three groups. Each group, which comprises banks with similar capitalization, Conference of First elects one Class A director and one Class B Vice Presidents director. Annually, the Board of Governors designates one of the Class C directors as The Conference of First Vice Presidents of chairman of the board and Federal Reserve the Federal Reserve Banks was organized in Agent of each District Bank, and it desig- 1969 to meet periodically for the consider- nates another Class C director as deputy ation of operations and other matters. chairman. Tony J. Salvaggio, First Vice President of Federal Reserve Branches have either five the Federal Reserve Bank of Dallas, served or seven directors, a majority of whom are as chairman of the conference in 1995, and appointed by the parent Federal Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 341 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 and Branches." Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

342 82nd Annual Report, 1995 Term expires Dec. 31 DISTRICT 1—BOSTON Class A Marshall N. Carter Chairman, President, and Chief Executive 1995 Officer, State Street Bank and Trust Company, Boston, Massachusetts Vacancy 1996 Jane C. Walsh President and Chief Executive Officer, 1997 Northmark Bank, North Andover, Massachusetts Class B Joan T. Bok Chairman, New England Electric System, 1995 Westborough, Massachusetts Stephen L. Brown Chairman and Chief Executive Officer, John 1996 Hancock Mutual Life Insurance Company, Boston, Massachusetts Edward Dugger III President and Chief Executive Officer, 1997 UNC Ventures, Inc., Boston, Massachusetts Class C William C. Brainard Professor of Economics and Chair, 1995 Department of Economics, Yale University, New Haven, Connecticut John E. Flynn Executive Director, The Quality Connection, 1996 East Dennis, Massachusetts Jerome H. Grossman Chairman, Outcomes and Health Services 1997 Research and Development Center, Boston, Massachusetts DISTRICT 2—NEW YORK Class A Robert G. Wilmers Chairman, President, and Chief Executive 1995 Officer, 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 J. Carter Bacot Chairman and Chief Executive Officer, 1997 The Bank of New York, New York, New York Class B William C. Steere, Jr. Chairman and Chief Executive Officer, 1995 Pfizer Inc., New York, New York Sandra Feldman President, United Federation of Teachers, 1996 New York, New York Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 343 Term expires Dec. 31 DISTRICT 2, Class B— Continued Eugene R. McGrath Chief Executive Officer, Consolidated Edison 1997 Company of New York, Inc., New York, New York Class C Herbert L. Washington Owner, HLW Fast Track, Inc., Rochester, New York 1995 John C. Whitehead Chairman, AEA Investors Inc., New York, New York 1996 Maurice R. Greenberg Chairman, American International Group, Inc., 1997 New York, New York BUFFALO BRANCH Appointed by the Federal Reserve Bank George W. Hamlin IV President and Chief Executive Officer, 1995 The Canandaigua National Bank and Trust Company, Canandaigua, New York Louise C. Woerner Chairman and Chief Executive Officer, HCR, 1996 Rochester, New York Mark W. Adams Owner and Operator, Adams Poultry Farm, 1997 Naples, New York William E. Swan President and Chief Executive Officer, 1997 Lockport Savings Bank, Lockport, New York Appointed by the Board of Governors F. C. Richardson President, Buffalo State College, Buffalo, New York 1995 Joseph J. Castiglia President and Chief Executive Officer, 1996 Pratt & Lambert United, Inc., Buffalo, New York Donald L. Rust Plant Manager, Tonawanda Engine Plant, 1997 General Motors Powertrain Division, General Motors Corporation, Buffalo, New York DISTRICT 3—PHILADELPHIA Class A 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 Dennis W. DiLazzero President and Chief Executive Officer, Minotola 1997 National Bank, Vineland, New Jersey Class B 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

344 82nd Annual Report, 1995 Term expires Dec. 31 DISTRICT 3, Class B— Continued Robert D. Bums President and Chief Executive Officer, 1997 Burns Foods, Inc., Milford, Delaware Class C James M. Mead President and Chief Executive Officer, Capital 1995 Blue Cross, Harrisburg, Pennsylvania Joan Carter President and Chief Operating Officer, UM 1996 Holdings Ltd., Haddonfield, New Jersey Donald J. Kennedy Business Manager, International Brotherhood of 1997 Electrical Workers, Local Union No. 269, Trenton, New Jersey DISTRICT 4—CLEVELAND Class A Edward B. Brandon Chairman and Chief Executive Officer (Retired), 1995 National City Corporation, Cleveland, Ohio Alfred C. Leist Chairman, President, and Chief Executive 1996 Officer, The Apple Creek Banking Company, Apple Creek, Ohio David S. Dahlmann President and Chief Executive Officer, 1997 Southwest National Corporation, Greensburg, Pennsylvania Class B I. N. Rendall Harper, Jr President and Chief Executive Officer, 1995 American Micrographics Company, Inc., Monroeville, Pennsylvania Thomas M. Nies President, Cincom Systems, Inc., Cincinnati, Ohio 1996 Michele Tolela Myers President, Denison University, Granville, Ohio 1997 Class C A. William Reynolds Chief Executive, Old Mill Group, Hudson, Ohio 1995 Robert Y. Farrington Executive Secretary-Treasurer, Ohio State 1996 Building and Construction Trades Council, Columbus, Ohio G. Watts Humphrey, Jr. President, GWH Holdings, Inc., 1997 Pittsburgh, Pennsylvania CINCINNATI BRANCH Appointed by the Federal Reserve Bank Jerry W. Carey President and Chief Executive Officer, 1995 Union National Bank and Trust Company, Barbourville, Kentucky Judith G. Clabes Director, Special Projects, Scripps Howard, 1996 Cincinnati, Ohio Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 345 Term expires Dec. 31 DISTRICT 4, CINCINNATI BRANCH Appointed by the Federal Reserve Bank—Continued Phillip R. Cox President, Cox Financial Corporation, 1996 Cincinnati, Ohio Jerry A. Grundhofer Chairman, President, and Chief Executive 1997 Officer, Star Bane Corporation, Cincinnati, Ohio Appointed by the Board of Governors 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 C. Wayne Shumate Chairman and Chief Executive Officer, 1997 Kentucky Textiles, Inc., Paris, Kentucky PITTSBURGH BRANCH Appointed by the Federal Reserve Bank Helen J. Clark Chairman, President, and Chief Executive 1995 Officer, 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 1996 Officer, DQE, Pittsburgh, Pennsylvania Thomas J. O'Shane President and Chief Executive Officer, 1997 First Western Bancorp, Inc., New Castle, Pennsylvania Appointed by the Board of Governors 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 John T. Ryan III President, Chairman, and Chief Executive 1997 Officer, Mine Safety Appliances Company, Pittsburgh, Pennsylvania DISTRICT 5—RICHMOND Class A Charles E. Weller President and Chief Executive Officer, 1995 Elkridge Bank, Elkridge, Maryland Robert M. Freeman Chairman and Chief Executive Officer, Signet 1996 Banking Corporation, Richmond, Virginia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

346 82nd Annual Report, 1995 Term expires Dec. 31 DISTRICT 5, Class A—Continued Philip L. McLaughlin President and Chief Executive Officer, Horizon 1997 Bancorp, Inc., Greenbrier Valley National Bank, Lewisburg, West Virginia Class B R.E. Atkinson, Jr. Chairman, Dilmar Oil Company, Inc., 1995 Florence, South Carolina Paul A. DelaCourt Chairman, The North Carolina Enterprise 1996 Corporation, Raleigh, North Carolina L. Newton Thomas, Jr. Senior Vice President (Retired), ITT/Carbon 1997 Industries, Inc., Charleston, West Virginia Class C Henry J. Faison Chairman, Faison, Charlotte, North Carolina 1995 Stephen Brobeck Executive Director, Consumer Federation of 1996 America, Washington, D.C. Claudine B. Malone President, Financial and Management 1997 Consulting, Inc., McLean, Virginia BALTIMORE BRANCH Appointed by the Federal Reserve Bank 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 Thomas J. Hughes President and Chief Executive Officer, 1997 Navy Federal Credit Union, Vienna, Virginia F. Levi Ruark Chairman, President, and Chief Executive Officer, 1997 The National Bank of Cambridge, Cambridge, Maryland Appointed by the Board of Governors Daniel R. Baker President and Chief Executive Officer, 1995 Tate Access Floors, Inc., Jessup, Maryland Michael R. Watson President, Association of Maryland Pilots, 1996 Baltimore, Maryland Rebecca Hahn Windsor Chairman and Chief Executive Officer, Hahn 1997 Transportation, Inc., New Market, Maryland CHARLOTTE BRANCH Appointed by the Federal Reserve Bank David B. Jordan Vice Chairman and Director, CCB Financial 1995 Corporation, Salisbury, North Carolina Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 347 Term expires Dec. 31 DISTRICT 5, CHARLOTTE BRANCH Appointed by the Federal Reserve Bank—Continued Jim M. Cherry, Jr President and Chief Executive Officer, 1996 Williamsburg First National Bank, Kingstree, South Carolina Dorothy H. Aranda President, Dohara Associates, Inc., 1997 Hilton Head Island, South Carolina J. Walter McDowell President and Chief Executive Officer, 1997 Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina Appointed by the Board of Governors James O. Roberson President, Research Triangle Foundation of 1995 North Carolina, Research Triangle Park, North Carolina Dennis D. Lowery Chief Executive Officer and Chairman, 1996 Continental Ltd., Charlotte, North Carolina Joan H. Zimmerman President, Southern Shows, Inc., 1997 Charlotte, North Carolina DISTRICT 6—ATLANTA Class A W. H. Swain Chairman, First National Bank, Oneida, Tennessee 1995 James B. Williams Chairman and Chief Executive Officer, 1996 SunTrust Banks, Inc., Atlanta, Georgia D. Paul Jones, Jr Chairman and Chief Executive Officer, 1997 Compass Bancshares, Inc., Birmingham, Alabama Class B 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 Maria Camila Leiva Executive Vice President, Miami Free Zone 1997 Corporation, Miami, Florida Class C Leo Benatar Chairman, Engraph, Inc., Atlanta, Georgia 1995 Daniel E. Sweat, Jr Program Director, The America Project, 1996 Atlanta, Georgia Hugh M. Brown President and Chief Executive Officer, BAMSI, Inc., 1997 Titusville, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

348 82nd Annual Report, 1995 Term expires Dec. 31 DISTRICT 6, ATLANTA—Continued BIRMINGHAM BRANCH Appointed by the Federal Reserve Bank J. Stephen Nelson Chairman and Chief Executive Officer, First 1995 National Bank of Brewton, Brewton, Alabama Julian W. Banton Chairman, President, and Chief Executive 1996 Officer, SouthTrust Bank of Alabama, N.A., Birmingham, Alabama Marlin D. Moore, Jr Chairman, Pritchett-Moore, Inc., 1997 Tuscaloosa, Alabama Columbus Sanders President, Consolidated Industries, Inc., 1997 Huntsville, Alabama Appointed by the Board of Governors Patricia B. Compton President, Patco, Inc., Georgiana, Alabama 1995 Donald E. Boomershine President, The Better Business Bureau of 1996 Central Alabama, Inc., and the Counties of the Wiregrass, Birmingham, Alabama D. Bruce Can* International Representative, Laborers' 1997 International Union, AFL-CIO of North America, Gadsden, Alabama JACKSONVILLE BRANCH Appointed by the Federal Reserve Bank Royce B. Walden Vice President, Ward Bradford & Company, 1995 Orlando, Florida William G. Smith, Jr. President, Capital City First National Bank, 1996 Tallahassee, Florida Arnold A. Heggestad Chester Holloway Professor of 1997 Entrepreneurship, University of Florida, Gainesville, Florida Terry R. West President and Chief Executive Officer, Jax Navy 1997 Federal Credit Union, Jacksonville, Florida Appointed by the Board of Governors Lana Jane Lewis-Brent President, Paul Brent Designer, Inc., 1995 Panama City, Florida Joan Dial Ruffier General Partner, Sunshine Cafes, Orlando, Florida 1996 Patrick C. Kelly Chairman and Chief Executive Officer, 1997 Physician Sales and Service, Inc., Jacksonville, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 349 Term expires Dec. 31 DISTRICT 6, ATLANTA—Continued MIAMI BRANCH Appointed by the Federal Reserve Bank E. Anthony Newton President and Chief Executive Officer, 1995 Island National Bank and Trust Company, Palm Beach, Florida Steven C. Shimp President, O-A-K/Florida, Inc., 1996 Fort Myers, Florida Pat L. Tornillo, Jr Executive Vice President, United Teachers 1996 of Dade, Miami, Florida Carlos A. Migoya President, Dade/Monroe Counties, First Union 1997 National Bank of Florida, Miami, Florida Appointed by the Board of Governors 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 Kaaren Johnson-Street Vice President, Diversity Business Enterprise, 1997 Burger King Corporation, Miami, Florida NASHVILLE BRANCH Appointed by the Federal Reserve Bank James D. Harris President and Chief Executive Officer, Brentwood 1995 National Bank, Brentwood, Tennessee Williams E. Arant, Jr Chairman, First Knoxville Bank, 1996 Knoxville, Tennessee John E. Seward, Jr. President and Chief Executive Officer, The Paty 1997 Company, Piney Flats, Tennessee Jack J. Vaughn President, Opryland Hospitality & Attractions 1997 Group, Gaylord Entertainment Company, Nashville, Tennessee Appointed by the Board of Governors Frances F. Marcum Chairman and Chief Executive Officer, Micro 1995 Craft, Inc., Tullahoma, Tennessee Paula Lovell President, Lovell Communications, Inc., 1996 Nashville, Tennessee James E. Dalton, Jr. President and Chief Executive Officer, Quorum 1997 Health Group, Inc., Brentwood, Tennessee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

350 82nd Annual Report, 1995 Term expires Dec. 31 DISTRICT 6, ATLANTA—Continued NEW ORLEANS BRANCH Appointed by the Federal Reserve Bank Thomas E. Walker Chairman and Chief Executive Officer, Bank of 1995 Forest, Forest, Mississippi Howard C. Gaines Chairman and Chief Executive Officer, 1996 First National Bank of Commerce, New Orleans, Louisiana Angus R. Cooper II Chairman and Chief Executive Officer, 1997 Cooper/T. Smith Corporation, Mobile, Alabama Kay L. Nelson President, Nelson Capital Corporation, 1997 New Orleans, Louisiana Appointed by the Board of Governors Lucimarian Tolliver Roberts President, Mississippi Coast Coliseum 1995 Commission, Biloxi, Mississippi Victor Bussie President, Louisiana AFL-CIO, 1996 Baton Rouge, Louisiana Jo Ann Slay don President, Slay don Consultants and Insight 1997 Productions and Advertising, Baton Rouge, Louisiana DISTRICT 7—CHICAGO Class A Arnold C. Schultz Chairman, President, and Chief Executive Officer, 1995 Grundy National Bank, Grundy Center, Iowa David W. Fox Chairman and Chief Executive Officer, 1996 The Northern Trust Corporation and The Northern Trust Company, Chicago, Illinois Stefan S. Anderson Chairman, President, and Chief Executive Officer, 1997 First Merchants Corporation, Muncie, Indiana Class B Donald J. Schneider President, Schneider National, Inc., 1995 Green Bay, Wisconsin A. Charlene Sullivan Associate Professor of Management, Krannert 1996 Graduate School of Management, Krannert Center, Purdue University, West Lafayette, Indiana Thomas C. Dorr President and Chief Executive Officer, Dorr's 1997 Pine Grove Farm Co., Marcus, Iowa Class C Richard G. Cline Chairman, NICOR Inc., Naperville, Illinois 1995 Robert M. Healey Member, Illinois State Labor Relations Board, 1996 Chicago, Illinois Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 351 Term expires Dec. 31 DISTRICT 7, Class C—Continued Lester H. McKeever, Jr Managing Partner, Washington, Pittman & 1997 McKeever, Chicago, Illinois DETROIT BRANCH Appointed by the Federal Reserve Bank Norman F. Rodgers President and Chief Executive Officer, Hillsdale 1995 County National Bank, Hillsdale, Michigan Charles E. Allen President and Chief Executive Officer, Graimark 1996 Realty Advisors, Inc., Detroit, Michigan William E. Odom Chairman and Chief Executive Officer, Ford 1996 Motor Credit Company, Dearborn, Michigan Charles R. Weeks Chairman and Chief Executive Officer, Citizens 1997 Banking Corporation, Flint, Michigan Appointed by the Board of Governors J. Michael Moore Chairman and Chief Executive Officer, 1995 Invetech Company, Detroit, Michigan Florine Mark President and Chief Executive Officer, 1996 The WW Group, Farmington Hills, Michigan John D. Forsyth Executive Director, University of Michigan 1997 Hospitals, Ann Arbor, Michigan DISTRICT 8—ST. LOUIS Class A Douglas M. Lester Chairman and President, Trans Financial 1995 Bancorp, Inc., Bowling Green, Kentucky W. D. Glover Chairman and Chief Executive Officer, First 1996 National Bank of Eastern Arkansas, Forrest City, Arkansas Michael A. Alexander Chairman and President, The First National 1997 Bank of Mount Vernon, Mount Vernon, Illinois Class B Richard E. Bell President and Chief Executive Officer, 1995 Riceland Foods, Inc., Stuttgart, Arkansas Warren R. Lee President, United Benefit Services, Inc., 1996 Louisville, Kentucky Sandra B. Sanderson President and Chief Executive Officer, 1997 Sanderson Plumbing Products, Inc., Columbus, Mississippi Class C John F. McDonnell Chairman, McDonnell Douglas Corporation, 1995 St. Louis, Missouri Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

352 82nd Annual Report, 1995 Term expires Dec. 31 DISTRICT 8, Class C— Continued Veo Peoples, Jr. Partner, Peoples & Hale, St. Louis, Missouri 1996 Robert H. Quenon Mining Consultant, St. Louis, Missouri 1997 LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank Mark A. Shelton III President, M. A. Shelton Farming Company, 1995 Altheimer, Arkansas Vacancy 1996 James V. Kelley Chairman, President, and Chief Executive 1996 Officer, First United Bancshares, Inc., El Dorado, Arkansas Lunsford W. Bridges President and Chief Executive Officer, 1997 Metropolitan National Bank, Little Rock, Arkansas Appointed by the Board of Governors Betta M. Carney Chairman 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 Robert D. Nabholz, Jr. Chief Executive Officer, Nabholz Construction 1997 Corporation, Conway, Arkansas LOUISVILLE BRANCH Appointed by the Federal Reserve Bank Malcolm B. Chancey, Jr Chairman and Chief Executive Officer, Bank 1995 One, Kentucky, N.A., Louisville, Kentucky Robert M. Hall Owner, East Fork Growers Farm, Seymour, Indiana 1996 Charles D. Storms President and Chief Executive Officer, Red Spot 1996 Paint and Varnish Company, Inc., Evansville, Indiana Thomas E. Spragens, Jr. President, Farmers National Bank, 1997 Lebanon, Kentucky Appointed by the Board of Governors Daniel L. Ash Consultant, Wenz-Neely Company, 1995 Louisville, Kentucky John A. Williams Chairman and Chief Executive Officer, 1996 Computer Services, Inc., Paducah, Kentucky Laura M. Douglas Legal Counsel, Louisville & Jefferson County 1997 Metropolitan Sewer District, Louisville, Kentucky Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 353 Term expires Dec. 31 DISTRICT 8, ST. LOUIS—Continued MEMPHIS BRANCH Appointed by the Federal Reserve Bank Anthony M. Rampley President and Chief Executive Officer, 1995 Arkansas Glass Container Corporation, Jonesboro, Arkansas Benjamin W. Rawlins, Jr. ...Chairman and Chief Executive Officer, Union 1996 Planters Corporation, Memphis, Tennessee Katie S. Winchester President, First Citizens National Bank, 1996 Dyersburg, Tennessee Lewis F. Mallory, Jr Chairman, President, and Chief Executive 1997 Officer, NBC Capital Corporation, Starkville, Mississippi Appointed by the Board of Governors John V. Myers President, Better Business Bureau, 1995 Memphis, Tennessee Woods E. Eastland President and Chief Executive Officer, Staple 1996 Cotton Cooperative Association, Greenwood, Mississippi Carol G. Crawley President, Mid-South Minority Business 1997 Council, Memphis, Tennessee DISTRICT 9—MINNEAPOLIS Class A 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 William S. Pickerign President, The Northwestern Bank, 1997 Chippewa Falls, Wisconsin Class B Dennis W. Johnson President, TMI Systems Design 1995 Corporation/TMI Transport Corporation, Dickinson, North Dakota Clarence D. Mortenson President, M/C Professional Associates, Inc., 1996 Pierre, South Dakota Kathryn A. Ogren Owner and Dealer, Bitterroot Motors, 1997 Missoula, Montana Class C Gerald A. Rauenhorst Chairman and Chief Executive Officer, Opus 1995 Corporation, Minneapolis, Minnesota David A. Koch Chairman and Chief Executive Officer, 1996 Graco, Inc., Golden Valley, Minnesota Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

354 82nd Annual Report, 1995 Term expires Dec. 31 DISTRICT 9, Class C— Continued Jean D. Kinsey Professor, Department of Applied Economics, 1997 College of Agricultural, Food, and Environmental Sciences, University of Minnesota, St. Paul, Minnesota HELENA BRANCH Appointed by the Federal Reserve Bank Ronald D. Scott President and Chief Executive Officer, The First 1995 State Bank of Malta, Malta, Montana Donald E. Olsson, Jr. President, Ronan State Bank, Ronan, Montana 1996 Sandra M. Stash Manager, Montana Facilities, Atlantic Richfield 1996 Company (ARCO), Anaconda, Montana Appointed by the Board of Governors Matthew J. Quinn President, Carroll College, Helena, Montana 1995 Lane W. Basso President, Deaconess Medical Center, 1996 Billings, Montana DISTRICT 10—KANSAS CITY Class A William L. McQuillan President, Chief Executive Officer, and Director, 1995 City National Bank, Greeley, Nebraska L. W. Menefee Chairman and Chief Executive Officer, 1996 Union Colony Bank, Greeley, Colorado Samuel P. Baird President, Farmers State Bank & Trust Co., 1997 Superior, Nebraska Class B 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 Jo Marie Dancik Area Managing Partner, Ernst & Young LLP, 1997 Denver, Colorado Class C Herman Cain Chairman and Chief Executive Officer, 1995 Godfather's Pizza, Inc., Omaha, Nebraska Colleen D. Hernandez Executive Director, Kansas City Neighborhood 1996 Alliance, Kansas City, Missouri A. Drue Jennings Chairman, President, and Chief Executive Officer, 1997 Kansas City Power & Light Company, Kansas City, Missouri Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 355 Term expires Dec. 31 DISTRICT 10, KANSAS CITY—Continued DENVER BRANCH Appointed by the Federal Reserve Bank Peter I. Wold Partner, Wold Oil & Gas Company, 1995 Casper, Wyoming Peter R. Decker President, Peter R. Decker & Associates, 1996 Denver, Colorado Clifford E. Kirk President and Chief Executive Officer, First 1997 National Bank of Gillette, Gillette, Wyoming Richard I. Ledbetter President and Chief Executive Officer, 1997 First National Bank of Farmington, Farmington, New Mexico Appointed by the Board of Governors Sandra K. Woods Vice President, Environmental Health and 1995 Safety Systems, Coors Brewing Company, Golden, Colorado Teresa N. McBride President and Chief Executive Officer, McBride 1996 and Associates, Inc., Albuquerque, New Mexico Donald E. Gallegos President, King Soopers, Denver, Colorado 1997 OKLAHOMA CITY BRANCH Appointed by the Federal Reserve Bank C. Kendric Fergeson Chairman and Chief Executive Officer, 1995 The 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 Michael S. Samis President and Chief Executive Officer, 1997 Macklanburg-Duncan Co., Oklahoma City, Oklahoma Appointed by the Board of Governors Barry L. Eller Senior Vice President and General Manager, 1995 MerCruiser, Stillwater, Oklahoma Ernest L. Holloway President, Langston University, 1996 Langston, Oklahoma Victor R. Schock President and Chief Executive Officer, Credit 1997 Counseling Centers, Tulsa, Oklahoma Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

356 82nd Annual Report, 1995 Term expires Dec. 31 DISTRICT 10, KANSAS CITY—Continued OMAHA BRANCH Appointed by the Federal Reserve Bank Robert L. Peterson Chairman, President, and Chief Executive 1995 Officer, IBP, Inc., Dakota City, Nebraska Bruce R. Lauritzen President, First National Bank of Omaha, 1996 Omaha, Nebraska Donald A. Leu President and Chief Executive Officer, 1997 Consumer Credit Counseling Service, Omaha, Nebraska Thomas H. Olson Chairman, First National Bank, Sidney, Nebraska 1997 Appointed by the Board of Governors Gladys Styles Johnston Chancellor, University of Nebraska at Kearney, 1995 Kearney, Nebraska LeRoy W. Thorn President, T-L Irrigation Company, 1996 Hastings, Nebraska Arthur L. Shoener Executive Vice President-Operations, Union 1997 Pacific Railroad, Omaha, Nebraska DISTRICT 11—DALLAS Class A 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 Kirk A. McLaughlin President and Chief Executive Officer, 1997 Security Bank, Rails, Texas Class B Milton Carroll Chairman and Chief Executive Officer, 1995 Instrument Products, Inc., Houston, Texas J. B. Cooper, Jr. Farmer, Roscoe, Texas 1996 Peyton Yates .President, Yates Drilling Company, 1997 Artesia, New Mexico Class C Roger R. Hemminghaus Chairman, President, and Chief Executive 1995 Officer, 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 Cece Smith General Partner, Phillips-Smith Specialty Retail 1997 Group, Dallas, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 357 Term expires Dec. 31 DISTRICT 11, DALLAS—Continued EL PASO BRANCH Appointed by the Federal Reserve Bank Wayne Merritt President, Norwest Bank Texas, Midland, N.A., 1995 Midland, Texas Veronica K. Callaghan Vice President and Principal, KASCO 1996 Ventures, Inc., El Paso, Texas Ben H. Haines, Jr President and Chief Executive Officer, 1996 First National Bank of Dona Ana County, Las Cruces, New Mexico Hugo Bustamante, Jr Owner and Chief Executive Officer, 1997 CarLube, Inc. and ProntoLube, Inc., El Paso, Texas Appointed by the Board of Governors W. Thomas Beard III President, Leoncita Cattle Company, 1995 Alpine, Texas Patricia Z. Holland-Branch ..President and Director of Design, PZH Contract 1996 Design, Inc., El Paso, Texas Alvin T. Johnson President, Management Assistance Corporation 1997 of America, El Paso, Texas HOUSTON BRANCH Appointed by the Federal Reserve Bank J. Michael Solar Managing Partner, Solar & Fernandes, L.L.P., 1995 Houston, Texas Judith B. Craven President, United Way of the Texas Gulf Coast, 1996 Houston, Texas Walter E. Johnson President and Chief Executive Officer, 1996 Southwest Bank of Texas, Houston, Texas Tieman H. Dippel, Jr. Chairman and President, Brenham 1997 Bancshares, Inc., Brenham, Texas Appointed by the Board of Governors 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 Isaac H. Kempner III Chairman, Imperial Holly Corporation, 1997 Sugar Land, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

358 82nd Annual Report, 1995 Term expires Dec. 31 DISTRICT 11, DALLAS—Continued SAN ANTONIO BRANCH Appointed by the Federal Reserve Bank 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 Calvin R. Weinheimer President and Chief Operating Officer, Kerrville 1997 Communications Corporation, Kerrville, Texas Appointed by the Board of Governors Carol L. Thompson President, The Thompson Group, Austin, Texas 1995 Erich Wendl President and Chief Executive Officer, Maverick 1996 Markets, Inc., Corpus Christi, Texas H. B. Zachry, Jr. Chairman and Chief Executive Officer, H. B. 1997 Zachry Company, San Antonio, Texas DISTRICT 12—SAN FRANCISCO Class A Carl J. Schmitt Chairman, University Bank & Trust Company, 1995 Palo Alto, California Richard L. Mount Chairman, President, and Chief Executive 1996 Officer, Saratoga Bancorp, Saratoga, California Gerry B. Cameron Chairman and Chief Executive Officer, 1997 U.S. Bancorp, Portland, Oregon Class B 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 Krestine Corbin President and Chief Executive Officer, Sierra 1997 Machinery, Inc., Sparks, Nevada Class C 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 Judith M. Runstad Partner, Foster, Pepper & Shefelman, 1997 Seattle, Washington Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 359 Term expires Dec. 31 DISTRICT 12, SAN FRANCISCO—Continued Los ANGELES BRANCH Appointed by the Federal Reserve Bank 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 Antonia Hernandez President and General Counsel, Mexican 1997 American Legal Defense and Educational Fund, Los Angeles, California William S. Randall President, First Interstate Bancorp, 1997 Los Angeles, California Appointed by the Board of Governors Anne L. Evans Chairman, Evans Hotels, San Diego, California 1995 Anita Landecker Western Regional Vice President, Local 1996 Initiatives Support Corporation, Los Angeles, California David L. Moore President, Western Growers Association, 1997 Newport Beach, California PORTLAND BRANCH Appointed by the Federal Reserve Bank John D. Eskildsen President and Chief Executive Officer, U.S. 1995 National Bank of Oregon, Portland, Oregon Elizabeth K. Johnson President, TransWestern, Inc., 1996 Scappoose, Oregon Cecil W Drinkward President and Chief Executive Officer Hoffman 1996 Construction Company, Portland, Oregon Thomas C. Young Chairman, President, and Chief Executive 1997 Officer, Northwest National Bank, Vancouver, Washington Appointed by the Board of Governors Carol A. Whipple Owner and Manager, Rocking C Ranch, 1995 Elkton, Oregon Ross R. Runkel Professor of Law, Willamette University, 1996 Salem, Oregon Marvin R. O'Quinn Chief Operating Officer, Providence Portland 1997 Medical Center, Portland, Oregon Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

360 82nd Annual Report, 1995 Term expires Dec. 31 DISTRICT 12, SAN FRANCISCO—Continued SALT LAKE CITY BRANCH Appointed by the Federal Reserve Bank Roy C. Nelson President, Bank of Utah, Ogden, Utah 1995 Nancy Mortensen Vice President-Marketing, ZCMI, 1996 Salt Lake City, Utah Daniel R. Nelson Chairman and Chief Executive Officer, 1996 West One Bancorp, Boise, Idaho R. D. Cash Chairman, President, and Chief Executive Officer, 1997 Questar Corporation, Salt Lake City, Utah Appointed by the Board of Governors 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 Gerald R. Sherratt President, Southern Utah University, 1997 Cedar City, Utah SEATTLE BRANCH Appointed by the Federal Reserve Bank Constance L. Proctor Partner, Alston, Courtnage, MacAulay & 1995 Proctor, Seattle, Washington Tomio Moriguchi President, Uwajimaya, Inc., Seattle, Washington 1996 John V. Rindlaub Chairman and Chief Executive Officer, Seafirst 1996 Corporation, Seattle, Washington Thomas E. Cleveland Chairman and Chief Executive Officer, 1997 Enterprise Bank, Bellevue, Washington Appointed by the Board of Governors Emilie A. Adams President and Chief Executive Officer, 1995 Better Business Bureau Foundation, Seattle, Washington George F. Russell, Jr Chairman, Frank Russell Company, 1996 Tacoma, Washington William R. Wiley Senior Vice President for Science & Technology 1997 Policy, Battelle Memorial Institute, Richland, Washington Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Maps of the Federal Reserve System Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

362 82nd Annual Report, 1995 The Federal Reserve System 9 • r ry BOSTON MINNEAPOLIS / 12 _ o • NEW YORK CHICAGO • CLEVELAND PHILADELPHIA 10 • SANFRANCISCO 4 $ KANSAS CITY • g ST. LOUIS RICHMOND 8 5, r 11 • ATLAN FA DALLAS ALASKA 1||| 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) and by the San Francisco Bank serves Ameriletter (shown on the facing page). can Samoa, Guam, and the Common- In the 12th District, the Seattle wealth of the Northern Mariana Islands. Branch serves Alaska, and the San Fran- The maps show the boundaries within cisco Bank serves Hawaii. the System as of year-end 1995. 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 363 1-A 2-B 3-C 4-D 5-E Pittsburgh Baltii Buffalo Mk •Cincinnati • Charlotte / NY BOSTON NEW YORK PHILADELPHIA CLEVELAND RICHMOND 7-G 8-H •Nashville tt ) IN r Detroit • J Louisville • Memphis ATLANTA CHICAGO ST. LOUIS 9-1 • Helena MINNEAPOLIS 10-J 12-L OmaSa* Denver Oklahoma City OK 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

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

367 Index Access to Credit: A Guide for Lenders and Bank Secrecy Act, 251 Women Owners of Small Businesses, Bank Secrecy Act Advisory Council, 252 206 Bank Supervision and Regulation Accounting by Creditors for Impairment of Derivatives activities, 243 a Loan (SFAS 114), 246 Enforcement actions, 234, 251 Accounting for Certain Investments in Debt International activities, 237, 250 and Equity Securities (SFAS 115), 246 National Information Center, 243 Accounting for Mortgage Servicing Rights Staff training, 244 (SFAS 122), 246 Bankers acceptances, Federal Reserve Agreement in Principal, 243 Banks, holdings, 286-89 American Association of Retired Persons, Banking offices, changes in number, 314 219 Basle Committee on Banking Regulation Assets and liabilities and Supervisory Practices, 239 Banks, by class, 307 Basle Committee on Banking Supervision, Board of Governors, 278 241, 243 Federal Reserve Banks, 286-89 Board of Governors (See also Federal Association of Reinvestment Consortia for Reserve System) Housing, 207 Decisions, public notice, 249 Automated clearinghouse services, 263 Financial statements, 277-83 Automated teller machines, 94, 210, 256 Legislation enacted, 227-29 Automobile leasing disclosure Litigation, 223-25 requirements, 208, 213 Members and officers, 332-34 Mergers, acquisitions, and Back-office facilities by state member consolidations, list, 315-30 banks, 94 Ombudsman, policy statement of Bank holding companies responsibility, 101 Applications Recommendations from other agencies, Delegation of, 249 221 Review of, 215 Record of policy actions, 93-104 Timely processing, 249 Regulatory simplification, 255-57 Community development investments, Testimony and legislative 205 recommendations, 221 Examinations by Federal Reserve Banks, Breaking Ground: A Beginner's Guide for 233 Nonprofit Developers, 205 Export trading companies, 251 Business spending and investment, 9-11, Risk-based capital guidelines, 94-96, 44-46 239, 241 Stock repurchases, 250 California Economic Development Loan Subsidiaries, discounts on products, 97, Initiative, 207 256 Call Reports, changes in reporting Supervision and regulation of, 231-38 requirements, 246 Bank Holding Company Act of 1956, Capital accounts banking structure regulation, 247 Banks, by class, 302 Bank Merger Act Federal Reserve Banks, 285, 286-89 Banking structure regulation, 248 Cash flows, Board of Governors, statement, Mergers, acquisitions, and 280 consolidations, list, 315-30 Cash services, 264 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

368 82nd Annual Report, 1995 Chairs, presidents, and vice presidents of Country transfer, risk-based capital Federal Reserve Banks standards, 240 Conferences, 340 Credit markets, 23-28, 60-64, 83-88 Salaries, 293 Currency and coin, 264 Change in Bank Control Act, banking Currency and Foreign Transactions structure regulation, 248 Reporting Act of 1970, 251 Check clearing and collection, 261, 303 Checks, government, surveillance and fraud Depository institutions prevention, 267 Material supervisory determinations, Clinton, President William, 200 process for appeals of, 100 Commercial banks Reserves and related items, 308-13 Banking offices, changes in number, 314 Deposits Foreign investments by, 96 Banks, by class, 307 Performance in 1995, 24 Federal Reserve Banks, 286-89, 308-13 Community Development Investments: A Derivatives, activities, 240, 241, 243 Guide for State Member Banks and Direct deposit use, 210 Bank Holding Companies, 205 Directors, Federal Reserve Banks and Community development lending, 204 Branches, list, 340-63 Community Reinvestment Act Directory: Bank Holding company Community Development Investments, Federal Reserve Bank seminars, 204 205 Financial institutions, change in Discount rate, 21-23, 102-04 standards for compliance, 98, 214, Discrimination practices by banks, 201 256 Dividends, Federal Reserve Banks, 296, Regulation BB reform, 199 298, 299, 301 Compliance Community Reinvestment Act, 214 Earnings of Federal Reserve Banks {See Consumer Leasing Act, 213 also Federal Reserve Banks, income Electronic Fund Transfer Act, 212 and expenses), 268, 294 Equal Credit Opportunity Act, 212 Economic development in other countries, Examination, member banks, 211 27-33 Expedited Funds Availability Act, 214 Economic Development News and Views, Truth in Lending Act, 213 newsletter, 206 Unfair and Deceptive Acts or Practices, Economy 215 Business, 9-12, 44-46, 73-75 Condition statement of Federal Reserve Foreign developments, 48, 76, 88-90 Banks, 284 Government spending, 12, 46-48, 75 Conferences of chairs, presidents, and vice Household, 7-9, 41-44, 72-74 presidents of Federal Reserve Banks, Labor markets, 14-16, 50-52, 77 340 Overview of 1995, 3-17 Confidential information, rules of access, Performance, 40-54, 71-79 100 Price developments, 16, 53-55, 78-80 Consumer Projections, 38, 70 Policies program, 219 Edge Act corporations and agreement Price index, 16, 53-55, 78-80 corporations, 237, 250 Spending in 1995, 8, 41-44, 72-74 Electronic data processing, examinations, Consumer Advisory Council 234 Meetings, 219 Electronic Federal Tax Payment System, Members, list, 336 266 Consumer and community affairs, 199-223 Electronic Funds Transfer Act, compliance, Consumer Complaint Executive 94, 207, 209, 212 Information System, 218 Employment in 1995, 14-16, 50-52, 77 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 369 Equal Credit Opportunity Act, compliance, Federal Reserve Banks—Continued 207, 209, 212 Branches— Continued Examinations, inspections, regulations, and Premises, 302 audits Vice presidents in charge, 338 Federal Reserve Banks, 268 Capital accounts, 286-89 Member banks, 211, 232 Chairs and deputy chairs, 338 Specialized Chairs, presidents, and vice presidents of Electronic data processing, 234 Federal Reserve Banks, list, 338 Fiduciary activities, 234 Condition statement, 284 Government securities, 235 Conferences of chairs, presidents, and Municipal securities, 235 vice presidents, 340 Subsidiaries of bank holding Deposits, 285, 286-89 companies, 235 Directors, list, 340-63 Surveillance and monitoring, 236 District banks Transfer agents, supervision, 236 Atlanta, Economic development U.S. offices of foreign banks, charges for seminars, 204 inspections, 237 Boston, Community development Expedited Funds Availability Act, seminars, 204 compliance, 214 Chicago Export trading companies, 251 Access to Credit: A Guide for Exports and imports, 1995, 30 Lenders and Women Owners of Small Businesses, 206 Fair Housing Act, compliance, 218 CRA seminars, 204 Fair lending practices, 200-02 Economic Development News and Fair lending training, Federal Reserve Bank Views, newsletter, 206 examiners, 201 Small business development Federal Advisory Council, members, 335 seminars, 204 Federal agency securities Dallas Federal Reserve Banks, 286-89 Breaking Ground: A Beginner's Federal Reserve open market Guide for Nonprofit transactions, 290 Developers, publication, 205 Repurchase agreements, 284, 286-89, Economic development seminars, 290, 292 204 Federal agency securities, Federal Reserve Kansas City Banks, 308-13 CRA seminars, 204 Federal debt in 1995, 23 House financing seminar, 205 Federal Financial Institutions Examination Philadelphia Council, 211,245 Economic development seminars, Federal Open Market Committee 204 Meetings, minutes of, 60, 110-97 Small Business = Big Possibilities, Members and officers, list, 334 publication, 205 Monetary policy and interest rate Richmond developments, 57-60, 81-83 CRA seminars, 204 Federal Reserve Automation Services, 259 Economic development seminars, Federal Reserve Bank examiners, fair 204 lending training, 201 Marketwise, newsletter, 206 Federal Reserve Banks San Francisco Assessments for expenses, Board of Association of Reinvestment Governors, 296-303 Consortia for Housing, 207 Bank premises, 284, 286-89, 302 California Economic Development Branches Loan Initiative, 207 Directors list, 340-63 CRA seminars, 204 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

370 82nd Annual Report, 1995 Federal Reserve Banks—Continued Federal Reserve System—Continued District banks—Continued Fees—Continued St. Louis, Economic development Net settlement services, 262 seminars, 204 Noncash collection services, 264 Dividends paid, 296-304 Pricing of, 294 Educational programs, 205 Treasury, U.S. Department of the, Examinations, inspections, regulations, services for, 267 and audits, 268 Loans to executive officers, 254 Fees and services, 259-75 Map, 362 Income and expenses, 268 Membership, 254 Interest rates, 304 Security and loan holdings, 269 International activities, 237 Staff training, 201, 211, 244 Liabilities and capital accounts, 285 Staff, technical assistance to member Loans and securities, 284, 286-89, banks, 238 292-97, 308-13 Supervision and regulation, Officers and employees, number and responsibilities, 231-38 salaries, 293-96 Supervisory policy, 238-47 Operations, volume, 303 Federal spending, 12, 46-48, 75 Payments to the U.S. Treasury, 299, 301 Federal tax payments services, 266 Premises, 270 Fednet, 259 Presidents and first vice presidents, 338 FedSelect checks, 267 Presidents and other officers, salaries, Fedwire funds transfer services, 101, 256, 293-96 261 Priced services, 271-78, 308-13 Fees, Federal Reserve services to Surveillance and monitoring, 236 depository institutions Federal Reserve Examination Database Automated clearinghouse services, 263 (FRED), 243 Book-entry securities, 262 Federal Reserve notes Cash services, 264 Condition statement data, 286-89 Check clearing and collection, 260 Interest, 299 Currency and coin, 264 Federal Reserve System {See also Board of Developments, 264-68 Governors) Fedwire funds transfer services, 261 Agreement in Principal, National Fiscal agency services, 264 Association of Securities Dealers, Float, 264 243 Food coupon services, 267 Bank holding company applications, Government depository services, 264 review of, 215 Net settlement services, 262 Banking structure decisions, public Noncash collection services, 264 notice, 248 Pricing of, 294 Fees, Federal Reserve services to Treasury, U.S. Department of the, depository institutions services for, 267 Automated clearinghouse services, 263 Fiduciary activities, supervision, 234 Book-entry securities, 262 Financial Action Task Force, 252 Cash services, 264 Financial Check clearing and collection, 261 Disclosure, state member banks, 251 Currency and coin, 264 Markets relative to monetary policy, Developments, 260-64 19-25 Fedwire funds transfer services, 261 Services, Federal Reserve Banks, 259 Fiscal agency services, 264 Statements, Board of Governors, 277-83 Float, 264 Fiscal agency services, 265 Food coupon services, 267 Float, 264 Government depository services, 264 Food coupon services, 267 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 371 Foreign International banking activities Banking organizations, examination Banking activities, 250 manual, 238 Developments, 27-33, 48, 76, 88-90 Companies, investments in, 257 Edge Act corporations and agreement Currencies, Federal Reserve income on, corporations, 237 294 Foreign-office operations of U.S. banking Currency operations, 32, 33 organizations, 237 Economies during 1995, 28, 48, 76, Transactions, 30 88-90 U.S. activities of foreign banks, 237, 238 Interpretations of regulations, 209 Exchange, 32, 48, 64-67, 76, 88-90 Investments Investments by U.S. banking Business in 1995, 9-11 organizations, 96, 251 Federal Reserve Banks, 284, 286-89 Securities purchases by the U.S., 1995, Foreign companies, 257 32 Public welfare, approval authority, 100 Foreign Stocks, list, 253 State member banks, 307 Gold certificate accounts of Reserve Justice, U.S. Department of, 201 Banks and gold stock, 286-89, 308-13 Labor markets, 14-16, 50-52, 77 Government debt in 1995, 12, 23 Leasing, automobile, disclosure Government depository services, 265 requirements, 208, 213 Legislation enacted, 227-29 Home Mortgage Disclosure Act Legislative recommendations, Board of Financial institutions, change in Governors, 221 standards for compliance, 98 Litigation involving the Board of Lending patterns and data reported, 202 Governors Loan applications, treatment of, 209 Financial Institutions Supervisory Act Home mortgage loans, amendment to Cavallari, 224 Regulation Z, new disclosure Din, 224 requirements, 208 DLG Financial Corp., 224 Household spending , 1995, 7-9 Hotchkiss, Adversary, 224 Houses, sale of, 43, 73 Interamericas Investments, Ltd., 224 Housing and Urban Development, U.S. Pharaon, 224 Department of, 204, 218 Scott, 224 Other actions Imports and exports, 1995, 30 Beckman, 225 Income and expenses Bennett, 225 Board of Governors, 279 Duces Tecum, subpeona, 225 Federal Reserve Banks, 268, 294 Kuntz, 225 Income growth during 1995, 8 Menick, 225 Industrial production, 10-12, 44 VuTi, 225 Insured commercial banks {See also Zemel, 225 Commercial banks), Assets, liabilities, Review of Board actions and number, by class of bank, 307 Jones, 223 Interest rates Kuntz, 223 During 1995, 21-23 Lee, 223 Federal Reserve Banks, 102-04, 304 Money Station, Inc., 223 Monetary policy, 57-60, 81-83 National Title Resource Agency, 223 Risk-based capital standards, 239 Loans Interest-bearing accounts, annual Banks, by class, 307 percentage yields on, 99 Executive officers, 97 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

372 82nd Annual Report, 1995 Loans— Continued Nonmember depository institutions Federal Reserve Banks Assets and liabilities, 307 Depository institutions, 284, 286-89, Banking offices, changes in number, 314 294 Holdings and income, 284, 286-89 Officers of Federal Reserve Banks and Interest rates, 304 Branches, 338 Securities, table, 308-13 Ombudsman, Board of Governors, policy Volume of operations, 303 statement of responsibilities, 101 Originated mortgage servicing rights, 240 Map, Federal Reserve System, 362 Over-the-counter Marginable Stocks, list, Margin requirements, 306 253 Marketwise, newsletter, 206 Material supervisory determinations, Paperwork Reduction Act of 1995, process for appeals, 100 enacted legislation, 228 Melzer, Thomas C, President, Federal Partners: A Public Private Partnership Reserve Bank of St. Louis, 259 Model for Home Mortgage Lending, Member banks computer software, 205 Payments system risk, policy statement on Assets, liabilities, and capital accounts, Fedwire third-party access, 101 307 Point-of-sale use, 210 Banking offices, changes in number, 314 Policy actions and statements Number, 307 Board of Governors, 93-104 Reserve requirements, 305 Federal Open Market Committee Membership with the Federal Reserve Domestic open market operations, System, 254 authorization, 105 Mexican Debt Disclosure Act of 1995, Domestic policy directive, 107 enacted legislation, 228 Foreign currency directive, 109 Minority loan programs, 203 Foreign currency operations, Monetary aggregate growth, 3, 37, 69 authorization, 107 Monetary policy Foreign currency operations, Credit markets, 23-28, 60-64, 83-88 procedural instructions, 110 Developments during 1995, 55-66, Fedwire closing schedule, 101 80-90 Material supervisory determinations, Financial markets relative to, 19-25 process for appeals, 100 Interest rate developments, 57-60, 81-83 Ombudsman responsibilities, 101 Reports to the Congress Payment systems risk, 101 February 21, 1995, 35-66 Price developments, 16, 53-55, 78-80 July 19, 1995, 67-90 Priced services, Federal Reserve, 271-78, Money laundering, protective measures 294, 308-13 against, 252 Privacy Act of 1974, Rules to restrict Mortgage loans access to personal information by third Fees, treatment of, 209 parties, 100 Lending practices, 202 Private mortgage insurance, 204 Reverse, disclosure requirements, 98 Profit and loss, Federal Reserve Banks, 296 Public welfare, investments in, approval National Association of Securities authority, 100 Dealers, 243 Publications National Book-Entry Securities System, Access to Credit: A Guide for Lenders 263 and Women Owners of Small National Information Center (NIC), 243 Businesses, 206 Net settlement services, 262 Breaking Ground: A Beginner's Guide Nnnrash rniiertinn servirp.s 964 fnr Nnn nrnfit npvplnnprs. 90S Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 373 Publications— Continued Regulations— Continued Community Development Investments: A CC, Expedited Funds Availability Act, Guide for State Member Banks and 214 Bank Holding Companies, 205 DD, Truth in Savings, 99, 209 Directory: Bank Holding Company Regulatory Ombudsman, policy statement Community Development on responsibilities, 101 Investments, 205 Reserve requirements of depository Economic Development News and Views, institutions, 93, 305 newsletter, 206 Reserves and related items, 308-13 Foreign stocks, list, 253 Residential investment, 9 Marketwise, newsletter, 206 Retail sales of nondeposit investment Over-the-counter Marginable Stocks, list, products, supervisory policy, 243 253 Reverse mortgages, disclosure Securities Credit Transactions Handbook, requirements, 98 Federal Reserve Regulatory Service, Riegle Community Development and 253 Regulatory Improvement Act of 1994, Small Business = Big Possibilities, 205 108, 240, 255 Risk-based capital standards Real estate loan fees, treatment of, 209 Market risk measurement policy, 240 Recourse issues, risk-based capital Revision to guidelines, 94-96 standards, 239 Risk management guidance, 240, 257 Regulation of the U.S. banking structure Supervisory policy, 239-242 Bank Holding Company Act, 247 Rules of Practice for Hearings, 96 Bank Merger Act, 248 Rules Regarding Access to Personal Banking and nonbanking proposals, 249 Information Under the Privacy Act, Change in Bank Control Act, 248 100 Federal Reserve decisions, public notice, Rules Regarding Delegation of Authority, 248 100 Regulations Rules Regarding Equal Opportunity, 100 B, Equal Credit Opportunity Act, 207, 209, 212 Safety and soundness guidelines, state C, Home Mortgage Disclosure, 98, 209 member banks, 96, 257 D, Reserve Requirements of Depository Salaries, Federal Reserve Bank staff, 293 Institutions, 93 Savings bonds, 266 E, Electronic Fund Transfers, 94, 207, Securities 209, 212 Book-entry transfer services, 262 H, Membership of State Banking Credit, 306 Organizations in the Federal Government, supervision of, 235 Reserve System, 94-96 Municipal, regulation of, 235 K, International Banking Organizations Nontrading, 241 in the Federal Reserve System, 96 Regulations, 252 M, Consumer Leasing, 208, 213 O, Loans to Executive Officers, Subsidiaries of bank holding companies, Directors, and Principal 235 Shareholders of Member Banks, 97 Transfer service, Fedwire schedule, 101 Y, Bank Holding Companies and Change Treasury, marketable, 265 in Bank Control, 94-96, 97 U.S. government, holdings by Federal Z, Truth in Lending, 98, 208, 209, 213 Reserve, 269 AA, Unfair and Deceptive Acts or Small Business = Big Possibilities, Practices, 215 publication, 205 BB, Community Reinvestment Act, 98, Small business obligations, recourse 199, 214 transactions, 239, 257 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

374 82nd Annual Report, 1995 Special drawing rights certificates, 284, Treasury Direct, 265, 267 286-89, 308-13 Treasury Offset Program, 266 State and local government debt in 1995, Treasury securities 23 Bank holdings, by class of bank, 307 State member banks Federal Reserve Banks, holdings, 284, Applications, 249 286-89, 292-95, 308-13 Back-office facilities, 94 Open market transactions, 290 Banking offices, changes in number, 314 Repurchase agreements, 284, 286-89, Community development investment, 290, 292, 308-13 205 Treasury securities, Federal Reserve Banks, Compliance examinations, 211 Income, 294 Consumer complaints, 217 Treasury, U.S. Department of the Examinations by Federal Reserve Banks, Federal Reserve depository services, 266 233 Federal Reserve payments to, 299, 301 Financial disclosure, 251 Truth in Lending Act, compliance, 208, Foreign branches, 250 209, 213, 227 Loans to executive officers, 254 Truth in savings, Interest-bearing accounts, Number, by class of bank, 307 annual percentage yields, 99, 209 Risk-based capital guidelines, 94-96, Unfair and Deceptive Acts or Practices, 239, 241 compliance with Act, 215 Safety and soundness guidelines, 96, 257 Unregulated banking practices, consumer Secured loans to executive officers, 97 complaints, 218 Supervision and regulation of, 231-38 State-chartered savings banks, changes in Women's Business Development Center number, 314 of Chicago, 206 Statistical analysis system for fair lending examinations, 201 Summit of the Americas Working Level Conference on Money Laundering, 252 Supervision and regulation, Federal Reserve System, responsibilities, 231-38 Supervisory Information System (SIS) database, 243 Technical Committee of the International Organization of Securities Commissions, 241, 243 Testimony and legislative recommendations, Board of Governors, 221 Thrift institutions, Performance in 1995, 25 Thrift Institutions Advisory Council, members, 337 Training, Federal Reserve System staff, 201,211,244 Transfer agents, supervision, 236 Transfers of funds (See also Fees and Regulations: E) Federal Reserve operations, volume, 303 Priced services, Federal Reserve, 294 FRB1/1-12500-0596C Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis