Annual Report of the Federal Reserve Board, 1996

'Report \U 1996 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. It is also available at the Board's World Wide Web site, at http://www.bog.frb.fed.us/ Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Letter ofTransmittal BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Washington, D.C., May 28, 1997 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-third annual report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1996. 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 1996 3 OVERVIEW 3 The evolution of policy in 1996 4 Debt and the monetary aggregates 7 THE PERFORMANCE OF THE ECONOMY IN 1996 7 The labor market 9 Prices 13 DOMESTIC SPENDING AND FINANCE IN 1996 13 The financial backdrop: interest rates, equity, and debt 14 The household sector 17 The business sector 19 The government sector 23 DEPOSITORY CREDIT AND THE MONETARY AGGREGATES 23 Depository credit 24 The monetary aggregates 29 INTERNATIONAL DEVELOPMENTS 30 Foreign economies 32 U.S. international transactions 34 Foreign exchange developments 35 Foreign exchange operations 37 MONETARY POLICY REPORTS TO THE CONGRESS 37 Report on February 20, 1996 61 Report on July 18, 1996 Part 2 Records, Operations, and Organization 87 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS 87 Regulation D (Reserve Requirements of Depository Institutions) 88 Regulation 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 88 Regulation G (Securities Credit by Persons Other than Banks, Brokers, and Dealers), Regulation T (Credit by Brokers and Dealers), and Regulation U (Credit by Banks for the Purpose of Purchasing or Carrying Margin Stocks) 88 Regulation H (Membership of State Banking Institutions in the Federal Reserve System) 89 Regulation H, Regulation K (International Banking Operations), and Regulation Y (Bank Holding Companies and Change in Bank Control) 89 Regulation H and Regulation Y 90 Regulation K 91 Regulation L (Management Official Interlocks) 91 Regulation M (Consumer Leasing) 91 Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks; Loans to Holding Companies) 92 Regulation R (Relations with Dealers in Securities Under Section 32, Banking Act of 1933) 92 Regulation S (Reimbursement for Providing Financial Records; Recordkeeping Requirements for Certain Financial Records) 93 Regulation T 93 Regulation V (Loan Guarantees for Defense Production) 93 Regulation Y 94 Regulation Z (Truth in Lending) 95 Regulation EE (Netting Eligibility for Financial Institutions) 95 Miscellaneous interpretations 95 Rules Regarding Availability of Information 96 Policy statements and other actions 97 1996 discount rates 101 MINUTES OF FEDERAL OPEN MARKET COMMITTEE MEETINGS 101 Authorization for Domestic Open Market Operations 103 Domestic Policy Directive 103 Authorization for Foreign Currency Operations 105 Foreign Currency Directive 106 Procedural Instructions with Respect to Foreign Currency Operations 106 Meeting held on January 30-31, 1996 124 Meeting held on March 26, 1996 132 Meeting held on May 21, 1996 140 Meeting held on July 2-3, 1996 152 Meeting held on August 20, 1996 159 Meeting held on September 24, 1996 168 Meeting held on November 13, 1996 177 Meeting held on December 17, 1996 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

187 CONSUMER AND COMMUNITY AFFAIRS 187 CRA reform 188 Fair lending 189 HMD A data and lending patterns 192 Community development 194 Other regulatory matters 197 Economic effects of the Electronic Fund Transfer Act 198 Compliance examinations 199 Agency reports on compliance with consumer regulations 203 Applications 204 Consumer complaints 208 Consumer policies 208 Consumer Advisory Council 210 Testimony and legislative recommendations 212 Recommendations of other agencies 213 LITIGATION 213 Bank Holding Company Act—review of Board actions 214 Litigation under the Financial Institutions Supervisory Act 215 Other actions 217 LEGISLATION ENACTED 217 Economic Growth and Regulatory Paperwork Reduction Act of 1996 223 National Securities Markets Improvment Act of 1996 224 Electronic Freedom of Information Act Amendments of 1996 224 Debt Collection Improvement Act of 1996 225 BANKING SUPERVISION AND REGULATION 226 Scope of responsibilities for supervision and regulation 232 International activities 234 Supervisory policy 238 National Information Center 238 Use of automation 238 Staff training 240 Federal Financial Institutions Examination Council 243 Regulation of the U.S. banking structure 246 Enforcement of other laws and regulations 249 Loans to executive officers 249 Federal Reserve membership REGULATORY SIMPLIFICATION 251 Comprehensive reviews 252 Regulation D (Reserve Requirements of Depository Institutions) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

REGULATORY SIMPLIFICATION Continued 252 Regulation E (Electronic Fund Transfers) 252 Regulation H (Membership of State Banking Institutions in the Federal Reserve System) 252 Regulation K (International Banking Operations) 253 Regulation M (Consumer Leasing) 253 Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders) 253 Regulation S (Reimbursement for Providing Financial Records; Recordkeeping Requirements for Certain Financial Records) 254 Regulation T (Credit by Brokers and Dealers) 254 Regulation Y (Bank Holding Companies and Change in Bank Control) 255 Regulation Z (Truth in Lending) 255 Regulation CC (Availability of Funds and Collection of Checks) 256 Rescission of Regulations R and V 251 FEDERAL RESERVE BANKS 258 Developments in Federal Reserve priced services 262 Developments in currency and coin 263 Developments in fiscal agency and government depository services 267 Income and expenses 268 Holdings of securities and loans 268 Volume of operations 268 Federal Reserve Bank premises 270 Pro forma financial statements for Federal Reserve priced services 275 BOARD OF GOVERNORS FINANCIAL STATEMENTS 283 STATISTICAL TABLES 284 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31, 1996 286 2. Statement of condition of each Federal Reserve Bank, December 31, 1996 and 1995 290 3. Federal Reserve open market transactions, 1996 292 4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities, December 31, 1994-96 293 5. Number and salaries of officers and employees of Federal Reserve Banks, December 31, 1996 294 6. Income and expenses of Federal Reserve Banks, 1996 298 7. Income and expenses of Federal Reserve Banks, 1914-96 302 8. Acquisition costs and net book value of premises of Federal Reserve Banks and Branches, December 31, 1996 303 9. Operations in principal departments of Federal Reserve Banks, 1993-96 304 10. Federal Reserve Bank interest rates, December 31, 1996 305 11. Reserve requirements of depository institutions, December 31, 1996 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

STATISTICAL TABLES—Continued 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, 1996 and 1995 308 14. Reserves of depository institutions, Federal Reserve Bank credit, and related items—year-end 1918-96 and month-end 1996 314 15. Number of banking offices in the United States, December 31, 1995 and 1996 315 16. Mergers, consolidations, and acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1996 329 FEDERAL RESERVE DIRECTORIES AND MEETINGS 330 Board of Governors of the Federal Reserve System 332 Federal Open Market Committee 333 Federal Advisory Council 334 Consumer Advisory Council 335 Thrift Institutions Advisory Council 336 Officers of Federal Reserve Banks and Branches 338 Conferences of chairmen, presidents, and first vice presidents 339 Directors 359 MAPS OF THE FEDERAL RESERVE SYSTEM 363 INDEX Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Parti Monetary Policy and the US. Economy in 1996 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Overview The economy performed impressively Federal Reserve's commitment to mainin 1996. Solid advances in the real ex- taining progress toward price stability, penditures of households and businesses may have discouraged aggressive pricled to sizable gains in output. Employ- ing behavior. Business firms continued ment rose briskly, and the unemploy- to rely on cost control and gains in proment rate edged down to its lowest ductivity, rather than on price increases, level of the current expansion. Con- as the primary channels for achieving sumer price inflation increased because profit growth. of the probably temporary effects of Still, the Federal Open Market Comfirmness in food and energy markets, mittee (FOMC) recognized the danger but some broader price measures that pressures emanating from the tight showed inflation holding steady or even labor market might trigger an acceldeclining. With the economy strength- eration of prices, which could eventuening, intermediate- and long-term inter- ally undermine the ongoing economic est rates rose on net, but credit contin- expansion. Consequently, although conued to be amply available to businesses ditions were not deemed to warrant and most households, and equity prices immediate policy action, the Commitsoared. tee's policy directives starting in mid- Several factors helped to restrain 1996 reflected a perception that the most price increases in the face of high levels likely direction of any policy action of resource utilization. Workers' con- would be toward greater restraint in the cerns about job security helped limit, to provision of reserves to the banking syssome degree, the acceleration of wages, tem. Forestalling a disruptive buildup of and further success in controlling health inflationary pressures in the near term care costs helped to temper the rise in and moving toward price stability over benefits. Moreover, significant declines time remained central to the System's in the prices of U.S. imports, resulting mission of promoting maximum susfrom low inflation abroad and apprecia- tainable growth of employment and tion of the dollar on foreign exchange production. markets, tended to hold down domestic prices. Damped inflation expectations The Evolution of Policy in 1996 probably contributed as well to the favorable price performance: A length- The FOMC eased the stance of moneening run of years during which infla- tary policy twice around the beginning tion has been in a more moderate range, of the year—in December 1995 and in together with an understanding of the January—lowering the federal funds rate Vi percentage point in total, to 5 lA percent. These actions were taken to NOTE. The discussion here and in the next three chapters is adapted from Monetary Policy Report offset the effect on the level of the real to the Congress Pursuant to the Full Employment federal funds rate of declines in inflation and Balanced Growth Act of 1978 (Board of Govand inflation expectations in the second ernors, February 1997). Data cited here and in the half of 1995 and thereby to help ensure next four chapters are those available as of mid- March 1997. the resumption of moderate economic Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

83rd Annual Report, 1996 growth after the marked slowdown and inflation. Core inflation remained modinventory correction in late 1995. erate, but in light of the heightened risk By the spring, economic growth had that it would turn upward, the Commitbecome more vigorous than either the tee in its early July directive to the Man- Committee or financial markets had ager of the Open Market Account indiforeseen. In response, intermediate- and cated its view that near-term economic longer-term interest rates as of mid-May developments were more likely to lead were up around a full percentage point to a tightening of policy than to an easfrom the two-year lows reached early in ing. Labor markets continued to be taut the year. In combination with some soft- over the balance of the year, and this ening of economic activity abroad and bias toward restraint was included in declines in interest rates in major for- directives adopted at all of the Commiteign industrial countries, these develop- tee's remaining meetings in 1996. ments contributed to a further apprecia- After having peaked during midtion of the dollar, building on the rise summer, interest rates moved down on that had started in mid-1995. The Com- balance through the fall, as expansion of mittee anticipated that the increase in consumer spending and economic activthe cost of credit, along with the higher ity in general appeared to be moderating exchange value of the dollar, would be and markets saw less likelihood of a sufficient to foster a downshift in eco- need for Federal Reserve firming action. nomic expansion to a more sustainable Equity prices fell back for a time during pace and contain price pressures; thus, it the summer, reversing some of the subleft its policy stance unchanged at its stantial increase registered over the first spring meetings. half of the year, but by autumn they had By early summer, however, the con- reached new highs. Interest rates and tinued momentum in demand and pres- dollar exchange rates turned back up sures on labor resources that were being late in the year when signs of rapid reflected in faster growth in wages were growth and more intense use of the seen as posing a threat of increased economy's resources re-emerged. Selected Interest Rates Debt and the Monetary Percent Aggregates 30-year Treasury For the nonfinancial business sector, the effect of the higher intermediate- and long-term interest rates on the overall cost of funds in 1996 was offset to some degree by an easing of lending terms at banks and a narrowing of yield spreads on corporate bonds over Treasuries, as 3-month well as by declines in the cost of capital Treasury in the equity market. Encouraged, per- I ! i i ! 1 } haps, by the prospects of sustained eco- 1995 1996 nomic expansion and low inflation, NOTE. Small tick marks refer to dates in 1995 and banks, market lenders, and equity inves- 1996 on which the Federal Open Market Committee held scheduled meetings. Dashed lines indicate dates of meet- tors displayed a strong appetite for busiings at which the Committee announced a monetary pol- ness obligations and seemed willing to icy action: July 6, 1995; December 19, 1995; and Janrequire less compensation for the posuary 31, 1996. The data are daily. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Overview sible risks entailed. Some households, by contrast, faced a tightening of standards and terms with respect to credit card debt and some other types of consumer debt as banks reacted to a rising volume of delinquencies and chargeoffs on these instruments. However, credit availability under home equity lines increased, particularly from finance companies but also from banks. Overall debt growth was slightly above the midpoint of its 3 percent to 7 percent monitoring range. The growth rates of M2 and M3 edged up and, as was anticipated in the monetary policy reports to the Congress in February and July, both aggregates ended 1996 near or above the upper end of their growth ranges. Again in 1996, the growth of M2 relative to nominal income and interest rates was generally in line with historical relationships, in contrast to its behavior during the early years of the decade. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Performance of the Economy in 1996 The economy turned in a remarkably employed, increased about 3 percent favorable performance in 1996. Real during 1996. Moderate employment GDP rose more than 3 percent, one of gains were posted in retail trade, transthe larger gains of the past several years portation, and finance, and sizable gains and appreciably more than the FOMC in hiring continued in some other was expecting early in the year. Employ- service-producing industries, such as ment rose substantially, and the unem- data processing, computer services, ployment rate declined further. Tight- and engineering and management. Job ness of the labor market led to a mod- growth at suppliers of personnel—a erate pickup in wage increases in 1996. category that includes temporary help However, acceleration of prices was agencies—was more than 6 percent, a confined largely to the food and energy touch faster than in 1995 but much sectors; prices for other consumer slower than it had been over 1992-94; products decelerated, as did prices paid with the tightening of labor markets in by businesses for capital goods and the past couple of years, longer-lasting materials. commitments in hiring may have come back into greater favor among some employers. The Labor Market Employment changes among pro- The number of jobs on nonfarm payrolls ducers of goods were mixed in 1996. rose more than 2Vi million from Decem- In construction, employment climbed ber 1995 to December 1996, an increase about 5Vi percent, to a new high that of about 2VA percent. At year-end, the was almost 4 percent above the peak of job count was up more than \2Vi mil- the last business expansion. In manufaclion from the lows of the early 1990s. turing, increases in factory jobs through Employment in the private service- the latter part of 1996 were not sufficient producing sector, in which nearly to reverse declines that had taken place two-thirds of all nonfarm workers are earlier in the year. On net, the loss of factory jobs amounted to about Vi per- Change in Real GDP cent, a shade less than the average rate Percent, Q4 to Q4 of decline since 1979, the year in which manufacturing employment peaked. Manufacturers of durable goods boosted employment slightly last year, but many producers of nondurables implemented further job cuts. As in many other recent years, reductions in factory employment were accompanied by strong gains in worker productivity. Consequently, JHLJJKJ^HJJ^^^LLJL increases in output were sizable—the rise in the Federal Reserve's index of 1992 1994 1996 manufacturing production cumulated to NOTE. The data are derived from chained (1992) dollars and come from the Department of Commerce. more than 4 percent over the year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 83 rd Annual Report, 1996 Growth of output per hour in the non- some workers continued to express anxifarm business sector as a whole picked ety about job security. The employment up in 1996, rising about 1 percent over cost index (ECI) for the private nonfarm the year according to preliminary data. sector of the economy snowed compen- However, coming after a three-year sation per hour moving up 3.1 percent period in which output per hour changed over the year. The index had risen little, this rise left the average rate of 2.6 percent in 1995. The step-up in productivity growth in the 1990s a bit hourly pay increases was to some extent below that of the 1980s and well below the result of a hike in the minimum the average gains achieved in the first wage that took place at the start of three decades after World War II. The October. More generally, however, busisustained sluggishness in measured pro- nesses probably had to boost hourly ductivity growth this decade is difficult compensation either to attract workers to explain, as it has occurred during a or to retain them at a time when alternaperiod when high levels of investment tive employment opportunities were perin new capital and extensive restructur- ceived to be more widely available. ing of business operations should have been boosting the efficiency of workers. Labor Market Conditions Of course, measurement problems could Millions of jobs, Dec. to Dec. be distorting the data. As a summary Net change in payroll employment measure that relates aggregate output to Total nonfarm aggregate input of labor, the nonfarm productivity index is affected by whatever deficiencies might be present either in adding up the nominal expenditures for goods and services in the economy or adjusting those expenditures for I .I 1 i price change. A considerable amount of Percent recent research suggests that growth Civilian unemployment rate of output and productivity is in fact understated, but whether the degree of understatement has been increasing over time is less clear. In contrast to the experience of most other recent years, the 1996 rise in employment was accompanied by a sus- Percent, Dec. to Dec. tained pickup in the labor force partici- Change in employment cost index pation rate. The rise in participation Tuial hourly compensation, private industry boosted the labor supply and helped to relieve pressures on the labor market. Illllll Nonetheless, hiring during 1996 was sufficient to reduce the civilian unemployment rate from a December 1995 rate of 5.6 percent to a December 1996 1990 1992 1994 1996 rate of 5.3 percent. NOTE. The data are from the Department of Labor. Tightness of the labor market appears The break in data for the unemployment rate at January to have exerted some upward pressure 1994 marks the introduction of a redesigned survey; data from that point on are not directly comparable with those on the cost of labor in 1996, even as of earlier periods. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Performance of the Economy in 1996 As in 1995, increases in hourly com- panying table, was significantly lower pensation in 1996 came more as wage than that of the CPI. The two measures and salary increases than as increases in of consumer prices differ to some fringe benefits. According to the ECI, degree in their weights and methods of the rise in wage rates for workers in the aggregation. They also differ somewhat nonfarm sector amounted to nearly in their selection of price data, with the 3 Vi percent after a rise of 23A percent in PCE measure relying on alternative data 1995. By contrast, the ECI measure of in some areas in which the accuracy of the hourly cost of benefits rose only the CPI has been questioned. The chain- 2 percent, slightly less than it did in type price index for gross domestic 1995 and much less than it rose on aver- purchases, which takes account of the age over the past decade. Increases in prices paid by businesses and governthe cost of benefits have been held down ments as well as those paid by consumin recent years by reduced inflation for ers, moved up 2lA percent during 1996, medical services and by the actions that about the same as the percentage rise many firms have taken to shift employ- during 1995. By contrast, price meaees into managed care arrangements and sures associated with GDP decelerated to require them to assume a greater por- in 1996 to thirty-year lows of around tion of the cost of health insurance and 2 percent or less. Conceptually, the GDP other medical benefits. measures are indicative of price changes for goods and services that are produced domestically rather than price changes Prices for goods and services purchased The consumer price index rose more domestically—foreign trade accounting rapidly than in 1995, but the step-up for the difference. was concentrated in the food and energy The 1996 outcomes for all these measectors—areas in which prices were sures reflected an economy in which affected by supply limitations that inflation pressures were muted. Sharp seemed likely to be of temporary dura- declines in non-oil import prices during tion. The CPI excluding food and the year lowered input costs for many energy—often called the "core" CPI— domestic firms and likely caused other rose just a touch more than 2Vi percent firms to restrain their product prices for after having increased 3 percent during 1995. Both the total CPI and the core Alternative Measures of Price Change CPI have been affected in the past two years by technical improvements imple- Percent mented by the Bureau of Labor Statis- Price measure 1995 1996 tics that are aimed at obtaining more Fixed-weight accurate readings of price change; the Consumer price index 2.7 3.2 rise in the CPI in 1996 would have been Excluding food and energy 3.0 2.6 somewhat greater if procedures used Chain-type through 1994 had not been altered. Personal consumption expenditures 2.1 2.5 Excluding food and energy 2.3 2.0 Other price indexes generally rose Gross domestic purchases 2.3 2.2 less rapidly than the CPI. Like the over- Gross domestic product 2.5 2.1 all CPI, the chain-type price index Deflator for personal consumption expenditures Gross domestic product 2.5 l.: (PCE) accelerated somewhat in 1996, NOTE. Changes are based on quarterly averages and are measured to the fourth quarter of the year indicated but its rate of rise, shown in the accomfrom the fourth quarter of the previous year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 83rd Annual Report, 1996 fear of losing market share to foreign significant inflation pressures were evicompetitors. Also important, in all like- dent in 1996. Crude oil prices, which lihood, were the favorable imprints that had started firming in the latter part of several years of moderate and relatively 1995, continued on an upward course stable rates of inflation have left on through much of 1996, rising more than inflation expectations. Despite the up- 30 percent in total. Stocks of crude oil tick in hourly compensation and adverse and petroleum products were tight developments in the food and energy during the year, even after allowing for sectors, survey data showed little change an apparent downward trend in firms' in consumers' expectations of inflation, desired inventories. Inventory building and private forecasters' views of the was forestalled by production disrupprospects for prices held steady. Busi- tions at refineries, a string of weather nesses commonly described the situa- problems here and abroad that boosted tion as one in which competitive pres- fuel requirements for heating or cooling, sures were intense and the "leverage" and a reluctance of firms to take on for raising prices simply was not inventories that seemed likely to fall in present. value once renewed supplies from Iraq Food and energy prices were the became available. Natural gas, too, was exceptions. In the food sector, steep in tight supply at times, and its price increases in grain prices in 1995 and the surged. With retail prices of gasoline, first few months of 1996 caused produc- fuel oil, and natural gas all moving up tion adjustments among livestock farm- substantially, the CPI for energy rose ers and substantial price increases for some livestock products. Later in the Change in Prices year, grain prices fell back, but livestock Percent, Q4 to Q4 production could not recover in time to prevent significant price advances for Consumer some retail foods. Consumer prices for pork, poultry, and dairy products registered their largest increases in several years. Retail beef prices also rose but only moderately: Expansion of the cattle herd in previous years had laid the groundwork for a high flow of product to consumers, and herd reductions that occurred in 1996 augmented that flow. Consumer excluding food and energy Elsewhere in the food sector, acceleration was reported in the price index for food away from home—a category that has a weight of almost 40 percent in the CPI for food; the rise in the minimum wage appears to have been an important factor in the acceleration. All told, the 1996 rise in CPI food prices amounted to 41/4 percent, the largest increase since 1990. 1990 1992 1994 1996 The energy sector was the other NOTE. Consumer price index for all urban consumers. major part of the economy in which Based on data from the Department of Labor. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Performance of the Economy in 1996 11 about 7 xh percent over the four quarters The CPI for non-energy services of 1996, the largest increase since the increased VA percent in 1996. The rise Gulf War. was somewhat smaller than the The CPI for goods other than food increases of most other recent years. and energy rose 1 percent during 1996, Prices of medical services decelerated one of the smallest increases of recent for a sixth consecutive year, and decades. As in 1995, price increases for increases in the cost of shelter were held new vehicles were moderate, and prices down by another year of moderate of used cars turned down after several advances in residential rent and owners' years of sizable advances. Prices of equivalent rent. Large increases were apparel and house furnishings also fell; evident only in scattered categories: these prices, as well as the prices Airfares posted a large increase, and of vehicles, may have been heavily educational costs, maintaining a longaffected by the softness of import prices. established trend, continued to rise quite Moderate increases were the rule among rapidly relative to prices in general. • most other categories of goods in the CPI. In the producer price index, prices of capital equipment rose only Vi percent over 1996; computer prices continued to plunge, and the prices of other types of equipment rose moderately, on balance. Materials prices were weak: Prices of intermediate materials excluding food and energy declined about VA percent from the fourth quarter of 1995 to the final quarter of 1996, and the producer price index for crude materials excluding food and energy dropped more than 6I/2 percent over that period. Productive capacity was adequate among domestic producers of materials, and supplies of many materials were readily available at competitive prices on the world market. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

13 Domestic Spending and Finance in 1996 Aggregate spending of households, up comparatively little over the first half businesses, and governments recorded a of 1996, as earlier relative increases in sizable advance in 1996, rising a touch these yields associated with discussions faster than real GDP. Household expen- of fundamental tax reform were reversed ditures picked up, and business invest- when the likelihood of such changes ment expenditures surged, the latter bol- to the tax code diminished. Movements stered by increases in business profits in interest rates over the year appeared and ready access to a variety of sources to be basically in their real component, of finance on quite favorable terms. as inflation expectations were little Government outlays for consumption changed, according to surveys. and investment rose moderately in real The substantial rise in equity prices in terms. 1996 was only a bit below that registered in 1995. However, in contrast to 1995, when bond rates declined substan- The Financial Backdrop: tially, the equity gains came despite the Interest Rates, Equity, and Debt net rise in bond rates. Corporate earn- Declines in interest rates during the sec- ings were robust, but their advance fell ond half of 1996, elicited by evidence short of share price increases, and pricethat economic growth had moderated, earnings ratios rose to unusually high only partially reversed the increases levels; dividend-price ratios were even over the first half. Longer-term Treasury more out of line with historical experirates rose on balance on the order of ence. Market participants appeared to I/2 percentage point over the year, and be anticipating further robust earnings intermediate rates were up somewhat growth, and they also seemed to be remore. Spreads between most private quiring much less compensation for the rates and Treasuries narrowed markedly, extra risk of holding equiti *,s compared reflecting the high quality of business to, say, Treasury bonds. Such evaluabalance sheets. Municipal rates moved tions may have been based on a perceived environment of persisting low inflation and balanced economic growth Selected Treasury Rates Percent Major Stock Price Indexes Index. December 1995 = 100 1965 1970 1975 NOTE. The twenty-year Treasury bond rate is shown until the first issuance of the thirty-year Treasury bond, in 1995 1996 February 1977. NOTE. The data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 83 rd Annual Report, 1996 Total Domestic Nonfinancial Debt problems arose with greater frequency Trillions of dollars in the household sector in 1996 and may have restrained spending in some Actual instances, households also benefited 7% 15.0 from healthy increases in real income and another year of sizable gains in 14.5 wealth. Consumers were relatively optimistic about prospects for the economy 14.0 at the start of 1996, and they became more so as the year progressed. Given this upbeat view, households were will- 1995 1996 ing to take on additional mortgage debt NOTE. The range was adopted by the FOMC for the at a brisk pace, but they did cut back on period from 1995:Q4 to 1996:Q4. expansion of consumer credit after very that would lower the odds of disruptions large increases in 1994 and 1995. to economic activity. Other asset prices were generally Spending, Income, and Saving subdued. Commodity prices were flat to down. Commercial real estate prices, After having risen less than 2 percent in although no longer falling, rose at little 1995, real personal consumption expenmore than the rate of inflation. Resi- ditures moved up 23A percent in 1996. dential real estate prices increased Real outlays for consumer durables moderately. rose more than 5 percent after a gain Growth of the debt of nonfinancial of only VA percent the previous year. sectors in 1996, about 5Vi percent, was As has been true for many years, real similar to the rise in 1995. The growth expenditures on computers and elecof household sector debt dropped from tronic equipment outpaced the growth SlA percent to VA percent, a decelera- of other household outlays by a wide tion accounted for entirely by a sharp margin in 1996. Sizable increases were slowing of consumer credit. The expan- also reported for most other types sion of business borrowing was held of consumer durables. However, real below its 1995 pace by an increase expenditures on vehicles changed little in internally generated funds, but at 43/4 percent it was faster than in any Change in Real Income and Consumption other year since 1989. Its strength Percent, Q4 to Q4 reflected robust spending, extremely Disposable personal income favorable credit conditions, and financ- Personal consumption expenditures ing needs associated with a high level of .1 6 mergers and acquisitions. Growth of federal debt slowed a bit further in 1996. 4 State and local debt expanded slightly I L after two years of contraction. 1 H 1 2 • 1 + ™ 0 The Household Sector 1 t 1 ! 1 Household expenditures picked up in 1992 1994 1996 1996—both consumer spending and NOTE. The data are derived from chained (1992) residential investment. Although debt dollars and come from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Domestic Spending and Finance in 1996 15 on net over the year, as gains achieved 4 percent in real terms over the four during the first half were reversed after quarters of 1996, more than reversing midyear. Late in 1996, sales of light a small decline in the previous year. vehicles may have been constrained to Demand for single-family housing was some degree by supply shortages that especially strong. Although interest rates arose during strikes in the United States on longer-term fixed-rate mortgage and Canada. Consumer purchases of loans moved up considerably in 1996, a nondurables rose PA percent in 1996 substantial number of homebuyers sideafter having increased 1 percent during stepped at least the initial costs by using 1995. Spending for services rose nearly adjustable-rate loans that were available 23/4 percent, slightly more than the aver- at lower rates. The effects of the rate age gain in previous years of the increases on the single-family market expansion. were cushioned by other influences After-tax personal income increased as well, most notably the growth of 5 percent in nominal terms over the four employment and income. Even for quarters of 1996. Wages and salaries fixed-rate loans, mortgage financing rose briskly, and the income of farm costs held at a level that, by historical proprietors surged. Other types of standards, was low relative to household income generally exhibited moderate incomes. All told, sales of new homes gains. Given the low level of price infla- surged to the highest annual total of the tion, the rise in nominal income trans- current expansion, and sales of existing lated into another significant advance in homes established a historical high. real disposable income—about 23A per- New construction of single-family cent over the year. dwellings also rose but not so dramatically as sales, as builders apparently As in 1995, strong cross-currents chose to work off some of their invencontinued to shape individual housetories of unsold units, which had holds' willingness—and ability—to climbed in 1995. spend from current income. Huge increases in stock market wealth pro- Construction of multifamily units vided some households the wherewithal maintained a path of recovery from the to boost spending at a pace considerably extreme lows of the early 1990s, movfaster than the growth of disposable ing up about 14 percent in terms of income. But a number of households annual totals. The number of multifamwere likely held back by the need to divert income to the servicing of debt, Private Housing Starts and according to some survey evidence, Millions of units, annual rate households have become more concerned about saving for retirement. Single-family Responding to these influences, the annual average of the personal saving rate was up slightly from that of 1995; however, it remained relatively low compared with its longer-run average. Residential Investment 1990 1994 1996 Outlays for residential investment NOTE. The data are seasonally adjusted quarterly averexpenditures posted a gain of about ages and come from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 83rd Annual Report, 1996 ily units started—about 315,000—was The slowing in consumer credit double the number started in 1993, growth also was associated with a shift when construction of these units was at toward increased use of home equity a low. However, compared with pre- loans. These loans were marketed vigorvious peaks, the 1996 total was less ously, particularly by finance compaimpressive—starts were twice as high nies, in part as a vehicle for consolidatin some years of the 1970s and 1980s. ing credit card and other outstanding Although market conditions for multi- consumer debt. Some of the growth in family properties varied considerably home equity loans reflected moves by from city to city in 1996, the national finance companies and banks into the average vacancy rate for multifamily "subprime" market—lending either to rental units remained relatively high, higher-risk customers or on terms entailand demographic influences were prob- ing unusually high loan-to-value ratios, ably less supportive of multifamily or both. The push to expand home housing than they were a decade or so equity lending offset to some degree the ago. Also, manufactured houses have effect of tighter lending standards and provided an increased number of fami- terms on credit cards and other forms of lies with an alternative to rental apart- consumer credit. ments in recent years. The shift toward home equity loans, along with a strong housing market, led to a pickup in mortgage debt growth in Household Finance 1996 to a rate of 8lA percent, the largest advance since 1990. Mortgage borrow- Consumer credit grew 814 percent ing for home purchases was restrained in 1996, just a bit over half the pace surprisingly little by the increase in of the preceding two years. The sharp interest rates over the first half of the retrenchment likely reflected the buryear. As noted previously, many borrowdens associated with a substantial accuers were able to put off, at least for a mulation of outstanding consumer debt time, much of the impact of the increase over recent years as well as some tightin rates by shifting to adjustable-rate ening of lending terms and standards mortgages, the rates on which rose much by commercial banks, particularly with less than those on fixed-rate mortgages. respect to credit cards. Delinquency Rates on Household Loans Percent Household Debt-Service Burden Percent Auto loans at finance companies Mortgages (more than 60 days) I 1 1 1 I I I 1 1 1 i I 1 11 I 1984 1987 1990 1993 1996 1981 1984 1987 1990 1993 1996 NOTE. AS a percentage of disposable personal income. Debt is household mortgage and consumer debt, and debt NOTE. The data for mortgages are from the Mortgage service is the sum of required interest and principal Bankers Association; for auto loans and credit cards, payments on such debt. The data are quarterly. from the Federal Reserve. The data are quarterly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Domestic Spending and Finance in 1996 17 Although the growth of household The Business Sector sector debt fell off a bit from the pace of The performance of the business sector recent years, it still exceeded that of in 1996 was marked by continued rapid disposable income. With loan rates up growth of fixed investment, a further on average for mortgages and down only increase in profits, and a conspicuous a little on consumer loans, debt-service absence of serious imbalances. In these burdens continued to rise, and some circumstances, businesses were able to households experienced difficulties serobtain credit on exceptionally favorable vicing certain kinds of debt. Delinterms. They also benefited from the rise quency rates on banks' consumer loans, in share values, which lowered the cost particularly credit card loans, posted a of obtaining finance through the equity second year of considerable increase, markets. although they remained below levels in the early 1990s. At finance companies that are subsidiaries of automakers, auto Investment Expenditures loan delinquency rates rose to very high levels; but this rise apparently resulted Business fixed investment recorded a in large part from a business strategy fifth consecutive year of strong expanto compete in the vehicle market by sion in 1996, moving up about 9Vi pereasing lending standards. Auto loan cent. As in other recent years, investdelinquency rates at commercial banks ment was driven by rising profits, also rose but remained well within his- favorable trends in the cost of capital, torical ranges. Delinquency rates on and the ongoing efforts of businesses residential mortgages turned up at some to boost efficiency. Although much of lenders but remained low overall. the investment spending was to replace Despite the rise in delinquencies depreciated equipment, the net addition on consumer debt, household balance to the aggregate capital stock appears to sheets appeared healthy overall, as have been substantial. The rate of rise in growth of household assets in 1995 and the stock has picked up over the past 1996 more than kept pace with the two or three years after subpar growth growth of debt. Household net worth, through the latter half of the 1980s and the sum of household financial claims first few years of the 1990s; the resultand tangible assets less liabilities, Change in Real Business Fixed Investment rose approximately $5 trillion from Percent, Q4 to Q4 the end of 1994 to the end of 1996, an amount that is equal to almost a Structures Producer's durable equipment full year's personal disposable income. 20 Roughly two-thirds of that gain was accounted for by the surge in the prices I I I 10 of corporate shares, which lifted the value of a wide range of household investments, not only directly held stocks but also assets held in other forms such as pension plans. The ratio of 10 household net worth to personal disposable income continued to climb in 1992 1994 1996 1996, moving to its highest level in NOTE. The data are derived from chained (1992) recent decades. dollars and come from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 83rd Annual Report, 1996 ing rise in the level of capital per worker tion for many types of buildings. Investshould enhance labor productivity and ment in office buildings scored an espepotential output. cially large gain over the year, amid Equipment outlays moved up almost widespread reports of firming market 93/4 percent in real terms in 1996. Busi- conditions and reduced vacancy rates, ness purchases of office and computing and real outlays for other commercial equipment once again rose much faster structures moved up for a fifth consecuthan the outlays for other types of equip- tive year. Financing appeared to be in ment. Computer purchases were pro- ample supply for commercial construcpelled by many of the same forces tion, and according to reports from the that have been at work in other recent District Reserve Banks, speculative years—most particularly, the expansion office building projects—that is, those of networks and the availability of new without pre-committed tenants—were models of computers embodying sub- becoming more common. stantially improved computing power Inventory investment was relatively at highly attractive prices. Outlays for subdued in 1996. The stock of nonfarm communications equipment also rose business inventories rose only V/i perquite rapidly in 1996. Gains for other cent over the four quarters of the types of equipment were generally more year, the smallest increase since 1992. modest. Businesses had been moving toward a Investment in nonresidential struc- reduced rate of stockpiling over much of tures also rose substantially over the 1995, and the rate of accumulation came four quarters of 1996, posting the largest almost to a halt in early 1996, when advance in several years. Business stocks of motor vehicles plummeted in spending on structures went through an conjunction with a strike at two plants extended contraction in the latter part that manufacture auto parts. Thereafter, of the 1980s and early 1990s, and until inventory developments were relatively recently the subsequent recovery has uneventful. Stocks of vehicles changed been relatively slow. That the 1996 gain little on net over the final three quarters in nonresidential investment would be of the year, and accumulation of invenso large was not evident until late in the tories by other nonfarm businesses was year, when incoming data began to trace moderate on average. Stocks at year-end out sizable increases in new construc- generally appeared to be at comfortable levels—or perhaps even a little tight— Change in Real Business Inventories relative to trends in sales. Percent, annual rate Corporate Profits and Business Finance Business profits turned in another strong • Illlll-I performance in 1996, building on the impressive gains of other recent years. 1 Economic profits earned by foreign subsidiaries of U.S. corporations fluctuated J J_ J L from quarter to quarter but remained at 1992 1994 1996 high levels, and returns from domestic NOTE. Total nonfarm sector. The data are seasonally operations rose substantially for both adjusted, derived from chained (1992) dollars, and come from the Department of Commerce. financial and nonfinancial firms. Domes- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Domestic Spending and Finance in 1996 19 tic profits of nonfinancial corporations, a range more favorable than at any time measured in proportion to the nominal in the current economic expansion. value of these firms' output, reached the On a gross basis, a pickup in bond highest levels of the current expansion. issuance by nonfinancial firms in Although many interest rates rose in 1996 was accounted for mainly by 1996, businesses continued to find credit speculative-grade offerings, likely in readily available and at favorable terms. part a reaction to the improved pric- This accommodation likely resulted in ing. In the fourth quarter, however, part from the strong financial condition investment-grade issuance was substanof firms, reflected in minimal delin- tial, responding to the decline in interest quency rates on bank loans to busi- rates that began in late summer. Comnesses and very low default rates on mercial paper declined in the final corporate bonds, including those of months of the year, primarily because of low-rated issuers. With securitization of paydowns from bond proceeds, but bank household debt instruments proceeding lending to businesses was strong, in apace and with high levels of capital, part because of robust merger activity. banks appeared to have ample room on Despite a marked increase in gross stock their balance sheets for business loans. issuance—with strong gains both for This situation encouraged the develop- initial public offerings and for seament of a highly competitive lending soned offerings—equity continued to environment in which banks further be retired on net, as merger activity eased a variety of credit terms, such as remained brisk and businesses used covenants and markups over base rates. ample cash resources to repurchase their In capital markets, interest rate spreads outstanding shares. of private debt instruments over Treasuries narrowed, particularly in the The Government Sector case of high-yield bonds. Surveys by the National Federation of Independent Real federal expenditures on consump- Business revealed a rising tendency of tion and gross investment—the part of small businesses to borrow over 1996, federal spending that is included in with credit availability reported to be in GDP—rose about Wi percent, on net, from the fourth quarter of 1995 to the fourth quarter of 1996, but the rise was Corporate Profits before Taxes Percent Change in Real Federal Expenditures on Consumption and Investment 12 Percent, Q4 to Q4 J i i i 1 I 1 I i I ] 1984 1987 1990 1993 1996 NOTE. Profits of nonfinancial corporations from domestic operations, with adjustments for inventory valu- 1992 1994 1996 ation and capital consumption, as a percentage of GDP of nonfinancial corporate sector. Last observation is NOTE. The data are derived from chained (1992) 1996:Q3. dollars and come from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 83 rd Annual Report, 1996 mostly an artifact of late-1995 real pur- expanding economy has relieved preschases having been pushed to especially sure on those outlays that tend to vary low levels by government shutdowns. inversely with the strength of activity. The underlying trend of federal con- Federal receipts increased about sumption and investment expenditures IV2 percent in fiscal 1996, the third year is probably better represented by the in which growth of receipts outpaced 23/4 percent annual rate of decline from growth of nominal GDP by a signifithe fourth quarter of 1994 to the final cant margin. Receipts from individual quarter of 1996. Reductions were appar- income taxes climbed more than 11 perent over this period both in real defense cent in the most recent fiscal year, in purchases and in real nondefense conjunction with healthy increases in purchases. households' taxable earnings from capi- Federal expenditures in the unified tal and labor. Taxes on corporate profits budget increased about 3 percent in also continued to rise rapidly, more or nominal terms in fiscal 1996 after hav- less in step with the growth of business ing increased 33A percent in fiscal 1995. earnings. The rapid growth of receipts, Slower growth was recorded across coupled with the restrained growth of many budgetary categories in fiscal expenditures, brought the unified budget 1996, and outright declines were re- deficit down to $107 billion in fiscal ported in some. Combined expenditures 1996 from almost $165 billion in fiscal on health, social insurance, and income 1995. The deficit as a share of nominal security—items that account for more GDP was 1.4 percent, the smallest in than half of all federal outlays—moved more than twenty years. up 4Vi percent, the smallest increase this Federal government debt grew decade. Defense spending was down 33/4 percent, the lowest rate in more than about 2]A percent in nominal terms, and two decades. The growth of federal debt net interest outlays rose much less rap- was held down in 1996 by legislative idly than in fiscal 1995. Measured rela- constraints on spending and by the boost tive to the size of nominal GDP, total to tax receipts from both the stronger outlays in fiscal 1996 were the smallest economy and a booming stock market. since 1979. Legislative restraint has The aggregate consumption and led to cuts in a number of discretion- investment expenditures of state and ary programs in recent years, and the local governments rose slightly more than 2 percent in real terms over 1996. Change in Real State and Local This gain was about the same as those of Expenditures on the two previous years. Outlays for ser- Consumption and Investment vices, which consist mainly of employee Percent, Q4 to Q4 compensation and account for more than two-thirds of all state and local purchases, rose roughly 1 Vi percent in real • l l l ll terms. Investment expenditures, which make up the next biggest portion of state and local purchases, rose about AVi percent, according to preliminary data. In the aggregate, the budget picture for state and local governments was rela- 1992 1994 1996 tively stable in 1996, as the surplus of NOTE. The data are derived from chained (1992) dollars and come from the Department of Commerce. nominal receipts over nominal current Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Domestic Spending and Finance in 1996 21 expenditures changed little from the positive readings of other recent years. Two years of contraction of state and local government debt ended in 1996. The declines had occurred as issues that were pre-refunded earlier in the decade, when interest rates were unusually favorable, matured or became eligible to be called. Pre-refunded debt continued to be called in 1996, albeit at a reduced pace, but this decline was just offset by gross issuance, which picked up. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

23 Depository Credit and the Monetary Aggregates The growth of credit supplied to the credit that had been securitized by banks economy by depository institutions also rose at a brisk pace in 1996, slowed in 1996, in part because of a although not so rapidly as in 1995. As a shift to greater caution in making loans result of the slowing of bank credit, the to consumers but also because of favor- share of the 1996 advance in nonfederal able conditions for selling loans in the debt that ended up on the books of securities markets. Shifts in the way that depositories fell to about 38 percent, banks financed their credit growth in down from around 44 percent in the 1996 translated into an increased rate preceding two years. of expansion of M3. Growth of M2 also Banks encountered an increased incipicked up, rising at a pace close to dence of repayment problems on loans that of nominal GDP, but Ml contracted to consumers in 1996, and charge-off as sweep arrangements continued to rates on these loans rose to around the expand. peak levels of the last recession, in 1990-91. According to Federal Reserve surveys of senior loan officers, banks Depository Credit had anticipated some deterioration in The slower expansion of depository the quality of their consumer loan portcredit in 1996 entirely reflected a slower folios, but they were surprised by its advance in bank credit. Growth at thrift extent. These surveys also showed that institutions picked up, benefiting from banks considered the rate of charge-offs strong demand for residential mortgages to be high relative to the level of delinand improved capital positions. Growth quencies and that the credit-scoring of commercial bank loans moderated, models most banks use to evaluate conas loans to businesses and, especially, sumer lending decisions have tended to consumers decelerated from elevated be too optimistic. An important reason rates of growth in 1995. Bank portfolio for the high level of charge-offs and expansion also appears to have been the apparent shortcomings of the creditdamped somewhat by a faster pace of scoring models was a 30 percent asset securitization, likely spurred by increase in personal bankruptcies. This receptive capital markets. For example, surge stemmed in part from changes in real estate loan growth at banks was the bankruptcy code that became effeca subdued 4 percent, despite a robust tive at the beginning of 1996 against housing market and a pickup in com- a backdrop of an apparently reduced mercial real estate. At the same time, stigma associated with this method of outstanding securities backed by mort- dealing with financial problems. Banks gage pools expanded nearly $200 billion responded to the deterioration in their in 1996, well above the pace of the consumer loan portfolios by tightening preceding year. Commercial banks are a standards and terms, especially on credit major source of securitized mortgages. cards. In contrast, banks eased terms The outstanding amount of consumer and conditions on home equity loans. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 83 rd Annual Report, 1996 Despite the rise in repayment prob- annual range. M2 grew 4l/z percent, up lems on consumer loans, the balance Vi percentage point from 1995 and in sheets and operating results of deposi- the upper portion of its 1 percent to tories remained strong in 1996. Bank 5 percent range. The ranges for moneprofits were at historically high levels tary growth in 1996 had been chosen to for the fourth consecutive year, a record be consistent with approximate price reflecting the maintenance of relatively stability and a sustainable rate of real wide interest rate margins, further loan economic growth, rather than as indicagrowth, and substantial fee income tors of the range of money growth rates related to sales of mutual funds as likely to prevail under expected ecowell as to securitization and other off- nomic conditions. balance-sheet activities. At year-end, The acceleration of M3 was caused almost 99 percent of commercial bank partly by a shift in the way banks assets were held at banks classified as financed their credit—specifically, subwell capitalized. Underlying thrift prof- stituting issuance of large time deposits its were also stronger. However, profits for borrowings from offices abroad. at thrift institutions and at banks with Both foreign and domestically chartered deposits insured by the Savings Associa- banks paid down net borrowing from tion Insurance Fund (SAIF) were held foreign head offices and branches in down temporarily by a special assess- 1996. For domestic banks, this pay down ment on deposits to recapitalize SAIF. may have been related to the reduction (Some bank deposits are SAIF-insured to zero of insurance assessments on because of mergers with thrift institu- deposits, beginning with the last quarter tions or acquisitions of them.) of 1995. In addition, the greater growth of M3 relative to that of M2 reflected the need to fund particularly strong loan The Monetary Aggregates growth at U.S. branches and agencies of The slowing of depository credit not- foreign banks, which do not offer the withstanding, growth of the broader retail accounts that dominate deposits monetary aggregates strengthened in inM2. 1996: M3 expanded almost 7 percent, Growth of both M2 and M3 was supup from the pace of 1995 and above the ported again in 1996 by continuing upper end of its 2 percent to 6 percent robust advances in money market Stock of M3 Stock of M2 Billions of dollars Billions of dollars Actual 3800 3700 1995 1996 1995 1996 NOTE. The range was adopted by the FOMC for the NOTE. The range was adopted by the FOMC for the period from 1995:Q4 to 1996:Q4. period from 1995:Q4 to 1996:Q4. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Depository Credit and the Monetary Aggregates 25 mutual funds (MMMFs). Because the holds, businesses, and banks. In the proyields on these funds are based on the cess, M2 velocity rose substantially and, average return earned on their assets, apparently, permanently. Since 1993, they lag changes in yields on new mar- velocity no longer appears to be shifting ket instruments; thus, the funds tend to higher, and M2 velocity and opportunity attract additional inflows when market costs are moving together about as they rates are falling. Accordingly, MMMFs did before 1990. However, the recent advanced rapidly in the early part of period of relative stability in this relathe year, when the monetary easings of tionship has been too short for the Fed- December and January pulled down eral Reserve to place increased reliance short-term rates, and also later in the on M2 as a guide to policy. year, when short-term rates were again Ml contracted 4l/z percent in 1996, as declining. However, these instruments the pace at which new arrangements expanded briskly even in the third quar- were established to sweep reservable ter, when short-term rates were rising, retail transactions deposits to nonreservsuggesting that part of the attractiveness able nontransaction accounts accelerof MMMFs is the convenience they ated. The initial amounts removed from offer those investors engaged in moving transaction accounts by sweep arrangefunds in and out of stock and bond ments established during the year mutual funds, which expanded at a amounted to $116 billion, compared record pace last year. In addition, with $45 billion in 1995. Ml continued institution-only funds seemed to have to be supported by currency growth, as considerable success in marketing cash foreign demands, which were depressed management programs that capture earlier in the year partly in anticipation excess cash of corporations and munici- of the new $100 bill, picked up in the palities. Likely reflecting the attractive- second half. Adjusted for the initial ness of money market and capital mar- amounts removed from transaction ket mutual funds, deposits in M2 accounts by sweep arrangements, Ml actually showed little growth in 1996. grew 5!A percent in 1996. The sweeping Retail deposit growth also may have of transaction deposits contributed to been damped by a lack of aggressive pricing of deposits on the part of banks, M2 Velocity and M2 Opportunity Cost as demand for their loans slipped and Ratio scale Percentage points, ratio scale they apparently found it cheaper to finance a larger share of loan origina- - 6 tions through securitizations and large - 4 time deposits. The behavior of M2 relative to income, as summarized by its income velocity, again bore a fairly systematic relationship to M2's opportunity cost— 1.7 the return on M2 assets relative to yields available on alternative instruments. The t 1 t 1 I t t It I I A A it I ft relationship of velocity to opportunity 1980 1984 1988 1992 1996 costs was reasonably stable historically, NOTE. The velocity of M2 is the ratio of nominal gross but it broke down in the early 1990s, domestic product to the stock of M2. The opportunity a period characterized by extensive cost of M2 is a two-quarter moving average of the threemonth Treasury bill rate less the weighted average return restructuring of balance sheets by house- on assets included in M2. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 83 rd Annual Report, 1996 Annual Rate of Change in Reserves, Money Stock, and Debt Aggregates Percent 1996 Item 1993 1994 1995 Year Ql Q2 Q3 Q4 Depository institution reserves' Total 12.2 -1.2 -4.9 -11.4 -7.9 -6.4 -16.4 -16.9 Nonborrowed plus extended credit 12.2 -1.5 -4.9 -11.4 -6.5 -7.6 -17.6 -16.0 Required 12.5 -1.1 -5.2 -11.7 -8.5 -5.7 -16.6 -18.3 Monetary base2 10.4 8.4 4.1 3.8 1.5 3.0 5.4 5.1 Concepts of money3 Ml 10.6 2.5 -1.6 -4.6 -3.5 -1.4 -6.5 -7.3 Currency 10.2 10.2 5.4 5.7 2.7 4.4 7.6 7.7 Demand deposits 13.5 .7 1.4 2.7 8.6 8.7 -.9 -5.5 Other checkable deposits 8.6 -10.5 -23.1 -23.1 -19.5 -29.8 -29.4 M2 1.3 .6 4.0 4.6 5.3 4.5 3.4 5.0 Non-Mi components -2.6 -.3 6.7 8.8 9.3 7.0 7.7 10.2 Savings (including MMDAs) 2.9 -4.3 -3.2 11.7 13.9 10.4 8.4 12.1 Small denomination time deposits ... -10.6 2.4 15.4 1.3 1.2 -1.8 2.2 3.8 Retail money market mutual funds .. 7.6 18.7 17.1 14.6 16.3 16.3 17.2 M3 1.1 1.7 6.2 6.9 6.6 6.4 5.4 8.4 Non-M2 components * 6.6 15.3 15.5 11.7 13.9 12.7 20.4 Large-denomination time deposits ... -6.5 7.3 16.1 17.6 9.9 14.7 16.4 25.5 Institution-only money market mutual funds -2.4 -4.9 24.0 19.8 21:4 12.1 20.6 19.8 Repurchase agreements 23.4 13.4 5.7 4.1 2.8 16.2 -4.7 2.1 Eurodollars -1.6 23.4 12.2 17.4 11.8 11.0 8.7 34.7 Domestic nonfinancial sector debt 5.2 5.2 5.5 5.4 5.0 5.8 5.3 5.0 Federal 8.4 5.7 4.4 3.8 3.0 4.7 3.8 3.2 Nonfederal 4.0 5.1 5.9 6.0 5.7 6.2 5.8 5.6 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 (IRA^) 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 *In absolute value, greater than zero and less than depository institutions, credit union share draft accounts, 0.05 percent. and demand deposits at thrift institutions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Depository Credit and the Monetary Aggregates 27 a contraction of almost 12 percent in decline in reserve balances of about required reserves—twice the rate of $12 billion attributable to sweeps must decline of the previous year. The mone- be matched by an accompanying lower tary base decelerated only a little, how- level of Treasury securities on the books ever, as growth of its major component, of the Reserve Banks. • currency, was little changed between 1995 and 1996. The Federal Reserve continued to monitor sweep activity closely, as persistent declines in the levels of required reserves have the potential to impinge on the Federal Reserve's ability to exert close day-to-day control over the federal funds rate—the overnight rate on reserves traded among depository institutions. Depositories hold balances at Reserve Banks to meet daily clearing needs in addition to satisfying statutory reserve requirements. At low enough levels, reserve balances may provide inadequate protection against adverse clearings, and banks' attempts to avoid overdrafts could generate highly variable daily demands for balances at the Federal Reserve and a volatile federal funds rate. Through 1996, however, no serious problems had emerged, in part because the substantial drop in depositories' required reserve balances attributable to sweeps was partially offset by increases in their holdings of required clearing balances—an arrangement whereby depositories pay for services provided by the Federal Reserve through the holding of specified amounts in reserve account balances. In addition, advances in banks' techniques of monitoring balances at the Federal Reserve and gauging their clearing needs have enabled them to operate efficiently and smoothly at relatively low levels of balances. Sweeps have had an effect on Federal Reserve earnings and the amounts it remits to the Treasury. The Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

29 International Developments Economic activity picked up in most countries generally continued to enjoy major foreign industrial countries in strong growth, although not as strong 1996, but the pace of expansion, while as in 1995. While output continued to brisk at times, was generally uneven decline in Russia and Ukraine, the pace over the course of the year. Output of contraction slowed further; most of remained significantly below estimated the other republics of the former Soviet potential in most countries, and unem- Union showed signs of growth. The ployment remained high or even rose countries of Central and Eastern Europe in much of Europe and in Canada. recorded moderate growth in line with These conditions helped keep inflation the recent average for these economies. in check; by the end of the year, the In Africa, growth for the region as a average inflation rate in the major whole reached 5 percent, significantly foreign industrial countries was below higher than in recent years. Economic 2 percent. activity picked up a bit in the Middle Growth in most of the major econo- East after several years of relatively mies of Latin America rebounded in slow growth there. 1996 as the drag associated with the The U.S. trade deficit in goods and collapse of the Mexican peso in late services widened to $114 billion in 1996 1994 and early 1995 dissipated. Asian from $105 billion in 1995. Recent movements in the exchange value of the dollar had partly offsetting effects on net Exchange Value of the Dollar trade flows during the year. The appreciand Interest Rate Differential ation of the dollar that began in 1995 Percentage points Ratio scale, December 1973 = 100 and continued during 1996 began to Price adjusted boost imports and hold down exports of exchange value of the dollar services as the year progressed. Meanwhile, lagged effects of the 1994-95 Interest rate differential U.S. minus foreign depreciation of the dollar continued to give a boost to merchandise exports. In addition, with U.S. income growth in 1996 close to the average for the country's major trading partners, U.S. imports increased more than exports, as 1981 1984 1987 1990 1993 1996 is typical when increases in income NOTE. The exchange value of the U.S. dollar is its among these countries are similar. weighted average exchange value in terms of the curren- The current account deficit expanded cies of the other G-10 countries using 1972-76 total trade to $165 billion from its 1995 level of weights. Price adjustments are made using relative consumer prices. $148 billion. As in 1995, a substantial The interest rate differential is the rate of long-term portion of the balancing net capital U.S. government bonds minus the weighted-average rate on comparable foreign securities, both adjusted for inflows represented accumulations of expected inflation; expected inflation is estimated by a foreign official assets in the United thirty-six month moving average of consumer price infla- States. Recorded holdings of assets in tion using staff forecasts of inflation where needed. The data are monthly. the United States by private foreigners Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 83 rd Annual Report, 1996 also increased rapidly in 1996, and in the year, activity slowed in France recorded U.S. private holdings of for- and declined in Italy. In Switzerland, eign assets likewise rose substantially. economic activity again contracted over The analysis of capital flows in 1996 is the course of the year. Growth remained complicated, however, by the statistical sluggish in Canada over the first half discrepancy's wide swing from positive of the year but increased substantially to negative. thereafter, partly in response to robust The foreign exchange value of the U.S. growth. In Japan, an exceptionally dollar rose about 4 percent on balance in strong first quarter was followed by 1996 in terms of a trade-weighted aver- two quarters of stagnation, but in the age of the other G-10 currencies.1 The fourth quarter, activity accelerated dollar's appreciation was consistent with again. Stimulated by the easy stance of the divergence in trends in economic monetary and fiscal policies in recent activity in 1996 between the United years, private investment strengthened, States and most other major industrial countries. Relatively strong growth here combined with moderate and uneven Changes in GDP, Demand, and Prices growth abroad was also reflected in a Percent, from previous year widening differential between long-term Gross domestic product interest rates in the United States and U.S. foreign countries. U.S. rates rose about Vi percentage point, while a weighted average of ten-year rates in foreign G-10 countries declined about 3A percentage point on balance. Generally lower short- 1 i 1 term interest rates plus fiscal consoli- Total domestic demand dation, especially in Canada and some parts of Europe, also contributed to the fall in foreign long-term rates. Foreign Economies i In Germany, domestic demand remained Consumer price index fairly subdued during 1996, but net exports made a strong contribution to growth. Economic activity turned down early in the year because frigid winter weather restricted construction activity; the pace of activity rebounded temporarily in the spring but then slowed 1992 1994 1996 sharply at the end of the year. In the NOTE. Data for the foreign G-10 countries are from United Kingdom, France, and Italy, national sources. The data are weighted by the countries' growth increased after midyear; but late 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 1. 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 31 contributing to a rise in domestic de- General government budget deficits mand over the year. narrowed further in Canada and the Weak growth in continental Europe United Kingdom, partly as a result of contributed to increased slack in the rising economic activity but also belabor market. The unemployment rate cause of fiscal policy changes aimed at rose to post-World War II records reining in structural budget deficits. in Germany, France, and Switzerland; France also experienced some improveunemployment also remained high in ment in its deficit. Despite the Maas- Italy and Belgium. By contrast, the rate tricht objective, budget deficits widened of unemployment continued to decline in Germany in 1996 to nearly 4 percent steadily in the United Kingdom, where of GDP and in Italy to 63A percent, expansion has been under way for mainly as a result of slow growth.2 In several years. In Canada, unemployment Japan, expansionary fiscal policy continrose slightly after falling a bit in 1995; ued to widen the deficit significantly. labor market conditions appeared to be Long-term interest rates declined in improving near the end of the year. all foreign G-10 countries except the Japan's unemployment rate rose to a United Kingdom. The drop was consispostwar high of 3.5 percent in the sec- tent with generally subdued economic ond quarter and fell only slightly over growth and related downward pressure the rest of the year. on inflation rates; fiscal consolidation The deterioration of labor market con- also contributed where it occurred. ditions in several of the major foreign Short-term interest rates fell as moneindustrial countries reflected sustained tary policy eased in many countries in or worsened shortfalls of actual output response to slowing economic activity from estimated potential output. With and declining inflation. In Japan, the growth at or slightly below its potential rate on three-month certificates of derate in Germany, Canada, and France, posit remained at Vi percent to maintain existing gaps were not narrowed; the support for economic recovery and to discrepancy widened in Italy, where facilitate restructuring in the Japanese growth was significantly below its financial sector. potential rate. Persistent output gaps The current account surplus in Japan continued to exert downward pressure fell to a six-year low, in part because of on inflation rates. On average, consumer lagged effects on exports from the yen's price inflation in the foreign G-10 coun- appreciation in 1995, but also because tries continued to decline gradually, higher oil prices and the depreciation reaching about VA percent by the last of the yen in 1996 raised the cost of quarter of 1996. In Italy, the rate of imports denominated in dollars. Italy's consumer price inflation at the end of current account surplus widened; weak the year, 2J/2 percent, was less than half domestic demand curbed imports, while the year-earlier rate. An exception was exports received a boost from the the United Kingdom, where growth restraints on labor costs that have exceeded the rate estimated to be sus- improved Italy's international comtainable, and the underlying inflation rate rose slightly above 3 percent. In Japan, consumer prices were unchanged 2. According to the Maastricht Treaty, only on balance over the year; the yen's those countries that had a general government deficit of 3 percent of GDP or less in 1997 may depreciation raised import prices, offsetparticipate in the European Monetary Union upon ting ongoing domestic price deflation. its scheduled commencement at the start of 1999. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

32 83rd Annual Report, 1996 petitiveness over the past few years. U.S. International Transactions Canada's deficit was almost eliminated, Real imports of goods and services in part because of strong exports to a in the United States rose rapidly over healthy U.S. economy. The U.K. current the four quarters of 1996, increasing account deficit also declined signifislightly more than 8 percent after cantly, mostly on account of rising expanding about 4 percent in 1995. The income from British investment abroad. pickup in U.S. economic activity Mexico's economy bounced back boosted the demand for imports, and from the sharp decline in output associfurther impetus came from the dollar's ated with the crisis that followed the appreciation, which put downward pres- December 1994 devaluation of the peso. sure on prices of imported goods other By the end of the year, economic activthan oil in 1996. Most major categories ity had regained the pace achieved of merchandise trade showed sizable before the crisis. With the currency increases in the volume of imports; oil stable and inflation much lower than in and semiconductors were the notable 1995—albeit at just under 30 percent— exceptions. While rising faster than in interest rates fell, helping investment and other elements of domestic demand take over from net exports as the driving U.S. International Trade force in the recovery. Mexico's trade Billions of dollars balance remained in moderate surplus, declining somewhat in the second half Balances of the year as imports accelerated and the expansion of non-oil exports slowed. The Argentine and Brazilian economies, which had been adversely affected in 1995 by spillovers from the Mexican Current account crisis, grew at fairly rapid rates in 1996. J i I I 1 L L Monetary tightening and a decline in Ratio scale, billions of chained (1992) dollars copper prices slowed growth in Chile Trade in goods and services from the high rate recorded in 1995. 850 Inflation in Venezuela exceeded 100 percent and, as noted, inflation remained high in Mexico; elsewhere in 650 Latin America, it ranged from zero to 10 percent. i _„...! L Economies in Asia slowed a bit on Ralio scale. 1992 = 100 average in 1996 after booming in 1995. GDP price index (chain-type) Earlier monetary tightening in some 105 countries had its intended effect of Total merchandise moderating strong growth. In addition, 100 exports were dampened in many econo- Non-oil merchandise imports mies by strong appreciation in their 95 exchange rates in terms of the yen and by a generally weak global electronics i } 1 [ i 1 i market. Inflation remained low, ranging 1990 1992 1994 1996 from 2 percent in Singapore to 7 percent NOTE. The data are from the Department of Commerce; they are quarterly and seasonally adjusted. Data in China. for trade are at annual rates. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 33 1995, imports of services grew less in ter of 1996 as they were a year earlier. 1996 than imports of merchandise. Receipts from services exports grew Real exports of U.S. goods and ser- more slowly in 1996. Much of the slowvices expanded IV2 percent over the down was in fees and royalties and in year, about the same pace as in 1995. receipts from travelers to the United Merchandise exports were stimulated by States, spending that was dampened in the pickup in growth in some important part by the appreciation of the dollar. U.S. trading partners and by lingering Foreign official assets in the United effects of the dollar's depreciation in States increased $122 billion in 1996. 1995. Exports to Mexico accounted for A number of countries gained dollar most of the expansion, but exports to reserves as they attempted to counter the Canada, South America, and Asia also domestic effects of large private capital increased. Exports to Western Europe inflows. In addition, exchange market were about the same in the fourth quar- intervention early in the year increased U.S. International Transactions Billions of dollars, seasonally adjusted Quarter Year Transaction 1995 1996 1995 1996P Q4 Ql Q2 Q3 Q4 Goods and services, net -105 -114 -19 -25 -29 -34 -26 Exports 787 836 204 205 209 206 216 Merchandise 576 612 149 150 153 150 158 Services 211 224 54 55 56 56 57 Imports 892 950 223 230 238 240 242 Merchandise 749 799 187 193 200 202 204 Services 142 150 36 37 37 38 38 Investment income, net -8 -8 -2 * -2 -4 -2 Direct investment, net 57 64 15 17 15 15 18 Portfolio investment, net -65 -73 -17 -16 -17 -19 -21 Unilateral transfers, private and government, net -35 -42 -9 -11 -9 -13 Current account balance -148 -165 -30 -35 -41 -48 -41 Private capital flows, net 17 89 -10 -21 37 38 36 Bank-related capital, net (outflows, -) -44 -90 25 -34 2 -34 -23 U.S. net purchases (-) of foreign securities -99 -105 -33 -34 -20 -23 -27 Foreign net purchases (+) of U.S. securities 195 285 29 48 60 78 99 Treasury securities 99 154 2 12 31 43 67 Corporate and other non-Treasury bonds 82 120 17 33 23 33 31 Corporate stocks 13 12 10 3 6 2 1 Direct investment flows, net (outflows, -) -35 -4 -29 5 -9 12 -13 U.S. direct investment abroad 96 88 44 23 26 9 30 Foreign direct investment in United States 60 84 15 29 17 21 17 Other corporate capital flows, net 3 -3 -6 4 5 n.a. Foreign official assets in United States (increase, +) 110 122 11 52 14 24 33 U.S. official reserve assets, net (increase, -) -10 -1 U.S. government foreign credits and other claims, net -1 Total discrepancy 32 -53 29 5 —9 -22 -27 Seasonal adjustment discrepancy 0 0 1 7 * -8 2 Statistical discrepancy 32 -53 28 _2 -9 -13 -29 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

34 83rd Annual Report, 1996 the holdings of certain industrial coun- ancy in 1996 contrasts sharply with the tries, and higher oil prices boosted the sizable positive figure of 1995. A negareserves of oil producers. tive discrepancy indicates net omissions Recorded foreign private assets in the or understatements of capital outflows United States expanded even more rap- and current account payments. idly than the record pace of 1995. Private entities abroad made net purchases Foreign Exchange Developments of U.S. Treasury securities amounting to $154 billion, well in excess of purchases The dollar appreciated about 7 percent in any other year. Net purchases of U.S. in terms of the mark and the other curgovernment agency and corporate bonds rencies that were in the European also surpassed previous sums, reaching exchange rate mechanism (ERM) $120 billion, much of which represented throughout the year.3 The rebound was U.S. borrowing in the Eurobond mar- consistent with growth in the United kets. In contrast, foreign net acquisitions States exceeding that in continental of U.S. stocks were relatively restrained. Europe and with the associated widen- U.S. net purchases of foreign securi- ing of the differential between long-term ties were also very strong in 1996, but interest rates in the two regions. Downstocks were favored over bonds. Net ward pressure on the mark may also purchases of stocks in Japan were par- have been related to uncertainties stemticularly large in the first half of the ming from the scheduled introduction in year. Equities of firms in Central and 1999 of a single currency among the South America and in Asia also attracted initial members of the European Mone- U.S. investors in 1996, but net purchases tary Union. Nonetheless, the prospects in both these regions were still below of a successful launch seemed to the peak reached in 1993. Net capital outflows occurred through banks and security dealers in 1996. With 3. The ERM linked the currencies of Austria, credit issued by banks in the United Belgium, Denmark, France, Germany, Ireland, the States slowing, lenders relied less on Netherlands, Portugal, and Spain throughout 1996. foreign sources of funds. Repurchase In October, the Finnish markka was added, and in agreements with securities dealers in the November the Italian lira rejoined the ERM after an absence of about four years. United States were used by foreign investors to finance part of their very large net purchases of U.S. Treasury Exchange Value of the Dollar securities, contributing to the outflow. versus Selected Currencies Foreign direct investment in the December 1995 = 100 United States, swelled by mergers and acquisitions, reached $84 billion in Japanese yen 1996, surpassing the previous record of 110 $68 billion, reached in 1989. U.S. direct investment abroad was also strong German mark although somewhat lower than in 1995. 100 Investments in formerly state-owned Canadian dollar enterprises in some foreign countries, along with mergers and acquisitions, t \ i i t t t t t t ( 1996 contributed to the large outflows. NOTE. Foreign currency units per dollar. The data are The large negative statistical discrep- monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 35 improve in the eyes of market partici- Foreign Exchange Operations pants, judging by the narrowing of long- U.S. authorities did not intervene in term interest rate differentials between foreign exchange markets in 1996. Germany and other prospective EMU Reported net purchases of dollars by members. major foreign central banks were By contrast, the dollar declined in $46 billion in 1996, about $20 billion value versus the pound and the Italian less than in the year before. In January lira. Solid growth in the United Kingthe Bank of Mexico made a final paydom led to a tightening of monetary ment of $650 million on its 1995 Fedpolicy in late October, which in turn eral Reserve swap drawing. boosted sterling 9 percent. The lira At the end of the year, the System strengthened 4 percent. Inflation in held $19,264 million of marks and yen Italy fell to its lowest rate in more valued at current exchange rates. With than twenty-five years, and prospects the dollar's appreciation versus both emerged for a substantial improvement currencies in 1996, the cumulative valuin the country's fiscal deficit. ation gains on System foreign currency With weakness in economic activity holdings declined $1,668 million. In the persisting in Japan, the yen depreciated absence of transactions in foreign cur- 12 percent versus the dollar. Switzerrency, the System realized no gains or land's recession likewise depressed the losses. • Swiss franc, which fell 16 percent in terms of the dollar. The Canadian dollar moved only slightly compared to the U.S. currency over the year. Adjusted for changes in consumer prices, the dollar declined about 1 percent on average measured against the currencies of eight newly industrializing countries in Latin America and Asia that are major U.S. trading partners.4 The dollar appreciated 2Vi percent in terms of the Mexican peso on a nominal basis, but adjusted for the inflation differential, the dollar depreciated 17 percent. This move was largely offset by the dollar's appreciation of 8 percent versus the Korean won in inflation-adjusted (and nominal) terms. 4. The countries are Chile, Hong Kong, Korea, Malaysia, Mexico, the Philippines, Singapore, and Taiwan. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

37 Monetary Policy Reports to the Congress Given below are reports submitted to to continued economic expansion, the the Congress on February 20 and July Federal Open Market Committee raised 18, 1996, pursuant to the Full Employ- the federal funds rate an additional ment and Balanced Growth Act of 1978. xh percentage point, to 6 percent. Inflation did, in fact, pick up in the first part of 1995, but data released during the Report on February 20, 1996 spring indicated that price pressures were receding, and the Committee reduced the federal funds rate XA percent- Monetary Policy and the age point at its July meeting. Through Economic Outlook the remainder of the year, inflation was The economy performed well in 1995. even more favorable than had been Moderate economic growth kept the un- anticipated in July, and inflation expecemployment rate at a relatively low tations decreased. In addition, an apparlevel, and inflation, as measured by the ent slowing of economic activity late in change in the consumer price index, was the year further reduced the potential for in a range of 3 percent or less for the inflationary pressures going forward. To fifth straight year, the first such occur- forestall an undue increase in real interrence in thirty years. This desirable est rates as inflation slowed, and to combination of low inflation and low guard against the possibility of unnecesunemployment provided further sub- sary slack developing in the economy, stantiation of a fundamental point that the Committee eased reserve conditions the Board has made in past reports— in December and again at the end of namely, that there is no trade-off in the January 1996, reducing the federal funds long run between the monetary policy rate a total of Vi percentage point. goals of maximum employment and Monetary policy easings since midstable prices set in the Federal Reserve 1995 contributed to declines in short- Act. Indeed, it is by fostering price term market interest rates, which by stability that a central bank can make mid-February were down 1 to 2 percentits greatest contribution to the efficient age points from the highs reached early operation and overall ability of the last year. Intermediate- and long-term nation's economy to create jobs and rates also moved sharply lower last year advance living standards over time. as the risks of rising inflation receded As economic prospects changed in and as prospects for substantial progress 1995 and early 1996, the Federal in reducing the federal budget deficit Reserve found that promoting full em- seemed to improve. As of mid-February, ployment and price stability required these rates were VA to 23A percentage several adjustments in its policy set- points below their levels at the begintings. Last February, the economy still ning of 1995. Helped by lower interest seemed to be pressing against its poten- rates and favorable earnings, major tial, and prices were tending to acceler- equity price indexes rose 30 percent to ate. To reduce the risk that inflation 40 percent last year and have moved might mount, with the attendant threat still higher in early 1996. These finan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 83rd Annual Report, 1996 rial developments reduced the cost to nonfinancial sectors grew slightly more businesses of financing investment and than 5 percent last year, just above the to households of buying homes and con- midpoint of the Committee's 3 percent sumer durables; households were also to 7 percent monitoring range. Rapid aided by substantial additions to finan- growth of business spending on invencial wealth from rising bond and equity tories and fixed capital early in the year prices. boosted the credit demands of firms, The foreign exchange value of the despite strong corporate profits. Borrow- U.S. dollar, measured in terms of the ing was also lifted by the financing of currencies of the other Group of Ten heavy net retirements of equity shares in (G-10) countries, fell about 5 percent, connection with mergers and share on net, during 1995. The dollar appreci- repurchase programs. Growth of houseated substantially from the summer on hold debt slowed a bit but remained and has advanced further on balance in brisk; consumer credit continued to 1996 but not enough to offset a sharp grow quite rapidly. Federal debt growth decline that took place in the first four was relatively modest for a second year, months of 1995. Interest rates fell in influenced by a lower deficit and conmost other foreign industrial countries, straints on normal seasonal borrowing at which also were experiencing slower year-end owing to the federal debt ceileconomic growth, but by less than the ing. Outstanding state and local governdecline in rates in the United States. ment debt ran off more rapidly than in Early in 1995, the dollar also was pulled 1994. down by the reactions to the crisis in Commercial banks and thrift institu- Mexico, but the negative influence on tions again financed a large portion of the dollar from this source appeared to the borrowing last year; their share of lessen as Mexican financial markets total outstanding debt of nonfederal secstabilized over the balance of the year. tors edged up in 1994 and 1995 after Inflation rates in major industrial coun- having declined for more than fifteen tries held fairly steady in 1995 at levels years. The growth in depository credit somewhat lower than those prevailing was funded primarily with deposits, in this country; thus, depreciation of boosting the expansion of the broad the dollar in real terms against other monetary aggregates. M3 grew 6 per- G-10 currencies was less than the depre- cent, at the upper end of its 2 percent to ciation in nominal terms. Against the 6 percent annual range established by currencies of a broader group of U.S. the Committee at midyear. Depositories trading partners, the dollar's real depre- relied heavily on large-denomination ciation in 1995 was even smaller. time deposits for funding, but retail Borrowing and spending in the United deposits also showed gains as declining States was facilitated not only by lower market interest rates made these deposinterest rates but also by favorable sup- its more attractive to retail customers. ply conditions in credit markets. Spreads M2 advanced 4lA percent, putting it in between interest rates on securities 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 unchanged after having and qualifying standards on loans to increased during the previous three businesses and households through most years. Nonetheless, growth of the aggreof the year. Total debt of domestic gate was erratic through the year, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 39 the stability of its relationship to nomi- industries in which efforts are being nal spending remains in doubt. Ml made to bring stocks into better aligndeclined last year for the first time since ment with sales. Inventory accumulation the beginning of the official series in apparently slowed in the fourth quarter, 1959. An increasing number of banks and with financial conditions remaining introduced retail sweep accounts, which broadly conducive to growth of private shift money from interest-bearing final sales, inventory problems of a checkable accounts to savings accounts degree that might prompt a sustained to reduce banks' reserve requirements. period of widespread production adjust- Without these shifts, Ml would have ments do not seem likely. In the houserisen in 1995, although slowly. hold sector, the accumulation of financial wealth brought on by the rise in the stock market has provided the where- Economic Projections for 1996 withal for increases in consumption The relatively small amount of informa- greater than would otherwise have been tion that is available for 1996 indicates expected—countering the potential that the economy has started off slowly negative influences of more burdensome early this year, but fundamental condi- levels of consumer debt. At the same tions appear to be more encouraging time, reductions in mortgage interest than recent data might seem to suggest. rates have put the cost of financing a Bad weather in a number of regions and house within reach of a greater number the partial shutdown of the federal of families and made it possible for a government have been disruptive to the significant number of households to ease economy this winter. These influences their debt-service burdens by refinancseem likely to leave only temporary ing their homes at lower rates. In the imprints on spending and production, business sector, reductions in the cost of creating volatility in incoming data over financing investment in new capital are the near term while having little effect providing some offset to the slowing on underlying trends. tendencies that normally accompany a The economy has also been slowed cyclical moderation in the growth of by production adjustments in some aggregate output. In addition, business Economic Projections for 1996 Percent Federal Reserve governors and Reserve Bank presidents Indicator Administration Central Range tendency Change, fourth quarter to fourth quarter1 Nominal GDP 4-5 4'/4-43/4 5.1 Real GDP2 l'/2-2'/2 2-21/4 2.2 Consumer price index3 2'/2-3 23/4-3 3.1 Average level, fourth quarter Unemployment rate 4 5'/2-6 5'/2-53/4 5.7 1. Change from average for fourth quarter of preced- 3. All urban consumers. ing year to average for fourth quarter of 1996. 4. Civilian labor force. Figure for the Administration 2. Chain-weighted. is an annual average. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 83 rd Annual Report, 1996 investment in high-tech equipment The central tendency of the Goverlikely will continue to be boosted not nors' and Reserve Bank presidents' only by the ready availability of finance forecasts of the rise in the consumer but also by technological upgrades and price index over the four quarters of ongoing steep declines in the effective 1996 is a range of 23A percent to 3 perprice of real computing power. cent, a shade to the high side of the In the U.S. external sector, growth of actual outcome of 1995. At this early exports strengthened after some slug- point in 1996, with grain stocks excepgishness early in 1995. Expansion of tionally tight, there is some risk that income abroad seems likely to pick up food price increases at retail could be this year, although the prospects still are larger than those of recent years, espesubject to some downside risk. Imports, cially if crop production should remain meanwhile, have slowed from the very subpar again this year; and, even though rapid pace seen earlier in the expansion. recent upward pressures on energy On net, the underlying trends in exports prices should diminish with the return of and imports of goods and services normal weather, another year of declinappear to be essentially canceling out ing prices cannot be taken as a given. in terms of their combined contribution Nonetheless, the experience with inflato growth of U.S. real gross domestic tion at high levels of resource utilization product. was favorable in 1995, and with busi- Against the backdrop of these devel- nesses still tightly focused on cost conopments, members of the Board of trol and efficiency gain, broad tenden- Governors and the Reserve Bank Pres- cies toward increased rates of price idents, all of whom participate in the increase are not anticipated. The Admindeliberations of the Federal Open Mar- istration forecast of inflation is higher ket Committee, anticipate that the U.S. than the forecasts of the Federal Reserve economy will grow moderately, with officials, but the difference is not little change in underlying inflation significant given the uncertainties of trends. The central tendency of the forecasting. participants' forecasts of real GDP Price increases like those being foregrowth ranges from 2 percent to cast for the coming year would leave 2lA percent, measured as the cumu- inflation no higher than it was in the first lative change in output from the final year or so of the current economic quarter of 1995 to the final quarter expansion, with the rate of increase of 1996. The rise in activity is expected holding appreciably below the average to be accompanied by further expan- rate seen during the expansion of the sion of job opportunities and little 1980s. Although the Federal Reserve's change, on net, in the civilian unemploy- long-run goal of restoring price stability ment rate over the four quarters of 1996. has not yet been achieved, the capping The central tendency of the unemploy- of inflation and its diminution over ment rate forecasts for the fourth quarter recent business cycles is a clear indicaof 1996 is a range of 5Vi percent to tion of the substantial progress that has 53/4 percent, compared with an average been made to date. of 5.6 percent in the final quarter of 1995. The Committee's forecasts of Money and Debt Ranges for 1996 economic growth and unemployment are quite similar to those of the The Committee's intention to make fur- Administration. ther progress over time toward price sta- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 41 bility formed the basis for the selection of the relationships between the aggreof the growth ranges for the monetary gates and nominal GDP that have yet to aggregates in 1996. In reaffirming the be resolved. ranges that were adopted on a provi- The Committee also reaffirmed the sional basis in July, the Committee 3 percent to 7 percent growth range for noted that it viewed them as bench- debt. Although there are indications that marks for what would be expected lenders may no longer be easing terms under conditions of reasonable price sta- and conditions for granting credit to bility and historical velocity behavior. businesses and households, the Commit- The Committee set the range for M2 at tee anticipated that credit supplies would 1 percent to 5 percent and the range for remain ample and that debt would grow M3 at 2 percent to 6 percent. at about the same pace as nominal GDP. Given its expectations for inflation in Such increases would be consistent with 1996, the Committee anticipates that containing inflation and promoting susnominal GDP will grow somewhat tainable growth. faster this year than would be the case if the economy already were at price The Performance of the Economy stability. If velocities of the aggregates were to exhibit roughly normal behavior Measured in terms of the chain-type this year and nominal income were to indexes that are now being emphasized expand as anticipated by the Committee, by the Bureau of Economic Analysis, M2 and M3 might grow near the upper growth of real GDP averaged slightly ends of their ranges. In assessing the less than l!/2 percent at an annual rate possible outcomes, the Committee noted over the first three quarters of 1995 after that considerable uncertainty remains a gain of 3!/2 percent in 1994. The rise about the usefulness of the monetary in aggregate output this past year was aggregates in guiding the pursuit of its accompanied by an increase in payroll macroeconomic objectives. Although employment of P/4 million, and the the monetary aggregates have been unemployment rate, after having fallen behaving more in line with historical sharply in 1994, held fairly steady over patterns than was the case earlier in the the course of 1995, keeping to a range decade, the effects of financial inno- of about 51/2 percent to 53A percent. vation and deregulation over the years Consumer prices, as measured by the have raised questions about the stability CPI for all items, rose 23A percent over the four quarters of 1995, an increase that was virtually the same as those of Ranges for Growth of Monetary the two previous years. and Debt Aggregates Growth of output during the past year Percent was slowed in part by the actions of businesses to reduce the pace of inven- Aggregate 1994 1995 1996 tory accumulation after a burst of stock- M2 1-5 1-5 1-5 piling in 1994. Final sales—a measure M3 2-6 ' 2-6 Debt2 4-8 3-7 3-7 of current output that does not end up in inventories—rose at an average rate of NOTE. Change from average for fourth quarter of pre- 2 percent over the first three quarters of ceding year to average for fourth quarter of year indicated. 1995 after an increase of 3 percent over 1. Revised at July 1995 FOMC meeting. the four quarters of 1994. The slowing 2. Monitoring range for debt of domestic nonfinancial of final sales was largely a reflection of sectors. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 83 rd Annual Report, 1996 a downshifting in growth of the real sions of one sort or another to buyers outlays of households and businesses, probably gave some lift to sales in 1995. from elevated rates of increase in 1994 However, "pent-up" demand, which to rates that were more sustainable. Real had helped to boost sales earlier in the government outlays for consumption expansion, probably was no longer an and investment edged down slightly, on important factor. Recent sales data do net, during the first three quarters of not seem to point to any big shifts in 1995. Increases in real exports and real demand for vehicles around the turn of imports of goods and services were the year: The average rate of sales of smaller than those of 1994; their com- cars and light trucks in December and bined contribution to GDP growth in the January was a touch above the average first three quarters was slightly negative. for 1995 as a whole. Real outlays for durable goods other than motor vehicles continued to rise at The Household Sector a brisk pace in 1995 but not so rapidly Real personal consumption expenditures as in other recent years. Spending for rose at an annual rate of about 2lA per- furniture and household equipment hit a cent over the first three quarters of 1995 temporary lull in the first part of 1995 after having risen slightly more than but picked up again over the next two 3 percent over the four quarters of 1994. quarters, lifted in part by a rebound Available data suggest that growth of in construction of new houses. Fourthreal outlays slowed further in the fourth quarter data on retail sales seem to quarter. The reduced rate of rise in con- point to a further sizable increase in sumption spending this past year came outlays for household durables; accordagainst the backdrop of moderate gains ing to most anecdotal accounts, spendin employment and income. The finan- ing for home computers and other cial wealth of households surged, but electronic gear, which has been surgimpetus to spending from this source ing in recent years, continued to move evidently was countered by other influ- up rapidly through the latter part of ences, such as increases in debt bur- 1995. dens among some households and an Consumer expenditures for nonduapparent rise, according to survey rables increased at an annual rate of data, in consumers' concerns about job about 1V2 percent, in real terms, over the security. first three quarters of 1995, a little less Real consumer expenditures for dura- than the average of the previous ten ble goods increased at an annual rate of years and considerably less than in 2lA percent over the first three quarters 1994. The growth of real expenditures of 1995, a slower rate of rise than in on apparel slowed sharply after three other recent years. Consumer expendi- years of sizable advances. In the fourth tures for motor vehicles declined quarter, real outlays for nondurables slightly, on net, over the first three quar- appear to have been lackluster. ters after having moved up nearly Real expenditures for services— 20 percent over the three previous years; which account for more than half of in the fourth quarter, unit sales of cars total consumer outlays—increased at an and light trucks, a key indicator of real annual rate of about 23A percent over the outlays for vehicles, were down slightly first three quarters of 1995, moderately from their third-quarter pace. Incentive faster than in either 1993 or 1994. After programs that provided price conces- having declined in 1994, outlays for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 43 energy services increased sharply over share prices and the rally in the bond the first three quarters of 1995: The market provided a substantial boost to unusually mild weather of late 1994 the wealth of households holding large gave way, first, to more normal winter amounts of those assets. However, conditions in early 1995 and, later on, to households holding few such assets benehot summer weather that lifted fuel fited little from the rally in securities requirements for cooling. Spending prices, and some of these households gains for other categories of services began to experience greater financial proceeded at an annual rate of about pressure in 1995. Debts taken on earlier 214 percent over the first three quarters proved to be difficult to repay in some of 1995, about the same rate of rise as in instances, and a rising number of housethe two previous years. holds saw their loans fall into delin- Real disposable personal income rose quency. Overall, however, the incidence at an average annual rate of about of financial stress among households 2Vi percent over the first three quarters appears to have been limited, as susof 1995, a gain that was about in line tained increases in personal income with the previous year's increase. helped to facilitate timely repayment of Monthly data through November sug- obligations. gest that growth of real income may Consumers maintained relatively uphave picked up a little in the fourth beat perceptions of current and future quarter. Nominal personal income economic conditions during 1995. The appears to have increased slightly faster measure of consumer confidence that is in 1995 than it did in 1994, and growth prepared by the Conference Board held of nominal disposable income, which fairly steady at a high level. The index excludes income taxes, apparently held of consumer sentiment that is compiled close to its 1994 pace. Inflation contin- by the University of Michigan Survey ued to take only a moderate bite from Research Center edged down a little, on increases in nominal receipts: The net, from the end of 1994 to the end of chain-type price index for personal con- 1995, but its level also remained relasumption expenditures rose at an annual tively high. By contrast, some survey rate of 2Vi percent over the first three questions dealing specifically with perquarters of 1995, matching, almost ceptions of labor market conditions exactly, the increases in each of the two pointed to increased concerns about job previous years. prospects during the year; although em- After little change during 1994, the ployment continued to rise in the aggrereal value of household wealth surged in gate, announcements of job cuts by 1995. The value of assets was boosted some major corporations may have substantially by huge increases in the rekindled consumers' anxieties about prices of stocks and bonds. Liabilities job security. In January of this year, continued to rise fairly rapidly but at a consumer assessments of labor market rate well below the rate of increase in conditions softened further, and the household assets; rapid growth of con- broader indexes of sentiment also sumer credit was again the most notable declined. The January levels of the feature on the liability side. Behind indexes were on the low side of their these aggregate measures of household averages of the past couple of years but assets and liabilities was some wide were well above levels that were variation in the circumstances of reported through most of the first three individual households. Appreciation of years of the expansion. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 83rd Annual Report, 1996 Consumers tended to save a slightly somewhat during the autumn, but perhigher proportion of their income in mits held firm. 1995 than they had in 1994. Large The intrayear swings in the various increases in financial wealth usually housing indicators left the annual totals cause households to spend a greater for these indicators at fairly elevated share of their current income, thereby levels. The average pace of sales of reducing the share of income that is existing homes over the first eleven saved. However, rising debt burdens and months of 1995 was well above the increased nervousness about job pros- average for the 1980s, even after having pects would work in the opposite direc- adjusted for increases in the stock of tion, and these influences may have off- houses. Starts and sales of new singleset the effect of increases in wealth. family dwellings in 1995 were about Some households also may have started one-tenth higher than their averages for focusing more intently on saving for the 1980s. So far in the 1990s, demoretirement, especially in light of graphic influences have been less supincreased political debate about curbing portive of housing activity than in the the growth of entitlements provided 1980s, as the rate of household formaunder government programs. Nonethe- tion has lagged—in part because many less, the personal saving rate for all of young adults have delayed setting up 1995, while moving up a little, remained their own domiciles. However, an offsetin a range that was relatively low by ting impetus to demand has come from historical standards. the improved affordability of housing, Residential investment fell in the first brought about in particular by declines half of 1995 but turned up in the third in mortgage interest rates. quarter. Both the downswing in the first Construction of multifamily units, half and the subsequent rebound after after having taken a notable step toward midyear appear to have been shaped, at recovery in 1994, rose only moderately least in a rough way, by swings in mort- further in 1995. Over the first eleven gage interest rates. Although housing months of 1995, starts of multifamily activity had been slow to respond to units amounted to 280,000 at an annual increases in mortgage interest rates rate, compared with about 260,000 the through much of 1994, sizable declines previous year and a low of 162,000 in in sales of new and existing homes 1993. Financing for the construction of started to show up toward the end of that new multifamily projects appeared to be year, and by early 1995, permits and readily available this past year. Howstarts also were dropping. However, the ever, the national vacancy rate for multidecline in activity proved to be rela- family rental units, while down from the tively short and mild. By March, mort- peaks of a few years ago, remained relagage interest rates already were down tively high, and increases in rents were appreciably from the peaks of late 1994, not of a magnitude to provide much and midway through the second quarter, incentive for the construction of new most indicators of housing activity were units. starting to rebound. Sales of new homes surged to especially high levels during The Business Sector the summer, and permits and starts of single-family units rose appreciably. In Most indicators of business activity the autumn, sales retreated from their remained favorable in 1995, but strength midyear peaks. Starts also slipped back was less widespread than it had been Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 45 in 1994, and growth overall was less investment outlays increased less raprobust. The output of all nonfarm busi- idly, on balance, than in 1994, and nesses rose at an annual rate of slightly growth after the first quarter was modless than 2 percent over the first three est, on net. In the equipment category, quarters of 1995, after a gain of 4 per- outlays for information-processing cent in 1994—a pace that could not equipment other than computers moved have been sustained given already high up at an annual rate of about 13 percent operating levels. Inventory problems in the first half of 1995 but fell back a cropped up in some lines of manufactur- little in the third quarter. Spending for ing and trade in 1995 and prompted industrial equipment followed a roughly production adjustments. Scattered struc- similar pattern, with a small thirdtural problems were apparent as well, quarter decline coming on the heels of especially in parts of retail trade in large gains in the first half of the year. which intense competition for market Real outlays for transportation equipshare caused financial losses and even- ment declined in the second quarter but tual bankruptcy for some enterprises. rebounded in the third. Real investment More generally, however, business prof- in nonresidential structures moved up in its remained high in 1995, as firms each of the first three quarters of 1995, continued to emphasize strategies that at an annual rate of more than 6 percent, have served them well throughout the on average, after a gain of VA percent 1990s—most notably, tight control over during 1994; the most recent year costs and rapid adoption of new tech- brought increased construction of most nologies, achieved by way of heavy types of nonresidential buildings. investment in high-tech equipment. In the industrial sector, elevated lev- In total, real business fixed invest- els of investment in equipment and ment increased at an annual rate of structures in 1995 led to a gain of about 8 percent over the first three quarters of 4 percent in industrial capacity. How- 1995 after a gain of 10 percent in 1994. ever, in a turnabout from the outcome of Growth in business spending for equip- the previous year, output of the indusment continued to outpace the growth of trial sector rose considerably less rapinvestment in structures, even though idly than capacity: A gain of V/i percent the latter scored its largest gain of the in total industrial production over the past several years. On a quarterly basis, four quarters of 1995 was a sharp slowinvestment remained very strong down from a 1994 rise of more than through the first quarter of 1995. After 6V2 percent. Production of consumer having slowed sharply in the spring, it goods followed a choppy pattern during then picked up somewhat in the third 1995 and rose less than V2 percent over quarter. Fragmentary data for the fourth the year as a whole, the smallest annual quarter suggest that investment in plant increase of the current expansion. The and equipment recorded a gain of at output of business equipment advanced least moderate size in that period. in each quarter, but a cumulative gain of Businesses continued to invest 4V2 percent for this category was smaller heavily in computers in 1995. In real than the increases of other recent years. terms, these expenditures rose at an Production of materials faltered tempoannual rate of nearly 30 percent over the rarily in the second quarter, but producfirst three quarters of the year, an tion gains resumed thereafter, leading to increase that was even more rapid than a rise of about 2XA percent over the four that of 1994. Excluding computers, real quarters of the year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 83rd Annual Report, 1996 With capacity expanding rapidly and Business profits rose further over the production growth slowing, the rate of first three quarters of 1995. Economic capacity utilization in industry turned profits of all U.S. corporations increased down sharply in 1995, backing away at an annual rate of nearly 11 percent, a from the high operating rates of late pace similar to that seen over the four 1994. As of this past December, the quarters of 1994. The profits of corporautilization rate in manufacturing was tions from their operations in the rest of about Vi percentage point above its the world moved up sharply, on net, and long-term average. In January of this earnings from domestic operations also year, utilization rates fell noticeably: continued to advance. The strongest Vehicle producers reduced assembly gains in domestic profits came at finanrates last month, and winter storms cial corporations and reflected, in part, temporarily shut down manufacturing an increased volume of lending by operations more generally. financial institutions, reduced premiums After having risen rapidly during on deposit insurance at commercial 1994, business inventories continued to banks, and rising profits of securities build at a substantial pace in the early dealers. The economic profits earned by part of 1995. By the end of the first nonfinancial corporations from their quarter, real inventories of nonfarm domestic operations rose at an annual businesses were about 5Vi percent above rate of about VA percent over the first the level of a year earlier. Meanwhile, three quarters of 1995 after three years strength that had been evident in final in which the annual increases were sales during 1994 gave way to more 15 percent or more. A moderation of subdued growth in the first quarter of output growth at nonfinancial corpora- 1995, and the ratio of inventories to tions and a flattening of the rise in profsales rose. In the second and third quar- its per unit of output both worked to ters, growth of inventories was roughly reduce the rate of growth in nominal in line with growth of business earnings in 1995. Nonetheless, with unit final sales; consequently, aggregate costs also moving up at a moderate pace, inventory-sales ratios held fairly steady the share of the value of nonfinancial during this period. Although data on corporate output that ended up as profits inventory change in the year's final changed little, on net, in the first three quarter are not yet complete, the avail- quarters, holding in a range that was able indicators suggest that significant relatively high in comparison to the imbalances probably were present in average profit share over the past couple only a few industries at year-end. Poten- of decades. tial for wider inventory problems appears to have been contained through The Government Sector a combination of production restraint late in 1995, caution in ordering mer- At the federal level, combined real outchandise from abroad, and discounting lays for investment and consumption fell by some retailers during the holiday at an annual rate of about AlA percent shopping season. Wholesalers reduced over the first three quarters of 1995, their inventories in the final two dropping to a level about 13 percent months of 1995, and manufacturers' below its annual peak in 1990. Both stocks rose only slightly; aggregate investment and consumption were cut inventory-sales ratios moved down in back over the first three quarters of both sectors. 1995. Outlays for defense continued to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 47 contract, and nondefense expenditures moving up more rapidly than spending turned down, reversing a moderate in fiscal 1995, the federal budget deficit increase that took place over the four fell for a third consecutive year, to quarters of 1994. $164 billion. Progress in reducing the Federal outlays in the unified budget, deficit in recent years has come from which covers items such as transfers and cyclical expansion of the economy, tax grants, as well as consumption and increases, nonrecurring factors such as investment expenditures other than the the sale of spectrum rights, and adherconsumption of fixed capital, rose ence to the budgetary restraints 33/4 percent in nominal terms in fiscal embodied in the Budget Enforcement 1995, matching almost exactly the per- Act of 1990 and the Omnibus Budgetary centage rise of the previous fiscal year. Reconciliation Act of 1993. Nominal outlays for defense declined The economic expansion also has 3VA percent in both fiscal 1995 and fis- helped to relieve budgetary pressures cal 1994. Outlays for social security that many state and local governments increased about 5 percent in both years. were experiencing earlier in the 1990s. Spending for Medicare and Medicaid Excluding social insurance funds, surcontinued to rise at rates appreciably pluses in the combined current accounts faster than the growth of nominal GDP. of state and local governments were Net interest payments jumped in fiscal equal to about V2 percent of nominal 1995 after three years of relatively little GDP in the first three quarters of 1995; change, but working in the other direc- this figure was more than double the tion, net outlays for deposit insurance average for 1991 and 1992, when budwere more negative than in 1994 (that getary pressures were most severe. is, the margin between insurance pre- Even so, state and local budgets miums and the payout for losses remain at the center of strongly competincreased). Proceeds from auctions of ing pressures, with the demand for many spectrum rights also helped to hold of the services that typically are prodown expenditures; like the premiums vided by these governments continuing for deposit insurance, these proceeds to rise at a time when the public also enter the budget as a negative outlay. In is expressing desire for tax relief. the first three months of fiscal 1996— Although states and localities have that is, the three-month period ended in responded to these pressures in different December—federal outlays were about ways, the aggregate picture is one in 1 percent lower in nominal terms than in which expenditures and revenues have the comparable period of fiscal 1995. continued to rise faster than nominal Nominal outlays for defense have con- GDP—but by smaller margins than in tinued to trend down this fiscal year, the early part of the 1990s. In total, the and the spending restraint embodied in current expenditures of state and local recent continuing budget resolutions has governments, made up mainly of transtranslated into sharp cuts in nondefense fers and consumption expenditures, outlays. were equal to about \2Vi percent of Federal receipts rose IV2 percent in nominal GDP in the first three quarters fiscal 1995, after having increased 9 per- of 1995, up slightly from the percent in fiscal 1994. In both years, cate- centages of the two previous years and gories of receipts that are most closely about PA percentage points higher than related to the state of the economy the comparable figure for 1989. Total showed sizable increases. With receipts receipts of state and local governments Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 83 rd Annual Report, 1996 were equal to about 133A percent of With the expansion of real GDP slownominal GDP in the first three quarters ing in the foreign G-10 countries at a of 1995, up just a touch from the com- time when some slack remained, inflaparable percentages of the two previous tion stayed low. The average rate of years but about VA percentage points consumer price inflation in these counhigher than the percentage in 1989. tries remained about 2 percent last year, State and local outlays that are essentially the same as in 1994 and included in GDP have been rising less somewhat less than in the United States. rapidly than the current expenditures Economic growth in the major develof these jurisdictions because GDP oping countries slowed on average in excludes transfer payments, which have 1995 from the strong pace recorded for been growing faster than other outlays. 1994. The substantial contraction of In real terms, combined state and local economic activity in Mexico had imporoutlays for consumption and investment tant effects on U.S. trade, but real output increased at an annual rate of about also slowed in other developing coun- 2Vi percent over the first three quarters tries, including Argentina. In response of 1995. Real investment expenditures, to the December 1994 collapse of the which consist mainly of outlays for con- Mexican peso, the Mexican government struction, moved up at an annual rate of adopted a set of policies intended to almost 7 percent. By contrast, consump- tighten monetary conditions, maintain tion expenditures, which are about four wage restraint, and reduce government times the size of investment outlays, spending to mitigate the inflationary rose only modestly in real terms— impact of the peso's devaluation and to at an average annual rate of about achieve significant reduction in the cur- 1 Vi percent. rent account deficit in 1995. Through the third quarter, the Mexican current account was approximately balanced; a The External Sector deficit of about $20 billion had cumu- Growth of real GDP in the major for- lated during the comparable three quareign industrial countries other than ters of 1994. The merchandise trade bal- Japan slowed sharply in 1995 from the ance improved to moderate surplus in robust rates of 1994. In Canada, where 1995 from a substantial deficit in 1994. economic activity had been particularly The improved trade performance in part vigorous through the end of 1994, the reflected a severe contraction in aggreslowdown reflected weaker U.S. growth gate demand. Mexican real output fell as well as macroeconomic policies sharply early in the year but picked up intended to achieve improved fiscal bal- toward the end of the year, for an annual ance and to prevent the reemergence of decline of nearly 7 percent. inflationary pressures. In Germany and The newly industrializing economies the other European economies, appreci- in Asia—for example, Malaysia, Korea, ation of their currencies in terms of the and Taiwan—continued to grow rapidly dollar during the early months of the during 1995, at about the same rate as in year and efforts to reduce public sector 1994. Although growth in most of these deficits contributed to the decline in the countries was driven by a strong expanrate of real output growth. In contrast, sion in internal demand, especially in Japan showed some tentative signs of investment, most countries also benerecovery late in 1995 after almost no fited from very fast export growth. The growth during the previous three years. marked acceleration in exports was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 49 attributable at least in part to a real Tabulation of the export data by country depreciation of their currencies against of destination showed divergent patthe yen and key European currencies terns: Exports to Mexico dropped in during the early part of the year. response to the economic crisis in that In the first eleven months of 1995 the country, but shipments to developing nominal U.S. trade deficit in goods and countries in Asia rose sharply. Exports services reached about $115 billion at a to Western Europe, Canada, and Japan seasonally adjusted annual rate, a level increased as well. slightly greater than the $106 billion Imports of goods and services recorded for 1994. U.S. income growth increased at an annual rate of about in 1995 was similar to the average for 6 percent in real terms during the first our trading partners, but as is typically three quarters, a slower rate of advance the case, comparable increases in than during 1994. Imports of computers income seemed to bring forth an and semiconductors rose sharply, but increase in U.S. demand for imports that imports of other machinery, consumer was larger than the average increases in goods, and industrial supplies slowed. demand for our exports by the foreign Import prices increased about 2Vi percountries with which we trade. Effects cent in the twelve months ending in of the dollar's depreciation during 1994 December 1995. An end to the very and early 1995 worked in the opposite rapid rise in world non-oil commodity direction, tending to boost exports and prices and low inflation abroad helped hold down imports. Overall, the result to restrain the rise in import prices. of these offsetting tendencies was that In the first three quarters of 1995, the dollar value of exports grew some- recorded net capital inflows into the what faster than the dollar value of United States were substantial and imports through November. Nonethe- nearly balanced the deficit in the U.S. less, with the level of imports exceeding current account. Sharp increases were the level of exports at the start of the reported in both foreign assets in the year, these growth rates translated into United States and U.S. assets abroad. a slightly larger deficit. The current Foreign official asset holdings in the account deficit averaged about $160 bil- United States increased almost $100 billion at an annual rate during the first lion through September. These increases three quarters of 1995. Both the trade reflected both intervention by certain deficit and the deficit on net investment industrial countries to support the income widened somewhat, resulting in foreign exchange value of the dollar an increase from the $150 billion cur- and very substantial accumulation of rent account deficit experienced in 1994. reserves by several developing countries Real exports of goods and services in Asia and Latin America. Private forgrew at an annual rate of about 5 percent eign assets in the United States also rose over the first three quarters of 1995. rapidly. Net purchases of U.S. Treasury Agricultural exports remained at ele- securities by private foreigners totaled vated levels, and the volume of com- $97 billion, an amount far exceeding puter exports continued to rise sharply. previous records. Net purchases of U.S. Other merchandise exports expanded in government agency bonds and corporate real terms at a marginally slower rate bonds were also very large. than did the total; within this broad cate- Direct investment inflows reached gory, machinery and industrial supplies almost $50 billion in the first three quaraccounted for the largest increases. ters of 1995; this total was about equal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 83 rd Annual Report, 1996 to the inflow during all of 1994 and reductions in employment also were almost matched the record pace of 1989. reported by manufacturers of textiles, Mergers and acquisitions added substan- tobacco, leather products, and petroleum tially to the inflow of funds from foreign and coal. In many of these industries, direct investors in the United States. cyclical deceleration of the economy U.S. direct investment abroad was even in 1995 compounded the effects of larger than foreign direct investment in adjustments stemming from longer-run the United States and also approached structural changes. In contrast to the previous peak rates. U.S. net purchases widespread contraction in employment of foreign stocks and bonds were up among producers of nondurables, emfrom 1994 but below the 1993 peak rate. ployment at the manufacturers of dura- The bulk of the net U.S. purchases of ble goods increased slightly during foreign securities were from the indus- 1995. Hiring continued to expand trial countries; net purchases from briskly at firms that produce business emerging markets played a relatively equipment. Metal fabricators also sussmall role. tained growth in employment but at a slower pace than in 1994. The number of jobs in transportation equipment Labor Markets declined, on net. The number of jobs on nonfarm payrolls In most other sectors of the economy, increased VA million over the twelve employment rose moderately last year. months ended in December 1995. After The number of jobs in construction a sharp rise during 1994, gains in increased 140,000 over the twelve employment slowed in the first part of months ended in December, a rise of 1995, and the second quarter brought more than 3 percent. In the private only a small increase. Thereafter, service-producing sector, which now increases picked up somewhat. Nearly accounts for about three-fourths of all 450,000 jobs were added in the final jobs in the private sector, employment three months of the year, a gain of about increased 1.7 million in 1995 after hav- 1 Vi percent at an annual rate. In January ing advanced 2.6 million in 1994. Estabof this year, with the weather keeping lishments that are involved in wholesale many workers at home during the refer- trade continued to boost payrolls at a ence week for the monthly survey of relatively brisk pace in 1995. Retailers establishments, payroll employment fell also added to employment but at a consharply. siderably slower rate than in 1994; As in 1994, increases in payroll em- within retail trade, employment at apployment in 1995 came mainly in the parel outlets fell substantially last year, private sector of the economy, but gains and payrolls at stores selling general there were more mixed than those of merchandise dropped moderately after a 1994. In manufacturing, employment large increase in 1994. Providers of fell about 160,000 over the twelve health services added slightly more jobs months ended in December, reversing than in other recent years. At firms that almost half of the previous year's gain. supply services to other businesses, em- Losses were concentrated in industries ployment growth was sizable again in that produce nondurables. A decline this 1995 but less rapid than in either of the past year in the number of jobs at two previous years; in this category, proapparel manufacturers was one of the viders of computer services expanded largest ever in that industry. Sizable their job counts at an accelerated pace Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 51 in 1995, but suppliers of personnel—a The average unemployment rate for category that includes temporary help all of 1995 was about V2 percentage agencies—added jobs at a much slower point below the average for 1994, and rate than in other recent years. it was only a little above the levels to Results from the monthly survey of which the unemployment rate fell in households showed the civilian unem- the latter stages of the long business ployment rate holding in a narrow range expansion of the 1980s. The low unemthroughout 1995, and the rate reported ployment rates reached back then in December—5.6 percent of the labor proved to be unsustainable, as they force—was near the midpoint of that eventually were accompanied by a signarrow range. In January of this year, nificant step-up in the rate of inflation, the unemployment rate ticked up to brought on in part by faster rates of rise 5.8 percent. in hourly compensation and unit labor The proportion of working-age per- costs. The current expansion, in consons choosing to participate in the labor trast, has remained relatively free of force edged down slightly, on net, over increased inflation pressures working the course of 1995. It has changed little, through the labor markets. The employon balance, since the start of the 1990s. ment cost index for hourly compen- By contrast, the two previous dec- sation of workers in private nonfarm ades brought substantial net increases industries rose only 2.8 percent over in labor force participation, although the twelve months ended in Decemlonger-term trends during the two ber, the smallest annual increase on decades were interrupted at times by record in a series that goes back to the spells of cyclical sluggishness in the start of the 1980s. Hourly wages economy. Two or three years ago, increased 2.8 percent during the past cyclical influences also seemed to be a year, the same relatively low rate of plausible explanation for the sluggish- increase as in 1994. The cost of fringe ness of labor force participation in the benefits, prorated to an hourly basis, current business expansion. But, with rose only 2.7 percent last year, the the participation rate remaining slug- smallest annual rise on record. With gish as job opportunities have continued many firms still undergoing restructurto expand, the evidence is pointing ings and reorganizations, many of which increasingly toward a slower rate of have involved permanent job losses, rise in the trend of participation. Slower workers probably have been more relucgrowth of participation will tend to tant to press for wage increases than limit the growth of potential output they normally would have been during unless an offsetting rise is forthcoming a period of tight labor markets. Also, in the trend of productivity growth. So firms have been making unprecedented far in the current expansion, measured efforts to gain better control over the increases in productivity seem to have rate of rise in the cost of benefits profollowed a fairly typical cyclical pat- vided to employees, especially those tern, with larger increases early in related to health care. Although some the expansion and smaller gains, on of these efforts may have only a oneaverage, in subsequent years. Overall, time effect on the level of benefit however, this pattern has not yielded costs, groundwork also seems to have evidence of a significant pickup in been laid for slower growth of benefits the longer-term trend of productivity over time than would otherwise have growth. prevailed. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 83rd Annual Report, 1996 Prices V/i percent in both 1993 and 1994. The last three-year period in which prices of Early in 1995, inflation pressures that these goods rose by such small amounts had started building in 1994 seemed to came in the middle part of the 1960s. be gaining in intensity. Indexes of spot Apparel prices continued to decline last commodity prices continued to surge in year but not so rapidly as in the previous the early part of last year, and in the year. Price increases for vehicles moderproducer price index, materials prices ated. The 1995 rise in the CPI for serrecorded some of the largest monthly vices other than energy was 33A percent; increases of the past decade and a half. although this increase exceeded the Consumer prices also began to exhibit 1994 rise by a slight amount, the results some upward pressure, with the index for both years were among the smallest for items other than food and energy increases for this category in the last moving up fairly rapidly over the first three decades. four months of the year. Trends in food prices and energy The surge in inflation proved to be prices remained favorable to consumers relatively short-lived, however. The spot in 1995. The rise in food prices from the prices of industrial commodities turned final quarter of 1994 to the final quarter down in the spring of the year and fell of 1995 was slightly more than 2lA perfurther, on net, after midyear. Price cent, almost exactly the same as the increases for intermediate materials increases of the two previous years. The slowed in the second and third quarters last yearly increase in food prices in of 1995, and by the final quarter of the excess of 3 percent came five years ago, year these prices also were declining. in 1990. In the intervening years, pro- Monthly increases in the core CPI duction adjustments by farmers and slowed in May; thereafter, increases weather problems of one sort or another generally were small over the remainder have caused temporary surges in the of the year. The slowing of the economy prices of some farm commodities, but after the start of the year appears to have these surges have not resulted in widecut short the buildup of inflationary spread pressures on food prices at the pressures before they could have much retail level. Moderate rates of increase effect on the underlying processes of in the costs of nonfarm inputs that conwage and price determination. In the tribute heavily to value added have been end, the rise in the CPI excluding food an important anchor in the setting of and energy from the final quarter of food prices at the consumer level. Also, 1994 to the final quarter of 1995 if only by chance, years of poor crops— amounted to 3 percent, an increase that like that of 1995, when grain and differed little from those of the two pre- oilseed production plummeted—have vious years. The increase in the total tended to be interspersed with years of CPI in 1995 came in at 23A percent, the good crops, a pattern that has prevented fifth consecutive year in which it has sustained upward pressures on farm and been in a range of 3 percent or less. food prices. In the energy area, prices In the aggregate, rates of price at the consumer level fell VA percent, increase held fairly steady for both on net, over the four quarters of 1995, goods and services this past year. The more than reversing a moderate 1994 CPI for commodities other than food increase. Gasoline prices dropped nearly and energy rose 13A percent over the 5 percent, on net, over the four quarters four quarters of 1995 after increases of of the year, and consumer prices of natu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 53 ral gas also declined appreciably. How- earlier. As time passed, it became clear ever, some upward pressures developed that these policy tightenings had been in late 1995 and early this year, largely successful in containing inflationary in response to unexpectedly cold tem- pressures, and the System initiated peratures that boosted fuel requirements lA point reductions in the federal funds for winter heating. rate in July and December 1995 and All told, the price developments of January 1996. 1995 appear to have left a favorable Most market interest rates had peaked imprint on expectations of future rates before the policy tightening last Februof inflation, if results from various ary. During the spring, interest rates surveys of consumers and forecasters declined appreciably, as market particiare an accurate reflection of the views pants increasingly came to believe that held by the broader public. Monthly no additional policy restraint would be responses to the surveys tend to bounce forthcoming, and, indeed, that easing around somewhat, but over 1995 as a might be in the cards. Mounting eviwhole, average readings of anticipated dence that the growth of spending had price increases one year into the future downshifted and price pressures were were slightly lower than those of 1994, muted, along with greater hopes that and survey responses about inflation substantial progress would be made prospects over the longer term came toward reducing the federal budget defidown more substantially. Although the cit, contributed to the change in attitudes responses regarding expected inflation and to the drop in interest rates, espestill tended, on balance, to run to the cially longer-term rates. On balance high side of actual rates of price during 1995, interest rates dropped 1 to increase, the easing of inflation expecta- IVi percentage points, with the largest tions this past year provided another declines registered on intermediate- and encouraging sign that inflation processes long-term securities. This year, shortthat helped to undermine other recent and intermediate-term interest rates have business expansions are still in check in fallen somewhat further, while longthe current expansion. term rates are unchanged to a little higher. During the first part of last year, Financial, Credit, and Monetary expectations of lower U.S. interest rates Developments relative to other G-10 countries and In 1995 and early 1996, the Federal other factors such as the crisis in Mexico Reserve had to adjust its policy stance contributed to a 10 percent depreciation several times to promote credit market of the trade-weighted exchange value of conditions supportive of sustained the dollar. By year-end, though, the dolgrowth with low inflation. At the begin- lar had retraced about half of these ning of 1995, some risk remained that losses, and it has appreciated further on inflation might rise. To provide addi- balance in 1996. tional insurance against that develop- The course of interest rates during the ment, the Federal Open Market Com- year influenced overall credit flows and mittee (FOMC) tightened reserve their composition. The expansion of the conditions, raising the intended federal total debt of domestic nonfinancial secfunds rate Vi percentage point, to 6 per- tors was relatively strong during the first cent, thereby extending the episode of half of the year but moderated later in policy firming that had begun one year 1995. For the year, debt grew 5lA per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 83rd Annual Report, 1996 cent, a bit above the midpoint of its icy, excessive demands on productive annual growth range. Initially, house- resources and resulting higher inflation hold and nonfinancial business credit would have produced strains, threatendemands were concentrated in floating- ing economic expansion. rate or short-term debt instruments. As In early February the policy actions the yield curve flattened, credit demands taken in 1994 did not appear to be suffishifted 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 buildwith declines in market interest rates ing inflationary pressures. In these cirrelative to yields on retail deposits, led cumstances, the FOMC agreed on a to the fastest growth in M2 and M3 V2 percentage point increase in the fedsince the late 1980s; M2 ended the year eral funds rate, and the Board of Goverin the upper part of its annual range, and nors approved an equal increase in the M3 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 the beginning of the official series and through the spring, incoming data in 1959, as many banks introduced retail signaled that economic growth was sweep accounts that shifted deposits finally moderating. At first, it was from interest-bearing checking accounts unclear if the slowdown was temporary to savings-type accounts in order to or if it was a lasting shift toward a reduce reserve requirements. sustainable rate of economic expansion in the neighborhood of the economy's potential. Adding to the uncertainty was The Course of Policy and a pickup of consumer price inflation and Interest Rates a pronounced weakening in the foreign The Federal Reserve entered 1995 hav- exchange value of the dollar. At the ing tightened policy appreciably during March meeting, the FOMC determined the previous year. Short-term interest that it would be prudent to await furrates had risen more than 21/2 percentage ther information before taking any addipoints from the end of 1993, and long- tional policy actions, but it alerted the term rates were up 2 percentage points. Manager of the System Open Market Policy tightening had been necessitated Account that, if intermeeting action by the threat of rising inflation posed by were to be required, the step would more unusually low real short-term interest likely be to firm than to ease. rates earlier in the 1990s. Rates had By the May meeting, substantial evibeen kept low to counter the effects of dence had accumulated that the threat of impediments to credit flows and eco- rising inflation had lessened. Economic nomic growth. But as these impediments growth had slowed; although the adjustwere reduced, the economy expanded at ment to inventory imbalances that had an unsustainable pace and margins of developed earlier in the year was conunderutilized labor and capital began to tributing to the slowdown, the undererode. Ultimately, absent a firmer pol- lying trajectory of final sales was still Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 55 uncertain. The FOMC determined that and equity markets rallied strongly the existing stance of policy was appro- immediately after the change in policy priate and expressed no presumption as was announced. However, a pickup in to the direction of potential policy action economic growth during the summer over the intermeeting period, issuing a made further reductions in the funds rate symmetric directive to the Account appear less likely, and interest rates Manager. backed up for a time. Intermediate- and long-term interest The Committee did keep rates unrates had fallen throughout the winter changed at the August and September 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 but the extent of any slowing of spendeasing of monetary policy. By midyear, ing and inflation was unclear. Although the three-month Treasury bill rate had short-term rates remained above longdeclined about lA percentage point from term averages on a real, inflationits level at the beginning of the year, adjusted basis, substantial rallies in bond while rates on securities with maturities and stock markets were thought likely to greater than one year had dropped as buoy spending. Against this backdrop, much as 2 percentage points. the FOMC voted to maintain the exist- Employment data released shortly ing stance of monetary policy. after the May FOMC meeting were sur- The generally positive news about prisingly weak, and by the July meeting inflation and hopes for a budget agreeit appeared that growth of aggregate out- ment had helped propel the bond marput had sagged markedly during the sec- ket higher throughout the fall. By the ond quarter as businesses sought to keep December meeting, intermediate- and inventories from rising to undesirable long-term interest rates were P/4 to levels. This deceleration of output 2Vi percentage points below their levels growth was accompanied by a softening at the beginning of the year. The bond of industrial prices and a marked reduc- market rally, along with strong earnings tion in the pace at which materials prices reports, pushed equity prices higher durwere rising. With the economy growing ing the year, and by mid-December, more slowly than had been anticipated equity price indexes were up about and potential inflationary pressures re- 35 percent from levels at the beginning ceding, the FOMC voted to ease reserve of the year. Since the last easing in July, pressures slightly with a lA percentage inflation had been somewhat more point decline in the intended federal favorable than anticipated, and the funds rate. expansion of economic activity had Although financial market partici- moderated substantially after having pants had anticipated a decline in the posted a strong third quarter. With both federal funds rate at some point, bond inflation and inflation expectations more Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 83 rd Annual Report, 1996 subdued than expected, and with the remained plentiful: Banks continued to slowing in economic growth suggesting be willing lenders, and in securities marthat price pressures would continue to kets most interest-rate spreads remained be contained, the FOMC decided to quite narrow. Debt burdens for housereduce the intended federal funds rate an holds increased, but except for a few additional lA percentage point, bringing types of consumer credit obligations, deit to 5 ^percent. linquency rates remained at low levels. The data available at the time of the Rising equity prices bolstered the over- FOMC meeting in late January gave all financial condition of households. stronger evidence of slowing economic Federal debt rose 33/4 percent in 1995, expansion. This development reduced slightly less than in 1994. The federal potential inflationary pressures going government's demands for credit fell forward and raised questions about largely because the budget deficit shrank whether monetary policy might unduly about 20 percent for the calendar year. restrain the pace of expansion. The Federal debt growth also slowed toward Committee believed that a further slight year-end as the Treasury drew down its easing in monetary policy was consis- cash balance to keep borrowing within tent with keeping inflation contained the $4.9 trillion debt ceiling. and fostering sustainable growth, given that price and cost trends were already subdued. In these circumstances, the Growth of Money and Debt Committee lowered the intended fed- Percent eral funds rate lA percentage point, to 5lA percent, and the Board approved an Domestic Measurement nonequivalent reduction in the discount rate, period Ml M2 M3 financial debt to 5 percent. Partly as a consequence of the System Year' actions in December and January, short- 1980 7.5 8.7 9.6 9.5 1981 5.4 9.0 12.4 10.2 and intermediate-term interest rates have 2.52 fallen lA to x/i percentage point since 1982 8.8 8.8 9.7 9.8 1983 10.3 11.8 9.5 11.9 mid-December. However, on balance, 1984 5.4 8.1 10.8 14.6 longer-term rates are unchanged to a 1985 12.0 8.6 7.7 14.3 little higher. The absence of a firm 1986 15.5 9.2 9.0 13.3 agreement to reduce the federal budget 1987 6.3 4.2 5.9 9.9 1988 4.3 5.7 6.3 9.0 deficit, and some tentative signs most 1989 .5 5.2 4.0 7.8 recently that the economy might not be 1990 4.2 4.1 1.8 6.8 so sluggish as some market participants 1991 7.9 3.1 1.2 4.6 1992 14.3 1.8 .6 4.7 had feared, have held up longer-term 1993 10.5 1.4 1.0 5.2 rates. 1994 2.4 .6 1.6 5.2 1995 -1.8 4.2 6.1 5.3 Quarter Credit and Money Flows (annual rate)3 1995:Q1 -.1 1.4 4.8 5.3 Q2 -.5 4.3 6.7 7.0 On balance in 1995, the debt of the Q3 -1.5 7.0 8.0 4.6 domestic nonfinancial sectors grew at Q4 -5.1 4.0 4.4 3.9 about the same pace as in the previous 1. From average for fourth quarter of preceding year to year, although within the year, debt average for fourth quarter of year indicated. growth was much stronger in the first 2. Adjusted for shift to NOW accounts in 1981. 3. From average for preceding quarter to average for half than in the second. Credit supplies quarter indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 57 State and local government debt fell reversed about one-half of the decline it 5Vi percent—more than in 1994. A few posted earlier in the decade. years earlier, municipalities had taken The average debt-service burden of advantage of low long-term rates to pre- nonfinancial corporations—the ratio of refund a substantial volume of issues, net interest payments to cash flow—also many of which were eligible to be called rose last year, but it remained well in 1995. As those securities were called, beneath the most recent peak reached in and with gross issuance light, the stock 1990. The increase in debt burden was of municipal securities contracted for a in part associated with the relatively second consecutive year. Despite the strong growth of the debt of nonfinanoverall reduction in debt outstanding, cial businesses. This sector's debt the ratios of tax-exempt to taxable yields growth was especially robust early in jumped in the first half of the year and, the year, when business fixed investfor long-term debt, held at an elevated ment picked up further and inventory level during the remainder of the year. accumulation was rapid. Debt issuance This increase was associated with con- was also boosted by the rising wave cerns about the effect on demands for of mergers, although a good number tax-free municipal debt of proposals for involved stock swaps. Financing needs changes in federal taxation that would fell back later on as investment growth sharply reduce the tax advantages of slowed and profits increased. Funding holding municipal bonds. patterns also shifted as bond yields fell, Household borrowing remained ro- and firms relied more heavily on longerbust in 1995, moderating only a bit from term debt. Despite the increase in credit 1994, and the ratio of household debt to demands, interest rate spreads of disposable personal income rose further. investment-grade private securities over Even so, the financial condition of this comparable Treasuries widened only sector remained good on balance, slightly and remained narrow by historialthough there were signs of deteriora- cal standards, suggesting that lenders tion. The rally in the domestic equity continued to view balance sheets of nonmarkets supported household balance financial corporations as remaining sheets by boosting net worth sharply. healthy on the whole. Spreads on below- In addition, delinquency rates on home investment-grade debt rose more sharply mortgages and closed-end consumer but stayed well beneath levels reached loans at banks, while rising, remained at early in the decade. low levels. Other indicators, however, Commercial banks met a significant provided evidence that some households portion of the increase in business credit were likely beginning to experience demands last year, which, in turn, conincreased financial pressures. For tributed to the rapid expansion of bank instance, delinquency rates on credit card debt held by banks and on auto Distribution of Bank Assets loans booked at captive finance compaby Capital Status nies rose sharply. Furthermore, the aver- Percentage of industry assets age household debt-service burden— calculated as the share of disposable 1990:Q4 1995:Q3 income needed to meet required pay- Undercapitalized 31.3 .5 ments on mortgage and consumer Adequately capitalized ... 38.6 2.9 debt—continued to rise last year. This Well capitalized 30.1 96.6 measure of debt burden has now NOTE. Adjusted for examiner ratings. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 83rd Annual Report, 1996 balance sheets. Banks funded a portion Banks and thrift institutions funded a of the loan increase by reducing their large share of their asset growth with securities holdings, although higher deposits, and M3 grew 6 percent. The market prices of securities and off- non-M2 portion of M3 was especially balance-sheet contracts left reported strong, in part as depository institutions securities holdings slightly higher for substituted large time deposits for nonthe year. In fact, bank security holdings deposit sources of funds. The sharp relative to the size of their balance reduction in deposit insurance premisheets remained elevated and, together ums, which made large time deposits a with banks' strong capital positions, more attractive source of funds, probindicated that late in the year banks were ably contributed to this shift. Late in the well positioned to continue accommo- year, branches and agencies of Japanese dating the credit demands of households banks, facing some resistance in U.S. and businesses. Although qualitative funding markets, ran off time deposits information suggested that banks were while continuing to increase their fundno longer reducing the standards busi- ing from overseas offices. nesses needed to meet to qualify for M2 rose as lower market interest rates loans, some easing of credit terms and a flatter yield curve increased the continued, with interest rate spreads relative attractiveness of retail deposits.1 on business loans narrowing further. As is typical, deposit interest rates, and Growth of real estate loans held by to a lesser extent returns on money marbanks slowed over the year as the share ket mutual funds, adjusted slowly to of fixed rate mortgages in total origina- declines in market rates last year. Falltions rose with the decline in long-term ing interest rates for comparable maturates. Banks tend to securitize fixed rate rity market instruments were not the mortgages more than adjustable rate whole story for the growth of M2, howloans. Consumer loans on the books of ever. As the yield curve flattened, the banks began the year growing at very relative gains from holding longer-term high rates; this growth decelerated assets with less certain price behavior throughout 1995 as the volume of securitization increased. In response to rising 1. In February 1996 M2 was redefined to delinquency rates, some banks tightened exclude overnight repurchase agreements (RPs) terms and standards for consumer loans and overnight Eurodollars; these instruments will remain in M3. These items were first included in toward the end of 1995 and early 1996. M2 in 1980 because they were being substituted Total assets of thrift institutions are for demand deposits as businesses were in the estimated to have risen slightly last year. process of managing their cash holdings more Growth at healthy thrift institutions closely. Since then, other uses of overnight RPs more than offset a substantial transfer of and Eurodollars have come to dominate movements. Moreover, while RPs and Eurodollars are thrift assets to commercial banks only 3 percent of M2, they contribute substantially through mergers. The revival of growth to the short-run volatility of that aggregate. Rein thrift assets, along with the strong moving these components from M2 should make showing of bank credit, helped to nudge the weekly levels of the aggregate less volatile and up depository credit as a share of reduce the reporting burden on banks that have had to distinguish between overnight and term domestic nonfinancial debt for the sec- RPs and Eurodollars. On a monthly and quarterly ond straight year after fifteen years of basis, the relationships of the two measures of M2 declines. Banks and thrift institutions to income and interest rates are almost indisstill account for more than one-third of tinguishable. The historical M2 data presented in this report exclude overnight RPs and overnight all credit to nonfinancial sectors. Eurodollars. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 59 fell, and this probably strengthened contributed to a rare decline in the curhousehold demand for components of rency component of Ml this past sum- M2. Even so, M2 velocity was about mer, the first decrease since the early unchanged after having increased for 1960s. The demand for existing Federal four years. Reserve notes also slackened in antici- Ml fell almost 2 percent in 1995, the pation of the introduction of a newly first annual decline since the beginning designed $100 bill that will be more of the Board's official series in 1959. difficult to counterfeit. Sweeps of deposits from reservable checking accounts, a component of Ml, Foreign Exchange Developments to nonreservable money market deposit accounts were a major influence. With- The weighted-average foreign exchange out these sweeps, Ml would have risen value of the dollar in terms of the other 1 percent. By the end of last year, G-10 currencies declined about 5 persweeps had spread to thirty-two bank cent on balance last year. The dollar fell holding companies, and the initial sharply through April and reached a low amounts swept by these programs almost 10 percent below its value at the totaled $54 billion. The corresponding end of 1994. The downward pressure decline of more than $5 billion in against the dollar was sparked by indirequired reserves largely showed cations of some slowing of the pace through to reserve balances maintained of U.S. real output growth, which conat Federal Reserve Banks. As banks tributed to expectations that further continue to introduce retail sweep pro- increases in U.S. interest rates were grams in the future, the aggregate level unlikely, and by the acrimony surroundof required reserve balances will tend to ing the ongoing trade dispute between fall further. Although it has not hap- the United States and Japan. The crisis pened yet, one possible consequence of in Mexico also weighed on the dollar. the declining required reserve balances On several occasions in March and early is greater instability in the aggregate April the Trading Desk at the Federal demand for reserves and in overnight Reserve Bank of New York, joined by interest rates. In 1991, after the cut in some other central banks, intervened to reserve requirements at the end of 1990, buy dollars on behalf of the Department unusually low levels of required reserve of the Treasury and the Federal Reserve balances were associated with greater System in an effort to counter the presvariability in the federal funds rate, as sure for dollar depreciation. banks' volatile clearing needs began to The release by the G-7 officials of the dominate the demand for reserves, mak- communique from their meeting in late ing daily reserve demand more difficult April supporting an orderly reversal of to estimate. the dollar's decline and the signing of The run-off in reserve balances held a trade agreement between the United down the growth of the monetary base States and Japan at the end of June to 4 percent in 1995. In addition, cur- helped to stabilize the dollar, which had rency growth slowed, primarily owing fluctuated narrowly until early August. to reduced shipments abroad. Foreign The dollar then rebounded somewhat demand moderated with the stabiliza- and remained within a narrow range tion of financial conditions in some through the end of the year. The recovcountries where dollars circulate widely. ery of the dollar stemmed, in part, from Indeed, reduced demands from abroad perceptions that its earlier decline, par- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 83rd Annual Report, 1996 ticularly in terms of the yen, had been the mark early in the year, the dollar excessive in light of the underlying fun- stabilized and then partly recovered as damentals. Moreover, weakness in the economic indicators revealed significant economies of some other major indus- softening in economic activity in Gertrial countries began to emerge, reduc- many. Easing by the Bundesbank during ing prospective returns available abroad. the second half of the year reinforced At times from May through August, the the view that mark interest rates were Trading Desk again entered the market not likely to rise and might fall further. in conjunction with other central banks The dollar depreciated slightly, on balto intervene in support of the dollar, ance, in terms of the Canadian dollar, reinforcing the view that U.S. authorities despite periods of selling pressure on were committed to a strong dollar. the Canadian dollar during the year In all of the major foreign industrial related to Canada's fiscal situation and countries, long-term interest rates possible secession by Quebec. declined during 1995, nearly reversing Although the dollar did fall to a the increases that had occurred during record low, below 80 yen to the dollar in the previous year. On average, rates on mid-April, by year-end the dollar had foreign government issues with maturi- appreciated slightly in terms of the yen ties of ten years fell about 150 basis from its level at the end of 1994. So far points in the twelve months to Decem- this year, the dollar has appreciated ber, somewhat less than the decline that somewhat further against the yen. Resooccurred in the comparable U.S. rate. lution of the trade dispute and repeated In Canada, where economic activity episodes of exchange market intervenslowed sharply, the drop in long-term tion by the Bank of Japan, sometimes in rates nearly matched that in the United conjunction with U.S. and foreign mone- States, while in Italy, where political tary authorities, contributed to the uncertainty remained a concern through- appreciation of the dollar in terms of the out the year, rates fell only 100 basis yen during the second half of the year. points. During the first few weeks of However, the fundamental cause of the this year, long-term rates abroad gener- yen's decline during that period probally moved down somewhat more but ably was the easing of monetary policy then most recently returned to their by the Bank of Japan that pushed short- December average levels. An important term market interest rates to extremely exception is Japan, where rates have low levels. risen from their late-December levels, In terms of the Mexican peso, the apparently reflecting market perceptions dollar appreciated sharply from the that the stage is set for a Japanese eco- onset of the crisis in late December 1994 nomic recovery. Short-term market rates to March. The dollar subsequently in the major foreign industrial countries retraced some of those gains, and the were mixed, but on average rates moved peso-dollar rate fluctuated narrowly down. through the middle of the year. Uncer- On balance, the dollar depreciated tainty about the prospects for Mexican about 8 percent in terms of the German economic performance and macroecomark during 1995 and by similar nomic policy sparked renewed appreciaamounts in terms of most other curren- tion of the dollar in terms of the peso in cies participating in the Exchange Rate November. Since November, data indi- Mechanism of the European Union. cating that the decline in Mexican real After substantial depreciation against economic activity may have ended, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 61 some intervention by the Bank of lift to job growth. Looking ahead, the Mexico in support of the peso, and a members of the Federal Open Market perception that the decline in the peso Committee (FOMC) anticipate that ecomay have gone too far given the under- nomic activity will grow more moderlying fundamentals have contributed to ately, on average, in coming quarters some rebound of the peso. During the and that the unemployment rate will year, the Mexican authorities drew remain around the level it has averaged $3 billion on short-term swap lines with over the past year and a half. the Federal Reserve and the Exchange Although overall consumer price Stabilization Fund (ESF) of the U.S. inflation was boosted by higher energy Treasury and $10.5 billion on a prices during the first half of the year, medium-term swap facility provided by the underlying trend of prices still the ESF. By the end of January 1996, appears to have been well contained. the short-term drawings had been Over the past twelve months, the conentirely repaid. sumer price index excluding food and Adjusted for relative consumer price energy items has risen 23A percent— inflation, the dollar was little changed, near the lower end of the narrow range on balance, against a multilateral-trade- that has prevailed since early 1994. weighted average of the currencies of Moreover, the deflator for personal coneight developing countries that are sumption expenditures on items other important U.S. trading partners. The dol- than food and energy derived from data lar's 30 percent real appreciation against reported in the national income and the Mexican peso was about offset product accounts (NIPA) has continued by real depreciations against the other to show a slowing trend. seven currencies. The combination of brisk growth and favorable underlying inflation so far this year has, of course, been welcome. Report on July 18, 1996 Nonetheless, mounting pressures on resources are apparent in some segments of the economy—most notably in the Monetary Policy and the labor market—and these pressures must Economic Outlook be monitored closely. Allowing infla- The U.S. economy performed well in the tionary forces to intensify would ultifirst half of 1996. In early February, mately disrupt the growth process. The when the Federal Reserve prepared its Federal Reserve recognizes that its conlast report on monetary policy, there was tribution to promoting the optimal persome concern about the strength and formance of the economy involves condurability of the current economic taining the rate of inflation and, over expansion: The economy was operating time, moving toward price stability. at a relatively high level of resource utilization, but it was not exhibiting a Monetary Policy, Financial great deal of forward momentum. As the Markets, and the Economy year has unfolded, however, economic over the First Half of 1996 activity has proved quite robust. After rising only fractionally in the fourth Information available around the turn of quarter of 1995, real gross domestic the year suggested that the economy had product posted a solid gain over the first downshifted after posting a strong gain half of 1996, providing a considerable in the third quarter of 1995. The growth Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

62 83 rd Annual Report, 1996 of final demand appeared to have The underlying trends in the economy slowed, reflecting importantly a decel- early in the year were obscured to a eration of consumer spending. In addi- degree by extraordinarily adverse tion, hesitant growth abroad and a weather that affected a significant part strengthening in the foreign exchange of the country. Through the course value of the dollar relative to the levels of the next few months, however, it prevailing at mid-1995 were seen as lim- became increasingly clear that the econiting the prospects for further growth in omy had regained vitality. Consumer exports. The slowdown in the growth of spending perked up after a lackluster final demand had given rise to inventory holiday season and was only tempobuildups in some industries; in turn, rarily depressed by the severe winter. the production cutbacks undertaken in Business demand for equipment proved response to those buildups were having quite strong, as did housing demand. a further damping effect on economic The strengthening in sales facilitated activity. Meanwhile, data on prices businesses' efforts to control their invenand wages suggested that inflation tories, and as that situation improved, performance continued to be fairly industrial production rebounded smartly. satisfactory—indeed, better than many Overall employment growth was brisk, members of the FOMC had expected and by June the unemployment rate as of midyear 1995. To keep the stance reached its lowest level in six years. of monetary policy from becoming Inflation during the first half of effectively more restrictive owing to the year was generally well behaved. the slowdown in inflation in the second Energy prices surged, mainly in half of last year and to promote sus- response to a run-up in the world price tainable growth, the Committee eased of oil, and bad news about grain crops the stance of policy in December 1995 raised the prospect of higher food prices and again at the end of January 1996, down the road. However, price inflation bringing the federal funds rate down for consumer items other than food and a half percentage point in total, to energy held steady or moved a bit lower. 514 percent. Labor costs presented a mixed picture. Most participants in financial markets The increase in total hourly compenwere unsurprised by these policy adjust- sation over the first three months of the ments, given the economic backdrop. year, as measured by the employment Moreover, they anticipated that there cost index (ECI), was in line with its would be scope for additional easing recent moderate trend. However, within steps in the coming months. Thus, total compensation, the wage and salary between mid-December and the end of component of the ECI surged in the first January, interest rates on Treasury secu- quarter, and further signals of wage rities generally moved lower, especially acceleration came from a more rapid at short and intermediate maturities, and increase in average hourly earnings in stock price indexes edged higher on bal- the second quarter. ance. The dollar strengthened slightly Against the backdrop of stronger on net against the currencies of the other activity but subdued inflation trends, the Group of Ten (G-10) countries, reflect- Federal Reserve made no adjustments ing, in part, disappointing news about to its policy stance after January. With the pace of activity in Europe and conse- economic activity more clearly on the quently larger declines in interest rates upswing, however, and prospects for a there than in the United States. breakthrough on the federal budget Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 63 seeming to fade, intermediate- and long- growth in the monetary aggregates relaterm interest rates reversed course in tive to nominal gross domestic product February and trended up over subse- has been broadly in line with historical quent months. Since the end of Decem- relationships, given the structure of ber, the yield on the thirty-year Treasury interest rates. bond has increased about 1 percentage point, on net, while the yield on the Economic Projections for five-year note has risen about VA per- 1996 and 1997 centage points over the same period. The rate on three-month bills has edged As noted previously, the members of the up only slightly. Despite the backup in Board of Governors and the Reserve bond yields, major stock-price indexes Bank presidents, all of whom participate rose considerably further through the in the deliberations of the Federal Open first half of the year; most of those gains Market Committee, generally think it were erased in late June and the first half likely that economic activity will return of July, however, as company reports to a moderate growth path in the second raised questions about the pace of earn- half of 1996 and in 1997 after the larger ings growth. The rise in bond yields has gains in the first half of this year. The boosted the dollar in foreign exchange resulting increase in real GDP over 1996 markets; since mid-April, the dollar has as a whole would be in the range of generally traded against an average of 2V2 percent to 23A percent, somewhat the currencies of the other major indus- above the forecasts in the February trial countries about 4 percent above its report on monetary policy. For 1997, the level at the end of December. central tendency of the forecasts spans a During the first half of the year, credit range of 13A percent to 2V4'percent. The remained easily available to most house- civilian unemployment rate, which averhold and business applicants. Interest aged around 5Vi percent in the second rate spreads on private debt over Trea- quarter of 1996, is expected to stay near sury securities remained narrow. In this level through the end of this year response to the recent increase in delin- and perhaps to edge higher during 1997. quencies on credit card accounts, many Economic activity clearly retains conbanks have tightened their standards for siderable momentum. The trend in final approval of new accounts, but this demand is positive, and inventories appears to have only partially reversed a appear to be well aligned with the curmarked relaxation of such standards ear- rent pace of sales—perhaps even a bit lier this decade, and banks overall lean. Accordingly, the members of the remain aggressive in the pursuit of new FOMC recognize the possibility that borrowers, especially business clients. growth could remain elevated a while, The debt of all domestic nonfinancial with the potential for putting greater sectors combined expanded at about a pressure on resources. Nonetheless, 43A percent annual pace, placing this most members think that some slowing aggregate near the middle of its monitor- from the rapid growth pace recorded, on ing range. M2 and M3 are currently near average, in the first half is the most the 5 percent and 6 percent upper likely outcome. Housing construction boundaries of their respective growth and other interest-sensitive activity ranges, in line with the FOMC's expec- should be restrained to some degree by tation as of last February. In contrast the rise in long-term interest rates over to the experience of the early 1990s, the past several months. And although Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

64 83rd Annual Report, 1996 some of the lagging economies abroad predicted last winter. The projected are expected to perform better this year, increase in the consumer price index is there are still concerns about the solidity also somewhat larger than that recorded of that acceleration and the associated in 1995. However, that step-up would lift to U.S. exports. In addition, growth mainly reflect developments in the food in real business fixed investment appears and energy sectors, which are likely to to be tapering off, although spending add to overall inflation in 1996 after will likely remain buoyant because of having damped it in 1995. Apart from the rapid rate of product innovation and these volatile sectors, inflation has dramatic price declines in the computer remained in check so far this year area. Consumer spending is also despite high levels of resource utilizaexpected to grow less rapidly in coming tion and reports that tightness in some quarters. Household wealth has been parts of the labor market is placing boosted substantially by the run-up upward pressure on wages. Assuming in stock prices over the past year and a no further adverse shocks to food and half, but for many households, debt bur- energy prices, and in the context of dens have risen significantly in recent the Federal Reserve's intent to keep years and may represent a constraint on trend inflation well contained, the Compurchases of big-ticket items. mittee believes that overall CPI inflation Most members of the FOMC expect should recede. Accordingly, the central the rise in the consumer price index over tendency of the FOMC's forecasts the four quarters of 1996 to be in the shows CPI inflation dropping back to range of 3 percent to 3lA percent, about the range of 23/4 percent to 3 percent in lA percentage point higher than they 1997. Economic Projections for 1996 and 1997 Percent Federal Reserve governors and Reserve Bank presidents Measure Administration Central Range tendency 1996 Change, fourth quarter to fourth quarter* Nominal GDP 43/4-53/4 5-51/2 5.0 R C e o a n l s u G m D e P r price index2 2'/ 3 2- - 3 3 '/4 2'/ 3 2- - 2 3 3 » / / 4 4 2 3 . . 6 2 Average level, fourth quarter Unemployment rate3 5'/4-53/4 About 5Vi 5.6 1997 Change, fourth quarter to fourth quarter' Nominal GDP 4-5'/2 4'/4-5 5.1 Real GDP V/2-V/2 VA-VA 2.3 Consumer price index2 2'/2-3'/4 23/4-3 2.8 Average level, fourth quarter Unemployment rate3 5'/2-6 5'/2-53/4 5.7 1. Change from average for fourth quarter of preced- 3. Civilian labor force. Figure for the Administration ing year to average for fourth quarter of year indicated. is an annual average. 2. All urban consumers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 65 The Committee's inflation projections In setting the ranges for M2 and M3, incorporate the technical improvements the Committee intended to communithe Bureau of Labor Statistics is making cate its expectation as to the growth of to the CPI in 1996 and 1997; they are these monetary aggregates that would expected to shave a little from inflation result under conditions of approximate in both years. The Committee also rec- price stability, assuming that the aggreognizes that the remaining biases in the gates exhibit the same trends relative to CPI are not negligible and may not be nominal spending that prevailed for stable over time. Thus, it will continue many years until the early 1990s and to monitor a variety of alternative mea- that seem to have reemerged after an sures of price change as it attempts to intervening period of marked deviation. gauge progress toward the long-run goal Based on that reemergence and on Comof price stability. mittee members' expectations for the The Administration has just released growth of nominal GDP in 1996 and its midyear update to its economic and 1997, the Committee anticipates that budgetary projections. Its forecasts for both M2 and M3 will probably finish real growth and inflation in 1996 and near the upper boundaries of their re- 1997 are broadly in line with the central spective ranges each year. The Committendencies of the forecasts of Federal tee expects that the debt of the domestic Reserve policymakers. nonfinancial sectors will remain near the middle of its monitoring range in 1996 and 1997. In light of the rapid pace of Money and Debt Ranges technological change and innovation for 1996 and 1997 still occurring in the financial sector— At its meeting earlier this month, the and the attendant uncertainty about the Committee reaffirmed the ranges for future behavior of the aggregates—the 1996 growth of money and debt that it Committee will continue to rely on a had established in February: 1 percent to wide range of other information in deter- 5 percent for M2, 2 percent to 6 percent mining its policy stance. for M3, and 3 percent to 7 percent for the debt of the domestic nonflnancial Economic and Financial sectors. In addition, the Committee Developments in 1996 set provisional growth ranges for 1997 at the same levels.. Economic activity has increased substantially thus far this year. Real gross domestic product grew at an annual rate Ranges for Growth of Monetary of about 2!/4 percent in the first quarter and Debt Aggregates of 1996, and the available data point to a much larger increase in the second quar- Percent ter. The increases in activity have been Provisional facilitated by generally supportive finan- Aggregate 1995 1996 for 1997 cial conditions: Although long-term interest rates have risen considerably on M2 1-5 1-5 1-5 M3 2-6 2-6 2-6 net since early 1996, intermediaries Debt 3-7 3-7 3-7 have continued to supply credit to most NOTE. Change from average for fourth quarter of borrowers on favorable terms, and interpreceding year to average for fourth quarter of year est rate spreads on corporate securities indicated. Figures for debt of the domestic nonfinancial over Treasury securities have remained sector are monitoring ranges. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 83 rd Annual Report, 1996 narrow. In the foreign exchange mar- quarter. Meanwhile, spending on serkets, the dollar has appreciated, on aver- vices has remained on a moderate age, against the currencies of the other uptrend, with short-run variations remajor industrial countries. flecting the effects of weather on household energy use. Consumer spending has been sup- Economic Developments ported by brisk gains in wage and salary income associated with the better pace The Household Sector of hiring this year. However, other com- After a sluggish performance in late ponents of before-tax income, taken 1995, spending by households has together, have risen less rapidly than picked up noticeably this year. Con- they did in 1995, and gains in after-tax sumer expenditures increased about income were restrained by larger-than- 3Vi percent at an annual rate in real usual tax bills (final payments less terms in the first quarter and appear to refunds) this spring. Accordingly, the have posted another sizable gain in the level of the personal saving rate in May second quarter. In addition, according was somewhat below that recorded in to indexes such as those compiled by the late 1995, although fragmentary data Survey Research Center at the Univer- suggest that saving rose sharply in June. sity of Michigan and the Conference In any event, taking a longer perspec- Board, consumer sentiment has gen- tive, spending and income have grown erally been relatively upbeat. In the at roughly similar rates over the past real estate market, sales of new single- few years, and the saving rate has generfamily dwellings have posted an aver- ally fluctuated in a fairly narrow band age level well above that of last year, between 4 percent and 5 percent since thus encouraging builders to boost hous- 1993—a low level historically. ing starts. The recent developments in financial Outlays for durable goods have con- markets may have had an important tinued to be the strongest component of influence on the spending decisions of spending, extending the long-standing individual households. In particular, uptrend in the share of durables in total households holding large stock portreal consumption. Declining relative folios have enjoyed sizable increases in prices and the availability of innovative wealth over the past year and a half, products have continued to lift demand which may be inducing them to confor home electronic equipment and soft- sume greater fractions of their incomes ware products. In addition, sales of light than they would otherwise. At the same motor vehicles, bolstered by relatively time, a growing number of households generous incentives and perhaps by the are apparently finding it difficult to meet cash freed up by the surge in mortgage their debt-service obligations, judging refinancings last winter, averaged a from the appreciable rise in delinquency healthy 15 million unit annual rate in the rates on consumer loans in recent years. first half of 1996. In addition, it is possible that job inse- After a lackluster performance in curity and longer-run concerns about 1995, real outlays for nondurable goods retirement income have caused many have also risen this year; the average households to raise their targets for level of these expenditures in April and asset accumulation. However, the rela- May was nearly 3 percent at an annual tive stability of the saving rate over rate above that recorded in the fourth the past few years suggests that the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 67 net effect of these factors on overall payment on a new home having a given consumption—at least to date—has set of attributes, divided by average been limited. monthly household income. Despite the Residential construction has, on the increase in mortgage rates this year, this whole, been robust this year. Private measure suggests that the cash-flow burhousing starts averaged nearly 1.5 mil- den of homeownership is still only modlion units at an annual rate through June, estly above the lows of the past thirty a pace appreciably above that in 1995. years. In addition, the volume of shipments Construction of multifamily housing of mobile homes ("manufactured hous- averaged about 300,000 units at an ing"), which has doubled over the past annual rate in the first half of 1996, a five years, now stands around 350,000 rate somewhat above that in 1995 but units at an annual rate, the highest level a fairly low one historically. Market since 1974. conditions vary geographically, but the In the single-family sector, starts and rental vacancy rate for the nation as a sales of new homes were surprisingly whole seems to have tilted back up, firm in the face of severe weather in after generally trending down between early 1996, and they moved still higher mid-1993 and mid-1995. Also, the in the second quarter. Moreover, the absorption rate, which measures the perregular survey of the National Associa- centage of apartments that are rented tion of Homebuilders continued to indi- within three months of their completion, cate solid demand through early July, edged back down in 1995 after several and the Mortgage Bankers Association years of increases. reported that loan applications for home purchases remained brisk through mid- The Business Sector year. Relative to the lows reached in early Developments in the business sector 1996, the rate on thirty-year conven- were quite favorable in the first half tional fixed-rate home mortgages has of 1996. After decelerating in 1995, risen nearly Wi percentage points and real business fixed investment rose at a has been fluctuating around 814 percent 12V2 percent annual rate in the first quarin recent weeks. However, a number of ter of 1996, with sizable advances for factors seem to have cushioned the both equipment and structures. And, effects of these higher mortgage rates. In although real investment appears to have particular, rates on adjustable-rate mort- decelerated again in the second quarter, gages have risen only about half as it probably posted an appreciable gain. much as have those on thirty-year fixed- Over the past four years, real investment rate loans. Also, house prices have has grown around 8 percent per year, on firmed somewhat, which may have average, and now stands at a level that raised confidence in the investment implies quite substantial growth in the value of residential real estate and thus capital stock. The updating of capital contributed to the recent rise in the and the increase in capital per worker homeownership rate, which is now at its are key to lifting productivity growth highest level since the early 1980s. and living standards. Probably more important in this regard, Outlays for producers' durable equiphowever, is the trend in the affordability ment rose at an annual rate of about of housing. One simple measure of 14 percent in real terms in the first quaraffordability is the monthly mortgage ter, after a IV2 percent rise over the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 83rd Annual Report, 1996 course of 1995. As has been true construction, which had moved up over throughout the expansion, much of the 1994 and the first half of 1995, have first-quarter growth was in real outlays been nearly flat over the past few quarfor computers and other information- ters, while construction of hotels and processing equipment; such investment motels, which account for less than received particular impetus from exten- 10 percent of structures outlays, has sive price cutting in virtually all seg- boomed. ments of the computer market and from Investment in nonfarm business a push to acquire the state-of-the-art inventories slowed dramatically in the equipment needed to take full advan- fourth quarter of 1995 after running at a tage of popular new software and fairly rapid pace over much of last year, opportunities for information transfer. and it nearly ceased in the first quarter However, incoming orders data and of 1996 as motor vehicle stocks plumrecent anecdotal reports suggest that the meted. Automotive stocks had risen growth in real outlays for computers appreciably over the second half of may be slowing. Meanwhile, demand 1995, and some reduction was in train for other types of capital equipment, even before a March strike at General which had softened in 1995, firmed Motors curbed production; with the somewhat in the first quarter. strike, dealer stocks were drawn down In the nonresidential construction sharply. In addition, although firms outarea, real investment continued to side motor vehicles apparently made expand in the first quarter. However, the considerable progress in rectifying monthly data suggest that outlays soft- inventory imbalances in late 1995, many ened in the second quarter, an occur- continued to restrain production in rence that is consistent with the down- response to continued weak orders in turn in contracts—a forward-looking early 1996; producers of household indicator of construction outlays—since durables and textiles are notable late 1995. examples. Trends within the construction sector Inventory investment evidently rehave been divergent. In the office sector, bounded in the second quarter, mainly the modest recovery that seemed to be because motor vehicle stocks stabilized under way appears to have waned even as sales and production returned to though vacancy rates have continued to rough balance. Outside of motor vehifall and transactions prices have contin- cles, stocks accumulated moderately, on ued to rise. Outlays dropped noticeably balance, in April and May. As of May, in the fourth quarter of 1995 and the first inventory-sales ratios for all major secquarter of 1996, and preliminary data tors were noticeably below their levels suggest that they remained at a fairly in late 1995; the decline in the ratio for low level in the second quarter. In con- retailers was especially steep. trast, spending for commercial struc- Economic profits of all U.S. corporatures other than office buildings, which tions continued to surge in the first quarhas been rising briskly since 1992, con- ter, extending the steep climb that began tinued to advance through the first in the early 1990s. The strength in profquarter—although further gains may be its in recent quarters has been attributlimited by an emerging excess of retail able in large part to robust earnings space in some parts of the country and growth at domestic financial institutions the recent leveling out of transactions and a rebound in profits at foreign subprices. Elsewhere, outlays for industrial sidiaries of U.S. corporations. In the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 69 domestic nonfinancial corporate sector, gains realizations associated with the the profit share—pretax profits divided strong performance in financial markets by the sector's GDP—has been hover- last year. ing around 10 percent since mid-1994, In total, federal outlays in the first after having risen appreciably over the eight months of fiscal 1996 were 4 perpreceding few years; its current level is cent higher than during the correspondsimilar to the levels attained in the mid- ing period of fiscal 1995. Outlay growth 1980s but well below the highs of the was damped by the reductions in discre- 1960s and 1970s. About half of the tionary domestic spending implied by increase in the sector's profit share since this year's appropriations legislation. the early 1990s has reflected a reduction However, expenditures for "mandatory" in net interest expenses. programs continued to rise rapidly, and net outlays for deposit insurance were less negative than in 1995 (that is, insur- The Government Sector ance premiums and the proceeds from Although the nation continues to grapple net sales of thrift assets declined). In with the prospect of growing federal addition, net interest payments increased budget deficits in the years ahead, the moderately, reflecting the growth in the incoming news on the budget for fiscal stock of outstanding federal debt. 1996 has been extremely favorable. The Federal expenditures on consumption deficit in the unified budget over the first and investment—the part of federal eight months of the fiscal year—the spending included directly in GDP— period from October to May—was only increased at an annual rate of about $109 billion, $27 billion less than dur- 6 percent in real terms in the first quarter ing the comparable period of fiscal of 1996 after declining about 13 percent 1995. The improvement in the deficit in the fourth quarter of 1995. In part, primarily reflected exceptionally rapid real spending rose in the first quarter growth in receipts; outlays continued to because the government shutdowns that rise at about the same pace as had been occurred during the budget crisis derecorded, on average, over the preced- pressed real spending less in the first ing four years. If present trends con- quarter than in the fourth. Even so, tinue, the fiscal 1996 deficit, when mea- given the enacted appropriations, the sured as a percentage of nominal GDP, first-quarter increase was almost surely will be the smallest since 1979. a transitory spike. Federal receipts in the first eight The fiscal position of states and months of fiscal 1996 were 8 percent localities has been relatively stable in higher than in the same period a year the aggregate over the past few years. earlier; the rise was considerably greater As measured in the NIPA, the surplus than that of nominal GDP. Boosted by (net of social insurance funds) in the the upswing in business profits, corpo- sector's operating accounts has flucrate taxes have been increasing at tuated in the range of $30 billion to double-digit rates since fiscal 1993, and $40 billion (annual rate) since the beginthat path has extended into fiscal 1996. ning of 1994; it stood around the middle Individual income taxes have also risen of that range in the first quarter. On the sharply this year; little information is whole, these governments are in considavailable on the factors behind the surge erably better shape than they were in the in individual payments, but it may have early 1990s. Even so, the sector remains resulted, at least in part, from capital under pressure to balance rising demand Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 83rd Annual Report, 1996 for services—especially in education, After expanding very slowly during corrections, and health care—against the the second half of 1995, the quantity of public desire for tax relief. U.S. imports of goods and services rose Real expenditures on consumption about 10 percent at an annual rate in the and gross investment—the part of state first quarter, and preliminary data for and local spending included directly in April show another sizable increase. The GDP—declined somewhat in the first rebound in imports largely reflected the quarter of 1996. However, the decrease strengthening of U.S. economic activity. reflected primarily the effects of the In addition, non-oil import prices have unusually adverse winter weather, and declined somewhat since last fall, after spending appears to have rebounded having risen sharply in late 1994 and in the second quarter. State and local early 1995. A turnaround in imported employment posted a respectable gain, automotive vehicles, consumer goods, on net, over the first six months of the and non-oil industrial supplies, followyear. In addition, outlays for construc- ing more than six months of declines, tion rose about 2>Vi percent in real terms accounted for most of the increase in over the year ending in the first quarter, imports during the first four months of reflecting higher spending on high- 1996. ways and schools; monthly construc- The quantity of U.S. exports of goods tion data through May suggest that and services expanded at a 2 percent spending rose substantially in the sec- annual rate during the first quarter; it ond quarter. also appears to have expanded at about Receipts of state and local govern- this pace in April. The somewhat subments rose about 4 percent in nominal dued pace of export growth so far this terms over the year ending in the first year reflects, in part, a bunching of shipquarter, about matching the rise in nomi- ments, particularly of machinery, that nal GDP. The sector's own-source gen- resulted in an unusually strong increase eral receipts, which comprise income, in exports in the fourth quarter of last corporate, and indirect business taxes, year. rose about 1 percentage point faster, Trends in economic activity have varwith solid gains in all major compo- ied across the major foreign industrial nents. Federal grants have changed little, countries so far in 1996. In Japan, ecoon net, over the past four quarters. nomic recovery appears to have taken hold, although the underlying pace of real GDP growth is clearly less than the The External Sector nearly 13 percent annual rate reported The nominal trade deficit in goods and for the first quarter; the first-quarter services widened from its low fourth- growth rate was boosted, in part, by quarter level of $78 billion at an annual a temporary surge in government rate to $97 billion in the first quarter of spending and measurement practices 1996, slightly less than the deficit of associated with the leap year.2 In Can- $105 billion for 1995 as a whole. The ada, growth remained subdued in the current account deficit stood at $142 billion (annual rate) in the first quarter, 2. Although the statistical agencies in many about the same as the figure for 1995 as countries take the number of working days in the a whole. In April, the trade deficit quarter into account when seasonally adjusting data, the statistical agencies in Japan, France, and increased from the average level for the Italy among the G-10 countries do not make first quarter. working-day adjustments. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 71 first quarter as real GDP rose only roughly stable at the level reached 1V4 percent at an annual rate despite toward the end of last year after having much stronger growth in domestic improved markedly over the course demand; indicators for the second quar- of 1995. Argentina also appears to be ter suggest some strengthening. emerging from the steep declines in out- Economic performance so far this put experienced during the first half of year in Europe has been mixed. In Ger- 1995, while Chile continues to enjoy many, real GDP declined another steady growth. Activity in Brazil has 1V2 percent at an annual rate in the first begun to expand again in recent months, quarter, largely because severe weather following a sharp contraction in midcaused a substantial contraction in con- 1995. struction spending; preliminary data Economic growth in our major Asian suggest that construction activity re- trading partners (other than Japan) bounded in the second quarter with the appears to have picked up again this return to more normal weather. In con- year after slowing noticeably during the trast, French real GDP expanded nearly second half of 1995 from the extremely 5 percent at an annual rate in the first rapid rates recorded in 1994 and the first quarter, supported by a very sizable half of 1995. The recent pickup in activrebound in consumption as well as leap- ity was associated with an easing of year effects; strikes during the fourth monetary policy in some of these counquarter of last year depressed economic tries in the second half of last year and activity and contributed to a decline in the early part of this year. In China, private consumption spending. Indica- output appears to have expanded during tors for the second quarter suggest that the first quarter at around the 10 percent output growth moderated from its first- annual rate recorded in 1995, with a quarter pace. In the United Kingdom, pickup in consumption spending comreal GDP grew at an annual rate of pensating for weaker growth in the IV2 percent during the first quarter, external sector. somewhat more slowly than during the Consumer price inflation generally second half of 1995. On the policy front, stayed low in the major foreign indusmost European countries are seeking to trial countries and declined or remained rein in their fiscal deficits during 1996 moderate elsewhere. In Japan, prices and 1997, in part to comply with the in the second quarter, on average, were criterion in the Maastricht Treaty that slightly above their year-earlier levels countries participating in the third stage because of the effects of yen depreciaof the European Monetary Union, now tion on import prices; this upturn folscheduled to begin on January 1, 1999, lowed a year of deflation. In western not have excessive fiscal deficits. As a Germany, inflation slowed through June reference value, the treaty specifies that to only about \lA percent. Inflation in deficits greater than 3 percent of a coun- Italy remained higher than in the other try's GDP are excessive, but it also pro- major foreign industrial countries but vides scope for accepting deficits above slowed to below 4 percent through June. that level in some circumstances. In Canada, inflation also moved down In Mexico, robust growth of real GDP further this year, to about 1 Vi percent in in the first quarter extended the recovery May. in economic activity that began in the Inflation trends in Latin America have second half of 1995. Through June, been mixed. In Mexico, the twelvethe Mexican trade balance remained month change in consumer prices dimin- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

72 83rd Annual Report, 1996 ished to about 32 percent in June, com- Developments in manufacturing were pared with a reading of 52 percent for uneven but showed some improvement the twelve months ending in December in the second quarter. As 1996 started, 1995. Consumer price inflation has also firms were still adjusting employment to declined further in Brazil and remained the slower path of output that had been low in Argentina. In contrast, prices evident since early 1995, and payrolls— have picked up in Venezuela in response especially at firms producing nondurato the depreciation of its currency asso- ble goods—were reduced further. In the ciated with the adoption of a program of past three months, manufacturing emmacroeconomic stabilization. In Asia, ployment has held fairly steady, buoyed inflation has decreased so far in 1996 in by the pickup in industrial activity, and China and remained moderate to low the average factory workweek, which elsewhere. had contracted appreciably in 1995, trended up through June. For the nonfarm business sector as a Labor Market Developments. whole, productivity rose at an annual Labor demand was strong over the first rate of about 2 percent in the first quarhalf of 1996. Growth in nonfarm payroll ter of 1996, echoing the acceleration in employment exhibited considerable output. However, productivity had month-to-month variability but aver- posted an outright decline in the fourth aged a hefty 235,000 per month. In addi- quarter of 1995; all told, productivity tion, the civilian unemployment rate rose about 1 percent over the year endremained low, holding in the narrow ing in the first quarter of 1996, in line range around 5Vi percent that has pre- with the average pace this decade. In the vailed since late 1994. manufacturing sector, productivity rose Employment gains were fairly AXA percent over the past year, although broadly based over the first half of the the reported increase was probably overyear. The services sector, which now stated because firms in this sector have accounts for nearly 30 percent of non- been relying increasingly on workers farm employment, continued to be a supplied by temporary help firms, who mainstay of job growth, showing are counted as service industry employincreases of nearly 120,000 per month, ees rather than as manufacturing emon average, over the first half. Within ployees in the establishment survey of services, growth in employment in busi- the Bureau of Labor Statistics. ness services remained rapid, with large Labor force participation has gains at computer and data processing remained sluggish this year. The particifirms as well as at temporary help agen- pation rate, which measures the percentcies, and employment in health services age of the working-age population that trended up further. In addition, construc- is either employed or looking for work, tion payrolls rose a brisk 30,000 per did retrace the dip that occurred in late month, on average—an annual rate of 1995. But taking a longer perspective, about 7 percent. Elsewhere, payrolls at the overall participation rate (adjusted wholesale and retail trade establish- for the redesign of the household survey ments continued to increase at about the in 1994) has changed little, on net, since same pace as that in 1995, and employ- 1989 after rising fairly steadily from the ment in the finance, insurance, and real mid-1960s to the late 1980s. The flattenestate category picked up after having ing reflects mainly a marked decelerabeen nearly flat over 1994 and 1995. tion in women's participation, owing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 73 both to a leveling off in the percentage overstates current wage trends, the of women who are in the labor force for twelve-month change in the series at least part of a given year and slower moved up to 314 percent, nearly xh pergrowth in the average number of weeks centage point larger than the increases they spend in the labor force that year. in the preceding two years. Separate Moreover, with the average number of data on average hourly earnings of weeks these women spend in the labor production or nonsupervisory workers force having risen to a level only slightly also show a recent acceleration in below the average for men, a significant wages; the twelve-month change in this rebound in participation does not seem series moved up to about 31/2 percent in very likely over the near term. The slug- June. gishness in participation tends to restrain the growth of potential output unless it Price Developments is offset by a better productivity performance or by faster growth in the The underlying trend of prices has working-age population—neither of remained favorable this year—notably, which has yet been in evidence. the CPI excluding food and energy rose Despite the tightness in labor markets at an annual rate of 23/4 percent over the in recent quarters, the broad trends in first six months of the year, near the hourly compensation appear to have lower end of the narrow range than has held fairly steady. The employment cost been evident since early 1994. Developindex for private industry—a measure ments in food and energy markets that includes wages and benefits—rose boosted overall inflation, however, and at an annual rate of about 3 percent over the total CPI rose at an annual rate of both the first three months of 1996 3!/2 percent over the first half; this patand over the twelve months ending tern was the reverse of that seen in 1995, in March; the ECI had also increased when a small drop in energy prices, about 3 percent over the twelve months combined with only a modest increase ending in March 1995. Compensation in food prices, held the rise in the total growth has continued to be damped CPI to just 2!/2 percent. Meanwhile, the by a marked deceleration in employer- producer price index for finished goods paid benefits—especially payments for rose about 23A percent over the twelve medical insurance, which have been months ending in June; excluding food restrained by the slowing in medical and energy, the PPI rose Vh percent, a care costs, the switch in insurance bit less than over the preceding year. arrangements from traditional indem- Consumer energy prices picked up nity plans to health maintenance orga- around the turn of the year and rose at nizations and other managed care plans, an annual rate of about 12 percent, on and changes in the provisions of health net, over the first six months of 1996. plans (including greater sharing of With crude oil stocks drained by strong health care costs by employees). On the worldwide demand for heating oil and whole, wages also seem to have been weather-related supply disruptions in the held in check, although the most recent North Sea and elsewhere, the spot price data may be hinting at some accelera- of West Texas intermediate (WTI) tion. Notably, the wage and salary com- soared from around $18 per barrel, on ponent of the ECI rose sharply in the average, in the second half of 1995 to a first quarter; although the data are vola- high of around $25 per barrel in midtile and the first-quarter figure likely April; the WTI price has since retraced Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 83rd Annual Report, 1996 much of that run-up. Reflecting the Association of Purchasing Managers surge in crude oil prices, retail prices of suggests that vendor performance deterefined petroleum products rose sharply riorated markedly in June, a developthrough May, on balance. However, they ment that could portend some firming of fell markedly in June, and private sur- prices of materials and supplies over the veys of gasoline prices imply a further near term. decrease in early July. Prices of non-energy services rose Retail food prices rose at an annual 33/4 percent at an annual rate over the rate of about 4 percent over the first six first half, about the same as the rise over months of 1996, somewhat above the 1995 as a whole. Airfares accelerated pace of the preceding few years. At the significantly in the first half. However, farm level, prices of grains and other shelter costs increased less rapidly than commodities rose to exceptionally high they had in 1995, and prices of medical levels as adverse crop conditions in care continued to decelerate; over the some parts of the country exacerbated six months ending in June, the CPI for an already tight stock situation. For medical care services rose at an annual some foods—notably, dairy products, rate of only about 3lA percent, roughly cereals and bakery products, poultry, 1 percentage point below the 1995 pace. and pork—the pass-through tends to Moreover, there is some evidence that occur relatively rapidly, and retail prices the CPI may be understating the recent of such items have already risen appre- slowing in medical care inflation, in part ciably. Beef prices fell through May as because it does not fully capture the producers sold off herds in response to discounts negotiated between medical higher feed costs and poor range condi- providers and insurers, including mantions; they turned around in June and aged care plans. The price measure used will likely rise further over the next to deflate consumer expenditures on several quarters as the selloff of breed- medical care in the NIPA better reflects ing stock will eventually lead to tighter such factors; it rose less than 2 percent supplies. over the year ending in the first quarter Price increases for consumer goods of 1996 after having risen 4l/z percent other than food and energy slowed to over the preceding year. 1 percent at an annual rate over the first Judging from the various surveys of half of 1996, after averaging about consumers and forecasters, expectations 1 l/i percent per year over the preceding of near-term CPI inflation deteriorated three years. Increases in goods prices slightly in the first half of 1996. Notahave been restrained, in part, by the bly, although both the University of uptrend in the dollar since mid-1995, Michigan and the Conference Board had which has helped to damp import prices. reported a noticeable drop in their one- In addition, with the operating rate in year-ahead measures in the second half the manufacturing sector having fallen of 1995, that improvement was not susto about its long-term average, pressure tained in 1996; the recent monthly readfrom the materials side has been limited. ings have bounced around, but the June Indeed, the PPI for intermediate materi- results from both surveys were similar als (excluding food and energy) actually to those recorded, on average, in the first fell a bit over the past twelve months, half of 1995. In contrast, longer-run after having risen IV2 percent over the inflation expectations, which have prepreceding year. Looking ahead, how- sumably been less affected by the recent ever, the latest report from the National news in food and energy markets, have Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 75 held fairly steady. Smoothing through relatively high interest rates in the midthe monthly data, the University of 1980s. They have pursued these efforts Michigan's measure of expected CPI through a strategy of advance refunding: inflation over the next five to ten years In the early 1990s, when bond yields has not changed much since late 1994, were seen as especially favorable, state and the survey of professional forecast- and local governments issued new debt, ers conducted by the Federal Reserve even before call provisions on the older Bank of Philadelphia during the second bonds could be exercised, and placed quarter of 1996 produced the same the proceeds in escrow accounts. As it expectation for the succeeding ten years became possible to do so, the issuing as that in the survey taken in the fourth governments began calling the older quarter of 1995. debt, using the contents of the escrow accounts to complete the transactions. Reflecting these retirements, the amount Financial Developments of state and local government debt outstanding declined about 4 percent per year in 1994 and 1995. This process is Credit still in train but evidently on a smaller Financial conditions in the first half of scale; available information suggests 1996 supported the pickup in the growth that state and local government debt outof spending. For the most part, lenders standing declined only marginally durcontinued to pursue credit applicants ing the first half of this year. aggressively as reflected, for example, in narrow spreads of interest rates on The Household Sector corporate securities over those on Treasury securities. The debt of domestic The pace of borrowing by households nonfinancial sectors increased about appears to have moderated somewhat 43/4 percent at an annual rate from the from the elevated rates of 1994 and fourth quarter of 1995 through May of 1995, but it remains substantial. In parthis year, a pace that was a bit slower ticular, consumer credit expanded at a than last year but still sufficient to place 9!/2 percent annual rate from the fourth the level of this aggregate in the middle quarter of 1995 through May of this of its monitoring range for 1996. year, a rate that was down from \AVi percent over the four quarters of 1995. Mortgage debt actually expanded The Government Sector somewhat more rapidly during the first Federal debt outstanding increased quarter than in 1995 (73A percent at an about 4 percent at an annual rate over annual rate versus 6*/2 percent), and the first half of 1996, a shade below the available indicators suggest that growth average rate of increase last year. The during the second quarter dropped back impasse over the debt ceiling disrupted only to about last year's pace. The the timing and size of some Treasury recent backup in mortgage rates, which auctions but did not alter the longer- only began in February, has had little term trajectory of federal debt. effect on borrowing thus far and might The pattern of net borrowing by state even have increased it temporarily by and local governments in the past sev- accelerating transactions. eral years has been heavily influenced The rapid growth in household debt by their efforts to retire debt issued at during the past few years has resulted in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 83rd Annual Report, 1996 a sizable increase in the estimated ratio the attractiveness of bankruptcy by of scheduled payments of principal and increasing the value of assets that can be interest to disposable personal income. protected from liquidation in bankruptcy This measure of debt-servicing burden proceedings. The "cost" of bankruptcy has trended up over the past two years, to households has also been effectively and as of the first quarter of 1996, was lowered by the greater willingness of approaching—but still short of—the lev- lenders to extend credit to riskier els attained toward the end of the last borrowers—even those with a previous business cycle expansion. bankruptcy on their records. Several other recent indicators sug- Other indicators are less suggestive of gest that some households are experi- a deterioration in the financial condition encing financial strains. For example, of households. For example, the delinthe Consolidated Report of Condition quency rate for mortgage loans sixty and Income shows that the delinquency days or more past due at all lenders is rate on credit-card receivables at com- near its lowest level in two decades, mercial banks has increased signifi- while the rate on closed-end consumer cantly in recent quarters, retracing about loans—despite having moved up over one-third of the improvement that took the past eighteen months—remains low place during the first few years of the by historical standards. Moreover, the current economic expansion. The delin- aggregate balance sheet of the housequency rate on auto loans at the finance hold sector clearly is in very good companies affiliated with the major shape; owing in large part to the surge in manufacturers moved up sharply begin- equity prices over the past year and a ning about two years ago and since late half, the ratio of household net worth to last year has hovered around historically disposable personal income moved up high levels. Anecdotal evidence sug- into record territory recently. gests that the rise in both credit card and Apparently in response to the recent auto-loan delinquency rates reflects a run-up in delinquency and charge-off strategy to liberalize lending standards rates on consumer loans, banks have as part of an overall marketing effort. selectively tightened their standards The auta loan delinquency rate has also for consumer lending. These actions been boosted a bit by the increased reversed steps taken earlier in the decprevalence of leasing. Lease customers ade, when many card issuers increased tend to be better credit risks than the the growth of their credit card receivaverage conventional borrower, and the ables by offering accounts to customers shift toward leasing has had the effect of who previously would have been denied skimming the more financially secure credit. The belief was that more sophiscar buyers and thus degrading some- ticated credit-scoring techniques would what the remaining pool of people control risks adequately, but it appears financing their purchases through con- that some "adverse selection" occurred ventional loan contracts. and that the uptick in delinquencies has The personal bankruptcy rate also been larger than at least some banks had surged to a new high this year. The planned. About 20 percent of the reextent to which this development spondents in the Federal Reserve's most reflects mounting financial difficulties recent survey of senior loan officers of households is clouded, however, by reported having tightened standards for changes in federal law (effective at the approving applications for credit cards, start of 1995) that may have increased and 10 percent reported tightening stan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 11 dards for other consumer loans. Not- running about in line with last year's withstanding the recent tightening of pace. However, the mix of issuers has standards, supply conditions for loans shifted somewhat, reflecting the changfrom banks to consumers still appear ing structure of rates. Late last year and accommodative. early this year, investment-grade corporations were issuing a hefty volume of bonds to pay down commercial paper The Business Sector and to refinance existing long-term debt. The debt of nonfinancial businesses also As the rates on investment-grade bonds appears to have expanded somewhat less increased this year, issuance of such rapidly during the first half of 1996 than debt dropped off. Rates on high-yield it did last year. In part, the moderation in bonds moved up less, however, and issuborrowing can be traced to the behavior ers of those bonds continued to offer of the financing gap for incorporated new debt at a rapid pace. nonfinancial enterprises—the excess of Gross issuance of equity shares by their capital expenditures (including nonfinancial corporations has been exinventory investment) over their inter- ceedingly strong this year. Indeed, total nally generated funds. During 1995, this offerings in each of the three months gap narrowed quite substantially, reflect- of the second quarter set successive ing strong profits and a marked reduc- monthly records. This activity has been tion in inventory investment. Available fueled by initial public offerings and indications are that the gap has remained other equity issuance by relatively small this year. young companies. Share retirements by External funding for business spend- nonfinancial corporations have also been ing has been in plentiful supply thus far very heavy. Announced stock buybacks this year. One piece of evidence on by such firms in both the first and secthis point is that interest rate spreads ond quarters ran at $28 billion per on investment-grade bonds have edged quarter—the fastest pace since the late down slightly since the beginning of the 1980s. On net, available information year. Additionally, spreads on high-yield suggests that nonfinancial corporations bonds have declined markedly and are retired even more equity during the first as low as they have been in at least a half of 1996 than they had in 1995. decade. Also, supply conditions for Share retirements and merger activity loans from banks to businesses continue have generated much less issuance of to look quite favorable. According to the debt recently than they did in the 1980s. Federal Reserve's most recent survey Recent share repurchases have been of bank lending officers, standards for undertaken mostly by companies seekapproval of commercial and industrial ing to return the excess cash on their loans were about unchanged from Janu- balance sheets to stockholders. And ary to May of this year, and terms on recent mergers and acquisitions have such loans were eased on net. Surveys mainly been accomplished through by the National Federation of Indepen- stock swaps between companies in simident Business indicate that small busi- lar lines of business, rather than the nesses have not faced difficulty getting leveraged transactions commonplace in credit, and stories abound of new small- the 1980s. In line with the limited extent business lending programs of banks. of debt financing, the mergers executed Gross offerings of long-term bonds thus far in 1996 have resulted in little by nonfinancial corporations have been net change in bond ratings—again in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 83rd Annual Report, 1996 marked contrast to the experience of the M2. In the aggregate, these components 1980s. increased about 11 percent at an annual rate between the fourth quarter of last Depository Intermediation year and June of this year, only moder- The growth of credit provided by ately below the 1995 average pace of depository institutions slowed sharply in \AVi percent. Institution-only moneythe fourth quarter of last year and first market mutual funds increased about quarter of this year, and commercial 18 percent at an annual rate over this bank credit—a component of total period. This component of the money depository credit for which more recent stock increased especially rapidly durdata are available—slowed further in the ing the first three months of the year. second quarter. The share of thrift insti- Often, the yields on these funds lag tutions in total depository credit has con- changes in short-term market interest tinued to decline in recent quarters. This rates, making them particularly attraclong-standing trend may have been tive investments when short-term margiven additional impetus last summer by ket rates are declining, as they were the opening up of a differential between the premium rates paid by banks and thrifts for their deposit insurance; this Growth of Money and Debt differential has reduced the cost of funds Percent for banks relative to the cost of funds for Domestic thrift institutions. Measurement non- Ml M2 M3 The reduction and subsequent elimi- period financial debt nation of the deposit insurance premium for financially sound banks probably Year1 1980 7.5 8.7 9.6 9.5 played a role in shifting bank funding 1981 5.4 9.0 12.4 10.2 2.52 toward deposits. During the first half 1982 8.8 8.8 9.7 9.8 of 1996, banks increased their deposit 1983 10.3 11.8 9.5 11.9 1984 5.4 8.1 10.8 14.6 liabilities more rapidly than their nondeposit liabilities—a contrast from 1985 12.0 8.6 7.7 14.4 1986 15.5 9.2 9.0 13.3 the preceding few years when banks 1987 6.3 4.2 5.9 10.0 1988 4.3 5.7 6.3 8.8 relied disproportionately for their fund- 1989 .6 5.2 4.0 7.9 ing on nondeposit sources, including 1990 4.1 4.1 1.8 6.8 borrowing from their foreign offices. 1991 7.9 3.1 1.2 4.6 1992 14.3 1.8 .6 4.7 1993 10.5 1.4 1.0 5.2 1994 2.4 .6 1.6 5.2 The Monetary Aggregates 1995 -1.8 4.0 5.9 5.6 The increased reliance on deposit Quarter (annual rate)3 sources of funding by banks has helped 1995:Q1 -.1 1.0 4.5 5.4 support the growth of the broad money Q2 -.5 3.3 6.3 7.1 Q3 -1.5 6.9 7.9 4.9 aggregates of late. Between the fourth Q4 -5.1 4.1 4.5 4.7 quarter of last year and June of this year, 1996:Q1 -2.7 5.9 7.2 4.7 M3 expanded at an annual rate of about Q2 -.5 4.1 5.3 n.a. 6 percent, putting it at the upper bound- 1. From average for fourth quarter of preceding year to ary of its annual growth cone. As in average for fourth quarter of year indicated. 1995, the growth in M3 this year was 2. Adjusted for shift to NOW accounts in 1981. 3. From average for preceding quarter to average for led by those components not included in quarter indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 79 around the turn of the year when the vices, however, it is impossible to know Federal Reserve eased policy. whether the new parallel movement of M2 increased 43A percent at an annual velocity and the opportunity cost will rate between the fourth quarter of 1995 persist. and June of this year, leaving it near the Ml declined about 13A percent at an upper boundary of its growth range. For annual rate during the first half of 1996, many years before the early 1990s, the just as it had done over the four quarters velocity of M2 (defined as the ratio of of 1995. The recent sluggish behavior of nominal GDP to M2) moved roughly Ml reflects the ongoing spread of soin tandem with the opportunity cost of called sweep programs, under which holding M2—that is, the interest earn- idle reservable deposits are "swept" ings forgone by holding M2 assets rather into money-market-deposit accounts than market instruments such as Trea- (MMDAs). (The appendix provides sury bills. This relationship implied that additional information on sweep M2 tended to move in proportion to accounts.) Estimates based on initial nominal GDP, except as it was influ- amounts swept suggest that Ml would enced by changes in the opportunity cost have expanded at about a 7 percent of holding it. When the opportunity cost annual rate during the first half of 1996 rose, owners of M2 tended to economize in the absence of these programs. on their holdings, driving up the veloc- Another factor contributing to the recent ity of M2. weakness in Ml has been the growth of Beginning around the early 1990s, currency, which has been sluggish by however, this historical relationship the standards of the early 1990s. Foreign began to break down. Indeed, in 1991 demand for currency apparently has and 1992, the velocity of M2 rose tailed off somewhat. In large part, the sharply even as the opportunity cost of slackening in net foreign demand owes holding M2 declined. A number of rea- to substantial reflows from Argentina sons for this development have been and Mexico, where earlier worst-case adduced, including the unusually steeply fears about the stability of the financial sloped yield curve and very low level of system have not been realized. Reflows short-term interest rates, which helped from Western Europe and Asia have to attract the public out of liquid bal- also been significant, but net shipments ances and into more readily available to the former Soviet Union remain sizlong-term mutual funds; the credit able. On the whole, demand for the new crunch at banks and the resolution of $100 bill has been substantial, but this troubled thrift institutions, which re- has not had any detectable effect on the duced the aggressiveness with which stock of currency outstanding. these institutions sought retail deposits; The sluggish growth of currency has and household balance-sheet restructur- held down expansion of the monetary ing, which entailed in part repayment of base to only about 2 percent at an annual loans out of liquid money balances. The rate thus far this year. The other restraint divergent movement of the velocity of on the growth of the base has been the M2 and its opportunity cost continued turnaround in the behavior of required until the end of 1992. More recently, the reserves. After surging at double-digit variables have once again been moving rates in 1992 and 1993, required essentially in parallel. In light of the reserves have been on a downward rapid ongoing pace of innovation and trend, and at an increasing rate. Thus far technological change in financial ser- this year, required reserves have con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 83rd Annual Report, 1996 tracted about IV2 percent at an annual The spread on investment-grade utility rate. The emergence of this trend is per- bonds continued to drift upward, but this haps the most direct consequence of the appeared to reflect the market's increasspread of sweep programs. Absent such ing perception that some firms in that programs, required reserves probably industry might become riskier as a result would have increased about 10 percent of deregulation and new competitive over the same period, owing to strong pressures. The rate spread on high-yield growth in demand deposits. Continued bonds over the comparable Treasury spread of sweep programs could affect notes narrowed sharply, reversing the the federal funds market, perhaps lead- upward drift of 1995, and returning this ing to greater volatility like that expe- measure to the low end of its range over rienced in early 1991 following the the past decade. The continuing low elimination of reserve requirements on level of spreads on most investmentnontransactions deposits. Thus far, such grade securities, as well as the marked instabilities have not been realized, but decline of the spread on high-yield the Federal Reserve is monitoring the securities, appeared to reflect in part situation carefully. market participants' increasing confidence in the durability of the economic expansion and consequent optimism about the creditworthiness of corporate Interest Rates, Equity Prices, borrowers. and Exchange Rates Interest Rates Equity Prices Interest rates on Treasury securities rose Share prices have fallen in recent weeks, over the first half of 1996, with the most most notably those of "high-tech" compapronounced increases occurring for nies whose ability to maintain steep intermediate-term securities. Between earnings trajectories has come into questhe end of December 1995 and the tion. On net, though, broad indexes of middle of July, the rate on three-month equity prices have held steady or moved bills increased somewhat less than up slightly since the end of 1995. As of lA percentage point, the rate on five-year July 16, the S&P 500 composite index notes rose about 1 lA percentage points, of stock prices had increased 2 percent and the rate on thirty-year bonds rose thus far this year, while the NASDAQ about 1 percentage point. Despite these index had returned to its beginning-ofincreases, nominal Treasury rates over- year level. Even this performance has all continued to be relatively low by the been impressive, given that it occurred standards of the past twenty years. in the face of appreciable upward move- The spread between interest rates on ment in long-term interest rates. investment-grade private bonds and those on comparable-maturity Treasury Exchange Rates securities remained narrow during the first half of the year. In particular, the Since mid-April, the weighted-average average spread on Baa-rated industrial value of the dollar in terms of the other bonds over thirty-year Treasury bonds G-10 currencies has generally been continued to fluctuate near where it has about 4 percent above its level at the end been for the past several years and well of December, although the dollar has below the levels typical of the 1980s. moved down somewhat in mid-July. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 81 When compared with an index of cur- nearly 50 basis points, while rates in rencies from a somewhat broader group France are down more than 100 basis of U.S. trading partners, the dollar has points and those in the United Kingdom appreciated 3 percent since December are down 70 basis points. Official lendafter adjustment for changes in relative ing rates have been reduced by the consumer prices. The dollar has risen on central banks in Germany, France, the balance about 4 percent in terms of the United Kingdom, and several other German mark and about 6 percent in European countries in 1996. In Japan, terms of the Japanese yen. short-term market interest rates remain The dollar has been supported by per- near the historically low levels reached ceptions of a disparity in the perfor- during the second half of 1995 as the mance of the U.S. economy relative to Bank of Japan's official rates have been that of many of our major trading part- unchanged. Stock markets in the foreign ners and the resulting expectations for G-10 countries have risen 3 percent to the course of relative interest rates. Spe- 15 percent since the end of December, cifically, while data suggesting robust except in the United Kingdom, where growth in the United States caused inter- stock prices, on balance, are about est rates to rise, questions remained unchanged. about the strength of expansions in a The Mexican peso traded during the number of other industrial countries, first half of 1996 in a range somewhat particularly in Europe. Average long- stronger than that which prevailed at the term (ten-year) interest rates in the other end of 1995. Mexican twenty-eight-day G-10 countries have risen only slightly, treasury bill (cetes) rates have declined about 20 basis points, since the end of from nearly 50 percent in December to December. With U.S. rates rising sub- around 30 percent as the rate of inflation stantially more than that, the apprecia- has fallen. The economic positions of tion of the dollar over this period is Mexican households and firms have consistent with the shift in the long-term improved since early 1995, but probinterest differential in favor of the dol- lems in the financial system remain, as lar. In addition, the dollar was lifted to evidenced by increasing amounts of an extent against the yen by data early in nonperforming loans at banks. Stock the year showing that the Japanese prices have risen, on balance, about external surpluses were narrowing. 5 percent in peso terms since December, Despite a weak output performance, buoyed by the interest rate declines and long-term interest rates in Germany evidence of recovery in the Mexican have risen about 50 basis points, with economy. much of that increase coming during the The pace at which private foreigners first quarter. Long-term interest rates acquired U.S. assets increased markedly have actually fallen since the end of last in the first quarter. Although private net year in some European countries, such purchases of U.S. Treasury securities as France and Italy, where political and were small, there were large increases in economic policy uncertainties have been the private holdings of U.S. government reduced. In Japan, long-term interest agency bonds and U.S. corporate bonds, rates have risen about 30 basis points, as U.S. corporations issued heavily in on balance. Short-term market interest the Eurobond market. In addition, direct rates abroad are generally lower than investment capital inflows surged to they were at the end of last year. Ger- almost $30 billion in the first quarter, man short-term market rates are down reflecting a pickup in foreign acquisi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 83rd Annual Report, 1996 tions of U.S. firms. Together, these gross the non-Mi portion of M2. Such sweeps inflows totaled nearly $80 billion, shift deposits from reservable (transroughly twice the U.S. current account actions) accounts to nonreservable (savdeficit for the quarter. U.S. net purchases ings) accounts without impairing of foreign stocks and bonds were also depositors' ability to access the funds sizable in the first quarter, with net pur- for transactions purposes. Depositories chases of foreign stocks from Japan par- have an incentive to establish these ticularly large. U.S. direct investment programs because reserves held at the abroad slowed somewhat between the Federal Reserve earn no interest. Retail fourth quarter of 1995 and the first quar- sweep programs reduce reported ter of 1996 but remained near the record reserves, the monetary base, and Ml. pace for all of last year. In April and May, private foreign interest in U.S. securities continued to be strong while Sweeps of Transaction Deposits U.S. investor interest in foreign stocks into Savings Accounts cooled somewhat from the strong first- Percentage of industry assets quarter pace. Monthly Cumulative Foreign official holdings in the United Period averages of total initial amounts States increased about $52 billion in the first quarter of 1996 after a rec- 1994 January 5.3 5.3 ord $110 billion rise in 1995. These February 2.2 7.5 increases reflected both intervention to March .0 7.5 April .0 7.5 support the foreign exchange value of May .0 7.5 the dollar by certain industrial countries June .0 7.5 July .0 7.5 and substantial reserve accumulation by August .0 7.5 several developing countries. Data for September 1.5 9.0 October .6 9.6 April and May indicated continued November .3 9.9 December .0 9.9 increases in official holdings in the United States but on a much more mod- 1995 January .0 9.9 est scale. February .0 9.9 March .0 9.9 April .0 9.9 May 5.0 14.9 Appendix: Sweeps of Retail June 7.3 22.2 Transaction Deposits July .6 22.8 August 4.6 27.4 September 5.9 33.3 In January 1994, depository institutions October 7.7 41.0 began implementing sweep programs November 4.3 45.3 December 9.2 54.5 for retail customers.3 In such programs, balances in household transaction 7996 January 13.7 68.2 accounts (typically NOW accounts, but February 7.0 75.2 also some demand deposits, both of March 6.4 81.6 April 7.8 89.4 which are included in Ml) are swept May 8.4 97.8 into savings deposits, which are part of NOTE. Figures are the estimated total of transaction account balances initially swept into savings accounts owing to the introduction of new sweep programs. 3. Sweep accounts for business customers of Monthly totals are averages of daily data. banks became widespread in the mid-1970s. They Regular monthly updates of initital amounts swept may involve sweeps of demand deposits into repur- be obtained by email by sending an email address along chase agreements or other money market instru- with a phone number to sweeps-frb @ frb.gov. Those ments whose minimum sizes are too large to without access to email may request data by calling accommodate households. (202) 872-7577. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 83 They have no effect on M2, because both transactions and savings accounts are in M2. Retail sweep programs have been established either as daily sweeps or as weekend sweeps. Under a daily sweep, a depositor's transaction balances above a target level are shifted each night into a special savings account created for the purpose. If debits threaten to reduce the remaining transaction account balances below zero, enough funds are transferred back from the savings account to reestablish the target level of transaction balances. Because only six transfers are allowed out of a savings account within a statement month, on the sixth transfer, the entire savings balance is returned to the transaction account. Alternatively, in a weekend sweep program, all affected transaction account balances are swept into the special purpose savings account over the weekend and then returned on Monday. Some "weekend sweep" programs undertake sweeps on certain holidays as well. No information is available on the current amounts of transaction balances that are being swept into savings accounts. The Federal Reserve has obtained data from depositories only on the initial amounts swept on the date each program was established. The table, which is updated and made available to the public on an ongoing basis, shows that the initial amounts swept under programs implemented through May 1996 have cumulated to $98 billion. With a marginal reserve requirement of 10 percent on most of these balances, the cumulative reduction of required reserves attributable to the initial amounts swept has been nearly $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

87 Record of Policy Actions of the Board of Governors Regulation D The amendments are effective with Reserve Requirements the reserve computation period beginof Depository Institutions ning December 31, 1996, for institutions reporting weekly and December 17, November 20, 1996—Amendments 1996, for institutions reporting quarterly. To reduce reporting burden for small The Board amended Regulation D to institutions, depository institutions with increase the amount of transaction total deposits below specified levels are balances to which the lower reserve required to report their deposits and requirement applies. reservable liabilities quarterly or less Votes for this action: Mr. Greenspan, frequently, while larger institutions must Ms. Rivlin, Messrs. Kelley, Lindsey, and report weekly. To reflect increases in Meyer, and Mses. Phillips and Yellen. the growth rate of total deposits at all depository institutions, the Board Under the Monetary Control Act of increased the deposit cutoff levels used 1980, depository institutions, Edge Act in determining the frequency and detail corporations, Agreement corporations, of deposit reporting, to $59.3 million for and U.S. agencies and branches of nonexempt depository institutions and foreign banks are subject to reserve to $48.2 million for exempt depository requirements set by the Board. The act institutions, beginning in September directs the Board to annually adjust the 1997. amount subject to the lower reserve requirement to reflect changes in trans- December 23, 1996—Amendments action balances nationwide. Recent decreases in transaction balances war- The Board amended Regulation D to ranted a decrease to $49.3 million, and simplify and update the regulation and the Board amended Regulation D reduce regulatory burden, effective accordingly. April 1, 1997. The Garn-St Germain Depository Votes for this action: Mr. Greenspan, Institutions Act of 1982 establishes a Ms. Rivlin, Messrs. Kelley, Lindsey, and zero percent reserve requirement on the Meyer, and Mses. Phillips and Yellen. first $2 million of an institution's reservable liabilities. The act also provides for After a review in accordance with annual adjustments to that exemption its policy of regular review of regulaamount based on deposit growth nation- tions and the requirements of the Riegle wide. Recent growth in deposits war- Community Development and Reguranted an increase to $4.4 million, latory Improvement Act of 1994, the and the Board amended Regulation D Board adopted a revision of Regulation accordingly. D to simplify and clarify the regula- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

83rd Annual Report, 1996 tion and remove certain obsolete mate- The National Securities Markets rial from it. Improvement Act of 1996 removes the Board's authority to regulate certain Regulation E loans by registered broker-dealers Electronic Fund Transfers unless the Board finds that such rules are in the public interest or necessary for March 20, 1996—Amendments the protection of investors. The Board issued an interpretation to clarify that it The Board amended Regulation E to had not made such a finding and that clarify, simplify, and update the regulaprovisions of its margin regulations for tion, effective May 1, 1996, with comwhich it no longer had general authority pliance mandatory by January 1, 1997. were not in effect. The interpretation Votes for this action: Messrs. Greenspan, also identified regulatory provisions the Kelley, and Lindsey and Mses. Phillips Board had adopted to implement section andYellen.1 8(a) of the Securities Exchange Act of 1934, which had been repealed by the The amendments change the exemp- 1996 act, and concluded that those tions for securities or commodities provisions were no longer in effect. In transfers and for preauthorized transfers connection with this action, the Board to or from accounts at small institutions, sought public comment on proposed simplify the language and format of amendments to its margin regulations to the regulation, and delete obsolete implement the requirements of the act. provisions. Regulation G Regulation H Securities Credit by Persons Other Membership of State Banking Than Banks, Brokers, or Dealers Institutions in the Federal Reserve System Regulation T Credit by Brokers and Dealers August 5, 1996—Amendments Regulation U The Board amended Regulation H to Credit by Banks for the Purpose improve compliance with certain flood of Purchasing or Carrying Margin insurance requirements, effective Octo- Stocks ber 1, 1996. November 20, 1996—Interpretation Votes for this action: Mr. Greenspan, Ms. Rivlin, Messrs. Kelley and Meyer, The Board approved an interpretation of and Mses. Phillips and Yellen. Absent and Regulations G, T, and U to implement not voting: Mr. Lindsey. requirements of the National Securities Markets Improvement Act of 1996, The Board and five other federal effective November 19, 1996. agencies adopted rules to implement the National Flood Insurance Reform Act of Votes for this action: Mr. Greenspan, 1994. The rules did not change the basic Ms. Rivlin, Messrs. Kelley, Lindsey, and flood insurance requirements but were Meyer, and Mses. Phillips and Yellen. designed to improve compliance with requirements concerning mandatory 1. Throughout this chapter, note 1 indicates that purchase of flood insurance and notice two vacancies existed on the Board when the action was taken. of flood hazards. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 89 December 23, 1996—Interim supervised by the Federal Reserve, Amendment effective April 1, 1996. The Board approved an interim amend- Votes for this action: Messrs. Greenspan, ment to Regulation H to revise the Blinder, Kelley, and Lindsey and Mses. Phillips and Yellen.2 guidelines for determining the frequency of examinations for banks, effective The new rule, which was developed January 30, 1997. by the Federal Reserve, the other federal Votes for this action: Mr. Greenspan, banking agencies, and the Financial Ms. Rivlin, Messrs. Kelley, Lindsey, and Crimes Enforcement Network of the Meyer, and Mses. Phillips and Yellen. Department of the Treasury, significantly reduces burdens while enhancing The Board, along with the other fed- the ability of law enforcement authorieral banking agencies, revised the cri- ties to investigate and prosecute crimiteria for determining the frequency of nal offenses involving U.S. financial examinations to implement provisions institutions. of the Riegle Community Development and Regulatory Improvement Act of 1994 and the Economic Growth and Regulation H Regulatory Paperwork Reduction Act Membership of State Banking of 1996. Under the new criteria, well- Institutions in the Federal Reserve managed banks with a composite rating System of 2 and with assets of $250 million or Regulation Y less are eligible to be examined once Bank Holding Companies and every eighteen months instead of once Change in Bank Control every twelve months. In connection with this action, the Board sought public August 7, 1996—Amendments comment on the revised guidelines. The Board amended Regulations H and Y to incorporate a measure of market risk in its risk-based capital guidelines Regulation H for state member banks and bank hold- Membership of State Banking ing companies, effective January 1, Institutions in the Federal Reserve 1997, with compliance mandatory by System January 1, 1998. Regulation K Votes for this action: Mr. Greenspan, International Banking Operations Ms. Rivlin, Messrs. Kelley and Meyer, and Ms. Phillips. Absent and not voting: Regulation Y Mr. Lindsey and Ms. Yellen. Bank Holding Companies and The Board, along with the other fed- Change in Bank Control eral banking agencies, revised the riskbased capital standards to set forth a January 29, 1996—Amendment supervisory framework for measuring The Board amended Regulations H, K, and Y to simplify the process for report- 2. Throughout this chapter, note 2 indicates that ing suspected crimes and suspicious one vacancy existed on the Board when the action activities by banking organizations was taken. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 83rd Annual Report, 1996 market risk of debt and equity positions February 7, 1996—Amendment in institutions' trading accounts and all foreign exchange and commodity posi- The Board approved an amendment to tions, wherever located. The amend- Regulation K to establish criteria for ments require banks and bank holding evaluating the operations of certain forcompanies with significant exposure to eign banks, effective March 25, 1996. market risk to measure that risk using Votes for this action: Messrs. Greenspan, their own internal value-at-risk models, Kelley, and Lindsey and Mses. Phillips as specified in the rule, and hold com- andYellen.1 mensurate amounts of capital. The amendment sets out the criteria under which the Board will assess the Regulation K U.S. operations of foreign banks that are International Banking Operations not subject to comprehensive, consolidated supervision or regulation by their January 19, 1996—Amendment home country supervisors. The Board will take the criteria into account in The Board approved an amendment to deciding whether and under what terms Regulation K to permit certain foreign such banks can continue to operate in banks to establish representative offices the United States. in the United States through advance notice, effective January 24, 1996. May 9, 1996—Amendments Votes for this action: Messrs. Greenspan, Kelley, and Lindsey and Mses. Phillips andYellen.1 The Board amended Regulation K to set a date by which certain foreign banks The amendments permit foreign must select a home state and to update banks that meet certain requirements to the regulation, effective May 9, 1996. establish representative offices without Votes for this action: Messrs. Greenspan filing a formal application. The amendand Kelley and Mses. Phillips and Yellen. ments clarify that only those foreign Absent and not voting: Mr. Lindsey.1 banking organizations subject to the International Banking Act and the Bank The Riegle-Neal Interstate Banking Holding Company Act may take and Branching Efficiency Act of 1994 advantage of general consent procedures removed geographic restrictions on to establish a representative office to interstate banking by foreign banks and engage in limited administrative func- required certain foreign banks without tions in connection with their existing U.S. deposit-taking offices to select a U.S. banking operations. The Board home state. The Board amended Regulaalso decided to review on a case-by- tion K to require those banks to select a case basis inquiries by special-purpose home state by June 30, 1996; remove government banks seeking exemptions outdated restrictions on certain mergers from regulation under the Foreign Bank by U.S. bank subsidiaries of foreign Supervision Enhancement Act on the banks outside their home states; and basis that they do not fall within the delete obsolete and superseded providefinition of a foreign bank under Regu- sions concerning selection of a home lation K. state. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 91 July 17, 1996—Amendment Regulation M Consumer Leasing The Board approved an amendment to Regulation K to establish rules govern- September 18, 1996—Revision ing the management of offshore banking offices by U.S agencies and branches The Board revised Regulation M to simof foreign banks, effective August 28, plify and clarify required disclosures for 1996. car leasing and other types of consumer lease transactions, effective October 1, Votes for this action: Mr. Greenspan, 1997. Ms. Rivlin, Messrs. Kelley, Lindsey, and Meyer, and Ms. Yellen. Absent and not Votes for this action: Messrs. Greenspan, voting: Ms. Phillips. Kelley, Lindsey, and Meyer and Mses. Phillips and Yellen. Absent and not vot- The amendment prohibits foreign ing: Ms. Rivlin. banks from using their U.S. branches or agencies to manage types of activities The revision included additional through offshore offices that could not requirements for early disclosure of be managed by a U.S. bank at its foreign termination charges; requirements for branches or subsidiaries. The amend- disclosure of the gross cost of a lease, ment implements a provision of the the residual value of the leased property, Riegle-Neal Interstate Banking and and the estimated lease charge; a Branching Efficiency Act of 1994. requirement that certain leasing disclosures be segregated from other information; and new provisions concerning advertising on radio and television. Regulation L Management Official Interlocks Regulation O July 10, 1996—Amendments Loans to Executive Officers, Directors, and Principal The Board amended Regulation L to Shareholders of Member Banks; conform rules on management inter- Loans to Holding Companies and locks to recent statutory changes and Affiliates to update the regulation, effective October 1, 1996. November 1, 1996—Amendments Votes for this action: Messrs. Greenspan, The Board amended Regulation O to Kelley, and Lindsey and Ms. Yellen. permit insiders of a bank and its affili- Absent and not voting: Ms. Phillips.1 ates to obtain loans under benefit plans available to all company employees and The Board revised its rules on manto simplify a procedure, effective agement interlocks to implement certain November 1, 1996. requirements of the Riegle Community Development and Regulatory Improve- Votes for this action: Mr. Greenspan, ment Act of 1994. The revisions also Ms. Rivlin, Messrs. Kelley and Meyer, clarify the rules and reduce unnecessary and Mses. Phillips and Yellen. Absent and regulatory burden. not voting: Mr. Lindsey. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

92 83rd Annual Report, 1996 The amendment implements a re- Regulation S quirement in the Economic Growth and Reimbursement for Providing Regulatory Paperwork Reduction Act of Financial Records; Recordkeeping 1996. The Board also simplified the pro- Requirements for Certain Financial cedure under which a bank's board of Records directors can exclude executive officers from the policymaking functions of the March 26, 1996—Amendments bank and, therefore, from the restric- The Board amended Regulation S to tions of the regulation. conform certain definitions in the regulation to the Uniform Commercial Code, effective May 28, 1996, and deferred Regulation R certain other effective dates until that Relations with Dealers in Securities date. Under Section 32, Banking Act of Votes for this action: Messrs. Green- 1933 span and Lindsey and Mses. Phillips and Yellen. Absent and not voting: October 30, 1996—Rescission of Mr. Kelley.1 Regulation and Related The Board and the Department of the Interpretation Treasury jointly adopted amendments to The Board approved rescission of Regu- their rules under the Bank Secrecy Act lation R and a related interpretation, that require enhanced recordkeeping effective December 6, 1996. related to certain funds transfers by financial institutions. The amendments Votes for this action: Mr. Greenspan, revise definitions and conform the defi- Ms. Rivlin, Messrs. Kelley, Lindsey, and nitions of certain terms to their mean- Meyer, and Mses. Phillips and Yellen. ings under article 4A of the Uniform Commercial Code. The two agencies Regulation R implemented section 32 deferred the effective date of the recordof the Glass-Steagall Act, which prohibkeeping rules until May 28, 1996, and its interlocks between member banks the Board also deferred the effective and firms primarily engaged in underdate of subpart B of Regulation S until writing and dealing in securities. A that date. related interpretation clarified the applicability of the prohibitions of section 32 June 5, 1996—Amendments to bank holding companies. After a review of the regulation and interpre- The Board amended subpart A of Regutation as required by the Riegle Com- lation S to establish rates and conditions munity Development and Regulatory under which payment would be made to Improvement Act of 1994, the Board financial institutions for assembling or determined that the regulation, which providing certain financial records, restated the statutory language of sec- effective July 12, 1996. tion 32, and the interpretation that Votes for this action: Messrs. Greenspan, applied the prohibitions to bank holding Kelley, and Lindsey and Mses. Phillips companies were no longer necessary. In and Yellen.1 addition, certain other interpretations of section 32 were moved to Miscellaneous The Right to Financial Privacy Act Interpretations. requires that the Board establish the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 93 rates and conditions for reimbursement number of domestic and foreign securiof financial institutions for costs in- ties that can be bought on margin and curred in responding to requests for increases the loan value of some other records by government agencies. The securities; removes Board rules on Board's amendments streamlined sub- options transactions and relies on the part A and updated the fees it specifies. margin rules of self-regulatory organizations; and reduces restrictions on November 14, 1996—Amendment transactions involving foreign persons, foreign securities, and foreign currency. The Board amended subpart B of Regu- The new rule also includes certain techlation S to clarify its applicability, effecnical changes. tive December 20, 1996. Votes for this action: Mr. Greenspan, Ms. Rivlin, Messrs. Kelley, Lindsey, and Regulation V Meyer, and Mses. Phillips and Yellen. Loan Guarantees for Defense Production Subpart B of Regulation S refers to the substantive provision of a joint rule October 1, 1996—Repeal adopted by the Board and the Department of the Treasury relating to record- The Board repealed Regulation V, effeckeeping requirements for funds transfers tive October 9, 1996. and transmittals of funds under the Bank Votes for this action: Mr. Greenspan, Secrecy Act. The Board amended sub- Ms. Rivlin, Messrs. Kelley, Lindsey, and part B to clarify that the regulation does Meyer, and Mses. Phillips and Yellen. not apply to any person or transaction or class of persons or transactions that After a review required by secthe Department of the Treasury has tion 303 of the Riegle Community exempted from the joint rule. Development and Regulatory Improvement Act of 1994, the Board found Regulation V to be obsolete. The Regulation T Board's action did not represent a Credit by Brokers and Dealers change in any policy. April 24, 1996—Amendments The Board updated Regulation T to take Regulation Y into account developing trends in the Bank Holding Companies and securities markets. The updates became Change in Bank Control effective July 1, 1996, except for certain provisions relating to options transac- August 23, 1996—Amendment tions, which become effective June 1, The Board amended an interpretive rule 1997. in Regulation Y to permit bank holding Votes for this action: Messrs. Greenspan, companies under certain conditions to Kelley, and Lindsey and Mses. Phillips purchase, as a fiduciary, securities of and Yellen.1 investment companies they advise, effective September 30, 1996. The final rule eliminates restrictions on the ability of broker-dealers to Votes for this action: Mr. Greenspan, arrange for credit, increases the type and Ms. Rivlin, Messrs. Kelley, Lindsey, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

94 83rd Annual Report, 1996 Meyer, and Ms. Phillips. Absent and not criteria: (1) risk-based capital thresholds voting: Ms. Yellen. that are the same as those for determining that a state member bank is The condition on such purchases is well capitalized and (2) a modified that they must be specifically authorized leverage ratio. The Board sought public by the terms of the instrument creating comment on the definition and how it the fiduciary relationship, by court order, should be applied to foreign banking or by the law of the jurisdiction under organizations. which the trust is administered. The revision conforms the rule to those of other federal banking agencies and the Regulation Z standard in section 23B of the Federal Truth in Lending Reserve Act. January 24, 1996—Amendment October 23, 1996—Interim Rule The Board amended Regulation Z to The Board approved an interim amend- adjust the threshold amount of mortgage ment to Regulation Y to provide a defi- points and fees that entails certain addinition of a well capitalized bank holding tional disclosures, effective January 1, company, effective October 23, 1996. 1996. Votes for this action: Mr. Greenspan, Votes for this action: Messrs. Green- Ms. Rivlin, Messrs. Kelley and Meyer, span, Blinder, Kelley, and Lindsey and and Mses. Phillips and Yellen. Absent and Mses. Phillips and Yellen.2 not voting: Mr. Lindsey. The Home Ownership and Equity The Board adopted the interim rule in Protection Act of 1994 requires that connection with easing provisions of creditors make additional disclosures on Regulation Y to eliminate the require- mortgages for which total points and ment that bank holding companies seek fees payable by the consumer exceed the Board's approval before engaging the larger of $400 or 8 percent of the de novo in permissible nonbanking total loan amount and requires that the activities. The easing would apply to Board annually adjust the absolute dolholding companies that are well capital- lar value of the threshold amount for the ized and meet other criteria specified in forthcoming calendar year according to the Economic Growth and Regulatory the annual percentage change in the con- Paperwork Act of 1996. The interim sumer price index as of June 1 of the rule also implements provisions of the preceding year. On the basis of the CPI act to establish expedited procedures for on June 1, 1995, the Board increased the qualified well capitalized bank holding threshold amount to $412 for 1996. companies to be approved to acquire smaller companies that engage in any September 11, 1996—Amendments permissible nonbanking activities listed The Board amended Regulation Z to in Regulation Y as well as to engage in limit lender liability for disclosure errors nonbanking activities that the Board has and to establish new rules for debt canapproved only by order. cellation agreements, effective Octo- For purposes of determining the capiber 21, 1996. tal levels at which a bank holding company is considered well capitalized Votes for this action: Mr. Greenspan, under the act and Regulation Y, the Ms. Rivlin, Messrs. Kelley, Lindsey, and DigitizedB foora FrRd AaSdEoRp ted, as an interim rule, two Meyer, and Mses. Phillips and Yellen. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 95 The Truth in Lending Act Amend- Votes for this action: Messrs. Greenspan, ments of 1995 established new rules for Blinder, and Kelley and Mses. Phillips and Yellen.1 creditor liability for closed-end loans secured by real property or dwellings The amendment clarifies that, for and consummated on or after Septempurposes of qualifying as a financial ber 30, 1995. The 1995 amendments institution under Regulation EE, an created several tolerances for accuracy entity may declare itself, either orally in disclosing the amount of the finance or in writing, to be a financial market charge; within those tolerances, crediintermediary. tors have no civil or administrative liability. The 1995 amendments also clarified requirements for disclosure of Miscellaneous Interpretations certain fees connected with mortgage loans. The Board revised Regulation Z April 15, 1996—Definition to implement the 1995 amendments and The Board defined unimpaired capital established new disclosure rules for debt stock and surplus for purposes of seccancellation agreements. tion 23A of the Federal Reserve Act, effective July 1, 1996. December 3, 1996—Amendment The Board amended Regulation Z to Votes for this action: Messrs. Greenspan, Kelley, and Lindsey and Mses. Phillips adjust the threshold amount of mortgage and Yellen.1 points and fees that entails certain additional disclosures, effective January 1, The new rule adopts the definition of 1997. unimpaired capital and unimpaired surplus used to calculate the limits in Regu- Votes for this action: Mr. Greenspan, lation O (Loans to Executive Officers, Ms. Rivlin, Messrs. Kelley, Lindsey, and Directors, and Principal Shareholders of Meyer, and Mses. Phillips and Yellen. Member Banks) for insider lending and Acting under the requirements of the used by the Office of the Comptroller of Home Ownership and Equity Protection the Currency to calculate the limit on Act of 1994, the Board increased the loans by a national bank to a single level of points and fees beyond which borrower. mortgage creditors must disclose additional information (see Regulation Z Rules Regarding Availability amendment of January 24, 1996, above). of Information On the basis of the CPI on June 1, 1996, the Board increased the threshold November 20, 1996—Interim amount to $424 for 1997. Amendment The Board approved an interim amend- Regulation EE ment to its Rules Regarding Availability Netting Eligibility for Financial of Information to increase certain fees Institutions associated with requests under the Freedom of Information Act, effective Janu- January 3, 1996—Amendment ary 1, 1977. The Board amended Regulation EE with Votes for this action: Mr. Greenspan, regard to the definition of a financial Ms. Rivlin, Messrs. Kelley, Lindsey, and institution, effective February 20, 1996. Meyer, and Mses. Phillips and Yellen. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 83rd Annual Report, 1996 The amended fee schedule reflects Votes for this action: Messrs. Greenspan, increases in the cost of conducting Blinder, and Lindsey and Mses. Phillips and Yellen. Absent and not voting: searches and reviewing and copying Mr. Kelley.2 documents. The Board also requested comment on the new fee schedule. The revisions make the arrangements for a foreign service provider subject to the conditions applicable to the arrange- Policy Statements and ments for a domestic service provider Other Actions and to several additional conditions related to access to examination infor- March 19, 1996—Uniform Rules mation and other data. of Practice and Procedure for Administrative Hearings May 7, 1996—Standards for Safety The Board amended its Uniform Rules and Soundness of Practice and Procedure for Adminis- The Board approved guidelines pretrative Hearings, effective June 5, 1996. scribing safety and soundness standards Votes for this action: Messrs. Greenspan, for the asset quality and earnings of Kelley, and Lindsey and Mses. Phillips depository institutions, effective OctoandYellen.1 ber 1, 1996. The Board, along with the other fed- Votes for this action: Messrs. Greenspan eral banking agencies, clarified certain and Kelley and Mses. Phillips and Yellen. Absent and not voting: Mr. Lindsey.1 provisions of the rules and made other changes that are expected to increase the As required by section 132 of the efficiency and fairness of administrative Federal Deposit Insurance Corporation hearings. Improvement Act of 1991, the Board, along with the other federal banking October 22, 1996—Amendment agencies, prescribed safety and sound- As required by the Debt Collection ness standards for the asset quality and Improvements Act of 1996, the Board earnings of depository institutions. The amended its Rules of Practice for Hear- guidelines require that institutions ings to increase the maximum amount (1) establish and maintain systems to of each civil money penalty under its identify problem assets and prevent their jurisdiction to account for inflation, deterioration and (2) evaluate and monieffective October 24, 1996. tor earnings to ensure that they are sufficient to maintain adequate capital and Votes for this action: Mr. Greenspan, reserves. Ms. Rivlin, Messrs. Kelley and Meyer, and Mses. Phillips and Yellen. Absent and May 23, 1996—Interest Rate Risk not voting: Mr. Lindsey. Policy Statement January 24, 1996—Fedwire Policy The Board provided guidance on sound Statement practices for managing interest rate risk, effective June 26, 1996. The Board set rules for access to Fedwire by a service provider located Votes for this action: Messrs. Greenspan outside the United States, effective Feb- and Kelley and Mses. Phillips and Yellen. ruary 1, 1996. Absent and not voting: Mr. Lindsey.1 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 97 The policy statement, which was Votes for this action: Mr. Greenspan, issued in conjunction with the other fed- Ms. Rivlin, Messrs. Kelley, Lindsey, and Meyer, and Mses. Phillips and Yellen. eral banking agencies, identifies the key elements of interest rate risk management and describes prudent principles October 30, 1996—Announcement and practices for each element. It of Date of Expansion of Fedwire emphasizes the importance both of a Operation Hours and Establishment comprehensive risk-management proof Daylight Overdraft Posting Time cess and of adequate oversight by the boards of directors and the senior man- The Board set December 8, 1997, as agement of banks. The statement also the effective date of its previously describes the critical factors affecting announced expansion of operating hours the agencies' evaluation of interest rate for the Fedwire on-line funds transfer risk when making determinations of service and established a posting time capital adequacy. for certain nonwire transactions. April 24, 1996—Uniform Cash Votes for this action: Mr. Greenspan, Access Policy Ms. Rivlin, Messrs. Kelley and Meyer, and Ms. Phillips. Absent and not voting: The Board approved a new cash access Mr. Lindsey and Ms. Yellen. policy for the Federal Reserve Banks that provides for greater consistency in The Board announced that beginning cash service levels at Reserve Banks, December 8, 1997, the Fedwire on-line effective May 1, 1998. funds transfer service will operate from 12:30 a.m. to 6:30 p.m., eastern time, Votes for this action: Messrs. Greenspan, Monday through Friday. The Board also Kelley, and Lindsey and Mses. Phillips established 8:30 a.m. eastern time as the andYellen.1 daylight overdraft posting time for certain nonwire transactions that had been The revised policy provides for a base based on the 8:30 a.m. opening time of level of free-of-charge access to curthe Fedwire funds transfer service. rency for all depository institutions but restricts the number of offices served and the frequency of access. Depository institutions that meet volume thresholds 1996 Discount Rates will be able to obtain more frequent free access. Access beyond the free service The Board approved one change in level will be priced. the basic discount rate during 1996, a decrease from 5lA percent to 5 percent in late January. In addition, the Board October 22, 1996—Policy approved numerous changes, including Statement on Payments System both increases and decreases, in the Risk rates charged by the Federal Reserve The Board modified its procedures for Banks for seasonal and for extended measuring daylight overdrafts to take credit; rates for both types of credit are into account posting times for Treasury set on the basis of market-related formuinvestments resulting from electronic las and those rates exceeded the basic tax payments, effective November 18, discount rate by varying amounts during 1996. the year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 83rd Annual Report, 1996 Basic Discount Rate high levels of resource use as reflected especially in low unemployment. In The Board's decisions on the basic rate these circumstances, the Board conare made against the background of the cluded that there was no clear case for policy actions of the Federal Open Mar- raising the discount rate. ket Committee (FOMC) and the related economic and financial developments Structure of Discount Rates that are covered more fully in part 1 of this REPORT and in the minutes of the The basic rate is the rate normally 1996 meetings of the FOMC that also charged on loans to depository instituappear in this REPORT. tions for short-term adjustment credit, The Board's approval of a XA percent- while flexible, market-related rates genage point reduction in the basic discount erally are charged on seasonal and rate, to 5 percent, on January 31, 1996, extended credit. These flexible rates are followed the FOMC's decision on the calculated periodically in accordance same day to ease reserve conditions with formulas that are approved by the slightly, an action that was expected to Board. foster a decrease of about lA percentage Under the seasonal program, whose point in the federal funds rate. The purpose is to assist smaller institutions complementary policy actions were in meeting regular needs arising from a taken against the backdrop of a potential clear pattern of intra-yearly movements reduction in inflationary pressures asso- in their deposits and loans, funds may ciated with the moderation in economic be provided for periods longer than growth in previous months. In an envi- those permitted under adjustment credit. ronment of already subdued price and Since its introduction in early 1992, the wage trends, a slight easing of monetary flexible rate charged on seasonal credit policy was deemed to be consistent with has been closely aligned with shortcontaining inflation and encouraging term market rates; it is never less than further economic expansion at a sustain- the basic rate applicable to adjustment able pace. credit. Over the remainder of 1996 the Board A different flexible rate is charged on considered further requests to change extended-credit loans, which are made the basic rate but took no action on to depository institutions that are under them. All those requests called for sustained liquidity pressure and are not increases of lA or Vi percentage point. able to obtain funds from other sources. The initial requests to increase the rate The rate for extended credit is 50 basis were submitted by two Federal Reserve points higher than the seasonal rate and Banks during the first half of May, and is at least 50 basis points above the basic the number of outstanding requests rose rate. In appropriate circumstances, borgradually to a maximum of eight during rowings of extended credit could be September and again from mid-October at the basic rate for up to thirty days, to early November. All but one had been but any further borrowings would be withdrawn by year-end. In reaching its charged the flexible rate. decisions not to approve the requests, Exceptionally large adjustment-credit the Board took account of the favorable loans that arise from computer breakperformance of inflation, including the downs or other operating problems that persistence of subdued increases in labor are not clearly beyond the reasonable compensation and overall prices despite control of the borrowing institution are Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 99 assessed the highest rate applicable to Votes for this action: Messrs. Greenspan, any credit extended to depository insti- Kelley, and Lindsey and Mses. Phillips and Yellen. Votes against this action: tutions; under the current structure, that None. Absent and not voting: Vice Chairrate is the flexible rate on extended man Blinder.2 credit. At the end of 1996 the structure of The Board subsequently approved discount rates was as follows: a basic similar actions taken by the directors of rate of 5 percent for short-term adjust- the Federal Reserve Banks of Boston, ment credit, a rate of 5.35 percent for Richmond, Chicago, and Kansas City, seasonal credit, and a rate of 5.85 per- effective February 1, 1996, and by the cent for extended credit. During 1996 directors of the Federal Reserve Bank of the flexible rate on seasonal credit St. Louis, effective February 5, 1996. • ranged from a low of 5.15 percent to a high of 5.50 percent, and the flexible rate on extended credit ranged from a low of 5.65 percent to a high of 6 percent. Board Votes Under the provisions of the Federal Reserve Act, the boards of directors of the Federal Reserve Banks are required to establish rates on loans to depository institutions at least every fourteen days and to submit such rates to the Board of Governors for review and determination. Federal Reserve Bank proposals on the discount rate include requests to renew the formulas for calculating the flexible rates on seasonal and extended credit. Votes relating to the reestablishment of existing rates or for the updating of market-related rates under the seasonal and extended credit programs are not shown in this summary. All votes on discount rates taken by the Board of Governors during 1996 were unanimous. Vote on the Basic Discount Rate January 31, 1996. Effective this date, the Board approved actions taken by the directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Atlanta, Minneapolis, Dallas, and San Francisco to reduce the basic discount rate ]A percentage point, to 5 percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

101 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 Federal Open Market Commit- Act. That section provides that the tee: an Authorization for Domestic Open Board shall keep a complete record of Market Operations and a Domestic Polthe actions taken by the Board and by icy 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 market operations, that it shall record currency 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 1996. 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 information that was available to the Authorization for Domestic Open Committee at the time of the meetings Market Operations rather than on data as they may have In Effect January 1, 1996 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 minutes. When Committee: members dissent from a decision, they are identified in the minutes 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

102 83rd Annual Report, 1996 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 US. 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 103 Domestic Policy Directive year that it had set for growth of total domestic nonfinancial debt. The Committee raised In Effect January 1, 19961 the 1995 range for M3 to 2 to 6 percent as a technical adjustment to take account of The information reviewed at this meeting changing intermediation patterns. For 1996, suggests a substantial slowing in the expan- the Committee established on a tentative sion of economic activity after a strong gain basis the same ranges as in 1995 for growth in the third quarter. Nonfarm payroll employ- of the monetary aggregates and debt, meament increased further in November, but the sured from the fourth quarter of 1995 to the civilian unemployment rate edged up to fourth quarter of 1996. The behavior of the 5.6 percent. Industrial production was little monetary aggregates will continue to be changed on average over October and evaluated in the light of progress toward November after a moderate rise in the third price level stability, movements in their quarter. Total nominal retail sales rose some- velocities, and developments in the economy what on balance over October and Novem- and financial markets. ber. Housing starts were down in October In the implementation of policy for the after a large increase in the third quarter. immediate future, the Committee seeks to However, orders for nondefense capital decrease slightly the existing degree of presgoods point to substantial expansion of sure on reserve positions. In the context of spending on business equipment in the near the Committee's long-run objectives for term, and nonresidential construction has price stability and sustainable economic risen appreciably further. Wage trends have growth, and giving careful consideration to been stable and consumer prices have risen economic, financial, and monetary develrelatively slowly on average in recent opments, slightly greater reserve restraint months. or slightly lesser reserve restraint would Most market interest rates have declined be acceptable in the intermeeting period. slightly since the Committee meeting on The contemplated reserve conditions are November 15. In foreign exchange markets, expected to be consistent with moderate the trade-weighted value of the dollar in growth in M2 and M3 over coming months. terms of the other G-10 currencies has risen slightly on balance over the intermeeting period. Authorization for Foreign The substantial moderation in the growth Currency Operations of M2 and M3 since midsummer continued in November; however, for the year through In Effect January 1, 1996 November, M2 expanded at a rate in the upper half of its range for 1995 and M3 grew 1. The Federal Open Market Committee at a rate at the upper end of its range. Growth authorizes and directs the Federal Reserve in total domestic nonfinancial debt has Bank of New York, for System Open Market slowed somewhat in recent months but for Account, to the extent necessary to carry out the year to date remains around the midpoint the Committee's foreign currency directive of its monitoring range. and express authorizations by the Committee The Federal Open Market Committee pursuant thereto, and in conformity with seeks monetary and financial conditions that such procedural instructions as the Commitwill foster price stability and promote sus- tee may issue from time to time: tainable growth in output. In furtherance of A. To purchase and sell the following these objectives, the Committee at its meet- foreign currencies in the form of cable transing in July reaffirmed the range it had estab- fers through spot or forward transactions on lished on January 31-February 1 for growth the open market at home and abroad, includof M2 of 1 to 5 percent, measured from the ing transactions with the U.S. Treasury, with fourth quarter of 1994 to the fourth quarter the U.S. Exchange Stabilization Fund estabof 1995. The Committee also retained the lished by Section 10 of the Gold Reserve monitoring range of 3 to 7 percent for the Act of 1934, with foreign monetary authorities, with the Bank for International Settle- 1. Adopted by the Committee at its meeting on ments, and with other international financial December 19, 1995. institutions: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 83rd Annual Report, 1996 Austrian schillings Amount Belgian francs Foreign bank (millions of Canadian dollars dollars equivalent) Danish kroner Pounds sterling Austrian National Bank 250 French francs National Bank of Belgium 1,000 German marks Bank of Canada 2,000 Italian lire National Bank of Denmark 250 Bank of England 3,000 Japanese yen Bank of France 2,000 Mexican pesos German Federal Bank 6,000 Netherlands guilders Bank of Italy 3,000 Norwegian kroner Bank of Japan 5,000 Swedish kronor Bank of Mexico Swiss francs Regular 3,000 Special 3,000 Netherlands Bank 500 Bank of Norway 250 B. To hold balances of, and to have Bank of Sweden 300 Swiss National Bank 4,000 outstanding forward contracts to receive or Bank for International Settlements to deliver, the foreign currencies listed in Dollars against Swiss francs 600 paragraph A above. Dollars against authorized European currencies other than Swiss francs 1,250 C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency arrangements listed 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 Federal Reserve System under Section 214.5 Bank of New York with the foreign banks of Regulation N, Relations with Foreign designated by the Board of Governors under Banks and Bankers, and with the approval of Section 214.5 of Regulation N shall be the Committee to renew such arrangements referred for review and approval to the on maturity: Committee. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings 105 5. Foreign currency holdings shall be Monetary and Financial Policies. invested insofar as practicable, considering needs for minimum working balances. Such 8. Staff officers of the Committee are investments shall be in liquid form, and authorized to transmit pertinent informagenerally have no more than 12 months tion on System foreign currency operations remaining to maturity. When appropriate in to appropriate officials of the Treasury connection with arrangements to provide Department. investment facilities for foreign currency holdings, U.S. Government securities may be 9. All Federal Reserve Banks shall parpurchased from foreign central banks under ticipate in the foreign currency operations agreements for repurchase of such securities for System Account in accordance with parawithin 30 calendar days. graph 3 G(l) of the Board of Governors' Statement of Procedure with Respect to For- 6. All operations undertaken pursuant to eign Relationships of Federal Reserve Banks the preceding paragraphs shall be reported dated January 1, 1944. promptly to the Foreign Currency Subcommittee 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 Board as the Chairman may designate (or in In Effect January 1, 1996 the absence of members of the Board serving on the Subcommittee, other Board Members 1. System operations in foreign currencies designated by the Chairman as alternates, shall generally be directed at countering disand in the absence of the Vice Chairman of orderly market conditions, provided that the Committee, his alternate). Meetings of market exchange rates for the U.S. dollar the Subcommittee shall be called at the reflect actions and behavior consistent with request of any member, or at the request of the IMF Article IV, Section 1. the Manager, System Open Market Account ("Manager"), for the purposes of reviewing 2. To achieve this end the System shall: recent or contemplated operations and of consulting with the Manager on other mat- A. Undertake spot and forward purters relating to his responsibilities. At the chases and sales of foreign exchange. request of any member of the Subcommittee, B. Maintain reciprocal currency questions arising from such reviews and con- ("swap") arrangements with selected forsultations shall be referred for determination eign central banks and with the Bank for to the Federal Open Market Committee. International Settlements. 7. The Chairman is authorized: C. Cooperate in other respects with central banks of other countries and with A. With the approval of the Commit- international monetary institutions. tee, to enter into any needed agreement or understanding with the Secretary of the Trea- 3. Transactions may also be undertaken: sury about the division of responsibility for foreign currency operations between the Sys- A. To adjust System balances in light tem and the Treasury; of probable future needs for currencies. B. To provide means for meeting Sys- B. To keep the Secretary of the Treatem and Treasury commitments in particular sury fully advised concerning System forcurrencies, and to facilitate operations of the eign currency operations, and to consult with Exchange Stabilization Fund. the Secretary on policy matters relating to foreign currency operations; C. For such other purposes as may be expressly authorized by the Committee. C. From time to time, to transmit appropriate reports and information to the 4. System foreign currency operations National Advisory Council on International shall be conducted: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 83rd Annual Report, 1996 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 I.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 obli- of 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, 1996 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, System Open Market swap arrangement. Account ("Manager")* shall be guided by the following procedural understandings 3. The Manager shall also consult with with respect to consultations and clearance the Subcommittee or the Chairman about with the Committee, the Foreign Currency proposed swap drawings by the System, and Subcommittee, and the Chairman of the about any operations that are not of a routine Committee. All operations undertaken pursucharacter. ant to such clearances shall be reported promptly to the Committee. Meeting Held on 1. The Manager shall clear with the Subcommittee (or with the Chairman, if the January 30-31, 1996 Chairman believes that consultation with the A meeting of the Federal Open Market Subcommittee is not feasible in the time available): Committee was held in the offices of the Board of Governors of the Federal A. Any operation that would result in a Reserve System in Washington, D.C., change in the System's overall open position in foreign currencies exceeding $300 million starting on Tuesday, January 30, 1996, on any day or $600 million since the most at 2:30 p.m. and continuing on Wednesrecent regular meeting of the Committee. day, January 31, 1996, at 9:00 a.m. B. Any operation that would result in a change on any day in the System's net posi- Present: tion in a single foreign currency exceeding Mr. Greenspan, Chairman $150 million, or $300 million when the Mr. McDonough, Vice Chairman operation is associated with repayment of Mr. Boehne swap drawings. Mr. Jordan Mr. Kelley C. Any operation that might generate a Mr. Lindsey substantial volume of trading in a particular Mr. McTeer currency by the System, even though the Ms. Phillips Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January 107 Mr. Stern Mr. Beebe, Ms. Browne, Messrs. Davis, Ms. Yellen Dewald, Goodfriend, and Hunter, Senior Vice Presidents, Federal Messrs. Broaddus, Guynn, Moskow, Reserve Banks of San Francisco, and Parry, Alternate Members Boston, Kansas City, St. Louis, of the Federal Open Market Richmond, and Chicago Committee respectively Mses. Krieger and Rosenbaum, Messrs. Hoenig, Melzer, and Vice Presidents, Federal Reserve Ms. Minehan, Presidents of the Banks of New York and Atlanta Federal Reserve Banks of respectively Kansas City, St. Louis, and Boston respectively In the agenda for this meeting, it was reported that advices of the election of Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary the following members and alternate Mr. Coyne, Assistant Secretary members of the Federal Open Market Mr. Gillum, Assistant Secretary Committee for the period commenc- Mr. Mattingly, General Counsel ing January 1, 1996, and ending Decem- Mr. Prell, Economist ber 31, 1996, had been received and that Mr. Truman, Economist the named individuals had executed Messrs. Lang, Lindsey, Mishkin, their oaths of office. Promisel, Rolnick, Rosenblum, The elected members and alternate Siegman, Simpson, Sniderman, members were as follows: and Stockton, Associate Economists William J. McDonough, President of the Mr. Fisher, Manager, System Open Federal Reserve Bank of New York, Market Account with Ernest T. Patrikis, First Vice President of the Federal Reserve Bank of New York, as alternate; Mr. Winn, Assistant to the Board, Edward G. Boehne, President of the Federal Office of Board Members, Board Reserve Bank of Philadelphia, with of Governors J. Alfred Broaddus, Jr., President of the Mr. Ettin, Deputy Director, Division of Federal Reserve Bank of Richmond, as Research and Statistics, Board of alternate; Governors Jerry L. Jordan, President of the Fed- Mr. Madigan, Associate Director, eral Reserve Bank of Cleveland, with Division of Monetary Affairs, Michael H. Moskow, President of the Board of Governors Federal Reserve Bank of Chicago, as Mr. Slifman, Associate Director, alternate; Division of Research and Robert D. McTeer, President of the Fed- Statistics, Board of Governors Mr. Rosine,2 Senior Economist, eral Reserve Bank of Dallas, with Jack Guynn, President of the Federal Division of Research and Reserve Bank of Atlanta, as alternate; Statistics, Board of Governors Mr. Reid,2 Economist, Division of Gary H. Stern, President of the Federal Reserve Bank of Minneapolis, with Monetary Affairs, Board of Robert T. Parry, President of the Fed- Governors eral Reserve Bank of San Francisco, as Ms. Low, Open Market Secretariat alternate. Assistant, Division of Monetary Affairs, Board of Governors By unanimous vote, the following 2. Attended portions of meeting relating to the officers of the Federal Open Market Committee's review of the economic outlook and establishment of its monetary and debt ranges for Committee were elected to serve until 1996. the election of their successors at the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 83rd Annual Report, 1996 first meeting of the Committee after By unanimous vote, the Authori- December 31, 1996, with the under- zation for Domestic Open Market standing that in the event of the discon- Operations shown below was tinuance of their official connection with reaffirmed. the Board of Governors or with a Federal Reserve Bank, they would cease to Authorization for Domestic Open have any official connection with the Market Operations Federal Open Market Committee: Reaffirmed January 30, 1996 Alan Greenspan Chairman William J. McDonough Vice Chairman 1. The Federal Open Market Committee authorizes and directs the Federal Reserve Donald L. Kohn Secretary and Bank of New York, to the extent necessary Economist to carry out the most recent domestic pol- Normand R.V. Bernard Deputy Secretary icy directive adopted at a meeting of the Joseph R. Coyne Assistant Committee: Secretary (a) To buy or sell U.S. Government Gary P. Gillum Assistant securities, including securities of the Federal Secretary Financing Bank, and securities that are direct J. Virgil Mattingly, Jr. General Counsel obligations of, or fully guaranteed as to Thomas C. Baxter, Jr. Deputy General principal and interest by, any agency of the Counsel United States in the open market, from or to Michael J. Prell Economist securities dealers and foreign and interna- Edwin M. Truman Economist tional accounts maintained at the Federal Reserve Bank of New York, on a cash, regu- Richard W. Lang, David E. Lindsey, lar, or deferred delivery basis, for the System Frederic S. Mishkin, Larry J. Promisel, Open Market Account at market prices, and, Arthur J. Rolnick, Harvey Rosenblum, for such Account, to exchange maturing U.S. Charles J. Siegman, Thomas D. Government and Federal agency securities Simpson, Mark S. Sniderman, and with the Treasury or the individual agencies David J. Stockton, Associate or to allow them to mature without replace- Economists ment; provided that the aggregate amount of U.S. Government and Federal agency securi- By unanimous vote, the Federal ties held in such Account (including forward Reserve Bank of New York was selected commitments) at the close of business on the to execute transactions for the System day of a meeting of the Committee at which action is taken with respect to a domestic Open Market Account until the adjournpolicy directive shall not be increased or ment of the first meeting of the Commitdecreased by more than $8.0 billion during tee after December 31, 1996. the period commencing with the opening of By unanimous vote, Peter R. Fisher business on the day following such meeting was selected to serve at the pleasure and ending with the close of business on the day of the next such meeting; of the Committee as Manager, System (b) When appropriate, to buy or sell in Open Market Account, on the underthe open market, from or to acceptance dealstanding that his selection was subject to ers and foreign accounts maintained at the being satisfactory to the Federal Reserve Federal Reserve Bank of New York, on a Bank of New York. cash, regular, or deferred delivery basis, for the account of the Federal Reserve Bank of New York at market discount rates, prime Secretary's note: Advice subsebankers acceptances with maturities of up to quently was received that the selection nine months at the time of acceptance that of Mr. Fisher as Manager was satis- (1) arise out of the current shipment of goods factory to the board of directors of the between countries or within the United Federal Reserve Bank of New York. States, or (2) arise out of the storage within Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings January 109 y the United States of goods under contract of national accounts on the bases set forth in sale or expected to move into the channels of paragraph l(a) under agreements providing trade within a reasonable time and that are for the resale by such accounts of those secured throughout their life by a warehouse securities within 15 calendar days on terms receipt or similar document conveying title comparable to those available on such transto the underlying goods; provided that the actions in the market; and (b) for New York aggregate amount of bankers acceptances Bank account, when appropriate, to underheld at any one time shall not exceed take with dealers, subject to the conditions $100 million; imposed on purchases and sales of securities (c) To buy U.S. Government securities, in paragraph l(c), repurchase agreements in obligations that are direct obligations of, or U.S. Government and agency securities, and fully guaranteed as to principal and interest to arrange corresponding sale and repurchase by, any agency of the United States, and agreements between its own account and prime bankers acceptances of the types foreign and international accounts mainauthorized for purchase under l(b) above, tained at the Bank. Transactions undertaken from dealers for the account of the Federal with such accounts under the provisions of Reserve Bank of New York under agree- this paragraph may provide for a service fee ments for repurchase of such securities, obli- when appropriate. gations, or acceptances in 15 calendar days or less, at rates that, unless otherwise ex- By unanimous vote, the Authorizapressly authorized by the Committee, shall tion for Foreign Currency Operations be determined by competitive bidding, after applying reasonable limitations on the vol- shown below was reaffirmed. ume of agreements with individual dealers; provided that in the event Government securities or agency issues covered by any such Authorization for Foreign Currency agreement are not repurchased by the dealer Operations pursuant to the agreement or a renewal thereof, they shall be sold in the market or transferred to the System Open Market Reaffirmed January 30, 1996 Account; and provided further that in the 1. The Federal Open Market Committee event bankers acceptances covered by any authorizes and directs the Federal Reserve such agreement are not repurchased by the Bank of New York, for System Open Market seller, they shall continue to be held by the Account, to the extent necessary to carry out Federal Reserve Bank or shall be sold in the Committee's foreign currency directive the open market. and express authorizations by the Committee 2. In order to ensure the effective conduct pursuant thereto, and in conformity with of open market operations, the Federal Open such procedural instructions as the Commit- Market Committee authorizes and directs the tee may issue from time to time: Federal Reserve Banks to lend U.S. Govern- A. To purchase and sell the following ment securities held in the System Open foreign currencies in the form of cable trans- Market Account to Government securities fers through spot or forward transactions on dealers and to banks participating in Govthe open market at home and abroad, includernment securities clearing arrangements ing transactions with the U.S. Treasury, with conducted through a Federal Reserve Bank, the U.S. Exchange Stabilization Fund estabunder such instructions as the Committee lished by Section 10 of the Gold Reserve Act may specify from time to time. of 1934, with foreign monetary authorities, 3. In order to ensure the effective conduct with the Bank for International Settleof open market operations, while assisting in ments, and with other international financial the provision of short-term investments for institutions: foreign and international accounts maintained at the Federal Reserve Bank of Austrian schillings Italian lire New York, the Federal Open Market Com- Belgian francs Japanese yen mittee authorizes and directs the Federal Canadian dollars Mexican pesos Reserve Bank of New York (a) for System Danish kroner Netherlands guilders Open Market Account, to sell U.S. Govern- Pounds sterling Norwegian kroner French francs Swedish kronor ment securities to such foreign and inter- German marks Swiss francs Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 83rd Annual Report, 1996 B. To hold balances of, and to have Any changes in the terms of existing swap outstanding forward contracts to receive or arrangements, and the proposed terms of any to deliver, the foreign currencies listed in new arrangements that may be authorized, paragraph A above. shall be referred for review and approval to C. To draw foreign currencies and to the Committee. permit foreign banks to draw dollars under 3. All transactions in foreign currencies the reciprocal currency arrangements listed undertaken under paragraph LA. above in paragraph 2 below, provided that draw- shall, unless otherwise expressly authorized ings by either party to any such arrangement by the Committee, be at prevailing market shall be fully liquidated within 12 months rates. For the purpose of providing an investafter any amount outstanding at that time ment return on System holdings of foreign was first drawn, unless the Committee, currencies, or for the purpose of adjusting because of exceptional circumstances, spe- interest rates paid or received in connection cifically authorizes a delay. with swap drawings, transactions with for- D. To maintain an overall open posi- eign central banks may be undertaken at tion in all foreign currencies not exceeding non-market exchange rates. $25.0 billion. For this purpose, the overall 4. It shall be the normal practice to open position in all foreign currencies is arrange with foreign central banks for the defined as the sum (disregarding signs) of coordination of foreign currency transacnet positions in individual currencies. The tions. In making operating arrangements net position in a single foreign currency is with foreign central banks on System holddefined as holdings of balances in that cur- ings of foreign currencies, the Federal rency, plus outstanding contracts for future Reserve Bank of New York shall not commit receipt, minus outstanding contracts for itself to maintain any specific balance, unless future delivery of that currency, i.e., as the authorized by the Federal Open Market sum of these elements with due regard to Committee. Any agreements or understandsign. ings concerning the administration of the 2. The Federal Open Market Commit- accounts maintained by the Federal Reserve tee directs the Federal Reserve Bank of Bank of New York with the foreign banks New York to maintain reciprocal currency designated by the Board of Governors arrangements ("swap" arrangements) for the under Section 214.5 of Regulation N shall System Open Market Account for periods up be referred for review and approval to the to a maximum of 12 months with the follow- Committee. ing foreign banks, which are among those 5. Foreign currency holdings shall be designated by the Board of Governors of the invested insofar as practicable, considering Federal Reserve System under Section 214.5 needs for minimum working balances. Such of Regulation N, Relations with Foreign investments shall be in liquid form, and gen- Banks and Bankers, and with the approval of erally have no more than 12 months rethe Committee to renew such arrangements maining to maturity. When appropriate in on maturity: connection with arrangements to provide Amount Amount Foreign bank (millions of Foreign bank (millions of dollars equivalent) dollar equivalent) Austrian National Bank 250 Bank of Mexico 3,000' National Bank of Belgium 1,000 Netherlands Bank 500 Bank of Canada 2,000 Bank of Norway 250 National Bank of Denmark 250 Bank of Sweden 300 Bank of England 3,000 Swiss National Bank 4,000 Bank of France 2,000 Bank for International Settlements: German Federal Bank 6,00 Dollars against Swiss francs 600 Bank of Italy 3,000 Dollars against authorized European Bank of Japan 5,000 currencies other than Swiss francs 1,250 1. The additional temporary $3 billion swap arrange- uary 31, 1996, in line with its original terms. See minutes ment with the Bank of Mexico, approved by the Commit- of the FOMC meeting of December 19, 1995. tee on February 1, 1995, was allowed to lapse on Jan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January 111 investment 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. 6. All operations Currency Directive shown below was undertaken pursuant to the preceding parareaffirmed. graphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman Foreign Currency Directive of the Committee, the Vice Chairman of the Board of Governors, and such other member of the Board as the Chairman may designate Reaffirmed January 30, 1996 (or in the absence of members of the Board serving on the Subcommittee, other Board 1. System operations in foreign currenmembers designated by the Chairman as al- cies shall generally be directed at countering ternates, and in the absence of the Vice disorderly market conditions, provided that Chairman of the Committee, his alternate). market exchange rates for the U.S. dollar Meetings of the Subcommittee shall be reflect actions and behavior consistent with called at the request of any member, or at the the IMF Article IV, Section 1. request of the Manager, System Open Mar- 2. To achieve this end the System shall: ket Account ("Manager"), for the purposes A. Undertake spot and forward purof reviewing recent or contemplated opera- chases and sales of foreign exchange. tions and of consulting with the Manager on B. Maintain reciprocal currency other matters relating to his responsibilities. ("swap") arrangements with selected for- At the request of any member of the Sub- eign central banks and with the Bank for committee, questions arising from such International Settlements. reviews and consultations shall be referred C. Cooperate in other respects with for determination to the Federal Open Mar- central banks of other countries and with ket 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 obliauthorized to transmit pertinent informa- gations of the United States in the Internation on System foreign currency operations tional Monetary Fund regarding exchange to appropriate officials of the Treasury arrangements under the IMF Article IV Department. 9. All Federal Reserve Banks shall par- By unanimous vote, the Procedural ticipate in the foreign currency operations Instructions with Respect to Foreign for System Account in accordance with para- Currency Operations shown below were graph 3 G(l) of the Board of Governors' Statement of Procedure with Respect to For- reaffirmed. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 83 rd Annual Report, 1996 Procedural Instructions with A. Any operation that would result in a Respect to Foreign Currency change in the System's overall open position in foreign currencies exceeding $1.5 billion Operations since the most recent regular meeting of the Committee. B. Any swap drawing proposed by a Reaffirmed January 30, 1996 foreign bank exceeding the larger of In conducting operations pursuant to the (i) $200 million or (ii) 15 percent of the authorization and direction of the Federal size of the swap arrangement. Open Market Committee as set forth in the 3. The Manager shall also consult with Authorization for Foreign Currency Opera- the Subcommittee or the Chairman about tions and the Foreign Currency Directive, proposed swap drawings by the System and 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 Agreement to "Warehouse" with respect to consultations and clearances with the Committee, the Foreign Currency Foreign Currencies Subcommittee, and the Chairman of the Committee. All operations undertaken pursu- At its meeting on January 31-February ant to such clearances shall be reported 1, 1995, the Committee had approved an promptly to the Committee. increase from $5 billion to $20 billion 1. The Manager shall clear with the Sub- in the amount of eligible foreign currencommittee (or with the Chairman, if the cies that the System was prepared to Chairman believes that consultation with the "warehouse" for the Treasury and the Subcommittee is not feasible in the time available): Exchange Stabilization Fund (ESF). The A. Any operation that would result in a purpose of the warehousing facility, change in the System's overall open position which has been in place for many in foreign currencies exceeding $300 million years, is to supplement the U.S. dollar on any day or $600 million since the most resources of the Treasury and the ESF recent regular meeting of the Committee. for financing purchases of foreign cur- B. Any operation that would result in a rencies and related international operachange on any day in the System's net position in a single foreign currency exceeding tions. The enlargement of the warehous- $150 million, or $300 million when the ing agreement was intended to facilitate operation is associated with repayment of U.S. participation in the Multilateral swap drawings. Program to Restore Financial Stability C. Any operation that might generate a in Mexico, announced by President substantial volume of trading in a particular Clinton on January 31, 1995, by warecurrency by the System, even though the change in the System's net position in that housing up to $20 billion in German currency might be less than the limits speci- marks and Japanese yen held by the fied in l.B. Treasury through the ESF. The Com- D. Any swap drawing proposed by a mittee had agreed that it would review foreign bank not exceeding the larger of each year the need to maintain this level (i) $200 million or (ii) 15 percent of the of warehousing authority in light of size of the swap arrangement. 2. The Manager shall clear with the Com- the progress and requirements of the mittee (or with the Subcommittee, if the program. Subcommittee believes that consultation The Treasury and the Exchange Stawith the full Committee is not feasible in the bilization Fund had made no use of the time available, or with the Chairman, if the warehousing facility over the past year. Chairman believes that consultation with the Subcommittee is not feasible in the time Nevertheless, consistent with Federal available): Reserve support for the program of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January 113 assistance to Mexico, the members kets. He indicated that the swap line agreed that it was appropriate to post- drawing by the Bank of Mexico had pone consideration of an adjustment in been repaid in full on January 29, 1996. the overall size of the facility at least The Committee ratified that transaction until the end of the disbursement phase by unanimous vote. of the Mexican program currently The Manager also reported on recent scheduled for August 1996. Accord- developments in domestic financial ingly, the Committee reaffirmed the markets and on System open market warehousing authority by unanimous transactions in U.S. government securivote. ties and federal agency obligations By unanimous vote, the Program for during the period December 19, 1995, Security of FOMC Information was through January 30, 1996. By unaniamended to conform it to the treatment mous vote, the Committee ratified these of transcripts of FOMC meetings and transactions. the procedures that the Committee had The Committee then turned to a disbeen following for some time in regard cussion of the economic and financial to redactions of confidential information outlook, the ranges for the growth of in transcripts and other documents that money and debt in 1996, and the impleare released to the public after five mentation of monetary policy over the years. In addition, the Committee agreed intermeeting period ahead. A summary to amend the program so that the auto- of the economic and financial informamatic extension of Federal Reserve staff tion available at the time of the meeting access to confidential material after six and of the Committee's discussion is months could be suspended for certain provided below, followed by the domesparticularly sensitive documents. tic policy directive that was approved by On January 23, 1996, the continuing the Committee and issued to the Federal rules, resolutions, and other instruments Reserve Bank of New York. of the Committee had been distributed Only a limited amount of new inforwith the advice that, in accordance with mation was available for this meeting procedures approved by the Committee, because of delays in government rethey were being called to the Commit- leases; that which was available, along tee's attention before the January 30-31 with anecdotal commentary, suggested organization meeting to give members that the economy had been growing relaan opportunity to raise any questions tively slowly in recent months. Conthey might have concerning them. Mem- sumer spending had expanded modestly bers were asked to indicate if they on balance, growth in business investwished to have any of the instruments ment in capital goods appeared to have in question placed on the agenda for slackened somewhat recently, and housconsideration at this meeting, and no ing demand seemed to have leveled out. requests for such consideration were Slower growth in final sales was leading received. to inventory buildups in a few indus- By unanimous vote, the minutes of tries, and these buildups, together with the meeting of the Federal Open Market the disruptions from government shut- Committee held on December 19, 1995, downs and severe weather, were having were approved. a restraining effect on economic activity. The Manager of the System Open The demand for labor was still grow- Market Account reported on recent ing at a moderate pace, though, and the developments in foreign exchange mar- unemployment rate remained relatively Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 83rd Annual Report, 1996 low. The recent data on prices and set much of the sales gains registered at wages had been mixed, but there was no automotive dealerships, furniture and firm evidence of a change in underlying appliance stores, and building and supinflation trends. ply outlets. Consumer surveys indicated Nonfarm payroll employment contin- some deterioration in consumer conued to expand moderately in December; fidence in January. Recent indicators the gain was in line with the average of housing demand and activity were monthly increase for 1995. Employment mixed. Sales of new homes edged still in manufacturing, boosted by the settle- lower in November (latest data availment of a strike at a major aircraft able), and sales of existing homes manufacturer, reversed the declines of declined by a larger amount in Decem- October and November. Construction ber than in November. However, houspayrolls rose further in December, ing starts rebounded in November from despite unfavorable weather in some a sizable October decline, and condiparts of the country. Job growth tions in mortgage markets remained remained solid in much of the services quite favorable, led by a further decline industry, although employment at per- in rates. sonnel supply firms was little changed. The sparse statistical data available The civilian unemployment rate on business fixed investment, along with remained at 5.6 percent in December. anecdotal information, suggested a mod- Industrial production edged up in eration recently in the expansion of busi- December and for the fourth quarter as a ness spending on capital goods, includwhole advanced only slightly; industrial ing some slowing of investment in activity remained sluggish in January computers. Investment in transportation according to the limited statistical infor- equipment, however, apparently had mation that was available. In December, held up well in the fourth quarter. manufacturing output rose a bit in asso- Incoming data on construction contracts ciation with an increase in motor vehicle pointed to some slowing in the growth assemblies and aircraft production. Else- of nonresidential building activity from where in manufacturing, the growth of a relatively brisk pace during most of output of office and computing equip- 1995. ment slowed somewhat from the rapid The information available on busipace of previous months, and the pro- ness inventories suggested that invenduction of defense and space equipment tory imbalances might have emerged and of nondurable consumer goods in a few sectors in association with registered sizable declines. The output weaker-than-expected sales. Motor vehiof utilities was boosted somewhat in cle inventories were at elevated levels December by the effect of colder-than- compared with sales in late 1995, and average temperatures on the demand manufacturers responded by offering for heating services. Utilization of total incentive packages on new cars and industrial capacity fell slightly but trucks and by adjusting downward their remained at a moderately elevated level. January production schedules. Data on Retail sales continued to grow at a manufacturing and retail trade invenrelatively modest rate in December, and tories for November had been delayed, the fourth-quarter increase was consid- but published information on inventories erably smaller than those of the previous held by wholesale distributors indicated two quarters. In the fourth quarter, lower a decline in that month, reversing part spending at general merchandisers off- of October's sizable run-up. Much of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January 115 the decline occurred in nondurable ity prices had been mixed recently after goods, although machinery distributors having trended down earlier. Average also reported a sizable liquidation. The hourly earnings of production and noninventory-sales ratio for the wholesale supervisory workers increased sometrade sector edged down in November what in December after having been but remained near the high end of its unchanged in November. Increases in range in recent years. average hourly earnings had been trend- The nominal deficit on U.S. trade in ing up over the past several years. goods and services narrowed in October At its meeting on December 19, 1995, from its average rate in the third quarter. the Committee adopted a directive that The value of imports declined more than called for some slight easing in the the value of exports. Much of the con- degree of pressure on reserve positions, traction in imports reflected reductions which was expected to result in a in oil and automotive products that more decline in the federal funds rate from than offset another strong rise in com- around 53A percent to around 5Vi perputer goods. For exports, an advance in cent. The directive did not include a machinery exports to record levels was presumption about the likely direction outweighed by a reduction in shipments of any adjustments to policy during the of agricultural and automotive products. intermeeting period. Accordingly, the Available data on economic activity in directive stated that in the context of the major foreign industrial countries the Committee's long-run objectives for suggested that the pace of expansion in price stability and sustainable economic Europe had slowed further on average growth, and giving careful consideration while growth in Japan had picked up a to economic, financial, and monetary little. developments, slightly greater reserve Recent data suggested little change in restraint or slightly lesser reserve reunderlying inflation trends. Consumer straint would be acceptable during the prices increased slightly in December intermeeting period. The reserve condiafter having been unchanged in Novem- tions associated with this directive were ber; food prices were quiescent over the expected to be consistent with moderate two-month period while energy prices growth of M2 and M3 over coming rose on balance, with a December months. rebound more than offsetting a sizable After the meeting, open market opera- November drop. Excluding food and tions were directed initially toward energy items, consumer prices were up implementing the slight easing in the modestly over the November-December degree of reserve pressure that had been period and for all of 1995 advanced adopted by the Committee and thereslightly more than in 1994. Producer after toward maintaining this new prices of finished goods were up consid- reserve posture. Operations were comerably in November and December after plicated by large swings in reserve having risen slowly in earlier months; in demands associated with year-end preslarge part, the price increases late in the sures and the adverse effects of unusuyear reflected sharp upward movements ally severe winter weather on check in both finished foods and finished clearings. Although the federal funds energy prices. For 1995, producer prices rate exhibited somewhat greater volaof finished goods other than food and tility than normal over the period, it energy rose at a subdued pace, though nonetheless averaged close to the somewhat more than in 1994. Commod- expected level of 5 xh percent. The occa- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 83rd Annual Report, 1996 sional periods of firmness in reserve M2, whose offering rates tend to be market conditions contributed to higher adjusted downward with a considerable adjustment plus seasonal borrowing, on lag. In addition, the flattening of the average, over the period. term structure of interest rates had less- Most market interest rates had ened the comparative attractiveness of declined somewhat further over the bond mutual funds, which had continperiod after the December 19 meeting. ued to experience only light inflows. Rates moved lower immediately after Faster growth of M3 in December and the policy easing action, and most fell January was associated with both the still more on balance over the remainder pickup in M2 expansion and the issuof the intermeeting interval in response ance of additional large time deposits to to incoming information about the econ- help finance a noticeable step-up in bank omy and the prospects for fiscal policy, loan demand in January. The expansion at least in the near term. Both were seen of M2 from the fourth quarter of 1994 as suggesting slower economic expan- to the fourth quarter of 1995 was in the sion for a time and an increased likeli- upper half of the Committee's annual hood of additional easing of monetary range, and M3 grew at the upper end of policy in coming months. With bond its range. Growth of total domestic nonyields down on balance, and occasion- financial debt had been moderate in ally approaching two-year lows, major recent months, and for the year was near indexes of equity prices advanced the midpoint of this aggregate's monisharply further. toring range. The trade-weighted value of the dol- The staff forecast prepared for this lar in terms of the other G-10 currencies meeting suggested that economic activcontinued to rise over the intermeeting ity would expand at a relatively slow period despite the decline in U.S. inter- pace over the near term. This forecast est rates. The dollar's upward move- was not materially different from that ment against the German mark and other prepared for the December meeting, European currencies was associated except for a slightly weaker outlook with increasing indications of further for the current quarter that was related weakening of economic expansion in in part to an inventory correction and key European countries and greater the effects of unusually severe winter declines in interest rates in those coun- weather on spending and output. Over tries than in the United States. The dol- the remainder of the two-year forecast lar's appreciation relative to the Japa- horizon, the economy was expected nese yen appeared to be related in part to grow generally along its estimated to a narrowing of Japan's trade and cur- potential. Consumer spending was rent account surpluses. The dollar was anticipated to keep pace with the growth unchanged on balance against the Cana- of disposable income; concerns about dian dollar, while the Mexican peso rose job security remained and consumer considerably in relation to the dollar. debt burdens had risen further, but the Growth of M2 and M3 strengthened still-ample availability of credit and the in December and January. The pickup in substantial rise in the value of house- M2 growth partly reflected the effect of hold equity holdings would support recent declines in short-term interest additional increases in consumption. rates; those declines had made money The further decline in mortgage rates market instruments less attractive rela- recently from already-favorable levels tive to household savings accounts in would help to sustain homebuilding Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January 117 activity at a relatively high level. With of concerns, including the extent of the sales and profits projected to grow more damping effects of high debt loads and slowly, and with utilization of existing employment uncertainty on consumpcapacity having eased considerably, tion and questions about the sources of business investment in new equipment further export growth, suggested the and structures was expected to expand possibility of sluggish expansion, while at a more moderate rate. In light of the possible developments on the upside recent strengthening of the dollar, the were more difficult to identify. With external sector was expected to exert a resource use unlikely to vary appresmall restraining influence on real activ- ciably, the members generally expected ity over the projection period as a whole. no significant change in the underlying Much uncertainty still surrounded the inflation picture over the year ahead. fiscal outlook, but the recent impasse The recent performance of inflation had in the budget negotiations between the some encouraging aspects, and the odds Administration and the Congress sug- on greater price pressures seemed relagested a lower degree of fiscal restraint tively small at this time. over coming years than had been In keeping with the practice at meetassumed in the previous forecast. Given ings when the Committee establishes its the projected outlook, rates of utilization long-run ranges for growth of the money of labor and capital resources and of and debt aggregates, the members of the inflation were not expected to change Committee and the Federal Reserve materially. Bank presidents not currently serving as In the Committee's discussion of cur- members had prepared individual prorent and prospective economic activity, jections of economic activity, the rate of members noted a number of temporary unemployment, and inflation for the factors that were retarding the expan- year 1996. Measured on the basis of sion. The weakness in business activity chain-weighted indexes, the forecasts of this winter was to some extent the result the growth in real GDP had a central of the partial shutdown of the federal tendency of 2 to 2lA percent and a full government and the severe storms in a range of \xh to 2xh percent for the number of regions; both clearly were period from the fourth quarter of 1995 transitory influences on the economy. to the fourth quarter of 1996. The mem- Growth of economic activity also was bers and nonmember presidents generbeing constrained by production cut- ally anticipated that economic expanbacks stemming from efforts to bring sion in line with their forecasts would be stocks into better alignment with disap- associated with employment growth pointing sales in a number of industries. close to that of the labor force. Accord- Even so, in the absence of major over- ingly, their forecasts of the civilian rate hangs in inventories of business equip- of unemployment in the fourth quarter ment and consumer durables, and given of 1996 were near the current level, with favorable conditions in financial mar- a central tendency of 5*/2 to 53/4 percent kets, members believed that a resump- and a full range of 5lA to 6 percent. tion of moderate, sustainable growth Projections of the rate of inflation, as after a relatively brief period of weak- reflected in the consumer price index, ness was the most likely outlook for had a central tendency of 23A to 3 perthe economy. At the same time, many cent; that central tendency was on the observed that the risks to such an out- high side of the outcome for 1995— come did not seem balanced. A number when the rise in the index was held Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 83rd Annual Report, 1996 down by damped increases in food number of areas to the clearly temporary prices and declines in energy prices— effects of unusually severe winter but a few of the forecasts anticipated a weather and the partial shutdown of slightly lower rate of inflation. the federal government. The members In their review of developments anticipated that moderate growth in across the nation, the Federal Reserve retail sales would resume, though some Bank presidents reported modest growth felt that the consumer sector might in most major areas of the country. remain vulnerable on the downside. The Many referred, however, to an admix- consumer spending outlook was comture of strengths and weaknesses in plicated by a number of crosscurrents. their local economies, and a majority Negative factors cited by the members observed that on balance growth in included ongoing concerns about job regional business activity appeared to security that were being sustained by a have slowed in the last few months. In continuing stream of workforce reduckeeping with the data available for the tion announcements by major business nation as a whole, the slowing seemed concerns, increased consumer debt burto be concentrated in manufacturing and dens that were showing up in rising especially at firms producing motor delinquency rates on some types of vehicles and parts. Some presidents loans, and the apparent satisfaction of referred to relatively negative, or at least much of the earlier pent-up demand for cautious, sentiment among many of their consumer durables. On the positive side, business contacts. reduced interest rates, still readily Much of the recent softening in eco- available credit, and the accumulation nomic activity appeared to arise from of financial wealth from the sharp rise production cutbacks in various sectors in stock and bond prices were seen as of the economy in which involuntary likely to support continuing gains in accumulation of inventories seemed to consumer spending. have occurred as a result of weaker sales Further increases in business fixed trends in the past few months. The mem- investment were viewed as a likely bers expected this inventory adjustment prospect for the year ahead, though the process to have a relatively pronounced growth of such investment probably effect on production and overall busi- would be well below the strong pace ness activity in the current quarter and experienced earlier in the current cycliperhaps to some extent in the second. cal expansion. Anecdotal reports indi- While a greater-than-expected inven- cated continuing strength in nonresidentory adjustment with spreading effects tial construction in some parts of the through the economy could not be ruled country, but declining rates of capacity out, the underlying strength of demand utilization augured reduced growth was likely to be sufficient to restore and going forward. The expansion of investsustain moderate growth in overall eco- ment in producers' durable equipment nomic activity as the current inventory also was expected to slow, but from a and production adjustments subsided. pace that had seemed unsustainable. With regard to consumer spending, While appreciable further growth could members referred to overall indications be expected in expenditures for highof lackluster retail sales during the holi- tech equipment as business firms continday season and into January. The anec- ued to focus on improving the efficiency dotal commentary on retail sales attrib- of their operations in a highly competiuted some of the recent weakness in a tive environment, spending for other Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January 119 types of equipment was likely to be The members anticipated that inflasluggish. Members noted in particular tion would remain contained in 1996, the prospects for weaker business spend- but they did not expect significant ing for motor vehicles, especially for progress toward more stable prices. heavy trucks. However, the fundamental They referred to crosscurrents bearing determinants of investment in business on the outlook for wages and prices equipment, including the reduced cost in the year ahead. Factors pointing to of financing such investment, remained potentially higher inflation included positive and this sector of the economy increased pressures on food prices stemshould continue to provide considerable ming from disappointing harvests in impetus to the expansion. some areas and relatively low grain sup- The members also viewed the con- plies. More generally, resource utilizasiderable decline that had occurred in tion was expected to remain high and mortgage interest rates and the ample greater pressures could emerge in labor availability of housing finance as key and product markets. Members noted factors in their forecasts of sustained that one broad measure of wages had residential construction at relatively picked up and that there was a small rise high levels. Adverse weather conditions in the number of anecdotal reports indiappeared to have retarded homebuild- cating that labor shortages were contribing activity in a number of areas in uting to higher wages in some parts recent weeks, but several members of the country. In addition, unusually commented that underlying trends in muted increases in the costs of worker housing demand were favorable and that benefits had been holding down overall residential construction had remained compensation costs, and this pattern relatively strong in several parts of the might not persist. On the other hand, country. high levels of resource utilization had The outlook for fiscal policy was been associated for some time with uncertain, especially with regard to lower rates of growth in costs than whether longer-term spending and tax- would have been anticipated on the basis ation measures would be enacted to of historical experience. In particular, a implement the goal of a balanced fed- general sense of job insecurity in a eral budget by the year 2002. For the period of major business restructurings year immediately ahead, however, the was holding down increases in labor members continued to anticipate consid- compensation. In an environment of erable restraint in federal spending, strong competition, which was preventpartly as a byproduct of the current ing many businesses from passing on budget debate between the Congress and rising costs through higher prices, firms the Administration. With regard to the continued to focus on efforts to control external sector of the economy, pros- costs by improving the efficiency of pects for economic growth in major their operations, and this was helping trading partners—led by developments to hold down inflation. An apparent in Europe—appeared to have weakened, decline in inflationary expectations also and the recent appreciation of the dollar would provide a moderating influence in the foreign exchange markets also on inflation trends in the period ahead. might tend to damp net exports. Conse- While most of the members saw little quently, several members saw downside reason to anticipate appreciably lower risks in the foreign trade sector over the inflation over the year ahead, they also year ahead. viewed the odds on a pickup in inflation Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 83rd Annual Report, 1996 as fairly low; they could see possible money growth and the basic objectives reasons for optimism on the long-run of monetary policy. trend in inflation; and they generally Most members endorsed a proposal to remained confident that further progress adopt the relatively low ranges for toward price stability would be made growth of M2 and M3 in 1996 that the over the longer term. Committee had set on a tentative basis In keeping with the requirements of in July 1995. These members favored the Full Employment and Balanced retention of the tentative ranges because Growth Act of 1978 (the Humphrey- they could be viewed as benchmarks for Hawkins Act), the Committee reviewed money growth that would be associated the ranges for growth of the monetary with price stability, assuming behavior and debt aggregates in 1996 that it had of velocity in line with historical experiestablished on a tentative basis at its ence, and a reaffirmation of those ranges meeting in July 1995. The tentative would underscore the Committee's comranges included expansion of 1 to 5 per- mitment to a policy of achieving price cent for M2 and 2 to 6 percent for M3, stability over the longer term. Some measured from the fourth quarter of members also noted that any adjustment 1995 to the fourth quarter of 1996. The of these ranges to align them more fully monitoring range for growth of total with projections of money growth condomestic nonfinancial debt was provi- sistent with the Committee's expectasionally set at 3 to 7 percent for 1996. tions for expansion of the economy and The tentative ranges for 1996 were prices in 1996 could be misinterpreted. unchanged from the actual ranges for Such an action might be seen as suggest- 1995. In July, the range for M3 had been ing that the Committee had a greater raised 2 percentage points to reflect degree of confidence in the relationship developments that seemed to be foster- between money growth and broad meaing a return to the historical pattern of sures of economic performance than was somewhat faster growth in M3 than in warranted by its current understanding M2. of that relationship or that the Commit- In their discussion, the members took tee was now placing greater emphasis note of a staff analysis which indicated on the broad monetary aggregates as a that monetary expansion consistent with gauge of the thrust of monetary policy. the moderate growth of nominal GDP Two members favored somewhat that the members were projecting for higher growth ranges for M2 and M3 in 1996 most likely would be around the 1996. They noted that the expansion of upper ends of the tentative ranges these broad aggregates was anticipated adopted last July. M2 and M3 velocity to be around the upper ends of their over the past couple of years had con- tentative ranges, and perhaps even formed more closely on balance with higher, given the Committee's expectahistorical patterns, and the projections tions for the performance of the econassumed that this behavior would con- omy and prices. In their view, the higher tinue in 1996. In light of the experience ranges would be more consistent with of earlier years, however, when the what they saw as the Committee's oblivelocities of these aggregates had exhib- gations under the Federal Reserve Act ited pronounced atypical behavior, sub- to set ranges consistent with expected or stantial uncertainty still surrounded any desired economic outcomes for the year, projections of monetary expansion and and the reasons for establishing those the linkage between particular rates of ranges could easily be set forth and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January 121 understood as an appropriate technical Votes for this action: Messrs. Greenspan, adjustment that would not imply any McDonough, Boehne, Jordan, Kelley, lessened commitment to the Commit- McTeer, Ms. Phillips, and Mr. Stern. Votes against this action: Mr. Lindsey and tee's price stability goal. Ms. Yellen. The Committee unanimously preferred to retain the 3 to 7 percent range for total domestic nonflnancial debt in Mr. Lindsey and Ms. Yellen dissented 1996. This position took account of a because they preferred somewhat higher staff projection indicating that the debt ranges for M2 and M3. They recognized aggregate was likely to continue to grow that the relationships between the ranges at a rate generally in line with the expan- for the monetary aggregates and broad sion of nominal GDP, although some measures of economic performance moderation in private credit demands were subject to substantial uncertainty, was anticipated and there were indica- but ranges higher than those adopted on tions that lenders were no longer easing a tentative basis in July 1995 were more their terms and conditions for granting likely to encompass monetary expancredit to consumers and businesses. sion consistent with the central tendency At the conclusion of its discussion, of members' current forecasts of nomithe Committee voted to approve without nal GDP growth for 1996. Raising the change the tentative ranges for 1996 that ranges for M2 and M3 would in their it had established in July of last year. view conform those ranges more closely In keeping with its usual procedures with the provisions in the Federal under the Humphrey-Hawkins Act, the Reserve Act that require the System to Committee would review its ranges at communicate to the Congress its objecmidyear, or sooner if interim conditions tives and plans for the growth of the warranted, in light of the growth and aggregates for the calendar year. They velocity behavior of the aggregates and believed the Committee could readily ongoing economic and financial devel- explain that such an adjustment to the opments. Accordingly, the following ranges did not represent a lessened comlonger-run policy statement for 1995 mitment to its price stability goal or an was approved for inclusion in the increased emphasis on the monetary domestic policy directive: aggregates in policy formulation. The Committee also discussed alter- The Federal Open Market Committee natives to the monetary aggregates seeks monetary and financial conditions that for communicating its intentions with will foster price stability and promote sus- regard to the course of inflation over the tainable growth in output. In furtherance of longer run. Some members thought that these objectives, the Committee at this meetexplicit numerical goals or forecasts for ing established ranges for growth of M2 and inflation over a period of years would M3 of 1 to 5 percent and 2 to 6 percent have several important benefits, includrespectively, measured from the fourth quarter of 1995 to the fourth quarter of 1996. The ing enhanced credibility that could monitoring range for growth of total domes- reduce the costs of achieving price static nonflnancial debt was set at 3 to 7 percent bility and greater flexibility to respond for the year. The behavior of the monetary to the emergence of economic weakness aggregates will continue to be evaluated by easing policy for a limited period in the light of progress toward price level of time without arousing inflation constability, movements in their velocities, and cerns. Other members, while endorsing developments in the economy and financial markets. fully the long-term goal of price stabil- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 83 rd Annual Report, 1996 ity, had a number of reservations about effects on aggregate demand of the implementing such proposals, especially recent rise in the foreign exchange value at this time. Based on experience in the of the dollar, which might continue to United States and elsewhere, many were move higher if interest rate declines skeptical about the payoff in terms of expected by the markets were not forthgreater credibility or flexibility in policy coming. It was noted that postponing a implementation. Moreover, they be- decision in this uncertain economic clilieved that substantially more study and mate could be defended on the ground deliberation were required to explore that more evidence was needed to ascerfully the alternatives and the conse- tain whether the weakness in the econquences of changes in the way the Com- omy was quite temporary or more lastmittee formulated and communicated ing; if it was the former, inflationary its objectives. They also thought that pressures could re-emerge at lower any such assessment would need to take interest rates. On the other hand, a few account of the prospects for, or disposi- members commented that the currently tion of, closely related legislation that sluggish performance of the economy was now being considered in the Con- could be read as calling for a more gress. The Committee did not take any pronounced easing move, but they preaction on this issue at this meeting, but ferred a cautious approach to policy it recognized that the matter would need in light of current inflation trends and to be revisited from time to time. the uncertainties that surrounded their In the Committee's discussion of pol- forecasts of some strengthening in the icy for the intermeeting period ahead, economy. the members supported a proposal call- The Chairman informed the Commiting for some slight easing in reserve tee that he had asked the members of the conditions. Although a pickup to an Board of Governors to convene immediacceptable rate of expansion was seen as ately after this meeting to consider a the most likely course for the economy reduction of lA percentage point in the in coming quarters, the risks of a short- discount rate. Such a reduction had been fall in growth were believed to be sig- proposed by a total of six Federal nificant. At the same time, while most Reserve Banks at this point. Given the members were forecasting high levels of easing in reserve markets favored by the resource use and little change in the rate Committee and the possibility of a lower of inflation this year, they saw only a discount rate, the members did not very limited risk that a slight easing believe that a further policy move was move might foster higher inflation under likely to be needed during the intermeetprevailing circumstances, and some felt ing period. Accordingly, they favored an that there were favorable prospects for a unbiased directive that did not incorslightly improved inflation performance. porate a presumption about the likely Under the circumstances, a slight direction of any adjustments to policy decrease was warranted in the real fed- during the next several weeks. In keeperal funds rate from a level that a num- ing with its usual practice, the Commitber of members considered still a bit to tee did not rule out the possibility of an the firm side—a stance that seemed less intermeeting policy change on the basis appropriate in light of the reduced threat of unanticipated economic or financial over the last year of a pickup in infla- developments. tion. One member pointed out that such At the conclusion of the Committee's a decrease would tend to counter the discussion, all the members supported a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, January 123 directive that called for a slight reduc- terms of the other G-10 currencies has risen tion in the degree of pressure on reserve further over the intermeeting period. Growth of M2 and M3 strengthened in positions and that did not include a bias December and January. From the fourth about the likely direction of an adjust- quarter of 1994 to the fourth quarter of ment to policy during the intermeeting 1995, M2 expanded in the upper half of its period, should unanticipated devel- range and M3 grew at the upper end of its range. Growth in total domestic nonfinancial opments warrant a change in policy. debt has been moderate in recent months, Accordingly, the Committee decided placing this aggregate near the midpoint of that in the context of its long-run objec- its monitoring range for the year. tives for price stability and sustainable The Federal Open Market Committee economic growth, and giving careful seeks monetary and financial conditions that consideration to economic, financial, will foster price stability and promote sustainable growth in output. In furtherance of and monetary developments, slightly these objectives, the Committee at this meetgreater or slightly lesser reserve restraint ing established ranges for growth of M2 and would be acceptable during the inter- M3 of 1 to 5 percent and 2 to 6 percent meeting period. The reserve conditions respectively, measured from the fourth quarter of 1995 to the fourth quarter of 1996. contemplated at this meeting were The monitoring range for growth of total expected to be consistent with moderate domestic nonfinancial debt was set at 3 to growth in M2 and M3 over coming 7 percent for the year. The behavior of the months. monetary aggregates will continue to be evaluated in the light of progress toward At the conclusion of the meeting, the price level stability, movements in their ve- Federal Reserve Bank of New York was locities, and developments in the economy authorized and directed, until instructed and financial markets. otherwise by the Committee, to execute In the implementation of policy for the transactions in the System Account in immediate future, the Committee seeks to accordance with the following domestic decrease slightly the existing degree of pressure on reserve positions, taking account of policy directive: a possible reduction in the discount rate. In the context of the Committee's long-run ob- The information reviewed at this meeting jectives for price stability and sustainable suggests that the economy has been growing economic growth, and giving careful considrather slowly in recent months. Nonfarm eration to economic, financial, and monepayroll employment continued to expand tary developments, slightly greater reserve moderately in December, and the civilian restraint or slightly lesser reserve restraint unemployment rate remained at 5.6 percent. would be acceptable in the intermeeting Industrial production increased only slightly period. The contemplated reserve conditions further in the fourth quarter. Growth of con- are expected to be consistent with moderate sumer spending was modest, on balance, growth in M2 and M3 over coming months. over the past several months. Housing starts rebounded in November from a sizable Octo- Votes for short-run policy: Messrs. ber decline. Orders for nondefense capital Greenspan, McDonough, Boehne, Jordan, goods point to a moderation in the expansion Kelley, Lindsey, McTeer, Ms. Phillips, of spending on business equipment, and non- Mr. Stern, and Ms. Yellen. Votes against residential construction has risen appreciably this action: None. further. The nominal deficit on U.S. trade in goods and services narrowed in October It was agreed that the next meeting of from its average rate in the third quarter. the Committee would be held on Tues- There has been no clear change in underlying inflation trends. day, March 26, 1996. Most market interest rates have declined The meeting adjourned at 12:00 p.m. somewhat since the Committee meeting on December 19. In foreign exchange markets, Donald L. Kohn the trade-weighted value of the dollar in Secretary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 83rd Annual Report, 1996 Meeting Held on Ms. Low, Open Market Secretariat March 26, 1996 Assistant, Division of Monetary Affairs, Board of Governors A meeting of the Federal Open Market Mr. Stone, First Vice President, Federal Committee was held in the offices of Reserve Bank of Philadelphia the Board of Governors of the Fed- Messrs. Davis, Dewald, Goodfriend, eral Reserve System in Washington, and Hunter, Senior Vice D.C., on Tuesday, March 26, 1996, at Presidents, Federal Reserve 8:00 a.m. Banks of Kansas City, St. Louis, Richmond, and Chicago respectively Present: Mr. Greenspan, Chairman Mr. Judd, Ms. Rosenbaum, and Mr. McDonough, Vice Chairman Mr. Rosengren, Vice Presidents, Mr. Boehne Federal Reserve Banks of Mr. Jordan San Francisco, Atlanta, and Mr. Kelley Boston respectively Mr. Lindsey Mr. Bentley, Assistant Vice President, Mr. McTeer Federal Reserve Bank of Ms. Phillips New York Mr. Stern Ms. Yellen By unanimous vote, the minutes of the meeting of the Federal Open Market Messrs. Broaddus, Guynn, Moskow, Committee held on January 30-31, and Parry, Alternate Members 1996, were approved. of the Federal Open Market Committee The Manager of the System Open Market Account reported on develop- Messrs. Hoenig and Melzer, and ments in foreign exchange markets dur- Ms. Minehan, Presidents of the ing the period January 31,1996, through Federal Reserve Banks of Kansas City, St. Louis, and March 25, 1996. There were no open Boston respectively market transactions in foreign currencies for System account during this Mr. Kohn, Secretary and Economist period, and thus no vote was required of Mr. Bernard, Deputy Secretary the Committee. Mr. Coyne, Assistant Secretary Mr. Gillum, Assistant Secretary The Manager also reported on devel- Mr. Mattingly, General Counsel opments in domestic financial markets Mr. Baxter, Deputy General Counsel and on System open market transactions Mr. Prell, Economist in government securities and federal Mr. Truman, Economist agency obligations during the period Messrs. Lang, Mishkin, Promisel, January 31, 1996, through March 25, Rolnick, Rosenblum, Siegman, 1996. By unanimous vote, the Commit- Simpson, Sniderman, and tee ratified these transactions. Stockton, Associate Economists The Committee then turned to a discussion of the economic and financial Mr. Fisher, Manager, System Open Market Account outlook and the implementation of monetary policy over the intermeeting Mr. Ettin, Deputy Director, Division of period ahead. A summary of the eco- Research and Statistics, Board of nomic and financial information avail- Governors able at the time of the meeting and of Mr. Reinhart, Assistant Director, Division of Monetary Affairs, the Committee's discussion is provided Board of Governors below, followed by the domestic policy Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 125 directive that was approved by the Com- computing machines continued to rise at mittee and issued to the Federal Reserve a rapid pace, and the production of other Bank of New York. types of business equipment picked up. Much of the information reviewed at Output of consumer goods changed little this meeting had been influenced to an on balance over the two-month period. uncertain degree by unusually severe Manufacturing, production expanded winter weather, industrial strikes, and about in line with capacity over the first U.S. government shutdowns. On bal- two months of the year, leaving the ance, however, growth of economic overall rate of utilization of manufacturactivity appeared to have picked up after ing capacity little changed. having slowed appreciably in late 1995. Nominal retail sales increased briskly Growth in consumer spending seemed in February after having registered little to have resumed at a moderate rate in change in January. The February spurt the wake of January's storms; business was paced by strong motor vehicle purspending on durable equipment was chases, but spending at general merrecording further healthy gains; and chandise stores and apparel outlets also housing demand was showing some was up considerably after a weak persigns of strengthening. With businesses formance in previous months. Sales at making considerable progress in getting durable goods stores were less robust, their inventories under control, indus- rising only slightly in February. Recent trial production and employment had indicators of housing demand and activrebounded briskly. The recent data on ity were generally favorable. Starts of prices gave little indication of any both single-family and multifamily units change in underlying inflation trends. moved higher on balance over January A surge in nonfarm payroll employ- and February, and sales of new homes ment in February considerably more increased appreciably in January (latest than offset a large weather-related drop data available). By contrast, sales of in January. Very large job gains were existing homes declined in January for a recorded in February in the construc- fourth consecutive month. tion, retail trade, and services indus- Business demand for durable equiptries; however, some of these increases ment apparently remained fairly robust reflected the reversal of the depressing in early 1996. Incoming orders for effects of January's severe winter storms computing equipment were particularly and the efforts of some firms to make strong in January, and shipments of such up for associated production losses. A equipment posted further healthy gains. small rise in manufacturing employment With airline profits high and new modin February only partially offset a fur- els of airplanes being introduced, orders ther loss of factory jobs in January. The for aircraft had climbed rapidly over civilian unemployment rate fell to recent months. Orders for other types 5.5 percent in February. of equipment also had picked up on Industrial production rose sharply in balance over the last several months, February, more than offsetting a sizable although shipments of such equipment decline in January. Part of the net dropped in January after a sizable rise increase in output over the January- in the fourth quarter. Nonresidential February period reflected an upturn in construction activity appeared to be aircraft production after the settlement growing more slowly: Non-office comof a strike at a major aircraft manufac- mercial construction continued its turer. In addition, output of office and upward trend but office, institutional, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 83rd Annual Report, 1996 and industrial building activity had Inflation trends had remained stable slowed noticeably in recent months, and in recent months. At the consumer level, contracts for those categories also had food prices continued to edge up in softened. February and energy prices again were Business inventories rebounded under appreciable upward pressure. sharply in January from a large drop in Excluding the often-volatile food and December. Much of the January buildup energy items, consumer prices advanced in stocks occurred in manufacturing, in February at a slightly slower rate than where part of the backup may have been in January; and for the twelve months associated with delays in shipments as a ended in February, consumer prices rose result of winter storms. The inventory- a little less than in the comparable yearsales ratio for the sector edged up in earlier period. At the producer level, January but was little changed on bal- prices of finished goods other than food ance in recent months. Inventories at the and energy were unchanged on balance wholesale level also rose considerably over January and February; the rise in in January; the inventory-sales ratio this measure of prices over the twelve increased slightly but was still well months ended in February was somebelow the high levels of last fall. Retail what larger than in the comparable yearstocks recorded a modest rise in January earlier interval. Average hourly earnings after a sharp decline in December. The of production and nonsupervisory work- January increase was in line with the ers edged down in February after a conadvance in sales, and the inventory- siderable increase in January. However, sales ratio for the sector as a whole for the twelve-month period ended in was unchanged from December and February, average hourly earnings rose remained well below levels seen over more than in the year-earlier period. most of 1995. At its meeting on January 30-31, The nominal deficit on U.S. trade in 1996, the Committee adopted a directive goods and services in December (latest that called for a slight reduction in the data available) was little changed from degree of pressure on reserve positions, its November level. On a quarterly- taking account of a possible reduction of average basis, however, the deficit in the lA percentage point in the discount rate. fourth quarter was substantially smaller The directive approved by the Committhan it had been in the third quarter. The tee did not include a presumption about value of exports of goods and services the likely direction of any adjustments rose appreciably in the fourth quarter, to policy during the intermeeting period, with the largest increases occurring in should unanticipated developments warmachinery exports and foreign tourist rant a policy change. Accordingly, the services. The value of imports declined directive stated that in the context of slightly, largely as a result of decreases the Committee's long-run objectives for in imports of automotive products, con- price stability and sustainable economic sumer goods, and oil. The data available growth, and giving careful consideraon economic conditions in the major tion to economic, financial, and moneforeign industrial countries in early 1996 tary developments, slightly greater suggested that a moderate recovery was reserve restraint or slightly lesser under way in Japan, and there were reserve restraint would be acceptable some signs of a pickup in activity in during the intermeeting period. The much of Western Europe, although the reserve conditions associated with this German economy remained weak. directive were expected to be consistent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 127 with moderate growth of M2 and M3 stronger than expected and that ecoover coming months. nomic conditions abroad were compara- On January 31, the Board of Gover- tively weaker than they had seemed earnors approved a reduction of lA percent- lier fostered a rebound in the value of age point in the discount rate, to a level the dollar. of 5 percent. The decrease was made Growth of the broader monetary effective immediately and was passed aggregates strengthened considerably in through to interest rates in reserve mar- February and early March following the kets. Open market operations during decline in short-term interest rates in the intermeeting period were directed late 1995 and early 1996. The acceleratoward maintaining this new policy tion of M2 reflected a surge in demand stance, and the federal funds rate aver- deposits as well as larger inflows to aged around 5lA percent, the level retail money market mutual funds, expected to be associated with that whose yields tend to adjust with a lag to stance. changes in short-term market interest Because the easing move had been rates. Larger inflows to institution-only largely anticipated in financial markets, money market funds contributed to the initial response was a small decline M3's stronger performance. Growth of in short-term rates and little change in total domestic nonfinancial debt slowed long-term rates. Over the remainder of somewhat in December and January, the period, however, most interest rates reflecting reduced federal government moved higher in response to incoming borrowing, but remained moderate on economic data that were seen as sug- balance. gesting improved prospects for eco- The staff forecast prepared for this nomic growth and, accordingly, a meeting suggested that the pace of ecoreduced likelihood of further easings nomic expansion would pick up over in monetary policy. In addition, the coming months after a sluggish fourth absence of much progress in federal quarter. Other than a better performance budget negotiations was viewed by the over the first half of 1996 associated markets as indicating that the chances a with a somewhat faster increase in final major multiyear deficit-reduction plan sales, this forecast differed little from would be adopted this year were becom- that prepared for the previous meeting ing more remote. Despite the increase in and indicated that the economy was bond yields, major indexes of equity expected to expand generally along its prices recorded sizable gains. estimated potential. Consumer spending In foreign exchange markets, the was projected to grow slightly more than trade-weighted value of the dollar in disposable income; the favorable effect terms of the other G-10 currencies of higher equity prices on household declined slightly over the intermeeting wealth and the still-ample availability of period. The dollar fell appreciably dur- credit were expected to outweigh pering the initial portion of the period— sisting consumer concerns about job before evidence of a more robust security and the effects of already high U.S. economy emerged—while data on household debt burdens. Homebuilding the German money supply and the Japa- activity was projected to decline a little nese economy were suggesting upward in response to the recent backup in resirevisions to expected interest rates dential mortgage rates but to remain at a abroad. In late February, emerging signs relatively high level. A less rapid pace that the U.S. economy was generally of business investment in equipment and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 83rd Annual Report, 1996 structures was expected in light of the rialize over the projection period. decline over the past year in the rate of Regarding the outlook for inflation, utilization of production capacity and members' assessments tended to center the moderate growth projected for sales on expectations of little change in averand profits. The external sector was age consumer price inflation over the expected to exert a small restraining projection horizon. influence on economic activity over The review of regional economic the projection period. The persisting developments by the Federal Reserve impasse in the federal budget negotia- Bank presidents pointed to moderate tions suggested little further fiscal con- expansion in economic activity across traction in coming quarters. Given the much of the nation, though growth was outlook for economic activity, rates of described as modest in a few regions utilization of labor and capital were not and relatively robust in some others. expected to change materially and infla- Business conditions appeared to have tion was projected to increase modestly. improved in a number of areas since In the Committee's discussion of early in the year, but as had been true current and prospective economic devel- previously, activity in various sectors of opments, members commented on the the economy remained uneven. Manuresiliency of the economy, which facturing of most durable goods other appeared to have strengthened apprecia- than motor vehicles and some defense bly after a period of subpar growth. The industry products displayed considerlatter had been induced to a large extent able strength, while the production of by inventory adjustments whose effects many nondurable goods tended to lag. were exacerbated temporarily by gov- In agriculture, high feed costs and low ernment shutdowns, unusually severe market prices were depressing the cattle winter weather, and industrial strikes. industry, while elevated grain prices The adjustment in inventory investment were boosting the incomes of farmers seemed to be nearing its completion, not subject to the effects of locally and some members observed that the adverse weather conditions. settlement of the recent strike in the The economy had displayed considermotor vehicle industry might well able resilience in the face of adjustments impart added impetus to the expansion to production associated with efforts by over the nearer term. Considerable vola- many business firms to reduce inventility could be expected in the short-rui tories and a number of additional, albeit performance of the economy, but the temporary, developments that had members continued to view trend tended to retard the expansion in the growth at a pace near the economy's latter part of 1995 and at the start of this potential as the most probable outcome. year. Apparently, relatively low long- Many also commented that the risks to term interest rates and the related subsuch a forecast appeared to have shifted stantial appreciation in the value of from being predominantly on the down- stock and bond market holdings had side earlier in the year to better balanced been important factors helping to suscurrently. Still, substantial uncertainties tain spending in this period. In the conattended the economic outlook, and a text of continued underlying momentum number of members observed that an in final demand and some decline in economic performance that differed excess stocks of unsold motor vehicles considerably in either direction from stemming from the recently ended strike their current forecasts might well mate- at a major domestic producer, inven- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 129 tories now seemed to be in better bal- highly competitive markets would tend ance with sales and the economy to to support growth in business fixed be better positioned to accommodate investment. Profits and cash flows were sustained expansion. Some members expected to remain reasonably strong, observed, however, that the recent though there were tentative signs of increase in intermediate- and long-term some softening in profit margins. On the interest rates would tend to blunt other hand, the longevity of the current demand in interest-sensitive sectors of expansion had resulted in the addition of the economy. Moreover, stock market a good deal of production capacity in prices had risen to comparatively high recent years. This development in conlevels in relation to earnings and interest junction with some decline in capacity rates and might be vulnerable to further utilization over the past several quarters weakness in the debt markets or to any pointed to less need for expansion in tendency for business profit margins to plant and equipment. The rise in outlays erode. for computers and related products was In the course of their comments about likely to remain fairly robust in light of developments in key sectors of the econ- the continuing advances in technology omy, members referred to recent indi- and the marked downtrend in computer cations, including anecdotal reports, of prices, but the growth of computer appreciable strengthening in retail sales expenditures was projected to be well that tended to support forecasts of sus- below the extraordinary pace of the past tained growth in consumer spending in few years. The slowdown would reflect coming quarters. In addition, surveys of factors that were expected to damp the consumer sentiment, which had been growth of overall business investment more favorable recently, and sharply spending and a greater saturation of increased household net worth were potential computer markets that might seen as positive factors in the outlook lead to more emphasis on replacement for consumer expenditures. On the nega- demand rather than the further expantive side, some members observed that sion of capacity. the rise in consumer indebtedness and Housing activity generally was the recent increase in interest rates expected to be well maintained in comwould tend to damp consumer spending. ing quarters, though likely to moderate Given these financial crosscurrents, it to some extent from current levels in was suggested that growth in consumer lagged response to the rise that had spending might approximate that of occurred in mortgage interest rates. The disposable income over the forecast response of housing expenditures to rate horizon. increases was uncertain, and a few The prospects for business capital members commented that the prospecspending remained a supportive element tive slowing in housing construction in the outlook for further economic could be fairly pronounced. For the expansion, but growth in such spending nearer term, however, recent data were was expected to slow considerably from indicative of considerable underlying its rapid pace over the past few years. strength in housing markets, especially The ready availability and fairly low in light of the adverse effects of notably cost of business finance in equity and unfavorable weather conditions in many debt markets and the continuing com- parts of the country this winter. Those mitment of business firms to moderniz- data tended to be supported by anecing their facilities to hold down costs in dotal reports of significant improvement Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 83rd Annual Report, 1996 in housing markets in several regions been unusually subdued in light of the over the course of recent months. Con- relatively low unemployment nationtributing to that performance, however, wide and widespread anecdotal reports might be a temporary acceleration of of labor shortages. In this view the rise purchases by homebuyers who antici- in labor costs could well accelerate at pated further increases in mortgage some point, though not necessarily in interest rates. The latter were viewed, the near term, with some feedthrough to nonetheless, as still low in comparison prices. Other developments that generwith their average level over the past ated some concern about the outlook for several years. inflation included the rise in the costs of The outlook for fiscal policy remained medical benefits in the fourth quarter, uncertain, especially for future years. price pressures in the energy and food It was suggested that the stalemate sectors of the economy, and the possibilbetween the Congress and the Adminis- ity that the recent rise in intermediatetration on major spending and tax issues and long-term interest rates might to might not be resolved in coming months some extent reflect worsening inflationor indeed during the current session of ary expectations. Other members saw the Congress. However, already legis- only a limited risk of higher inflation, lated appropriations and current continu- and a few indicated that they did not ing resolutions still pointed to consider- rule out some reduction in consumer able restraint in federal spending this price inflation from that experienced in year. With regard to the external sector 1995. In this view there was sufficient of the economy, projections of appre- capacity in the economy to allow room ciable growth in exports tended to be for moderate growth of economic activsupported by anecdotal comments of ity in line with their forecasts without strong export demand for goods pro- fostering added inflation. Moreover, duced in various parts of the country, there was only scattered evidence of including some improvement in exports accelerating increases in worker comto Mexico. At the same time, imports pensation associated with labor shortmight well expand somewhat more rap- ages and little indication that possibly idly than exports if the domestic econ- diminishing worries about job security omy strengthened as projected this year would induce rising labor militancy. from its reduced rate of growth in 1995. Some members also stressed the persis- The members did not differ greatly in tence of strong competition in numertheir assessments of the most probable ous markets that tended to preclude or course of inflation. Their expectations restrain raising prices. ranged from essentially unchanged to In the Committee's discussion of polslightly higher inflation in comparison icy for the intermeeting period ahead, all with 1995. At the same time, members the members endorsed a proposal to expressed somewhat differing views maintain an unchanged degree of presabout possible deviations of inflation sure in reserve markets. This policy from their expectations. Those who preference was based on expectations of emphasized the risks of higher-than- growth in business activity at a pace projected inflation tended to cite the averaging in the vicinity of the econopotential for increasing wage and price my's potential, a perception among the pressures in an economy that already members that the risks to such an outwas operating at or close to its estimated look were more balanced than earlier, capacity. Increases in labor costs had and anticipations that under these cir- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 131 cumstances inflation would remain con- that slightly greater or slightly lesser strained. The economy seemed to have reserve restraint would be acceptable adequate forward momentum and did during the intermeeting period. The not appear to require any further stimu- reserve conditions contemplated at this lus, whose implementation might con- meeting were expected to be consistent tribute to inflationary pressures in the with moderate growth in M2 and M3 economy. Several members observed over coming months. that robust growth in broad money for At the conclusion of the meeting, the some months suggested that monetary Federal Reserve Bank of New York was policy had been supportive of sustained authorized and directed, until instructed economic expansion. At the same time, otherwise by the Committee, to execute information on the economy and prices transactions in the System Account in did not seem to indicate developing accordance with the following domestic inflation pressures that needed to be con- policy directive: tained by tightening policy at this juncture. Indeed, some members commented Many of the data for recent months that, judged from one perspective, finan- reviewed at this meeting were influenced to cial conditions had tightened somewhat an uncertain degree by unusually severe winas a consequence of the recent rise ter weather, industrial strikes, and U.S. government shutdowns. On balance, the expanin intermediate- and long-term interest sion in economic activity appears to have rates, though it was difficult to disenpicked up after slowing appreciably in late tangle the real and the inflation compo- 1995. Nonfarm payroll employment surged nents of the rate increases. Nonetheless, in February, considerably more than offseta number of members noted that infla- ting a large drop in January, and the civilian unemployment rate fell to 5.5 percent. tion was not expected to moderate fur- Manufacturing production increased sharply ther over the projection horizon and that in February after a sizable decline in Januit could move higher and the Committee ary. Growth of consumer spending, which would need to be particularly vigilant in had been sluggish earlier in the winter, guarding against such an outcome. spurted in February, paced by strong motor vehicle purchases. Housing starts rose in Against this background, the members January and February. Orders and contracts favored an unbiased instruction in the point to continuing expansion of spending directive that did not prejudice possible on business equipment and nonresidential intermeeting adjustments to policy in structures. The nominal deficit on U.S. trade either direction. in goods and services narrowed substantially in the fourth quarter from its average rate in At the conclusion of the Committee's the third quarter. There has been no clear discussion, all the members indicated a change in underlying inflation trends. preference for a directive that called for Changes in short-term market interest maintaining the existing degree of pres- rates have been mixed while long-term rates sure on reserve positions and that did have risen appreciably since the Committee meeting on January 30-31. In foreign not include a presumption about the exchange markets, the trade-weighted value likely direction of any adjustments to of the dollar in terms of the other G-10 policy during the intermeeting period. currencies has declined slightly over the Accordingly, in the context of the Com- intermeeting period. mittee's long-run objectives for price Growth of M2 and M3 has strengthened stability and sustainable economic considerably in recent months, while expansion in total domestic nonfinancial debt has growth, and giving careful consideration remained moderate on balance. to economic, financial, and monetary The Federal Open Market Committee developments, the Committee decided seeks monetary and financial conditions that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 83rd Annual Report, 1996 will foster price stability and promote sus- Present: tainable growth in output. In furtherance of Mr. Greenspan, Chairman these objectives, the Committee at its meet- Mr. McDonough, Vice Chairman ing in January established ranges for growth Mr. Boehne of M2 and M3 of 1 to 5 percent and 2 to Mr. Jordan 6 percent respectively, measured from the Mr. Kelley fourth quarter of 1995 to the fourth quarter Mr. Lindsey of 1996. The monitoring range for growth of Mr. McTeer total domestic nonfinancial debt was set at Ms. Phillips 3 to 7 percent for the year. The behavior of Mr. Stern the monetary aggregates will continue to be Ms. Yellen evaluated in the light of progress toward price level stability, movements in their Messrs. Broaddus, Guynn, Moskow, velocities, and developments in the economy and Parry, Alternate Members and financial markets. of the Federal Open Market In the implementation of policy for the Committee immediate future, the Committee seeks to maintain the existing degree of pressure on reserve positions. In the context of the Com- Messrs. Hoenig and Melzer, and mittee's long-run objectives for price stabil- Ms. Minehan, Presidents of ity and sustainable economic growth, and the Federal Reserve Banks of giving careful consideration to economic, Kansas City, St. Louis, and Boston financial, and monetary developments, respectively slightly greater reserve restraint or slightly 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. Baxter, Deputy General Counsel Votes for this action: Messrs. Greenspan, Mr. Prell, Economist McDonough, Boehne, Jordan, Kelley, Mr. Truman, Economist Lindsey, McTeer, Ms. Phillips, Mr. Stern, and Ms. Yellen. Votes against this action: Messrs. Lang, Lindsey, Mishkin, None. Promisel, Rolnick, Rosenblum, Siegman, Simpson, and Stockton, It was agreed that the next meeting of Associate Economists the Committee would be held on Tuesday, May 21, 1996. Mr. Fisher, Manager, System Open The meeting adjourned at 10:35 a.m. Market Account Donald L. Kohn Mr. Ettin, Deputy Director, Division of Secretary Research and Statistics, Board of Governors Mr. Slifman, Associate Director, Division of Research and Statistics, Board of Governors Meeting Held on Mr. Madigan, Associate Director, May 21, 1996 Division of Monetary Affairs Ms. Low, Open Market Secretariat A meeting of the Federal Open Market Assistant, Division of Monetary Committee was held in the offices of the Affairs, Board of Governors Board of Governors of the Federal Reserve System in Washington, D.C., Mr. Rives, First Vice President, Federal on Tuesday, May 21, 1996, at 9:00 a.m. Reserve Bank of St. Louis Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 133 Mr. Beebe, Ms. Browne, Messrs. Davis, had been quite robust early in the year, Dewald, Eisenbeis, Goodfriend, was showing some signs of slowing and Hunter, Senior Vice in recent data. Consumer spending Presidents, Federal Reserve Banks appeared to be growing at a moderate of San Francisco, Boston, Kansas City, St. Louis, Atlanta, pace; business expenditures on durable Richmond, and Chicago equipment had registered further large respectively gains, though new orders had flattened Mr. Altig, Mses. Chen and Rosenbaum, out; and housing demand seemed to be Vice Presidents, Federal Reserve holding up well despite the increase in Banks of Cleveland, New York, and Atlanta respectively mortgage interest rates this year. Business inventories, most notably in the By unanimous vote, the minutes of automotive industry, had been brought the meeting of the Federal Open Mar- into better alignment with sales, and ket Committee held on March 26, 1996, industrial production and employment were approved. had risen appreciably. Upward pressures The Manager of the System Open on food and energy prices accounted for Market Account reported on develop- somewhat larger increases in consumer ments in foreign exchange markets prices. during the period March 26 through Nonfarm payroll employment was May 20, 1996. There were no open mar- essentially unchanged in April after risket transactions in foreign currencies ing substantially in the first quarter; for System account during this period, part of the slowdown resulted from an and thus no vote was required of the unwinding of special factors that had Committee. boosted job growth in the first quarter. The Manager also reported on devel- Payrolls continued to expand in April opments in domestic financial markets in retail trade; finance, insurance, and and on System open market transactions real estate; and the services industries. in government securities and federal In contrast, employment in construction agency obligations during the period fell sharply, reversing much of the large March 26 through May 20, 1996. By first-quarter gain. In manufacturing, unanimous vote, the Committee ratified employment declined further in April these transactions. despite the settlement of a major strike The Committee then turned to a dis- in the automotive sector and the return cussion of the economic and financial of affected workers to their jobs. The outlook and the implementation of civilian unemployment rate fell to monetary policy over the intermeeting 5.4 percent. period ahead. A summary of the eco- Industrial production rebounded in nomic and financial information avail- April from an appreciable decline in able at the time of the meeting and of March. The changes in industrial outthe Committee's discussion is provided put over the two-month period largely below, followed by the domestic policy reflected fluctuations in motor vehicle directive that was approved by the Com- assemblies associated with a strike and mittee and issued to the Federal Reserve its subsequent settlement. Manufactur- Bank of New York. ing of products other than motor vehi- The information reviewed at this cles rose moderately in April on the meeting suggested that economic activ- strength of further large advances in the ity had expanded moderately on balance output of office and computing equipin recent months. Final demand, which ment and of construction supplies. Utili- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 83rd Annual Report, 1996 zation of total industrial capacity, which the ratio of stocks to sales was not far had varied in recent months in concert above historical lows. In the wholesale with movements in production, climbed sector, inventories declined a little furin April to a rate slightly above that of ther in March, reflecting a reduction the fourth quarter of 1995. in stocks of motor vehicles, and the Retail sales declined somewhat in inventory-sales ratio remained near the April after posting a strong gain in the middle of its range in recent years. first quarter. Sales of durable goods, Retail inventories also declined in which had increased substantially in the March, with cuts in stocks of motor first quarter, retraced part of that vehicles more than accounting for the advance in April; the drop more than drop. The inventory-sales ratio for the offset a further rise in sales of nondura- retail sector was near the low end of its ble goods. Housing activity was well range in recent years. sustained in April, with the run-up in The nominal deficit on U.S. trade in mortgage rates that began in February goods and services in the first quarter having had little perceptible effect to was substantially larger than in the date. Single-family housing starts were fourth quarter of last year. The value of up considerably in April, and sales of imports increased sharply in the first new and existing homes remained brisk quarter after declining in the two previin March (latest data available). ous quarters. Moreover, growth in the Business fixed investment accelerated value of exports slowed considerably in sharply in the first quarter of 1996 fol- the first quarter from the pace of other lowing three quarters of relatively mod- recent quarters. Available data indicated erate expansion; however, recent data that the performance of the economies on orders and contracts pointed, on bal- of the major foreign industrial countries ance, to some deceleration in business was mixed in the first quarter. The spending on both durable equipment and recovery in Japan was still under way nonresidential structures. Much of the while economic activity in continental first-quarter pickup reflected stronger Europe remained generally weak, with spending for durable equipment; pur- the German economy apparently having chases of computing equipment re- contracted further and the French econmained robust and spending on other omy exhibiting signs of only a modest durable equipment increased. Nonresi- upturn after a fourth-quarter decline. dential construction activity also Moderate further expansion in economic advanced further in the first quarter; activity evidently was occurring in Canhowever, construction of office build- ada and the United Kingdom. ings continued to lag, and construction Rising crude oil and, to a lesser of other commercial buildings slowed extent, food prices led to somewhat after recording strong gains for several larger increases in consumer and proyears. ducer price indexes in March and April. Business inventories declined in For nonfood, non-energy items, how- March after rising appreciably on aver- ever, consumer prices rose only slightly age over January and February; inven- in April after three months of somewhat tory accumulation over the quarter as faster advances; over the twelve months a whole was of modest proportions, as ended in April, this measure of confirms sought to bring stocks into better sumer inflation increased a little less balance with sales. In manufacturing, than the rise over the comparable yearinventories changed little in March and earlier period. At the producer level, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 135 prices of finished goods other than food were seen by market participants as and energy items recorded a third pointing to stronger growth in output straight small increase in April. Over the and employment and therefore to a twelve months ended in April, this mea- somewhat tighter monetary policy sure of producer prices rose slightly less stance than previously had been than over the comparable year-earlier expected. Despite the increase in bond period. Hourly compensation of private yields, most indexes of stock prices rose industry workers expanded in the first on balance over the intermeeting period, quarter at the average rate for all of apparently reflecting generally favorable 1995; the growth was associated with a first-quarter earnings reports and the decline in benefit costs and a sharp rise improved economic outlook. in wages and salaries. In foreign exchange markets, the rise At its meeting on March 26, 1996, the of U.S. interest rates contributed to a Committee adopted a directive that considerable appreciation of the tradecalled for maintaining the existing weighted value of the dollar in terms of degree of pressure on reserve positions the other G-10 currencies. The dollar was and that did not include a presumption particularly strong against the German about the likely direction of any adjust- mark, reflecting incoming data that sugments to policy during the intermeeting gested continued weakness in economic period. The directive stated that in the activity in Germany and, accordingly, context of the Committee's long-run a greater likelihood of further moneobjectives for price stability and sustain- tary policy easing by the Bundesbank. able economic growth, and giving care- The dollar rose less against the yen, ful consideration to economic, financial, partly owing to information indicating a and monetary developments, slightly strengthening of the economic recovery greater reserve restraint or slightly lesser in Japan and heightened market expectareserve restraint would be acceptable tions of a near-term tightening of moneduring the intermeeting period. The tary policy by the Bank of Japan. reserve conditions associated with this Growth of M2 and M3 slowed subdirective were expected to be consistent stantially in April after having recorded with moderate growth in M2 and M3 sizable increases earlier in the year. over coming months. Weakness in demand deposits after Open market operations were directed unusually rapid first-quarter expansion toward maintaining the existing degree and sluggishness in currency demand of pressure on reserve positions through- were factors in the slowdown. In addiout the intermeeting period, and the fed- tion, the rise in market interest rates eral funds rate averaged near 5lA per- in recent months, which had increased cent, the level expected to be associated the opportunity costs of holding retail with that unchanged policy stance. deposits, likely had a restraining effect Other short-term market interest rates on these deposits. For the year through changed little over the period, and April, both aggregates grew at rates because the Committee's decision had somewhat above the upper bounds of been largely anticipated in financial their respective ranges for the year. markets, longer-term rates also were Expansion in total domestic nonfinanlittle changed initially. Over the remain- cial debt remained moderate on balance der of the period, however, intermediate- over recent months, and this aggregate and long-term rates came under upward stayed near the middle of its monitoring pressure when incoming economic data range for the year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 83rd Annual Report, 1996 The staff forecast prepared for this ally expected the expansion to slow, meeting suggested that the economy keeping the economy close to its potenwould remain generally around its esti- tial. Views differed to some extent with mated potential. Consumer spending regard to the risks surrounding such an was expected to grow in line with dis- outlook. Some saw those risks as fairly posable income; the favorable effect evenly balanced, given prospective of higher equity prices on household restraint from the rise in bond yields and wealth and the still-ample availability of the foreign exchange value of the dollar credit were expected to outweigh per- since early this year. Others expressed sisting consumer concerns about job concern that economic growth might security and the influence of already- continue at a pace that could increase high household debt burdens. Home- pressures on resources, with adverse building was projected to decline a little implications for inflation in an economy in response to the recent backup in resi- already operating in the neighborhood dential mortgage rates but to remain at a of its estimated long-term potential. relatively high level because of gener- Moreover, faster increases in energy and ally supportive employment and income food prices could contribute to higher conditions and the still- favorable cash overall inflation, both directly and by flow affordability of homeownership. boosting inflationary expectations, and Business spending on equipment and the proposed increase in the minimum structures was expected to grow less wage would add to cost pressures if it rapidly in light of the projected moder- were enacted into law. Nonetheless, ate growth of sales and profits and the while the chances of a pickup in inflalower rate of utilization of production tion later had risen to some extent, a capacity now prevailing. The external number of members emphasized that sector was projected to exert a small no firm evidence had surfaced thus far restraining influence on economic activ- to signal that labor compensation was ity over the projection period, even increasing at a faster rate or that core though an anticipated firming of eco- inflation was worsening, and even the nomic activity abroad would bolster early signs of increased pressures on demand for U.S. exports. Little addi- costs and prices were mixed. The past tional fiscal contraction was anticipated few years had witnessed significantly over the projection period. Inflation lower cost pressures and more subdued recently had been lifted by adverse inflation than typically would have been developments in the energy market and experienced in earlier years with similar was projected to remain above the levels rates of resource utilization, but whether of recent years, given the high level of this favorable outcome would persist resource utilization and the effects of was an open question. tight grain supplies on food prices. Fur- Members observed that the strongerther risks of inflationary pressure were than-expected performance of the econassociated with a possible elevation of omy thus far this year reflected relathe federal minimum wage. tively rapid growth in final demand. In their discussion of current and pro- Favorable financial conditions, notably spective economic conditions, members the relatively low interest rates of the commented that the economy had been latter part of 1995 and early 1996 and stronger this year than they had antici- increases in wealth stemming from sizpated and appeared to be growing at a able advances in stock market prices, quite robust pace. However, they gener- evidently were undergirding the expan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 137 sion. Indications of improving or con- underlying factors, continued growth tinuing high levels of economic activity in consumer spending seemed likely, were widespread across the nation although members referred to developaccording to recent anecdotal reports ments that could begin to slow such and regional data, though agricultural growth over the months ahead. The latconditions in many areas were cited as a ter included the satisfaction of much of significant exception. While the econ- the earlier pent-up demand for consumer omy appeared to have solid and bal- durables and fairly elevated levels of anced momentum that pointed to sus- consumer debt. On balance, moderate tained growth, a number of factors were expansion in consumer expenditures, seen as likely to foster more moderate perhaps in line with the growth in expansion beginning in the second half incomes, seemed likely over the projecof the year. These included the effects tion period. of higher intermediate- and long-term Business fixed investment was interest rates on interest-sensitive sec- believed likely to remain a source of tors of the economy such as housing, considerable strength in the expansion, consumer durables, and business fixed though growth in this sector of the econinvestment. The appreciation of the omy also was expected to moderate dollar over the past year and near-term from the elevated pace thus far this year. moderation in federal government The desire of many business firms and spending also were expected to exert other users of capital equipment to take some restraint on economic activity over advantage of new, more effective, and the forecast horizon. Some members less expensive computer and other techalso questioned the sustainability of the nologies and more generally to add furperformance of the stock market; a cor- ther to capital in an effort to reduce costs rection in this market would help to in highly competitive markets would restrain aggregate demand. Nonetheless, continue to underpin investment spendthe continued strength in economic ing. In addition, equity and other financactivity raised questions about whether ing remained available on relatively these developments would damp de- attractive terms. On the other hand, the mand sufficiently to keep resource utili- rise in business investment in recent zation at sustainable levels. years had brought capital stocks into In their review of recent develop- more acceptable alignment with exments and the outlook for key sectors of pected sales, damping the need for furthe economy, members noted that con- ther sizable additions. sumer spending had strengthened con- Business firms appeared to have comsiderably this year after a period of slug- pleted, or nearly completed, their efforts gish growth in late 1995. The recent to bring inventories into better balance data on consumer spending were rein- with sales, including the rebuilding of forced by anecdotal reports from vari- motor vehicle stocks after the strike at ous parts of the country. The wealth a major manufacturer was settled in effects from the further gains that had March. On the basis of recent experioccurred in stock market prices, along ence, subdued growth in inventories with sustained increases in employment could be anticipated in the context of the and a ready availability of consumer projected expansion of overall economic financing, were seen as playing a activity at a pace near the economy's positive role in boosting consumer long-run potential. It was suggested, expenditures. Barring changes in these however, that such an expectation Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 83rd Annual Report, 1996 implied relatively restrained inventory more rapid rise in consumer prices thus investment in comparison with past far this year, and they likely would concyclical patterns. Accordingly, much tinue to add to inflation in the months stronger growth in such investment ahead. Retail energy prices had risen could occur, with concomitant effects on appreciably, but at least some of that incomes and the growth of overall increase was expected to be reversed spending. over the near term. Retail food prices With regard to the outlook for hous- did not yet display any significant effects ing, the rise in mortgage rates in the past from the sizable rise in grain prices in few months could be expected to retard recent months, and while some effects residential construction activity to some on retail prices were likely, their extent extent. Thus far, however, increased and duration were difficult to gauge at interest costs did not appear to have had this point. Moreover, it was difficult to any perceptible effects on housing sales anticipate how much the higher food or construction. Indeed, the housing sec- and energy prices might affect inflation tor was continuing to display a good expectations and wage demands and deal of strength in many parts of the thereby potentially become embedded country. Some members observed that more generally in the price structure. the appreciable momentum in housing Also of concern to the members were activity reflected strength in the under- the possible effects on inflation of conlying fundamentals, including continued tinued pressures on resources, especially affordability, that seemed likely to sus- if the current pace of the expansion tain a high level of housing construction should fail to moderate as much as profor a considerable period of time despite jected. In recent years, the relationship somewhat higher mortgage rates. between resource use and inflation had In the area of fiscal policy, legislative not followed earlier patterns. In particuagreement had not yet been reached on lar, increases in labor compensation had how to implement the objective of a been comparatively subdued over an balanced federal budget over time, but extended period of what seemed to be decisions covering the nearer term relatively full employment highlighted implied continued budget restraint. On by anecdotal reports of scarcities of varithe foreign trade side of the economy, ous types of labor in numerous parts an anticipated firming of economic con- of the country. In part, worker willingditions abroad would provide impetus to ness to accept comparatively limited real net exports. At the same time, how- increases in compensation could be ever, imports were expected to rise attributed to the apparent rise in insecuappreciably in response to the expansion rity about the permanence of jobs or the of domestic economic activity and the availability of alternative jobs, but the appreciation of the dollar, and on bal- reasons were not fully understood. From ance the external sector probably would the standpoint of the inflation outlook, it not be boosting real GDP. therefore was uncertain how long the The outlook for inflation was of key period of relatively restrained increases importance to the formulation of mone- in labor compensation would last. tary policy at this time, but it was Against this background, a number of clouded by substantial uncertainty. One members indicated that they perceived source of uncertainty was the behavior an appreciable risk of rising labor costs of food and energy prices. Increases in and related inflation, even though there these prices largely accounted for the was little evidence to date of such devel- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 139 opments; others noted that they could rate of inflation that, if it were to materinot rule out the possibility that the favor- alize, would be difficult and costly to able experience would be extended. reverse. In this regard, the view was In the Committee's discussion of pol- expressed that a firming in policy sooner icy for the intermeeting period ahead, all rather than later was likely to end up the members supported a proposal to promoting stability in output and prices. maintain an unchanged degree of pres- In the Committee's discussion of possure in reserve markets. The members sible intermeeting adjustments to policy, agreed that the balance of risks on infla- all the members indicated at least some tion had shifted substantially since early preference for retaining a symmetric in the year. At that time, the economy directive. Members commented that the had seemed sluggish and inflation was probability of developments during this seen as possibly easing, but more recent period that would warrant a change in developments indicated that the econ- policy before the next meeting was quite omy was stronger and rising inflation low. Moreover, symmetry did not rule down the road could not be ruled out. out an intermeeting adjustment, and the Nonetheless, while policy might need to Chairman could call for a Committee be firmed at some point to head off consultation should the incoming inforemerging inflation pressures, financial mation raise questions about the stance conditions were not so obviously stimu- of monetary policy. Some members felt lative as to counsel a need for any that it was especially appropriate that a immediate tightening of policy. The real policy action that represented a reversal federal funds rate probably was not of the previous move be made with a greatly out of line with its appropriate full discussion at a regular meeting. level, and the rise in longer-term interest Some members also commented that an rates and the exchange rate meant that asymmetric directive toward restraint financial conditions were now exerting would imply a predisposition on the part more restraint than earlier this year. of the Committee to tighten policy at More information might provide a bet- some point, possibly at the next meetter sense of how the higher interest ing. While they would be prepared to rates were affecting aggregate demand take such a step if the evidence warand perhaps also help—to a small ranted, their preference was to come degree—to shed light on the consider- into the July meeting without such a able uncertainties surrounding the rela- presumption. tionship of output to inflation. In any At the conclusion of the Committee's event, actual inflation data—apart from discussion, all the members indicated a food and energy prices—and many of preference for a directive that called for the usual early warning signs of mount- maintaining the existing degree of presing price pressures did not yet indicate a sure on reserve positions and that did pickup in the underlying trend of prices. not include a presumption about the Accordingly, the members viewed pol- likely direction of any adjustments to icy as appropriately positioned under policy during the intermeeting period. current circumstances, though ongoing Accordingly, in the context of the Comdevelopments would need to be reas- mittee's long-run objectives for price sessed at the upcoming meeting in early stability and sustainable economic July. Some members noted that the growth, and giving careful consideration Committee would need to anticipate, to economic, financial, and monetary and act to preclude, a rise in the core developments, the Committee decided Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 83rd Annual Report, 1996 that slightly greater or slightly lesser The Federal Open Market Committee reserve restraint would be acceptable seeks monetary and financial conditions that will foster price stability and promote susduring the intermeeting period. The tainable growth in output. In furtherance of reserve conditions contemplated at this these objectives, the Committee at its meetmeeting were expected to be consistent ing in January established ranges for growth with moderate growth in M2 and M3 of M2 and M3 of 1 to 5 percent and 2 to over coming months. 6 percent respectively, measured from the fourth quarter of 1995 to the fourth quarter At the conclusion of the meeting, the of 1996. The monitoring range for growth of Federal Reserve Bank of New York was total domestic nonfinancial debt was set at authorized and directed, until instructed 3 to 7 percent for the year. The behavior of otherwise by the Committee, to execute the monetary aggregates will continue to be transactions in the System Account evaluated in the light of progress toward price level stability, movements in their in accordance with the following domesvelocities, and developments in the economy tic policy directive: and financial markets. In the implementation of policy for the The information reviewed at this meeting immediate future, the Committee seeks to suggests that, on balance, economic activity maintain the existing degree of pressure on has grown moderately in recent months. reserve positions. In the context of the Com- Nonfarm payroll employment changed lit- mittee's long-run objectives for price statle in April after rising substantially in the bility and sustainable economic growth, and first quarter; the civilian unemployment rate giving careful consideration to economic, fell to 5.4 percent. Industrial production financial, and monetary developments, increased sharply in April, largely reflecting slightly greater reserve restraint or slightly a rebound in motor vehicle assemblies after lesser reserve restraint would be acceptable a strike in March. Retail sales declined some- in the intermeeting period. The contemplated what in April after posting a strong gain in reserve conditions are expected to be consisthe first quarter. Single-family housing starts tent with moderate growth in M2 and M3 rose considerably in April. Orders and con- over coming months. tracts point to some deceleration in spending on business equipment and nonresidential Votes for this action: Messrs. Greenspan, structures after a very rapid expansion in the McDonough, Boehne, Jordan, Kelley, first quarter. The nominal deficit on U.S. Lindsey, McTeer, Ms. Phillips, Mr. Stern, trade in goods and services widened signifi- and Ms. Yellen. Votes against this action: cantly in the first quarter from its rate in the None. fourth quarter of last year. Upward pressures on food and energy prices have led to some- It was agreed that the next meeting what larger increases in the consumer price of the Committee would be held on index over recent months. Tuesday-Wednesday, July 2-3, 1996. Short-term market interest rates have changed little while long-term rates have The meeting adjourned at 1:15 p.m. risen somewhat further since the Committee meeting on March 26. In foreign exchange Donald L. Kohn markets, the trade-weighted value of the dol- Secretary lar in terms of the other G-10 currencies has appreciated considerably over the intermeeting period. Growth of M2 and M3 slowed substan- Meeting Held on tially in April after recording sizable July 2-3, 1996 increases earlier in the year. For the year through April, both aggregates grew at rates A meeting of the Federal Open Market somewhat above the upper bounds of their Committee was held in the offices of respective ranges for the year. Expansion in total domestic nonfinancial debt remained the Board of Governors of the Federal moderate on balance over recent months. Reserve System in Washington, D.C., Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 141 on Tuesday, July 2, 1996, at 1:00 p.m. Messrs. Madigan and Slifman, and continued on Wednesday, July 3, Associate Directors, Divisions of Monetary Affairs and Research 1996, at 9:00 a.m. and Statistics respectively, Board of Governors Present: Mr. Brayton,4 Ms. Johnson,4 Mr. Greenspan, Chairman Messrs. Reinhart and Smith,5 Mr. McDonough, Vice Chairman Assistant Directors, Divisions Mr. Boehne of Research and Statistics, Mr. Jordan International Finance, Monetary Mr. Kelley Affairs, and International Finance Mr. Lindsey respectively, Board of Governors Mr. McTeer Ms. Kusko4 and Mr. Wilcox,4 Senior Mr. Meyer Economists, Divisions of Research Ms. Phillips and Statistics and Monetary Ms. Rivlin Affairs respectively, Board of Mr. Stern Governors Ms. Yellen Ms. Garrett, Economist, Division of Monetary Affairs, Board of Messrs. Broaddus, Guynn, Moskow, Governors and Parry, Alternate Members of Ms. Low, Open Market Secretariat the Federal Open Market Assistant, Division of Monetary Committee Affairs, Board of Governors Messrs. Hoenig and Melzer, and Ms. Holcomb, First Vice President, Ms. Minehan, Presidents of the Federal Reserve Bank of Dallas Federal Reserve Banks of Mr. Beebe, Ms. Browne, Messrs. Davis, Kansas City, St. Louis, and Boston Dewald, Eisenbeis, Goodfriend, respectively and Hunter, Senior Vice Presidents, Federal Reserve Banks Mr. Kohn, Secretary and Economist of San Francisco, Boston, Mr. Bernard, Deputy Secretary Kansas City, St. Louis, Atlanta, Mr. Coyne, Assistant Secretary Richmond, and Chicago Mr. Gillum, Assistant Secretary respectively Mr. Mattingly, General Counsel Messrs. Kos and Meyer, Vice Mr. Baxter, Deputy General Counsel Presidents, Federal Reserve Banks Mr. Prell, Economist of New York and Philadelphia Mr. Truman, Economist respectively Messrs. D. Lindsey, Mishkin, Promisel, By unanimous vote, the minutes of Rolnick, Rosenblum, Siegman, the meeting of the Federal Open Market Simpson, Sniderman, and Stockton, Associate Economists Committee held on May 21, 1996, were approved. Mr. Fisher, Manager, System Open The Manager of the System Open Market Account Market Account reported on recent developments in foreign exchange mar- Mr. Winn,3 Assistant to the Board, kets. There were no open market trans- Office of Board Members, Board of Governors Mr. Ettin, Deputy Director, Division of 4. Attended portion of the meeting relating to Research and Statistics, Board of the Committee's discussion of the economic out- Governors look and its longer-run growth ranges for the monetary and debt aggregates. 3. Attended portion of meeting concerning 5. Attended portion of the meeting relating issues relating to the long-run price objective for to the Committee's review of its swap line monetary policy. agreements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 83rd Annual Report, 1996 actions in foreign currencies for System industries, while employment in manuaccount during the period since the facturing was stable on balance over the meeting on May 21, 1996, and thus no April-May period after having declined vote was required of the Committee. somewhat in 1995 and the first quarter The Manager also reported on recent of 1996. The civilian unemployment developments in domestic financial mar- rate rose in May to 5.6 percent, which kets and on System open market trans- was the average rate for the year to date. actions in U.S. government securities Industrial production increased appreand federal agency obligations during ciably further in May. In contrast to the period May 21, 1996, through April's advance, much of which had July 2, 1996. By unanimous vote, the resulted from the resumption of opera- Committee ratified these transactions. tions at a major motor vehicle manufac- The Committee then turned to a dis- turer after the settlement of a strike, the cussion of the economic and financial May rise largely reflected gains in a outlook, the ranges for the growth of wide range of non-auto-related manumoney and debt in 1996 and 1997, and facturing industries as well as a weatherthe implementation of monetary policy related jump in electricity generation. over the intermeeting period ahead. A The surge in overall output lifted total summary of the economic and financial utilization of industrial capacity someinformation available at the time of the what above the average rate recorded meeting and of the Committee's discus- during the previous two quarters. sion is provided below, followed by the Total nominal retail sales surged in domestic policy directive that was ap- May after having changed little in April; proved by the Committee and issued to the increase in sales, coupled with availthe Federal Reserve Bank of New York. able information on prices, suggested The information reviewed at this that real consumer spending on goods meeting suggested that economic activ- had risen substantially on balance since ity advanced considerably further in the first quarter. Recent data (available the second quarter, although growth in through April) indicated that spending aggregate final demand showed some on services had increased moderately on signs of slowing. Consumer spending balance in recent months. Single-family continued to post sizable gains, but housing starts fell considerably in May business investment in equipment and from the relatively high April level. The structures apparently was rising less decline suggested that the rise in mortvigorously, and higher mortgage rates gage rates in recent months had begun evidently were starting to exert some to damp construction activity, but indirestraint on housing construction activ- cators of housing demand, such as sales ity. Business inventories had been of new and existing homes, remained brought into better balance with sales, relatively robust. and production and employment had Growth in business expenditures on risen appreciably. Upward pressures on durable equipment and nonresidential food and energy prices had led to some- structures appeared to be slowing folwhat larger increases in the consumer lowing a surge in outlays in the first price index over recent months. quarter. In May, shipments of nonde- Nonfarm payroll employment contin- fense capital goods rebounded from the ued to expand briskly over April and substantial decline in April; however, May. Job gains were concentrated in excluding movements in the volatile airthe service-producing and construction craft category, shipments were down on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 143 balance over the two months. Among appeared to have expanded moderately the major components, shipments of on balance since the beginning of the both computing and communications year. In the first quarter, economic perequipment fell sharply in April and formance ranged from unexpectedly retraced only part of that decline in May. robust in Japan to further weakness in Recent data on new orders pointed to Germany; the limited data available for more modest increases in spending on the second quarter suggested a slowbusiness equipment over the months down in Japan, a bounceback in Gerahead. Nonresidential building activity many, and moderate growth in other increased considerably further in April major trading partners. (latest data available), but incoming Although upward pressures on energy information on contracts suggested that prices continued to boost overall congrowth in nonresidential construction sumer prices in April and May, price would weaken somewhat in coming increases for nonfood, non-energy items months. remained small. Over the twelve months Businesses had made considerable ended in May, the increase in core conprogress in recent months in bringing sumer prices was appreciably smaller their inventories into better alignment than in the previous twelve-month with sales. In manufacturing, stocks rose period; much of the deceleration moderately in April after a decline in reflected swings in automobile finance March. The stock-to-shipments ratio charges. At the producer level, higher dropped further in April and was at a prices for finished energy goods over low level. At the wholesale trade level, April and May were partially offset by inventory accumulation was appreciable slightly lower prices for finished foods; in April after several months of modest prices for nonfood, non-energy finished growth. The inventory-to-sales ratio for goods were little changed over the twothis sector edged up in April but month period and rose less over the remained well below the elevated levels twelve months ended in May than in the of last fall. Retail inventories increased comparable year-earlier period. Data on slightly in April after a large decline average hourly earnings of production in March associated with a substantial and nonsupervisory workers indicated liquidation of motor vehicle stocks. The that this measure of labor costs had aggregate ratio of inventories to sales increased by a somewhat larger amount for retail establishments was around the in the year ended in May than in the lower end of its range in recent years. comparable year-earlier period. The nominal deficit on U.S. trade in At its meeting on May 21, 1996, the goods and services widened in April Committee adopted a directive that from its rate in the first quarter, reflect- called for maintaining the existing ing a slightly larger increase in the value degree of pressure on reserve positions of imports than in that of exports. The and that did not include a presumption expansion in imports was concentrated about the likely direction of any adjustin oil as U.S. refiners sought to meet ments to policy during the intermeeting growing domestic demand and rebuild period. The directive stated that in the their inventories. The rise in exports was context of the Committee's long-run broadly based, although exports of com- objectives for price stability and sustainputers, semiconductors, and automotive able economic growth, and giving careproducts edged off. Economic activity ful consideration to economic, financial, in the major foreign industrial countries and monetary developments, slightly Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 83rd Annual Report, 1996 greater reserve restraint or slightly lesser weakness in M2 and M3 was associated reserve restraint would be acceptable in part with the adverse effects of the during the intermeeting period. The earlier rise in market interest rates on reserve conditions associated with this the opportunity costs of holding deposdirective were expected to be consistent its. Deposit balances also may have been with moderate growth in M2 and M3 drawn down to meet unusually large over coming months. individual tax liabilities on the April 15 Open market operations were directed tax date. Partial data for June pointed to toward maintaining the existing degree a rebound in both aggregates. For the of pressure on reserve positions through- year through June, these aggregates out the intermeeting period. The federal were estimated to have grown at rates funds rate averaged near 5VA percent, around the upper bounds of their respecthe level expected to be associated with tive annual ranges. Expansion of total the unchanged policy stance. Because domestic nonfinancial debt had slowed the Committee's decision had been somewhat in recent months, but the debt largely anticipated in financial markets, aggregate had remained in the middle other market interest rates also were portion of its annual range. little changed during the early part of The staff forecast prepared for this the period. However, market rates meeting suggested that, after a sizable increased appreciably following the advance in economic activity in the secrelease of a strong employment report in ond quarter, growth would moderate and early June, though most of that rise was the economy would expand around or later retraced as expectations of near- perhaps a little above its estimated term tightening of monetary policy potential. Consumer spending was prodiminished. On balance, most market jected to expand at a more moderate rates were up a little over the intermeet- pace, in line with disposable income; the ing period. Major indexes of stock favorable effect of higher equity prices prices were down on balance over the on household wealth and the still-ample period. availability of credit were expected to In foreign exchange markets, the balance persisting consumer concerns trade-weighted value of the dollar in about job and retirement security and terms of the other G-10 currencies the restraining effect of high household depreciated slightly over the intermeet- debt burdens. Homebuilding was foreing period. The dollar declined against cast to slow somewhat in response to the the German mark and other European back-up in residential mortgage rates but currencies as growing indications of a was expected to remain at a relatively recent pickup in economic activity in high level in the context of sustained Germany damped market expectations income growth and the still-favorable of any further easing of monetary policy cash flow affordability of home ownerby the Bundesbank. By contrast, the ship. Business spending on equipment dollar rose against the yen in apparent and structures was projected to grow response to a series of statements by less rapidly in light of the anticipated Japanese officials suggesting that there moderate growth of sales and profits and would be no near-term firming of Japa- the reduced rate of utilization of producnese monetary policy. tion capacity now prevailing. The exter- The broad monetary aggregates were nal sector was expected to exert a small weak in May: M2 declined, and M3 restraining influence on economic activexpanded relatively sluggishly. The ity over the projection period, even Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 145 though an anticipated firming of eco- might be trending higher, although key nomic activity abroad would bolster measures of price inflation, excluding demand for U.S. exports. Little further their food and energy components, confiscal contraction was forecast over the tinued to display a flat or even a declinprojection period. Inflation recently had ing trend. been lifted by adverse developments in In keeping with the practice at meetenergy markets and was projected to ings when the Committee sets its longremain above the levels of recent years, run ranges for the money and debt given the still-high level of resource uti- aggregates, the members of the Commitlization and the effects of tight grain tee and the Federal Reserve Bank presisupplies on food prices. dents not currently serving as members In the Committee's discussion of cur- provided individual projections of the rent and prospective economic devel- growth in real and nominal GDP, the opments, members commented on the rate of unemployment, and the rate of stronger-than-expected expansion in inflation for the years 1996 and 1997. overall economic activity in recent (The ranges in this paragraph take into months, but for a variety of reasons they account minor revisions made by a few anticipated that growth would slow members subsequent to the meeting.) appreciably over the second half of the The forecasts of the rate of expansion year to a pace more in line with the in real GDP for 1996 as a whole had a growth in the economy's potential. Key central tendency of 2V2 to 23A percent, factors bearing on this outlook included reflecting expectations of considerable the prospective effects of the rise in moderation in the rate of economic interest rates and the dollar that had growth over the second half of the year; occurred since earlier in the year and the for 1997, the projections centered on waning influence of transitory factors continued moderate growth of GDP in a that had stimulated economic activity in range of PA to 2XA percent. With regard the second quarter. The members gener- to the expansion of nominal GDP, the ally agreed, however, that, apart from forecasts were concentrated in growth evidence of some moderation in the ranges of 5 to 5V6 percent for 1996 and growth of business investment expendi- AXA to 5 percent for 1997. The civilian tures from a very rapid pace, there were rate of unemployment associated with few hard indications of a slowing in the these forecasts was expected by most expansion and the risks were clearly to members to remain around 5Vi percent the upside of their current forecasts. this year and to be in a range of 5Vi to Against that background, they were con- 53/4 percent in 1997. This level of cerned that inflation could begin to rise. resource utilization was expected to be Cost and price pressures had been sur- associated with a slightly higher rate of prisingly well contained at high levels inflation in 1996, as measured by the of resource utilization, but this unusu- consumer price index, than that recorded ally favorable performance might not in 1995 owing to developments in the be sustained, and in any event even food and energy sectors, but a decline greater resource utilization, as would was anticipated in 1997. Specifically, occur if growth did not moderate appre- the projections converged on rates of ciably, carried substantial inflation risk. 3 to 3V4 percent in 1996 and 23A to There were some scattered indications 3 percent in 1997. The projections for in statistical and anecdotal reports that both 1996 and 1997 were based on inditended to suggest that wage inflation vidual views concerning what would be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 83rd Annual Report, 1996 an appropriate monetary policy over the Housing was seen as another imporprojection horizon. tant sector of the economy that was In their assessment of factors bearing likely to exert a retarding effect on the on the outlook for final demand, mem- expansion as the rise that had occurred bers commented that growth in con- in mortgage interest rates was felt sumer spending was likely to moderate increasingly in housing markets. The in coming quarters from its pace thus far anecdotal information from around the this year. This moderation would reflect nation and the available statistics sugthe projected slowing in income growth. gested, however, that those markets While overall employment conditions, generally had remained surprisingly the buildup of household net worth, and ebullient thus far, and there were only access to financing would bolster con- limited indications of some softening in sumer expenditures, members also cited home construction activity. a number of limiting factors. The lat- Business inventory investment was ter included the increase in consumer viewed as a key upside risk in the ecoindebtedness, satisfaction of earlier nomic outlook for coming quarters. An pent-up demand for consumer durable inventory overhang at the end of last goods, and continuing concern about job year had been corrected in the first quarsecurity. Higher interest rates also were ter, and inventory investment was indiexpected to exert an inhibiting effect on cated to have turned positive again in purchases of consumer durables, includ- the second quarter. However, current ing those related to housing. Some inventory-to-sales ratios appeared to members observed that while slower be relatively lean, and final sales that growth in consumer spending was the exceeded current expectations might most probable forecast, they saw an well induce a sharp upward adjustment upside risk from the wealth effects of in inventory accumulation, especially if the large rise that had occurred in the lead times were to lengthen and producvalue of stock market holdings. ers perceived shortfalls in their safety Business expenditures for plant and stocks. equipment were expected to grow at a Members viewed the outlook for slower though still appreciable pace. inflation as a source of substantial uncer- Indeed, such spending already appeared tainty in their forecasts, though many to be moderating. Contract data sug- saw reasonable prospects that a rate gested that nonresidential construction of economic expansion in line with their activity was on a slowing growth tra- forecasts and associated levels of capacjectory and expansion of outlays for ity utilization would prove to be conproducers' durable equipment also ap- sistent with little change in the core peared to have softened. Given the out- rate of inflation. Some important mealook for slower growth in final demand, sures of price inflation, after adjustmany businesses would not have to ment to exclude their volatile food and add significantly to capacity. However, energy components, had shown a flat spending for computing equipment, or even a declining trend in recent while perhaps moderating from the quarters. The outlook for overall price exceptional pace of recent quarters, was increases would remain contingent in thought likely to remain buoyant as con- part on food and energy price develtinuing innovations and declining prices opments, but more importantly on stimulated further solid gains in this seg- underlying cost pressures in the ment of business spending. economy. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 141 Several members commented that the level presented difficult problems for levels of utilization of capital and labor assessing progress toward price stabilresources that had prevailed over the ity. Some also observed that the precise past couple of years would have been level of average price inflation that expected, on the basis of historical pat- might be compatible with the optimal terns, to foster rising cost pressures and functioning of the economy was an greater inflation. However, labor com- unsettled issue owing, for example, to pensation gains had been subdued in potential rigidities in labor markets. relation to earlier cyclical experience, Thus far, such rigidities had not likely as a consequence of increased impeded the economy from functioning worker concerns about job security and at a very high level as inflation came job opportunities. Despite the continued down, and continued adaptation to even low rate of unemployment and wide- lower inflation rates was very likely. spread anecdotal reports of tight labor However, the Committee would need to markets across the country, there were pay careful attention to these potential only limited indications in national data problems as inflation fell further. For that wage inflation might be increasing. now, the members agreed that some Whether greater labor cost pressures additional progress in reducing inflation would emerge in the context of the was very likely to improve the ultimate members' consensus forecast for eco- performance of the economy, and that it nomic activity was a critical issue in the was particularly important at this juncoutlook for prices, though it was noted ture to resist firmly any tendency for that at least some of the rising costs inflation to worsen. were likely to be absorbed in shrinking In keeping with the requirements of profit margins. Even if greater price the Full Employment and Balanced inflation were averted under that sce- Growth Act of 1978 (the Humphreynario, the members saw a substantial Hawkins Act), the Committee at this risk that if economic growth did not meeting reviewed the ranges for growth slow in line with their current forecasts, of the monetary and debt aggregates that the resulting added pressures on re- it had established in January for 1996, sources would at some point translate and it decided on tentative ranges for into higher price inflation. Accordingly, those aggregates for 1997. The current the factors bearing on the outlook for ranges set in January for the period from resource use and inflation needed to be the fourth quarter of 1995 to the fourth monitored with special care in this quarter of 1996 were unchanged from period. the ranges for 1995 and included expan- With regard to inflation over the long sion of 1 to 5 percent for M2 and 2 to run, the members agreed that it was 6 percent for M3. An unchanged moniessential for the Committee to continue toring range of 3 to 7 percent was set in to focus on reducing inflation over January for growth of total domestic time because the achievement of an even nonfinancial debt in 1996. less inflationary economic environ- A majority of the members favored ment would foster a more productive retaining the current ranges for this year economy and maximum sustainable and extending them on a provisional economic expansion. The members basis to 1997. They anticipated that acknowledged that as inflation dimin- growth of M2 and M3 probably would ished to very low levels, questions about continue at rates close to the upper limit the measurement of the overall price of their respective ranges in both years, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 83rd Annual Report, 1996 given the Committee's expectations for economic outcomes for the period covthe performance of the economy and ered by the ranges. They believed that prices. However, despite a degree of the reasons for establishing the higher concern about setting ranges that did not ranges could readily be explained and more comfortably encompass expected understood as appropriate technical growth, these members preferred not to adjustments that did not imply any lesschange the ranges for a variety of rea- ened commitment to the Committee's sons. The current ranges for the broad price stability goal. For example, such monetary aggregates could be viewed an explanation appeared to have been as anchors or benchmarks for money accepted with little or no comment by growth that would be associated with the public when the range for M3 was approximate price stability and sus- increased in July 1995. tained economic growth, assuming The Committee members were unanibehavior of velocity in line with histori- mously in favor of retaining the current cal experience. Accordingly, a reaffir- monitoring range of 3 to 7 percent for mation of those ranges would under- growth of total domestic nonfinancial score the Committee's commitment to a debt in 1996 and extending that range policy of achieving price stability over on a provisional basis to 1997. They time; and in the view of some members, took account of a staff projection indihigher ranges could raise questions in cating that growth of the debt aggregate this regard. Moreover, a change in the was likely to slow somewhat from its ranges might be misinterpreted as a sig- pace earlier this year in line with some nal of greater reliance on the broad moderation in the expansion of nominal monetary aggregates in the formulation income. According to the staff projecand conduct of monetary policy. In this tion, growth in the debt measure would connection, the members noted that the be near the midpoint of the existing behavior of M2 in relation to nominal range over the period through 1997. GDP and interest rates had displayed At the conclusion of this discussion, a pattern over the past two years or so the Committee voted to reaffirm the that was in line with historical norms ranges for growth of M2 and M3 and the before the 1990s. However, in light monitoring range for expansion of total of difficulties in the early 1990s and domestic nonfinancial debt that it had changes in financial markets, the pro- established in January for 1996. For the spective growth of M2 and its velocity year 1997, the Committee approved remained subject to considerable uncer- provisional ranges for M2 and M3 and a tainty and the members felt that it provisional monitoring range for total would be premature for the Committee domestic nonfinancial debt that were to place increased reliance on M2 at this unchanged from the 1996 ranges. In point. keeping with its usual procedure under A few members preferred somewhat the Humphrey-Hawkins Act, the Comhigher growth ranges for M2 and M3 mittee would review its preliminary because such ranges would more com- ranges for 1997 early next year, or fortably surround the Committee's sooner if interim conditions warranted, expectations for monetary growth. The in light of their growth and velocity higher ranges would be more informa- behavior and ongoing economic and tive for the Congress and the public as financial developments. Accordingly, to the money growth likely to be asso- the Committee voted to incorporate the ciated with the Committee's expected following statement regarding the 1996 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 149 and 1997 ranges in its domestic policy easily be explained and understood as a directive: technical adjustment that did not represent a reduced commitment to the goal The Federal Open Market Committee of price stability or an increased emphaseeks monetary and financial conditions that sis on the monetary aggregates in policy will foster price stability and promote susformulation. tainable growth in output. In furtherance of these objectives, the Committee reaffirmed In the Committee's discussion of polat this meeting the ranges it had established icy for the intermeeting period ahead, in January for growth of M2 and M3 of 1 to all but one of the members supported 5 percent and 2 to 6 percent respectively, a proposal to maintain an unchanged measured from the fourth quarter of 1995 to policy stance. These members also indithe fourth quarter of 1996. The monitoring range for growth of total domestic nonfinan- cated that they preferred or could accept cial debt was maintained at 3 to 7 percent for an asymmetric directive that was biased the year. For 1997 the Committee agreed on toward restraint. In their view, the most tentative ranges for monetary growth, mea- likely outcome was a slowing of the sured from the fourth quarter of 1996 to the expansion to a more sustainable pace fourth quarter of 1997, of 1 to 5 percent for and a continuation of subdued inflation. M2 and 2 to 6 percent for M3. The Committee provisionally set the associated monitor- Nevertheless, they were concerned that ing range for growth of total domestic non- the risks to that outcome were tilted financial debt at 3 to 7 percent for 1997. The toward higher inflation. While a strong behavior of the monetary aggregates will economy generally was a welcome continue to be evaluated in the light of development, at current levels of progress toward price level stability, movements in their velocities, and developments resource use a continuation of rapid in the economy and financial markets. growth was not likely to be sustainable because it would have the potential for Votes for this action: Messrs. Greenspan, adding significantly to inflation pres- McDonough, Boehne, Jordan, Kelley, sures. However, inflation had remained McTeer, Meyer, Mses. Phillips and Rivlin, relatively damped thus far, and the rise and Mr. Stern. Votes against this action: in interest rates among other factors was Mr. Lindsey and Ms. Yellen. expected to curb demand. Moreover, any Mr. Lindsey and Ms. Yellen dissented tendency for price pressures to mount because they preferred somewhat higher was likely to emerge only gradually ranges for M2 and M3 growth in 1996 and be reversible through a relatively and 1997. The central tendencies of the limited policy adjustment. The current members' forecasts of nominal GDP for stance of monetary policy could not be the two years were likely to be associ- described in this view as clearly accomated with growth of the broad monetary modative. While the federal funds rate aggregates at rates around the top of the had been reduced appreciably in nomicurrent ranges. Somewhat higher ranges nal terms over the past year, its current would more comfortably encompass the level on an inflation-adjusted basis anticipated growth of the monetary seemed to be only marginally below its aggregates and in their view would con- peak prior to mid-1995. In the circumform more closely with the provisions stances, the Committee could afford to and intent of the Federal Reserve Act wait for more evidence to see whether that require the System to communicate additional inflation pressures were likely its objectives and plans for monetary to develop. A number of key economic growth to the Congress. They believed data would become available over the the reasons for raising the ranges could next several weeks that would provide a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 83rd Annual Report, 1996 much better basis for assessing the sible firming of reserve conditions dureconomy's momentum over the second ing the intermeeting period. Accordhalf of the year and the outlook for ingly, in the context of the Committee's inflation. long-run objectives for price stability A differing view gave more emphasis and sustainable economic growth, and to prospects for rising inflation and the giving careful consideration to econeed for immediate action to forestall nomic, financial, and monetary devela buildup of cost and price pressures opments, the Committee decided that before they undermined the expansion. somewhat greater reserve restraint There was little firm evidence that eco- would be acceptable and slightly lesser nomic growth was slowing and reports reserve restraint might be acceptable of appreciable wage pressures were during the intermeeting period. The increasing. Inflation expectations per- reserve conditions contemplated at this sisted in financial markets, and probably meeting were expected to be consistent in product and labor markets as well; if with moderate growth of M2 and M3 they were allowed to worsen, the Com- over coming months. mittee's long-run goal of price stability At the conclusion of the meeting, the would become much more difficult to Federal Reserve Bank of New York was achieve. Delaying action risked the need authorized and directed, until instructed for a greater adjustment in policy at a otherwise by the Committee, to execute later date with possible disruption to the transactions in the System Account in economy. accordance with the following domestic Members observed that an asymmet- policy directive: ric directive would represent a shift from the symmetric directives that had been The information reviewed at this meeting adopted over the past year but would be suggests that economic activity advanced considerably further in the second quarter, in keeping with their assessments of the but increases in final demand showed some risks of higher inflation. Several comsigns of moderation. Nonfarm payroll emmented that an asymmetric directive did ployment was up substantially in April and not imply a commitment to tighten May; the civilian unemployment rate rose to monetary policy at some point, whether 5.6 percent in May. Industrial production increased appreciably further in May, reflectduring the intermeeting period or at a ing gains across a wide range of industries. future meeting, but it did imply the need Real consumer spending rose substantially for special vigilance. Some noted that a on balance over April and May. Singlepolicy tightening action could tend to family housing starts fell considerably in have a more pronounced effect than May from a relatively high level in April. usual because it would indicate a shift in Orders and contracts point to some deceleration in spending on business equipment and the direction of policy and might genernonresidential structures after a very rapid ate expectations of further tightening. expansion earlier in the year. The nominal Under the circumstances, the Commit- deficit on U.S. trade in goods and services tee would consult in some way before widened in April from its rate in the first any policy tightening was undertaken. quarter. Upward pressures on food and energy prices have led to somewhat larger At the conclusion of the Committee's increases in the consumer price index over discussion, all but one member indirecent months. cated that they supported a directive that Most market interest rates have edged called for maintaining the existing higher since the Committee meeting on degree of pressure on reserve positions May 21. In foreign exchange markets, the and that included a bias toward the pos- trade-weighted value of the dollar in terms Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 151 of the other G-10 currencies has depreciated Phillips, Rivlin, and Yellen. Vote against slightly over the intermeeting period. this action: Mr. Stern. M2 declined in May, though partial data for June pointed to a rebound. Growth of M3 Mr. Stern dissented because he was was relatively sluggish in May but also convinced that a modestly more restricappears to have turned up in June. For the tive policy was warranted. In his view, year through June, both aggregates are estimated to have grown at rates around the the momentum of the economy and upper bounds of their respective ranges for strains on capacity in labor and some the year. Expansion in total domestic non- other markets raised the possibility of financial debt has been moderate on balance an acceleration of inflation that would over recent months and has remained in the jeopardize the economic expansion. This middle portion of its range. concern aside, Mr. Stern also believed The Federal Open Market Committee that current circumstances were favorseeks monetary and financial conditions that will foster price stability and promote sus- able for policy action to reduce inflatainable growth in output. In furtherance of tion further and thereby help to susthese objectives, the Committee reaffirmed tain the ongoing improvement in the at this meeting the ranges it had established economy. in January for growth of M2 and M3 of 1 to As a prelude to its formal review later 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of 1995 to in the year, the Committee at this meetthe fourth quarter of 1996. The monitoring ing considered its existing network of range for growth of total domestic nonfinan- swap arrangements with a number of cial debt was maintained at 3 to 7 percent for foreign central banks and the Bank for the year. For 1997 the Committee agreed on International Settlements. From time to tentative ranges for monetary growth, meatime in recent years the Committee had sured from the fourth quarter of 1996 to the fourth quarter of 1997, of 1 to 5 percent for discussed a variety of issues relating M2 and 2 to 6 percent for M3. The Commit- to its foreign exchange activities and tee provisionally set the associated monitor- its financial arrangements with other ing range for growth of total domestic non- central banks. In this discusssion, the financial debt at 3 to 7 percent for 1997. The Committee considered in particular behavior of the monetary aggregates will whether the swap arrangements, all continue to be evaluated in the light of progress toward price level stability, move- of which had been put in place in ments in their velocities, and developments the 1960s, remained an appropriate in the economy and financial markets. approach to international financial coop- In the implementation of policy for the eration among central banks in light immediate future, the Committee seeks to of the evolution of the international maintain the existing degree of pressure on financial system in recent decades, and reserve positions. In the context of the Committee's long-run objectives for price whether other approaches should be stability and sustainable economic growth, considered. The Committee made no and giving careful consideration to eco- decisions relating to these matters, nomic, financial, and monetary develop- though it was understood that these ments, somewhat greater reserve restraint issues would be explored further. would or slightly lesser reserve restraint It was agreed that the next meeting of might be acceptable in the intermeeting period. The contemplated reserve conditions the Committee would be held on Tuesare expected to be consistent with moderate day, August 20, 1996. growth in M2 and M3 over coming months. The meeting adjourned at 12:50 p.m. Votes for short-run policy: Messrs. Donald L. Kohn Greenspan, McDonough, Boehne, Jordan, Secretary Kelley, Lindsey, McTeer, Meyer, Mses. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 83rd Annual Report, 1996 Meeting Held on Messrs. Madigan and Slifman, August 20, 1996 Associate Directors, Divisions of Monetary Affairs and Research A meeting of the Federal Open Market and Statistics respectively, Committee was held in the offices of the Board of Governors Ms. Johnson, Assistant Director, Board of Governors of the Federal Division of International Finance, Reserve System in Washington, D.C., Board of Governors on Tuesday, August 20, 1996, at Ms. Low, Open Market Secretariat 9:00 a.m. Assistant, Division of Monetary Affairs, Board of Governors Present: Mr. Greenspan, Chairman Mr. Connolly, First Vice President, Mr. McDonough, Vice Chairman Federal Reserve Bank of Boston Mr. Boehne Mr. Beebe, Ms. Browne, Messrs. Davis, Mr. Jordan Dewald, Eisenbeis, and Goodfriend, Senior Vice Mr. Kelley Presidents, Federal Reserve Banks Mr. Lindsey of San Francisco, Boston, Mr. McTeer Kansas City, St. Louis, Atlanta, Mr. Meyer and Richmond respectively Ms. Phillips Ms. Krieger, Vice President, Federal Ms. Rivlin Reserve Bank of New York Mr. Stern Mr. Sullivan, Assistant Vice President, Ms. Yellen Federal Reserve Bank of Chicago Mr. Bryan, Consultant, Federal Reserve Messrs. Broaddus, Guynn, Moskow, Bank of Cleveland and Parry, Alternate Members of the Federal Open Market Committee By unanimous vote, the minutes of the meeting of the Federal Open Market Messrs. Hoenig, Melzer, and Committee held on July 2-3, 1996, were Ms. Minehan, Presidents of the approved. Federal Reserve Banks of The Manager of the System Open Kansas City, St. Louis, and Boston Market Account reported on recent respectively developments in foreign exchange markets. There were no open market trans- Mr. Kohn, Secretary and Economist actions in foreign currencies for System Mr. Bernard, Deputy Secretary account during the period since the Mr. Coyne, Assistant Secretary Mr. Gillum, Assistant Secretary meeting on July 2-3, 1996, and thus no Mr. Mattingly, General Counsel vote was required of the Committee. Mr. Prell, Economist The Manager also reported on developments in domestic financial markets Messrs. Lang, Lindsey, Mishkin, and on System open market transac- Promisel, Rolnick, Rosenblum, tions in U.S. government securities and Siegman, Simpson, and Stockton, federal agency obligations during the Associate Economists period July 3, 1996, through August 20, 1996. By unanimous vote, the Commit- Mr. Fisher, Manager, System Open tee ratified these transactions. Market Account The Committee then turned to a discussion of the economic and financial Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of outlook and the implementation of Governors monetary policy over the intermeeting Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 153 period ahead. A summary of the eco- electricity generation dropped sharply as nomic and financial information avail- a result of unseasonably cool weather. A able at the time of the meeting and of substantial increase in the production of the Committee's discussion is provided motor vehicles and parts accounted for below, followed by the domestic policy most of the advance in manufacturing directive that was approved by the Com- output. Elsewhere, the manufacture of mittee and issued to the Federal Reserve office and computing equipment contin- Bank of New York. ued on its strong upward trend in July The information reviewed at this while the production of other business meeting suggested that the economic equipment slipped. The output of conexpansion had moderated somewhat sumer goods edged lower after having recently. Growth in consumer spending risen slightly in May and June. The rate appeared to be slowing, business pur- of utilization of total industrial capacity chases of equipment and structures were declined a little in July but remained at a rising less vigorously, and higher mort- relatively high level. gage rates were beginning to exert a Retail sales weakened somewhat over restraining effect on housing construc- June and July following several months tion. Business inventory accumulation of robust growth. Sales of motor vehihad been quite modest, and production cles were down in both months, and and employment were expanding less spending on other goods rose sluggishly rapidly. Increases in labor compensation on balance. Housing starts fell somehad been somewhat larger this year, but what further in July, reflecting a sizable consumer price inflation, adjusted for decline in single-family starts that more food and energy prices, had remained on than offset a bounceback in multifamily a fairly steady trend. starts. The drop in housing starts, Private nonfarm payroll employment coupled with lower sales of new and increased relatively rapidly in July, existing homes in June (latest data availthough at a considerably slower pace able), suggested that the rise in mortthan in the second quarter. Job growth gage rates was exerting a damping effect in the services industry slowed sharply, on housing demand and homebuilding and manufacturing employment de- activity. clined appreciably after having risen Growth in business spending on durasomewhat in the second quarter. In con- ble equipment and nonresidential structrast, the expansion in employment in tures had slowed after a very rapid wholesale and retail trade picked up expansion earlier in the year. Shipments slightly in July, and the number of jobs of nondefense capital goods were little in construction continued to increase at changed in June after a sizable increase about the second-quarter pace. The aver- in May. Weakness in outlays for aircraft age workweek for private production or more than offset persisting strength in nonsupervisory workers fell consider- spending on office and computing equipably in July, to a level a little below its ment, and purchases of other types average for the second quarter, and the of equipment, notably communications civilian unemployment rate edged up to and industrial equipment, continued to 5.4 percent. advance briskly. Nonresidential con- Industrial production rose slightly struction activity rebounded in June further in July after three consecutive from an appreciable decrease in May. months of strong gains; manufacturing The pace of office building picked up, production expanded less rapidly, and and construction of other commercial Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 83rd Annual Report, 1996 and industrial structures posted healthy The employment cost index for private gains after May declines. industry workers advanced at a some- Business inventories increased by a what faster rate in the second quarter modest amount in June after having con- than in the first quarter or in the second tracted in May. In manufacturing, inven- half of 1995. Measured over the year tories continued to run off in June, ended in June, the index rose by a reducing the sector's stock-sales ratio slightly larger amount than in the previto near its historical low. Wholesale ous year. trade stocks also fell in June, and the At its meeting on July 2-3, 1996, the inventory-sales ratio was in the lower Committee adopted a directive that portion of its range over recent years. called for maintaining the existing de- Retail inventories rose in June; larger gree of pressure on reserve positions but stocks at automotive dealers more that included a bias toward the possible than accounted for the increase. The firming of reserve conditions during the inventory-sales ratio for the sector as a intermeeting period. The directive stated whole edged higher but remained at a that in the context of the Committee's relatively low level. long-run objectives for price stability The nominal deficit on U.S. trade in and sustainable economic growth, and goods and services narrowed in June, giving careful consideration to ecobut on a quarterly average basis the defi- nomic, financial, and monetary develcit widened in the second quarter from opments, somewhat greater reserve reits rate in the first quarter. In June, the straint would be acceptable and slightly value of exports declined slightly, but lesser reserve restraint might be acceptthe value of imports dropped by a con- able during the intermeeting period. The siderably larger amount from a rela- reserve conditions associated with this tively high rate in May. Available infor- directive were expected to be consistent mation suggested that economic activity with moderate growth of M2 and M3 in the major foreign industrial countries over coming months. continued to advance, but at an uneven With economic growth moderating pace; in Germany, activity rebounded and inflation quiescent, open market from the contraction in the first quarter, operations were directed toward mainwhile in Japan a considerable slowing of taining the existing degree of pressure growth had occurred in the second quar- on reserve positions throughout the ter after very rapid expansion in the first intermeeting period. The federal funds quarter. rate averaged a little higher than the Price inflation remained moderate on level expected with an unchanged polbalance in June and July, with declines icy stance, in part because of unexpectin energy prices essentially offsetting edly high demand for reserves in late increases in food prices. Over a some- July and early August. On balance, most what longer horizon, consumer prices other short-term market interest rates for nonfood, non-energy items rose declined slightly, and intermediate- and slightly less in the twelve months ended long-term rates fell somewhat more, in July than in the previous twelve- over the intermeeting period. In the days month period. Producer prices of fin- immediately following the meeting, ished goods other than food and energy rates rose sharply in response to incomalso increased more slowly in the twelve ing data, notably the employment remonths ended in July. In contrast, port for June that market participants growth in labor costs had picked up. viewed as indicating increasing pres- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 155 sures on economic resources and labor The staff forecast prepared for this costs. Subsequently, however, that rise meeting suggested that the expansion was more than reversed when further would slow to a rate around, or perhaps data releases were interpreted as sug- a little above, the economy's estimated gesting that the economic expansion growth potential. Consumer spending might be slowing and that the upturn in was projected to expand at a more modlabor compensation was mild. Equity erate pace that would be in line with the prices also exhibited considerable vola- projected increase in disposable income; tility over the period since the Commit- the favorable effect of the earlier run-up tee meeting on July 2-3, with major in equity prices on household wealth indexes of stock prices falling steeply and the generally ample availability of through late July before recouping part credit were expected to balance conto most of their losses in association tinuing consumer concerns about the with the bond market rally and favor- adequacy of their savings and the able earnings reports. restraining effect of high household debt In foreign exchange markets, the burdens. Homebuilding was forecast trade-weighted value of the dollar in to slow somewhat in response to the terms of the other G-10 currencies backup in residential mortgage rates but declined slightly over the intermeeting to remain at a relatively high level in the period. The flow of information suggest- context of sustained income growth and ing a slowing in U.S. economic growth the still-favorable cash flow affordabiland reduced prospects for a near-term ity of home ownership. Business spendtightening of Federal Reserve policy ing on equipment and structures was weighed against the dollar. On the other projected to grow less rapidly in light of hand, the yen was bolstered by incom- the anticipated moderate growth of sales ing data suggesting that the Japanese and profits. On balance, the external current account surplus was again wid- sector was expected to exert a small ening, and the German mark benefited restraining influence on economic activfrom the Bundesbank's inaction at a ity over the projection period. Only time when market participants were modest fiscal restraint was anticipated expecting a policy easing. over the forecast horizon. Inflation Growth of M2 and M3 moderated in recently had been lifted by adverse July. Much of the slowdown in the developments in energy markets and expansion of M2 was associated with an was projected to remain above the levels unexpected decline in demand deposits, of recent years, given the high level of which had grown rapidly earlier in the resource utilization, the effects of tight year. With bank credit expanding slug- grain supplies on food prices, and a gishly, the funding needs of banks were noticeable step-up in labor compensamodest, and the slower growth of M2 tion reinforced by the legislated rise in showed through to M3. For the year the federal minimum wage. through July, both aggregates were esti- In the Committee's discussion of curmated to have increased at rates some- rent and prospective economic develwhat below the upper bounds of their opments, members commented that on respective ranges for the year. Expan- balance the information received since sion in total domestic nonfinancial debt the July meeting, including anecdotal had been moderate on balance over reports from around the nation, pointed recent months and had remained in the to some slowing in the growth of ecomiddle portion of its range. nomic activity from a very rapid pace Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 83rd Annual Report, 1996 during the spring. The extent of the expansion in the first half of the year slowing remained uncertain, and it was had been provided by large increases in unclear at this juncture whether the spending for consumer durables, housexpansion would slow sufficiently to ing, and business equipment; however, contain pressures on labor and other growth in such spending could be producer resources. Nonetheless, broad expected to slow in the context of measures of price inflation, adjusted to increasingly satisfied pent-up demands exclude their volatile food and energy and the lagged effects of earlier components, did not exhibit any uptrend increases in intermediate- and long-term despite robust growth in economic activ- interest rates on these interest-sensitive ity this year and high levels of resource sectors of the economy. A key unceruse. Indeed, some price measures sug- tainty in the outlook was the prospective gested that inflation had trended lower behavior of inventories. Should the through the second quarter. Moreover, expansion in final demand fail to moderthere were no early signs of pressures ate to a sustainable pace, business firms or imbalances in the industrial sector. would be likely to intensify their efforts In labor markets, however, there were to build their inventories, which curincreasing indications of tightness that rently were widely viewed as satisfacmight at some point feed through to tory or even relatively lean in relation to greater inflation. Upward wage adjust- sales. While some buildup in inventories ments were becoming more evident and appeared to be occurring in the current increases in overall compensation had quarter, developments that might lead to edged up, suggesting the possibility of a sharp increase in inventory investfurther increases in labor costs at current ment, such as shortages of various goods or higher levels of labor utilization even and materials and lengthening delays before taking account of the effects of in securing deliveries, were not in the rise in the minimum wage. Although evidence at this time. Accordingly, increases in compensation might be aggressive inventory accumulation moderated by greater productivity or remained an upside risk to the projected absorbed for a time by lower profit mar- expansion but not one that was likely to gins, the risks seemed tilted toward materialize unless final demand were to increases in inflation at some point, exceed current forecasts by a significant especially if the growth of the economy margin. continued to outstrip its potential and In their discussion of the outlook added to pressures on resources. for inflation, members observed that In the course of the Committee's dis- increases in prices had remained cussion, members cited a variety of indi- remarkably subdued for an extended cations that economic growth was slow- period in relation to measures of ing from a very rapid pace, and they resource utilization, notably the rate of pointed to a number of factors that in unemployment. Such behavior differed their view should promote continued, markedly from the historical experithough more moderate, expansion in ence under similar circumstances. One economic activity. These included gen- factor tending to hold down prices has erally supportive financial conditions, been highly competitive markets— relatively high levels of consumer confi- throughout the nation and internationdence, and the absence of major imbal- ally as well—that have made it very ances in the economy. It was noted that difficult for business firms to raise much of the stimulus for the strong prices. Another key factor, though one Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 157 whose importance might now be start- be to the upside, with the potential for ing to diminish, was the persistence of more inflation stemming from rising comparatively small increases in labor labor compensation costs augmented by compensation, which remained appre- a rise in the minimum wage and the ciably below earlier norms in relation to prospect of higher food prices and perlevels of unemployment. This develop- haps energy prices over the next several ment appeared to reflect worker con- quarters. cerns about job security in a period of In the Committee's discussion of polmajor business restructuring and down- icy for the intermeeting period ahead, sizing activities as well as substantially members focused on indications that reduced increases in benefit costs, nota- the economy already was slowing, perbly those relating to health care. haps by enough to limit pressures on In assessing whether a relatively resources, and they noted that broad stafavorable inflation performance was tistical measures of prices and the aneclikely to continue, the members focused dotal evidence did not suggest that a on a variety of issues. One was whether pickup in inflation was already under the expansion would moderate suffi- way. Consequently, all but one of the ciently to keep pressures on labor and members supported a proposal to mainother resources from intensifying. tain an unchanged policy stance. A num- Another was whether a rate of unem- ber also commented that real interest ployment in the vicinity of its current rates were not unusually low, suggesting level would foster added wage pres- that any pickup in inflationary pressures, sures. Uncertainty also surrounded the should that occur, would be modest and extent to which further increases in labor readily contained. One concern was that compensation costs, should they materi- policy tightening at this point might genalize, would be passed through to higher erate an excessive reaction in financial prices. Improvements in productivity markets, both because it was not generwere likely to offset part of such ally expected and because it would repincreases, but how much remained an resent a change in policy direction that open question. In addition, profit mar- might well lead to expectations of furgins were high, but the extent to which ther policy tightening. Such a developthey might narrow to absorb increasing ment could have serious adverse conlabor costs was difficult to predict. With sequences for economic activity if the regard to the outlook for wages, expansion was in fact already slowing to members observed that, though it was a more sustainable and less inflationary too early to reach a firm judgment, the pace. These members therefore conacceleration of wage increases this year cluded that the prudent course at this might well augur faster advances that point was to await further developments were more in line with historical experi- that would permit them to assess the ence under essentially full employment possible need for some tightening with conditions. Moreover, the tendency a higher degree of confidence. At the toward reduced increases in the costs of same time, it was emphasized that the benefits might tend to dissipate, though Committee remained committed to a some members commented that further policy that would resist a rise in inflaeconomies in the provision of medical tion; such a policy would entail moving services might well be achievable for in anticipation of greater price pressures some period. On balance, the inflation and before they showed through to risks in the outlook clearly seemed to actual inflation. Accordingly, they also Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 83rd Annual Report, 1996 agreed on the desirability of a directive At the conclusion of the meeting, the that remained biased toward possible Federal Reserve Bank of New York was tightening in the intermeeting period authorized and directed, until instructed ahead. Such a directive would imply otherwise by the Committee, to execute that any tightening should be imple- transactions in the System Account in mented promptly if developments were accordance with the following domestic perceived as pointing to rising infla- policy directive: tion. For now, the Committee should remain particularly vigilant to incoming The information reviewed at this meeting information bearing on the outlook for suggests that growth in economic activity inflation. recently has moderated somewhat. Private A differing view gave more weight to nonfarm payroll employment grew less rapidly in July, the average workweek fell the risks of rising inflation. In this view, sharply, and the civilian unemployment rate while there were uncertainties, the edged up to 5.4 percent. Industrial producweight of the evidence suggested that a tion increased slightly in July after three prompt policy action was needed to con- months of strong gains. Real consumer tain inflation and set the stage for further spending weakened somewhat on balance over June and July following several months progress toward price stability. The posof robust growth. Housing starts fell somesibility of an overreaction in financial what further in July. Growth in spending on markets to a tightening move could not business equipment and nonresidential strucbe ruled out, but such a reaction was tures has slowed after a very rapid expansion likely to be short-lived. More impor- earlier in the year. The nominal deficit on U.S. trade in goods and services widened in tantly, a prompt action would reduce the the second quarter from its rate in the first risk that inflation would worsen and quarter. Increases in labor compensation pose difficult problems for monetary have been somewhat larger this year, but policy later. consumer price inflation, adjusted for food At the conclusion of the Committee's and energy prices, has remained on a fairly steady trend. discussion, all but one member indi- Most short-term market interest rates have cated that they supported a directive that declined slightly while intermediate- and called for maintaining the existing long-term rates have fallen somewhat more degree of pressure on reserve positions since the Committee meeting on July 2-3, and that included a bias toward the 1996. In foreign exchange markets, the possible firming of reserve conditions trade-weighted value of the dollar in terms of the other G-10 currencies has depreciated during the intermeeting period. Accordslightly over the intermeeting period. ingly, in the context of the Committee's Growth of M2 and M3 moderated in July. long-run objectives for price stability For the year through July, both aggregates and sustainable economic growth, and are estimated to have grown at rates somegiving careful consideration to eco- what below the upper bounds of their respecnomic, financial, and monetary devel- tive ranges for the year. Expansion in total domestic nonfinancial debt has been moderopments, the Committee decided that ate on balance over recent months and has somewhat greater reserve restraint remained in the middle portion of its range. would be acceptable and slightly lesser The Federal Open Market Committee reserve restraint might be acceptable seeks monetary and financial conditions that during the intermeeting period. The will foster price stability and promote susreserve conditions contemplated at this tainable growth in output. In furtherance of these objectives, the Committee at its meetmeeting were expected to be consistent ing in July reaffirmed the ranges it had estabwith moderate growth of M2 and M3 lished in January for growth of M2 and M3 over coming months. of 1 to 5 percent and 2 to 6 percent respec- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 159 tively, measured from the fourth quarter of The meeting adjourned at 12:45 p.m. 1995 to the fourth quarter of 1996. The monitoring range for growth of total domes- Donald L. Kohn tic nonfinancial debt was maintained at 3 to Secretary 7 percent for the year. For 1997 the Committee agreed on a tentative basis to set the same ranges as in 1996 for growth of the monetary aggregages and debt, measured from the Meeting held on fourth quarter of 1996 to the fourth quarter September 24, 1996 of 1997. The behavior of the monetary aggregates will continue to be evaluated in A meeting of the Federal Open Market the light of progress toward price level stability, movements in their velocities, and Committee was held in the offices of the developments in the economy and financial Board of Governors of the Federal markets. Reserve System in Washington, D.C., In the implementation of policy for the on Tuesday, September 24, 1996, at immediate future, the Committee seeks to 9:00 a.m. maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stabil- Present: ity and sustainable economic growth, and Mr. Greenspan, Chairman giving careful consideration to economic, Mr. McDonough, Vice Chairman financial, and monetary developments, some- Mr. Boehne what greater reserve restraint would or Mr. Jordan slightly lesser reserve restraint might be Mr. Kelley acceptable in the intermeeting period. The Mr. Lindsey contemplated reserve conditions are Mr. McTeer expected to be consistent with moderate Mr. Meyer growth in M2 and M3 over coming months. Ms. Phillips Ms. Rivlin Mr. Stern Votes for this action: Messrs. Greenspan, Ms. Yellen McDonough, Boehne, Jordan, Kelley, Lindsey, McTeer, Meyer, Mses. Phillips, Messrs. Broaddus, Guynn, Moskow, Rivlin, and Yellen. Vote against this and Parry, Alternate Members action: Mr. Stern. of the Federal Open Market Committee Mr. Stern dissented because he be- Messrs. Hoenig, Melzer, and lieved that policy should become mod- Ms. Minehan, Presidents of the estly more restrictive. He was concerned Federal Reserve Banks of that, in the absence of a substantial and Kansas City, St. Louis, and Boston sustained improvement in productivity, respectively the prevailing pattern of demand might engender an increase in inflationary Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary pressures, and that such pressures would Mr. Coyne, Assistant Secretary ultimately threaten the ongoing eco- Mr. Gillum, Assistant Secretary nomic expansion. In Mr. Stern's judg- Mr. Mattingly, General Counsel ment, it was prudent at this point to Mr. Baxter, Deputy General Counsel resist such a development in order to lay Mr. Prell, Economist a foundation for the long-term health of Mr. Truman, Economist the economy. Messrs. Lang, Lindsey, Mishkin, It was agreed that the next meeting of Promisel, Rosenblum, Siegman, the Committee would be held on Tues- Simpson, Sniderman, and day, September 24, 1996. Stockton, Associate Economists Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 83rd Annual Report, 1996 Mr. Fisher, Manager, System Open The Manager also reported on recent Market Account developments in domestic financial markets and on System open market Mr. Ettin, Deputy Director, Division of transactions in U.S. government securi- Research and Statistics, Board of ties and federal agency obligations Governors Messrs. Madigan and Slifman, during the period August 20, 1996, Associate Directors, Divisions of through September 23, 1996. By unani- Monetary Affairs and Research mous vote, the Committee ratified these and Statistics respectively, transactions. Board of Governors Mr. Smith,6 Assistant Director, The Committee then turned to a dis- Division of International Finance, cussion of the economic and financial Board of Governors outlook and the implementation of Ms. Low, Open Market Secretariat monetary policy over the intermeeting Assistant, Division of Monetary period ahead. A summary of the eco- Affairs, Board of Governors nomic and financial information avail- Ms. Pianalto, First Vice President, Federal Reserve Bank of able at the time of the meeting and of Cleveland the Committee's discussion is provided Messrs. Beebe, Davis, Dewald, below, followed by the domestic policy Eisenbeis, and Hunter, Senior Vice directive that was approved by the Com- Presidents, Federal Reserve Banks mittee and issued to the Federal Reserve of San Francisco, Kansas City, Bank of New York. St. Louis, Atlanta, and Chicago respectively The information reviewed at this Messrs. Bentley, Hetzel, Ms. Krieger, meeting suggested that the expansion of and Mr. Rosengren, Vice economic activity had moderated appre- Presidents, Federal Reserve ciably from an elevated second-quarter Banks of New York, Richmond, pace. Growth in consumer spending had New York, and Boston respectively slowed noticeably, and higher mortgage Mr. Weber, Senior Research Officer, rates seemed to be exerting some mod- Federal Reserve Bank of est restraint on housing demand. While Minneapolis business demand for durable equipment remained strong, spending on nonresi- By unanimous vote, the minutes of dential structures had weakened a litthe meeting of the Federal Open Market tle. Business inventory accumulation Committee held on August 24, 1996, appeared to have picked up, although were approved. the level of inventories remained mod- The Manager of the System Open est in relation to sales. Employment and Market Account reported on recent production had continued to post sizable developments in foreign exchange margains in recent months, but the increases kets. There were no open market transwere somewhat below those recorded actions in foreign currencies for System earlier in the year. Consumer price inflaaccount during the period since the tion, excluding its food and energy meeting on August 20, 1996, and thus components, had edged lower this year no vote was required of the Committee. despite somewhat larger increases in labor compensation. Private nonfarm payroll employment grew less rapidly over July and August 6. Attended portion of meeting relating to prothan it had in the second quarter; aggreposal to amend the Authorization for Foreign Currency Operations. gate hours worked by private production Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 161 workers also expanded at a slower pace August from a July drop and for the two over the two-month period. Job growth months were about unchanged on averin the services industries was somewhat age from their second-quarter level; lower over the two months compared however, permits for single-family houswith that of the second quarter. Manu- ing were unchanged in August and had facturing employment changed little on fallen from their second-quarter level. balance over the July-August period, Sales of existing homes weakened in and construction hiring was down con- June and July. siderably in August after a July increase Demand for business equipment had that was a little above the pace of the remained strong in recent months. Shipsecond quarter. The civilian unemploy- ments of nondefense capital goods ment rate declined to 5.1 percent in declined in July, retracing part of a sub- August. stantial second-quarter advance, but Industrial production also advanced recent data on new orders pointed to somewhat less rapidly on average in further increases in business spending July and August after having recorded for durable equipment, notably office strong gains in the previous few months; and computing equipment, in coming slower growth was evident in mining months. Nonresidential construction and utilities as well as in manufacturing. activity fell somewhat in July after hav- Smaller increases in the output of motor ing decreased a little in the second vehicles and parts accounted for part of quarter. the slowdown in the expansion of the Business inventory investment picked manufacturing sector in August; in addi- up sharply in July; most of the increase tion, the output of consumer goods other occurred at retail establishments. Manuthan motor vehicles remained sluggish, facturing inventories rose somewhat, and the production of construction sup- with the gain concentrated at manufacplies declined significantly after having turers of producers' durable equipment. surged in the second quarter. Elsewhere The stock-sales ratio for the sector was in manufacturing, business equipment, around its historical low. In the wholenotably its office and computing compo- sale sector, inventories edged higher in nent, continued its robust expansion July despite a substantial drop in stocks over July and August, and defense and of farm products, and the inventoryspace equipment extended the upturn sales ratio for the sector fell to the low that had begun in the second quarter. end of its range over recent years. Retail The rate of utilization of total industrial stocks expanded considerably at both capacity was unchanged on balance automotive dealers and non-auto estabfrom June to August and remained at a lishments in July. Inventory-sales ratios relatively high level. edged higher in most retail categories, Total retail sales rose slightly over but they remained at relatively low July and August after having declined levels. substantially in June. Decreased outlays The nominal deficit on U.S. trade in at food stores, gas stations, and furniture goods and services widened substanand appliance stores in August were a tially in July from its June level and also little more than offset by a sharp pickup from its average rate for the second in sales at general merchandisers, quarter. Despite one-time service payapparel stores, and outlets for durable ments related to the Olympics and larger goods other than furniture and appli- inflows of imported oil, imports edged ances. Housing starts rebounded in down in July from the sharply increased Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 83rd Annual Report, 1996 rate recorded for the second quarter; the increased considerably more than it had latter largely reflected the strength of the over the previous year. U.S. economy during the first half of At its meeting on August 20, 1996, the year. Exports fell considerably more the Committee adopted a directive that in July than did imports; in addition to called for maintaining the existing decreased exports in such categories as degree of pressure on reserve positions consumer goods, aircraft and parts, auto- but that included a bias toward the motive products, and other industrial possible firming of reserve conditions supplies, part of the measured decline during the intermeeting period. The may have reflected residual seasonality directive stated that in the context of the in the data. Available information sug- Committee's long-run objectives for gested that, on balance, the economies price stability and sustainable economic of the major foreign industrial countries growth, and giving careful consideration had strengthened in recent months. In to economic, financial, and monetary Japan, a mild second-quarter pause after developments, somewhat greater reserve very rapid first-quarter growth had restraint would be acceptable and been followed by renewed expansion. slightly lesser reserve restraint might Economic activity in Germany had be acceptable during the intermeeting rebounded sharply in the second quarter period. The reserve conditions associfrom a first- quarter contraction, and ated with this directive were expected to further expansion appeared to be in be consistent with moderate growth of train. Although economic growth had M2 and M3 over coming months. been sluggish in Canada and the United With incoming information generally Kingdom in the second quarter, recent confirming that economic growth was indicators suggested a pickup in activ- moderating and that price inflation ity in those countries as well. By con- remained subdued, open market operatrast, France and Italy had experienced tions were directed toward maintaining little, if any, growth since early in the the existing degree of pressure on year. reserve positions throughout the inter- Consumer price inflation remained meeting period. The federal funds rate moderate on balance over July and generally remained close to the level August; declines in energy prices offset expected with an unchanged policy higher food prices. Excluding food and stance, but most other market interest energy, consumer prices recorded a rates exhibited considerable volatility somewhat smaller advance over the and rose somewhat on balance over the twelve months ended in August than intermeeting interval. Despite the rise in over the previous twelve months. Pro- many market interest rates, equity prices ducer prices of finished goods other than rebounded over the period, and most food and energy were unchanged on net major market indexes reached record over July and August, and this index highs. rose at a significantly slower pace over In foreign exchange markets, the the twelve months ended in August than trade-weighted value of the dollar in over the preceding twelve months. Aver- terms of the other G-10 currencies age hourly earnings of production or appreciated slightly over the intermeetnonsupervisory workers rebounded in ing period. The dollar's rise reflected in August, more than offsetting a small part the increase in U.S. long-term inter- July decline. Over the year ended in est rates over the period. Declines in August, this measure of labor costs market rates abroad, both short- and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 163 long-term, also contributed to the dol- a relatively high level in the context lar's strengthening. In Japan, newly of sustained income growth and the released data led market participants to still-favorable cash flow affordability of lower their assessments of the strength home ownership. The expansion of busiof that country's economic expansion ness investment in equipment and strucand of the prospects of any near-term tures was projected to slow gradually increase in official interest rates. In Ger- in response to an easing of pressures on many, a reduction by the Bundesbank in capacity, a prospective slackening in the its repo rate in late August and sub- growth of corporate cash flows, and the sequent statements by Bank officials rise in long-term interest rates that had regarding possible additional declines in occurred this year. Only modest fiscal official rates appeared to foster market restraint was anticipated over the foreexpectations that monetary policy might cast period. Inflation, which had been be eased further. boosted thus far in 1996 by adverse Growth of M2 and M3 picked up in developments in food and energy mar- August from sluggish rates in July but kets, was projected to remain somewhat remained below the average increases above that of recent years, given high over the first half of the year. A continu- levels of resource utilization and a ing, rapid runoff in the liquid deposit noticeable step-up in labor compensacomponents of these aggregates was off- tion that would be reinforced by the set in part by solid gains in retail money legislated rise in the federal minimum market funds and small time deposits, wage. whose yields had not declined in step In the Committee's discussion of curwith decreases in market interest rates rent and prospective economic developin early August. For the year through ments, members commented that the August, both aggregates grew at rates in incoming information had been mixed the upper portions of their respective since the August meeting but that on annual ranges. Expansion in total the whole it continued to suggest appredomestic nonfinancial debt had been ciable slowing in the economic expanmoderate on balance over recent months sion from a rapid and unsustainable pace and had remained in the middle portion in the second quarter. Data for many of its range. components of final demand, notably in The staff forecast prepared for this the consumer sector, indicated that ecomeeting, which differed little from that nomic growth had moderated considerfor the previous meeting, suggested that ably in recent months. At the same time, the expansion would slow to a rate supply-side data including employment around, or perhaps a little above, the and industrial production had remained economy's estimated growth potential. relatively robust, contributing to uncer- Expansion of consumer spending was tainty about underlying growth and forecast to rebound from the sluggish suggesting that inventory accumulation third-quarter rate in light of strong had picked up during the summer. While income trends, the favorable effect of the extent of the slowing in the overall the rise in the stock market this year on expansion remained unclear, there were household wealth, and the generally no indications of serious imbalances in ample availability of credit. Homebuild- the economy, and the members genering was anticipated to slow somewhat in ally viewed further growth at a pace response to this year's increase in resi- near that of the economy's potential as a dential mortgage rates but to remain at likely prospect. They continued to be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 83rd Annual Report, 1996 concerned, however, about the outlook the whole, however, the completion of for inflation, given the high level of numerous capital spending programs production. In that regard, some com- in conjunction with slower projected mented that labor markets appeared to growth in overall demand could be have tightened further in recent months expected to temper the expansion of and that wages were rising at a some- business investment over coming quarwhat faster pace. Even so, the rate of ters. In the housing sector, recent develprice inflation had not picked up and the opments were somewhat mixed, but prospects were good that inflation would they suggested on balance that housing remain contained for some time. activity had held up better than expected Whether the factors that had contributed in the light of increased mortgage interto such a price performance would per- est rates. It was suggested in this regard sist remained a key uncertainty in the that the retarding effects of higher rates economic outlook, and the members on fixed-rate mortgage contracts were generally agreed that the risks continued being blunted to some extent by shifts to be tilted to some extent in the direc- toward adjustable rate mortgages. Even tion of rising price inflation over the so, and consistent with the softening forecast horizon. already observed in a number of areas, In their discussion of the outlook for residential construction was thought spending in key sectors of the economy, likely to drift lower over time. members commented that consumer The outlook for inventory investment, expenditures were likely to pick up after as is typically the case, was very diffitheir summer lull, though probably to a cult to assess. The moderation in the pace appreciably below that in the first expansion of final demand in recent half of this year. Favorable factors in the months, together with still relatively outlook for consumer spending included robust growth in employment and prostrong gains in employment and income, duction, suggested that inventory investthe wealth effect stemming from the rise ment had picked up since the second that had occurred in the value of finan- quarter. The strength in inventories in cial assets, and generally buoyant con- July tended to confirm that assessment. sumer sentiment. The improvement in However, assuming moderate economic the consumer sector would tend to be growth in line with current forecasts, restrained, however, by the increase in there was no reason to anticipate subconsumer debt burdens and the probable stantial further strengthening in invensatisfaction of much of the pent-up tory investment over coming quarters. demands for consumer durables during Indeed, the recent rebuilding of inventhe current expansion. Business fixed tories after little or no growth earlier in investment likewise was expected to the year made rapid expansion less provide considerable further stimulus likely going forward. The members to the economy. Expenditures for busi- acknowledged, nonetheless, that invenness equipment, notably for office and tory developments needed to be monicomputing equipment, were expected to tored with care, including such indirect expand substantially further, and recent signs as rising pressures on the prices weakness in nonresidential construction of intermediate goods and tightening might well prove to be temporary, judg- delivery schedules that might provide ing in part from anecdotal reports of incentives for a rapid buildup. With considerable strength in commercial capacity utilization already at high levreal estate markets in many areas. On els, relatively rapid growth in inventory Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 165 investment, if it were superimposed on Productivity had increased fairly sharply stronger-than-projected expansion in in manufacturing, and the slowdown in final demand, could portend serious overall productivity since 1973 had been pressures on resources and inflationary concentrated in the service areas of the consequences for the economy. economy. Indeed, measured productiv- In their comments about the outlook ity in noncorporate businesses—largely for inflation, members observed that the services—had displayed a negative recent behavior of price inflation was a trend for many years. This result was welcome though highly unusual devel- implausible and suggested considerable opment, given current pressures on error in estimating output and prices for resources. The statistical and anecdotal many services. Consequently, it was information provided evidence of in- likely that actual productivity growth creasingly tight labor markets that under was higher than the current measures similar conditions historically had been indicated. By the same token, the rate of associated with considerable upward price inflation was lower than had been pressure on nominal labor compensation reported, consistent with the findings of and, in turn, on prices. While wages, a number of studies of distortions in and probably total labor compensation, published price data. were rising more rapidly this year, the The implications for the inflation outacceleration in the latter still appeared to look were not clear-cut. The key quesbe held down by worker insecurity and tion was how long the favorable price relatively subdued increases in the cost behavior would persist. Advances in of benefits. Moreover, for a variety of productivity had boosted profit margins, reasons rising labor costs were not cur- and high margins were helpful in that rently being passed through to prices, they could absorb some portion of any which by several key measures adjusted cost increases for a time. However, for their volatile food and energy com- many business contacts indicated that ponents exhibited a steady or even a they would resist squeezes in profit mardeclining trend. Explanations tended to gins, and continued acceleration in costs concentrate on the intense competition would eventually feed through to greater in many markets, which prevented firms price inflation whatever the rate of profrom raising prices to absorb cost ductivity growth. The behavior of costs increases. and the ability of businesses to pass Competitive pressures also were along any greater increases over time compelling firms to curb cost increases would depend on the extent to which the through improvements in their produc- expansion would slow and how much tivity performance. Widespread reports associated pressure there would be in suggested major gains in productivity in labor and product markets. In this connumerous industries, induced in recent nection, some members observed that years by business restructuring and even if the expansion were to slow to related activities and by large capital a sustained pace around the rate of investments that had introduced increas- increase of the economy's potential, ingly productive equipment. Although price inflation could well trend at least currently available measures of pro- modestly higher at current levels of ductivity for the economy as a whole resource utilization. Others did not disshowed only weak gains, sectoral dis- agree that the odds might be tilted maraggregation of the data gave reasons to ginally in that direction, but they conquestion the productivity measurements. tinued to believe that a great deal of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 83rd Annual Report, 1996 uncertainty surrounded the outlook for one for them, and in light of the uncerresource use and, in turn, the relation- tainties that were involved, they were ship between a given degree of pressure willing to join the majority and wait for on resources and overall price changes. further evidence bearing on the outlook In sum, assuming economic growth gen- for inflation. With regard to possible erally in line with their forecasts, the intermeeting adjustments to policy, the critical question for some was when and members agreed that retaining an asymhow much inflation would rise; many metric directive that was biased toward others were not persuaded of the inevita- restraint would be consistent with their bility of such an outcome. assessments of the inflation risks in the In the Committee's discussion of pol- economy. Accordingly, information sugicy for the intermeeting period ahead, gesting that the odds on higher inflation nearly all the members indicated that had risen should be met with a prompt they could support an unchanged policy policy firming. stance and the retention of a bias toward A differing view focused on the restraint in the directive. The members desirability of a prompt move toward generally agreed that while the risks restraint to curb what were seen as were greater that price inflation would growing inflationary pressures in the rise than that it would fall, higher infla- economy. Tight labor markets were tion was not a foregone conclusion and likely to exert continuing upward presmost believed that the uncertainties in sure on labor costs, barring unexpected the outlook made it prudent to hold weakness in the economy, and at some monetary policy on a steady course and point those costs would begin to be await further developments. The expan- passed through to prices. In the circumsion appeared to be slowing substan- stances, it was important for policy to be tially and broad measures of prices, forward-looking and to move promptly adjusted for fluctuations in their food to head off intensifying inflationary and energy components, still indicated a pressures. Potentially, waiting could steady or even slightly declining infla- require more disruptive policy tightention trend. In these circumstances, the ing actions later and could risk the Committee could wait for more informa- credibility of the System's anti-inflation tion on the momentum of the expansion policy. and the degree of pressure on resources At the conclusion of the Committee's and its implications for inflation. A discussion, all but one of the members delay in adjusting monetary policy was indicated that they could accept a direcfacilitated by its current positioning, tive that called for maintaining the existwhich did not appear to be far from a ing degree of pressure on reserve posidesirable longer-term stance because tions and that included a bias toward the any pickup in inflation was likely to be possible firming of reserve conditions relatively small and gradual, and was during the intermeeting period. Accordfurther supported by the possibility of ingly, in the context of the Committee's an excessive reaction in financial mar- long-run objectives for price stability kets to a change in the direction of pol- and sustainable economic growth, and icy. A few members indicated that they giving careful consideration to ecocould vote for some slight tightening nomic, financial, and monetary develin policy, although they did not feel any opments, the Committee decided that urgency about such a move. They somewhat greater reserve restraint observed that the decision was a close would be acceptable and slightly lesser Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 167 reserve restraint might be acceptable The Federal Open Market Committee during the intermeeting period. The seeks monetary and financial conditions that will foster price stability and promote susreserve conditions contemplated at this tainable growth in output. In furtherance of meeting were expected to be consistent these objectives, the Committee at its meetwith moderate growth of M2 and M3 ing in July reaffirmed the ranges it had estabover coming months. lished in January for growth of M2 and M3 The Federal Reserve Bank of New of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter York was authorized and directed, until of 1995 to the fourth quarter of 1996. The instructed otherwise by the Committee, monitoring range for growth of total domesto execute transactions in the System tic nonfinancial debt was maintained at 3 to Account in accordance with the follow- 7 percent for the year. For 1997 the Commiting domestic policy directive: tee agreed on a tentative basis to set the same ranges as in 1996 for growth of the monetary The information reviewed at this meeting aggregages and debt, measured from the suggests that growth in economic activity fourth quarter of 1996 to the fourth quarter has moderated appreciably from an elevated of 1997. The behavior of the monetary second-quarter pace. Private nonfarm pay- aggregates will continue to be evaluated roll employment grew less rapidly over July in the light of progress toward price level and August than in the second quarter, while stability, movements in their velocities, and the civilian unemployment rate declined to developments in the economy and financial 5.1 percent in August. Industrial production markets. increased somewhat less rapidly on average In the implementation of policy for the in July and August than in the prior few immediate future, the Committee seeks to months. Total retail sales rose slightly over maintain the existing degree of pressure on July and August after having declined sub- reserve positions. In the context of the Comstantially in June. Housing starts in July and mittee's long-run objectives for price stabil- August were unchanged on average from ity and sustainable economic growth, and their second-quarter level. Demand for busi- giving careful consideration to economic, ness equipment has remained strong, while financial, and monetary developments, somespending on nonresidential structures has what greater reserve restraint would or changed little on balance in recent months. slightly lesser reserve restraint might be The nominal deficit on U.S. trade in goods acceptable in the intermeeting period. The and services widened substantially in July contemplated reserve conditions are exfrom its average in the second quarter. pected to be consistent with moderate growth Increases in labor compensation have been in M2 and M3 over coming months. somewhat larger this year, but consumer price inflation, excluding its food and energy Votes for this action: Messrs. Greenspan, components, has edged lower. McDonough, Boehne, Jordan, Kelley, Most market interest rates have risen Lindsey, McTeer, Meyer, Mses. Phillips, somewhat on balance since the Committee Rivlin, and Yellen. Vote against this action: meeting on August 20, 1996. In foreign Mr. Stern. exchange markets, the trade-weighted value of the dollar in terms of the other G-10 Mr. Stern dissented because he becurrencies has appreciated slightly over the lieved that a modestly more restrictive intermeeting period. policy was appropriate. In his view, Growth of M2 and M3 picked up in August, but they continued to expand at rates historical precedents suggested that probelow those in the first half of the year. For longed periods of taut labor markets the year through August, both aggregates are were eventually associated with rising estimated to have grown at rates in the upper inflation. Given prevailing pressures portions of their respective ranges for the on resources, especially labor, Mr. Stern year. Expansion in total domestic nonfinancial debt has been moderate on balance over was concerned about the distinct risk of recent months and has remained in the an acceleration of inflation. Should this middle portion of its range. acceleration occur, he believed it would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 83rd Annual Report, 1996 prove disruptive to the favorable perfor- March 31, 1992, the Committee decided mance of the economy, and he preferred that the enhanced liquidity of the SOMA to begin to address this risk promptly. portfolio that had been achieved should be maintained but that net additions to System holdings should continue to Amendment to Authorization be spread across all maturity areas. In for Foreign Currency Operations the course of their discussion at this At this meeting the Committee consid- meeting, the members agreed that the ered a proposal to replace the existing primary objective in the management twelve-month maturity limit on the of the SOMA portfolio was to ensure a investment of foreign currency balances high degree of liquidity so that prompt with an eighteen-month average dura- and effective adjustments could be made tion limit. The proposal was designed to without unduly affecting the market for allow the Manager a wider choice of Treasury securities. maturities and hence somewhat greater It was agreed that the next meeting operational flexibility in the implemen- of the Committee would be held on tation of the System's primary portfolio Wednesday, November 13, 1996. objectives of liquidity with respect to The meeting adjourned at 1:40 p.m. investments in foreign government securities and limits on overall interest rate Donald L. Kohn and credit risks. At the conclusion of Secretary their review, the Committee members voted unanimously to amend section 5 of the Authorization for Foreign Cur- Meeting Held on rency Operations to read as follows: November 13, 1996 5. Foreign currency holdings shall be A meeting of the Federal Open Market invested to ensure that adequate liquidity is Committee was held in the offices of the maintained to meet anticipated needs and so Board of Governors of the Federal that each currency portfolio shall generally Reserve System in Washington, D.C., have an average duration of no more than on Wednesday, November 13, 1996, at 18 months (calculated as Macaulay dura- 9:00 a.m. tion). When appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. Govern- Present: ment securities may be purchased from for- Mr. Greenspan, Chairman eign central banks under agreements for Mr. McDonough, Vice Chairman repurchase of such securities within 30 cal- Mr. Boehne endar days. Mr. Jordan Mr. Kelley Mr. Lindsey Liquidity Management and the Mr. McTeer Maturity Structure of the SOMA Mr. Meyer Portfolio Ms. Phillips Ms. Rivlin The Committee also reviewed, on a pre- Mr. Stern liminary basis, its current practices with Ms. Yellen regard to the maturity structure of the Messrs. Broaddus, Guynn, Moskow, System Open Market Account (SOMA) and Parry, Alternate Members portfolio of Treasury obligations. In of the Federal Open Market its last such review, at its meeting on Committee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 169 Messrs. Hoenig, Melzer, and The Manager of the System Open Ms. Minehan, Presidents of the Market Account reported on recent Federal Reserve Banks of developments in foreign exchange mar- Kansas City, St. Louis, and Boston kets. There were no open market transrespectively actions in foreign currencies for System Mr. Bernard, Deputy Secretary account during the period since the Mr. Coyne, Assistant Secretary meeting on September 24, 1996, and Mr. Gillum, Assistant Secretary thus no vote was required by the Mr. Mattingly, General Counsel Committee. Mr. Prell, Economist The Manager also reported on devel- Mr. Truman, Economist opments in domestic financial markets Messrs. Lang, Lindsey, Mishkin, and on System open market transactions Promisel, Rolnick, Siegman, in government securities and federal Simpson, Sniderman, and agency obligations during the period Stockton, Associate Economists September 24, 1996, through November 12, 1996. By unanimous vote, the Mr. Fisher, Manager, System Open Market Account Committee ratified these transactions. By unanimous vote, the Committee Mr. Ettin, Deputy Director, Division of authorized the renewal for an additional Research and Statistics, Board of one-year period of the System's recipro- Governors cal currency ("swap") arrangements Messrs. Madigan and Slifman, Associate Directors, Divisions of with foreign central banks and the Bank Monetary Affairs and Research for International Settlements. The and Statistics respectively, amounts and maturity dates of the Board of Governors arrangements approved for renewal are Mr. Reinhart, Assistant Director, shown in the table below. Division of Monetary Affairs, Board of Governors The Committee then turned to a dis- Ms. Low, Open Market Secretariat cussion of the economic and financial Assistant, Division of Monetary outlook and the implementation of Affairs, Board of Governors monetary policy over the intermeeting Mr. Moore, First Vice President, period ahead. A summary of the eco- Federal Reserve Bank of San Francisco nomic and financial information avail- Ms. Browne, Messrs. Davis, Dewald, able at the time of the meeting and of Eisenbeis, Goodfriend, and the Committee's discussion is provided Hunter, Senior Vice Presidents, below, followed by the domestic policy Federal Reserve Banks of Boston, directive that was approved by the Com- Kansas City, St. Louis, Atlanta, Richmond, and Chicago mittee and issued to the Federal Reserve respectively Bank of New York. Messrs. Cox and Judd, Vice Presidents, The information reviewed at this Federal Reserve Banks of Dallas meeting suggested that the growth of and San Francisco respectively economic activity slowed substantially Ms. Perelmuter, Assistant Vice in the third quarter, and the limited President, Federal Reserve Bank of New York information available for the period since then indicated continued moder- By unanimous vote, the minutes of ate expansion. A marked softening in the meeting of the Federal Open Market the growth of consumer expenditures Committee held on September 24, 1996, accounted for much of the slowing in were approved. the third quarter, but slight weakening Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 83rd Annual Report, 1996 roll growth had moderated on balance Amount of since midyear but nevertheless had arrangeremained substantial. In October, job ment Term Maturity Foreign bank (millions (months) date gains were large in service industries; of dollars construction employment registered equiva- another moderate gain; and manufaclent) turing payrolls edged up after a sizable Austrian National September loss. The civilian unemploy- Bank 250 12 12/04/96 ment rate in October was unchanged at Bank of England 3,000 12/04/96 Bank of Japan 5,000 12/04/96 5.2 percent. Bank of Norway 250 12/04/96 Bank of Sweden 300 12/04/96 Industrial production appeared to Swiss National Bank . 4,000 12/04/96 have declined appreciably in October Bank for International Settlements: after having grown briskly on balance Swiss francs 600 12/04/96 over earlier months of the year. Much of Other authorized European the slackening in October resulted from currencies 1,250 12/04/96 work stoppages in the motor vehicles Bank of Mexico 3,000 12/13/96 Bank of Canada 2,000 12/15/96 industry, but the output of other indus- National Bank of Belgium 1,000 12/18/96 tries also apparently decreased slightly National Bank of on balance. The drop in production was Denmark 250 12/28/96 Bank of France 2,000 12/28/96 accompanied by a slight decline in German Federal capacity utilization in manufacturing. Bank 6,000 12/28/96 Bank of Italy 3,000 12/28/96 Total retail sales rose appreciably in Netherlands Bank ... 500 1 12/28/96 September after having changed little on net over July and August; for the in housing demand, net exports, and third quarter as a whole, total retail sales federal purchases of goods and services edged higher after having expanded also exerted retarding effects. On the briskly in the first half of the year. other hand, a sizable increase in inven- September sales totals were boosted tory investment, greater strength in busi- by strong spending at automotive dealness demand for durable equipment, and ers, food stores, and nondurable goods an upturn in spending on nonresidential outlets. However, expenditures for furconstruction helped foster moderate niture, appliances, and other non-auto further economic growth in the third durable goods fell, and apparel sales quarter. Employment posted sizable weakened a little further. Housing starts increases over the third quarter and rose declined in September from the unususubstantially further in October, but on ally high level recorded in August, and balance the gains were somewhat below permits moved lower for a second those recorded earlier in the year. Indus- straight month. Home sales were mixed, trial production had weakened some- with sales of new homes well sustained what recently. Consumer price inflation in September while those of existing had picked up this year because of larger homes continued on a downtrend. increases in food and energy prices. Growth of business fixed investment Increases in labor compensation, though surged in the third quarter. Outlays for moderating in the third quarter, also had durable equipment picked up sharply, been somewhat larger this year. and new orders for business equipment Private nonfarm payroll employment remained on an upward trend. Sales of increased considerably in October after computers and communications equipa small rise in September; private pay- ment increased rapidly, but demand for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 111 other capital goods was up only slightly Consumer price inflation had picked during the quarter. In the transportation up on balance this year as a result of sector, expenditures on motor vehicles sizable increases in food and energy and aircraft strengthened while sales of prices. Over August and September, heavy trucks continued to drift lower. however, increases in food prices were Spending on nonresidential structures offset by a net decline in energy prices, more than reversed a second-quarter and overall consumer prices rose more decline; however, incoming data on con- moderately. For the twelve months tracts pointed to a continuation of the ended in September, the advance in conpattern of somewhat slower growth sumer prices of items other than food recorded thus far in 1996. and energy was a little smaller than it The pace of inventory investment had been over the previous twelve picked up markedly after midyear, months. At the producer level, price but inventory-sales ratios nonetheless inflation also was moderate over August remained relatively low. In manufactur- and September despite appreciable ing, inventories rose moderately in the increases in the prices of food and third quarter, more than offsetting a energy items; producer prices of items small rundown in stocks in the previous other than food and energy rose conquarter; stock-shipments ratios for most siderably less over the twelve months industries remained near the low end of ended in September than they had over their recent ranges. In the wholesale sec- the previous twelve months. Growth in tor, inventories declined sharply in Sep- the employment cost index for private tember after having edged down in the industry workers slowed considerably in previous two months, and the aggregate the third quarter after having trended up inventory-sales ratio for the sector fell over the first two quarters of the year; to the low end of its range over recent however, this measure of labor compenyears. At the retail level, substantial sation was up slightly over the twelve inventory accumulation occurred over months ended in September compared the July-August period (latest data). with the previous twelve months. Although stock-sales ratios rose Average hourly earnings of production slightly, inventories remained relatively and nonsupervisory workers were well aligned with sales. unchanged in October, but the twelve- The nominal deficit on U.S. trade in month rise in this index through October goods and services narrowed somewhat was a bit larger than the increase over in August from a high rate in July; how- the previous twelve months. ever, for the two months combined, At its meeting on September 24, the deficit was considerably wider than 1996, the Committee adopted a directive its average rate for the second quarter. that called for maintaining the existing Exports declined appreciably over the degree of pressure on reserve positions July-August period, with most of the but that included a bias toward the decrease occurring in nonmonetary gold possible firming of reserve conditions and aircraft. Imports rose only margin- during the intermeeting period. The ally on balance over the two months. directive stated that in the context of the The limited available information sug- Committee's long-run objectives for gested that, on average, economic activ- price stability and sustainable economic ity in the major foreign industrial coun- growth, and giving careful consideratries expanded moderately in the third tion to economic, financial, and monequarter. tary developments, somewhat greater Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 83rd Annual Report, 1996 reserve restraint would be acceptable of the recent elections in that country. and slightly lesser reserve restraint The dollar declined against the pound might be acceptable during the inter- sterling in response to the release of meeting period. The reserve conditions favorable data on the U.K. economy as associated with this directive were well as an unexpected increase in the expected to be consistent with moderate Bank of England's minimum lending growth of M2 and M3 over coming rate. months. M2 grew at a slower pace in Septem- With incoming information continu- ber and October than it had over earlier ing to suggest moderate economic months of the year; the weaker expangrowth and subdued price inflation, sion resulted from a continuing rapid open market operations during the inter- runoff in its liquid deposit components. meeting period were directed toward Nonetheless, M2 was estimated to have maintaining the existing degree of pres- grown for the year through October at a sure on reserve positions, and the fed- rate in the upper half of the Committee's eral funds rate generally remained close annual range. By contrast, M3 expanded to the level expected with an unchanged at a substantially faster rate in Septempolicy stance. Market participants had ber and October than it had earlier in the anticipated some tightening of monetary year, reflecting a surge in its large time policy at the September 24 meeting, and deposit and other managed liability the announcement of an unchanged components to meet business demand policy led to an immediate decline in for bank loans. For the year through interest rates, with the larger decreases October, M3 was estimated to have occurring at the shorter end of the yield grown at a rate around the top of its curve. Interest rates, especially those annual range. Total domestic nonfinanat intermediate and longer maturities, cial debt had expanded moderately on dropped further over the remainder of balance over recent months and had the period in response to information remained in the middle portion of its indicating that price and labor cost pres- range. sures were lower than market partici- The staff forecast prepared for this pants had expected. Equity markets meeting suggested that the expansion responded to the declines in interest would continue at a rate close to, or rates as well as to favorable earnings perhaps a little above, the economy's reports, and most major indexes reached estimated growth potential. Consumer record highs. spending was projected to rebound in In foreign exchange markets, the the current quarter and subsequently to trade-weighted value of the dollar in expand at a moderate pace in line with terms of the other G-10 currencies the projected increase in disposable depreciated slightly on balance over the income; the favorable effect on houseintermeeting period. Interest rates in the hold wealth of the rise that had occurred foreign industrial countries fell some- in stock prices and the ample availwhat less on average than did U.S. ability of credit for most borrowers interest rates. The dollar changed little were expected to balance continuing against the German mark and most other consumer concerns about the adequacy major continental European currencies, of their savings and the restraining effect but it rose against the yen as prospects of high household debt burdens. Homefor a significant supplemental budget building was forecast to decline slightly package in Japan waned in the aftermath further in response to the previous Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 173 backup in residential mortgage rates but retrenchment in inventory accumulation. to stabilize at a relatively high level in With respect to the outlook for inflation, the context of continued income growth members emphasized that despite wideand a generally favorable cash flow spread indications of tight labor maraffordability of home ownership. Busi- kets, the increase in wages had been ness spending on equipment and struc- muted and somewhat less than anticitures was projected to grow less rapidly pated, and there was no broad evidence in light of the anticipated moderate of rising price inflation. Indeed, many growth of sales and profits. On balance, major measures of inflation had exhibthe external sector was expected to ited a slight downtrend since 1993. exert a small restraining influence on Looking ahead, views differed to some economic activity over the projection extent regarding the most likely course period. A slight degree of fiscal restraint for inflation. Several members indicated was anticipated over the forecast hori- that, while recent developments were zon. Continued pressure on resources, encouraging, they continued to see the especially in labor markets, pointed to risks as tilted toward some rise, even a likely underlying tendency toward assuming that the expansion settled higher inflation over the projection into a pattern of growth near the econoperiod; however, it was expected that my 's potential as they anticipated and improved supply conditions in food and resource utilization remained near curenergy markets, as well as planned tech- rent levels; other members felt that the nical changes, would damp increases in risks surrounding the forecasts for both the consumer price index relative to the economic growth and price inflation had elevated 1996 rate. become more evenly balanced, but more In the Committee's discussion, mem- evidence was needed before a firm judgbers commented that most recent devel- ment could be reached. opments bearing on the outlook for eco- In their review of developments in nomic growth and inflation had been key sectors of the economy, members favorable. The information on economic said that they anticipated a pickup in activity since the September meeting consumer spending from its much had confirmed earlier indications of reduced rate of growth in the third quarappreciable slowing in the expansion to ter. While the factors relating to the a sustainable pace close to the econo- prospects for consumer expenditures did my's potential. The outlook remained not all point toward greater strength, subject, as usual, to considerable members tended to focus on those favoruncertainty, but many of the members ing an upturn. These included persisting observed that underlying trends in key growth in employment and incomes sectors of the economy along with gen- and clearly upbeat consumer sentiment erally supportive financial conditions as evidenced by recent surveys and seemed consistent with further moderate anecdotal reports. Financial factors also economic expansion. In this regard, seemed likely on balance to accommoseveral focused on what they saw as the date continuing growth in consumer promising prospects for a rebound in spending, in particular the marked the growth of consumer expenditures increases that had occurred in the value following weak expansion in the third of stock holdings and a still-ample availquarter; the pickup would help sustain ability of credit to most households. moderate economic growth over the Supporting evidence included anecdotal nearer term despite some anticipated reports from retailers in a number of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 83rd Annual Report, 1996 areas who were experiencing sizable building activity was slowing somewhat, gains in sales and seemed optimistic apparently in lagged response to earlier about the outlook for the upcoming holi- increases in mortgage interest rates. day season. Among the developments However, in the context of the partial that would tend to limit growth in con- reversal recently of the previous sumer spending, members emphasized increases in mortgage rates and susthat the level of consumer indebtedness tained growth in employment and had strained the liquidity of many incomes, the housing sector was viewed households. The growth of consumer as likely to exert only a minor constraint credit was now exhibiting a moderating on overall economic activity over the trend, possibly pointing to restrained forecast horizon. Another somewhat spending by many households because negative factor in the outlook for ecoof already heavy debt service burdens nomic activity was the prospect of some and generally tightening credit standards widening in the nation's trade deficit for consumer loans. Other negative fac- over the projection period. tors cited in the outlook for consumer Fiscal policy currently remained on a expenditures were the possibility of a mildly restrictive course, but the range correction in the stock market and the of potential developments was espeprobable satisfaction of much of the cially wide, injecting an element of earlier pent-up demand for consumer considerable uncertainty in the ecodurables. In balancing these conflicting nomic outlook. Legislation affecting the influences, the members generally con- federal budget could have marked benecluded that a pickup in the growth of ficial or adverse effects not only directly consumer spending to a moderate pace on spending and incomes but also on was a likely prospect for this critical business and consumer confidence and sector of the economy. financial markets. Business fixed investment was The growth of nonfarm business expected to provide further but dimin- inventories in the third quarter had ished impetus to the expansion. This exceeded earlier expectations, but memview took account of the continued bers commented that the sizable rise availability of debt and equity financing appeared to have been largely voluntary on favorable terms but also of expecta- and the overall level of inventories was tions of a more moderate growth trend still historically low in relation to sales. in sales and the substantial buildup that Against this background, inventory had already occurred in stocks of equip- accumulation was likely to continue but ment and structures. With regard to the at a slower pace in the current quarter. latter, some overbuilding of commercial Beyond the near term, inventory investand other structures characterized condi- ment was expected to become a more tions in a number of areas. Nonetheless, neutral factor in the performance of the members reported considerable nonresi- economy, given the absence of incendential building activity in several parts tives to build stocks relative to sales in a of the country, and nationwide such period of moderate growth in projected activity was expected to help sustain demand. The members recognized, howmodest growth in overall nonresidential ever, that the prospective behavior of construction in coming quarters. inventories remained subject to substan- Recent data, supported by anecdotal tial uncertainties. reports from several though not all parts In their discussion of the outlook for of the country, suggested that residential inflation, members again focused on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 175 developments in labor markets and the could not predict when a more normal extent to which rising cost pressures in relationship would re-emerge. A related those markets might be passed through concern was whether the tightness in to higher prices. The statistical and labor markets would ease sufficiently anecdotal information generally contin- and quickly enough to prevent inflation ued to point to tight labor markets and to pressures from escalating significantly. a somewhat faster rise in labor compen- Some members mentioned a number of sation costs this year. Even so, the favorable factors in the outlook for inflaincreases in such costs were still falling tion that tended to attenuate such conshort of those that would have been cerns, such as reduced pressures on food anticipated on the basis of historical prices as a result of better-than-expected experience under similar labor market harvests and improved supply condiconditions. Moreover, the advance in the tions in markets for energy. Relatively overall employment cost index in the restrained monetary growth in recent third quarter, while perhaps understated months also was cited as a development to some extent, was appreciably below consistent with subdued inflationary expectations. At the same time, business pressures. Moreover, the view was firms generally were not raising their advanced that recent developments in prices sufficiently to compensate for bond markets could be read as suggestfaster increases in their labor costs, to ing some decrease in inflationary expecthe extent that the latter were occurring, tations. On balance, while the members evidently because of the persistence expressed varying degrees of concern of intense competition in most markets. that tight labor markets and attendant Indeed, with the notable exception of increases in wages might at some point the overall consumer price index, the lead to rising price inflation, they agreed rate of inflation as measured by various that there was little or no evidence of broad price indexes had tended to ease such a development at this point and the marginally or at worst to stabilize over outlook was far from certain. the past two years. Prices of farm com- In the Committee's discussion of polmodities and industrial materials had icy for the intermeeting period ahead, all declined considerably recently. the members indicated that they could Despite the recent encouraging re- support an unchanged policy stance and ports on labor compensation and prices, the retention of a bias toward restraint in the members agreed that the risks of the directive. The slowing of the expanrising inflation could not be dismissed, sion to a sustainable pace near the and several continued to view slightly economy's growth potential and the higher inflation as a likely if not inevi- recent surprisingly favorable inflationtable prospect. Much would depend, of ary developments suggested lower risks course, on the strength of the economic of strengthening price pressures and proexpansion and the associated degree of vided the Committee with a desirable pressure on resources, notably in labor opportunity to pause and observe further markets which appeared to have com- developments bearing on the course of paratively little slack in relation to other economic activity and inflation. Indeed, producer resources. It was suggested to the extent that inflation expectations in this regard that restrained increases had declined recently, short-term interin labor compensation in comparison est rates, which had changed little in with historical experience probably were nominal terms, had edged higher in real a transitory phenomenon, though one terms, implying slightly greater mone- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 83rd Annual Report, 1996 tary restraint and reducing the odds that The Federal Reserve Bank of New inflation would pick up. York was authorized and directed, until With regard to possible adjustments instructed otherwise by the Committee, to policy during the intermeeting period, to execute transactions in the System all the members indicated that they Account in accordance with the followcould support a proposal to retain the ing domestic policy directive: current bias toward restraint. Several viewed such a bias as desirable because The information reviewed at this meeting suggests that growth in economic activity they continued to believe that the risks slowed substantially in the third quarter, remained tilted, at least to some extent, and the limited available information inditoward rising inflation over time. In the cates continued moderate expansion more circumstances, an asymmetric directive recently. Private nonfarm payroll employwould best reflect their views even if, as ment increased appreciably on balance over September and October. The civilian unemseemed likely, intermeeting developployment rate remained at 5.2 percent in ments did not prompt a policy tighten- October. Industrial production, which contining adjustment. Other members com- ued to rise in the third quarter, appears to mented that a shift to a symmetric have declined in October owing in important directive might be viewed as more con- measure to work stoppages in the motor vehicles industry. Total retail sales turned up sistent with the apparently diminished in September after slumping earlier in the inflationary pressures. They agreed, summer. Housing starts fell in September however, that such a shift would be pre- from the exceptionally high level registered mature in the currently uncertain envi- in August. Outlays for business equipment ronment and might signal, inaccurately, were strong in the third quarter and new orders continued to trend upward; business that the Federal Reserve was less conspending on nonresidential structures posted cerned about the possibility of a a moda moderate advance. Inventory investment est upward trajectory in price inflation. was substantial in the third quarter, but At the conclusion of the Committee's inventory-sales ratios remained relatively low. The nominal deficit on U.S. trade in discussion, all the members indicated goods and services widened considerably in that they supported a directive that July-August from its average rate in the called for maintaining the existing second quarter. Increases in labor compensadegree of pressure on reserve positions tion, though moderating in the third quarter, and retaining a bias toward the possible have trended up this year; consumer price firming of reserve conditions during the inflation also has picked up this year, owing to larger increases in food and energy prices. intermeeting period. Accordingly, in the Market interest rates have moved lower context of the Committee's long-run since the Committee meeting on Septemobjectives for price stability and sustain- ber 24, 1996, with the largest declines occurable economic growth, and giving care- ring in intermediate- and long-term maturiful consideration to economic, financial, ties. In foreign exchange markets, the tradeand monetary developments, the Com- weighted value of the dollar in terms of the other G-10 currencies has depreciated mittee decided that somewhat greater slightly over the intermeeting period. reserve restraint would be acceptable Growth of M2 in September and October and slightly lesser reserve restraint remained below its pace in the first half of might be acceptable during the inter- the year, while expansion of M3 was submeeting period. The reserve conditions stantially higher over those two months. For contemplated at this meeting were the year through October, M2 is estimated to have grown at a rate in the upper half of the expected to be consistent with moderate Committee's annual range, and M3 at a rate growth of M2 and relatively strong around the top of its range. Expansion in expansion in M3 over coming months. total domestic nonfinancial debt has been Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 111 moderate on balance over recent months and Meeting Held on has remained in the middle portion of its December 17, 1996 range. The Federal Open Market Committee A meeting of the Federal Open Market seeks monetary and financial conditions that Committee was held in the offices of the will foster price stability and promote sus- Board of Governors of the Federal tainable growth in output. In furtherance of these objectives, the Committee at its meet- Reserve System in Washington, D.C., ing in July reaffirmed the ranges it had estab- on Tuesday, December 17, 1996, at lished in January for growth of M2 and M3 9:00 a.m. of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of Present: 1995 to the fourth quarter of 1996. The Mr. Greenspan, Chairman monitoring range for growth of total domes- Mr. McDonough, Vice Chairman tic nonfinancial debt was maintained at 3 to Mr. Boehne 7 percent for the year. For 1997 the Commit- Mr. Jordan tee agreed on a tentative basis to set the same Mr. Kelley ranges as in 1996 for growth of the monetary Mr. Lindsey aggregages and debt, measured from the Mr. McTeer fourth quarter of 1996 to the fourth quarter Mr. Meyer of 1997. The behavior of the monetary Ms. Phillips aggregates will continue to be evaluated in Ms. Rivlin the light of progress toward price level Mr. Stern stability, movements in their velocities, and developments in the economy and financial Ms. Yellen markets. Messrs. Broaddus, Guynn, Moskow, and Parry, Alternate Members In the implementation of policy for the of the Federal Open Market immediate future, the Committee seeks to Committee maintain the existing degree of pressure on reserve positions. In the context of the Committee's long-run objectives for price stabil- Messrs. Hoenig, Melzer, and ity and sustainable economic growth, and Ms. Minehan, Presidents of the giving careful consideration to economic, Federal Reserve Banks of financial, and monetary developments, some- Kansas City, St. Louis, and Boston respectively what greater reserve restraint would or slightly lesser reserve restraint might be acceptable in the intermeeting period. The Mr. Kohn, Secretary and Economist contemplated reserve conditions are ex- Mr. Bernard, Deputy Secretary pected to be consistent with moderate growth Mr. Coyne, Assistant Secretary in M2 and relatively strong expansion in M3 Mr. Gillum, Assistant Secretary over coming months. Mr. Mattingly, General Counsel Mr. Baxter, Deputy General Counsel Mr. Prell, Economist Votes for this action: Messrs. Greenspan, Mr. Truman, Economist McDonough, Boehne, Jordan, Kelley, Lindsey, McTeer, Meyer, Mses. Phillips, Messrs. Lang, Lindsey, Mishkin, Rivlin, Mr. Stern, and Ms. Yellen. Votes Promisel, Rolnick, Rosenblum, against this action: None. Siegman, Simpson, Sniderman, and Stockton, Associate It was agreed that the next meeting of Economists the Committee would be held on Tuesday, December 17, 1996. Mr. Fisher, Manager, System Open The meeting adjourned at 12:25 p.m. Market Account Mr. Ettin, Deputy Director, Division of Donald L. Kohn Research and Statistics, Board of Secretary Governors Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 83rd Annual Report, 1996 Mr. Slifman, Associate Director, 1997. The changes included advancing Division of Research and the normal time for initiating daily Statistics, Board of Governors operations by one hour to between Mr. Reinhart, Assistant Director, 10:30 a.m. and 10:45 a.m. Moving to Division of Monetary Affairs, Board of Governors the earlier time would place Desk opera- Ms. Low, Open Market Secretariat tions closer to the period during the day Assistant, Division of Monetary when the financing market was most Affairs, Board of Governors active and thus in a position to accom- Mr. Barron, First Vice President, modate a larger volume of System trans- Federal Reserve Bank of Atlanta Messrs. Beebe, Davis, Eisenbeis, and actions when necessary. As at present, Goodfriend, Senior Vice the Manager might choose to undertake Presidents, Federal Reserve Banks Desk operations at other times during of San Francisco, Kansas City, the day when special circumstances dic- Atlanta, and Richmond tate. The Manager also indicated that respectively the normal time for domestic operations Messrs. Gavin, Kos, and Rosengren, Vice Presidents, Federal Reserve might be moved to an even earlier hour Banks of St. Louis, New York, after expedited procedures were develand Boston respectively oped for assembling the necessary statis- Mr. Evans, Assistant Vice President, tical information on a timely basis for Federal Reserve Bank of Chicago such operations. In the interest of making information about System opera- By unanimous vote, the minutes of tions available more promptly to market the meeting of the Federal Open Market participants and the broader public, the Committee held on November 13, 1996, Desk also would begin at the start of were approved. 1997 to announce the par amount of The Manager of the System Open its market transactions shortly after the Market Account reported on develop- completion of the operations. With rements in foreign exchange markets since spect to purchases of Treasury coupon the meeting on November 13, 1996. securities for System account, the Desk There were no transactions in foreign had adopted about one year ago the currencies for System account during practice of making such purchases in this period, and thus no vote was separate maturity tranches but might at required of the Committee. its option in the future spread such pur- The Manager also reported on devel- chases over a number of weeks rather opments in domestic financial markets than over the course of several days. and on System open market transactions This more flexible timing would allow in government securities and federal the Desk to inject reserves into the bankagency obligations during the period ing system through outright operations from November 13, 1996, through as the need arose without waiting for December 16, 1996. By unanimous that need to accumulate to particularly vote, the Committee ratified these high levels. transactions. All the members who commented The Committee members discussed endorsed the changes, with several certain changes in the procedures for noting that they were appropriate conducting domestic open market opera- responses to evolving market circumtions that the Manager of the System stances. Because the new procedures did Open Market Account had proposed for not involve any alterations in the Comimplementation at the beginning of mittee's current directives, authoriza- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 179 tions, or rules, a formal vote was not ment in construction and manufacturing required. rose moderately. The civilian unemploy- The Committee then turned to a dis- ment rate increased slightly, to 5.4 percussion of the economic and financial cent, in November. outlook and the implementation of Industrial production rose sharply in monetary policy over the intermeeting November after a small October decline. period ahead. A summary of the eco- A rebound in motor vehicle assemblies nomic and financial information avail- from the disruptive effects of work able at the time of the meeting and of stoppages accounted for much of the the Committee's discussion is provided increase in production in November, but below, followed by the domestic policy output from utilities also surged in directive that was approved by the Com- response to unusually cool weather. The mittee and issued to the Federal Reserve production of nondurable consumer Bank of New York. goods and business equipment other The information reviewed at this than motor vehicles also was up signifimeeting suggested that economic activ- cantly in November, while the manufacity had continued to expand at a mod- ture of consumer durables and defense erate pace in recent months. Consumer and space equipment decreased further. spending had rebounded from its sum- Reflecting the strong advance in promer lull, but housing demand was some- duction, the utilization of total industrial what weaker on balance and the growth capacity picked up considerably in of business spending on durable equip- November. ment had slowed from a very rapid pace. Consumer spending increased appre- Although inventory investment had ciably on balance in recent months after picked up, stocks in most sectors had a lackluster performance in the summer. remained well aligned with sales. Both Total retail sales fell in November but industrial production and employment nonetheless were considerably above had recorded sizable advances. Increases their average in the third quarter. The in labor compensation had trended up November decline reflected weakness in this year, and consumer price inflation auto sales; retail spending on other also had picked up, but the faster rise in items, notably nonauto durable goods, overall consumer prices owed entirely rose significantly further. Spending on to larger increases in food and energy services picked up in October (latest prices. data) following a relatively weak third Private-sector demand for labor quarter. Housing starts rebounded in remained solid in November. Private November after having declined in Sepnonfarm payroll employment increased tember and October. Single-family starts appreciably further in November after in November were a little below the an October surge, and the average work- average pace of previous months in the week of private production or nonsuper- year, while multifamily starts surged to visory workers retraced more than half a level not seen since late 1990. By of its October decline. Service industries contrast, sales of both new and existing recorded another large gain in employ- homes dropped again in October (latest ment despite a sharp drop in payrolls at data). help-supply firms, and the number of Growth of business fixed investment jobs in retail trade expanded further in appeared to have slowed to a moderate November after a steep rise in October. pace in the fourth quarter after a sharp In the goods-producing sector, employ- rise in the previous quarter. Shipments Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 83rd Annual Report, 1996 of nondefense capital goods fell in Octo- exports reflected lower sales of aircraft ber, reversing a sizable September gain; and gold. Increases in imports were however, recent data on orders pointed widespread but they were largely offset to further increases in business spending by declines in imports of gold and semifor equipment, especially for commu- conductors. Economic growth picked nications equipment where shipments up in most of the major foreign indusalready were at a high level. Business trial countries in the third quarter, but investment in transportation equipment available indicators generally suggested evidently weakened, as sales of heavy some slowing of growth in the fourth trucks remained sluggish and produc- quarter. In Japan, by contrast, economic tion shortfalls held back fleet sales of activity had been sluggish in the third light vehicles. By contrast, nonresiden- quarter but appeared to have picked up tial construction continued to expand at more recently. a solid rate in October, with building Consumer price inflation in October activity particularly strong in the office, and November was lifted slightly by other commercial, institutional, and sizable advances in energy prices and, to industrial categories. a lesser degree, increases in food prices; Business inventory investment picked however, consumer prices for items up sharply in October from the slow other than food and energy rose mod- September pace, but total stocks estly during the two months. The rise in remained at a low level in relation to core consumer prices over the twelve sales. Most of the October increase months ended in November was someoccurred at the wholesale level; inven- what smaller than it had been over the tories of farm products turned up previous twelve months, although the sharply after months of sizable draw- total index registered a bigger advance downs, and petroleum stocks were built as a result of larger increases in food up from unseasonably low levels. De- and energy prices. At the producer level, spite the October rise, the ratio of prices of finished energy goods rose wholesale inventories to shipments sharply in October and November while remained at the lower end of its range prices of finished foods advanced less over recent years. In manufacturing, rapidly. Excluding food and energy, stocks increased at a pace in line with prices of finished goods edged lower on shipments, and the aggregate inventory- balance over October and November, shipments ratio stayed at a very low and in the twelve months ended in level. Retail inventories were up moder- November, these prices rose substanately in October. The inventory-sales tially less than in the previous twelve ratio for the sector was unchanged and months. Average hourly earnings of remained in the middle of its range over production and nonsupervisory workers recent years. were up considerably in November after The nominal deficit on U.S. trade in having edged down in October. The goods and services was somewhat larger twelve-month rise in this index was in September than in August; exports somewhat larger than the advance over decreased slightly in September while the previous twelve months. imports were little changed. For the At its meeting on November 13, third quarter, the deficit widened sub- 1996, the Committee adopted a directive stantially from its rate in the second that called for maintaining the existing quarter as exports fell and imports rose degree of pressure on reserve positions moderately. Nearly all of the decline in but that included a bias toward the pos- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 181 sible firming of reserve conditions dur- terms of the other G-10 currencies rose ing the intermeeting period. The direc- slightly over the intermeeting period. tive stated that in the context of the The dollar rose even more against the Committee's long-run objectives for German mark and the French franc amid price stability and sustainable economic increased market apprehension that the growth, and giving careful consideration European Monetary Union's common to economic, financial, and monetary currency, the euro, will not be as strong developments, somewhat greater reserve a currency as the mark. The dollar also restraint would be acceptable and might have been boosted by statements slightly lesser reserve restraint might be by French and German officials that acceptable during the intermeeting suggested the dollar was undervalued period. The reserve conditions associ- against their currencies. ated with this directive were expected to Expansion of the broad monetary be consistent with moderate growth of aggregates was relatively strong in M2 and relatively strong expansion of November. Growth of M2 picked up, M3 over coming months. reflecting a sharp increase in demand Open market operations during the deposits and smaller runoffs in other intermeeting period were directed to- checkable deposits. Inflows to retail ward maintaining the existing degree of money market funds remained substanpressure on reserve positions. However, tial. Expansion of M3 moderated somethe federal funds rate tended to average what from its brisk pace in October as a little above the level expected with an growth in business demands for credit unchanged policy stance in apparent re- slowed and banks reduced their reliance sponse to scattered operating problems on large time deposits and other manand occasional unexpectedly large clear- aged liability components. For the year ing needs at banks. Other short-term through November, M2 was estimated interest rates registered small mixed to have grown at a rate in the upper half changes since the November 13 meet- of the Committee's annual range, and ing; Treasury bill rates drifted lower, M3 at a rate a little above the top of its partly because of heightened demands range. Total domestic nonfinancial debt for safety and liquidity as asset markets expanded moderately on balance over became more volatile during the period, recent months and remained in the while year-end pressures boosted rates middle portion of its range. on private instruments with maturities in The staff forecast prepared for this early 1997. At longer maturities, yields meeting suggested that the expansion drifted lower over most of the inter- would be sustained at a pace close to meeting period in response to incoming the economy's estimated growth potendata that suggested economic growth tial. Consumer spending was projected would remain moderate and inflation to increase at a rate generally in line subdued, but they rebounded late in the with the anticipated rise in disposable period in response to the release of income; the favorable effects on housefirmer economic data and growing con- hold wealth of the advance that had cerns regarding the sustainability of cur- occurred in stock prices and the ample rent domestic asset prices. Despite these availability of credit for most borrowers concerns, most major indexes of equity were expected to balance the damping prices advanced further on balance. effects of continuing consumer concerns In foreign exchange markets, the about the adequacy of their savings, the trade-weighted value of the dollar in security of their jobs, and the extent of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 83rd Annual Report, 1996 their debt burdens. Homebuilding was ment. The overall pace of the expanforecast to decline somewhat but to sion was expected to be restrained to an stabilize at a relatively high level in the extent, however, by declining federal context of continued income growth government outlays for goods and serand the generally favorable cash-flow vices and ongoing weakness in net affbrdability of home ownership. Busi- exports. ness spending on equipment and struc- Despite the prospects for moderate tures was projected to expand less rap- economic growth, members observed idly in light of some anticipated slowing that the risks on inflation still seemed to in the growth of sales and profits. Fiscal be tilted toward some rise over time. policy and the external sector were Measures of core inflation had displayed expected to continue to exert small little trend and even some decline over restraining influences on economic the past year. However, wage increases activity over the projection period. Con- had moved higher over that period, a sumer price inflation, excluding the rela- development suggesting the possibility tively volatile food and energy compo- that labor markets might be tighter than nents of the price index, was forecast could be sustained over the long term. to rise slightly over 1997 and 1998 in At some point accelerating labor comthe context of anticipated high resource pensation costs, were they to continue, use and an accompanying appreciable likely would spill over into higher inflapickup in the growth of labor compen- tion. Such an outcome remained subject sation that would be augmented by the to a great deal of uncertainty, however, legislated rise in the federal minimum in light of the relatively benign behavior wage. Somewhat larger increases would in recent years of both wages and prices have been projected in consumer price in comparison with historical experiinflation in the absence of anticipated ence at prevailing levels of resource technical measurement changes to the utilization. index. In the Committee's discussion of In the Committee's discussion of developments in major sectors of the current and prospective developments, economy bearing on the outlook for members commented that the informa- business activity, members noted that tion received during the relatively short consumer spending had picked up as interval since the previous meeting had expected after a lull during the summer not materially altered either their assess- months. Survey data and anecdotal ment that the economy was performing reports suggested that consumer confiquite favorably or their forecasts of fur- dence was currently high, and there ther growth at a pace averaging near the were widespread indications of robust economy's potential. The economy cur- retail sales during the early weeks of the rently displayed fairly solid underpin- holiday season, though holiday sales nings, with few imbalances of the kind were always difficult to read at this that historically had tended to create stage. Thus far, however, sales of motor problems. Against the background of vehicles had not strengthened to the generally supportive financial conditions extent that was anticipated after full proand a high degree of consumer and duction was restored following a work business confidence, further economic stoppage at a major manufacturer. Memgrowth was thought likely to be sus- bers cited a number of factors—the rise tained by appreciable increases in con- in consumer debt burdens, tightening sumer spending and business invest- consumer credit standards, continued Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 183 worker concerns about job security, was projected to remain moderate and, and the satisfaction of earlier pent-up barring unexpected surges or declines in demands—that were tending to inhibit final sales, was not likely to be a signifithe growth in consumer spending and cant factor affecting the course of the perhaps helped to explain why the sharp economy. increases in stock market wealth had not The recent information on residential been accompanied by stronger growth construction was mixed. Weakness in in such spending. The behavior of the late summer and early fall evidently stock market injected an additional note reflected the effects of earlier increases of uncertainty into the forecast for con- in mortgage interest rates, but some sumer spending and the economy more measures of housing activity in Novemgenerally. The rise over recent years had ber indicated unexpected strength. In been extraordinary and had brought addition, reports from around the counmarket valuations to fairly high levels try pointed to uneven conditions ranging relative to earnings and dividends. In from further strength to some emerging these circumstances, the members rec- weakness in regional housing markets. ognized the need to monitor with special On balance, the statistical and anecdotal care price movements in the stock mar- information was interpreted, by some ket and asset markets more generally members at least, as consistent with a for their implications for consumer and tendency for housing activity to staother spending. On balance, favorable bilize. In this view, a level of housing employment and income conditions construction somewhat below the peak seemed likely to foster a level of reached earlier in 1996 was likely to be consumer spending that would provide sustained, buoyed in part by the recent key support for sustained economic decline in mortgage interest rates and expansion. the continuing rise in consumer incomes The members anticipated smaller and favorable consumer sentiment. though still sizable gains in business A modest degree of fiscal restraint fixed investment over the year ahead. seemed likely over the next two fiscal Slowing growth in profit levels and cash years. Some members expressed optiflows was likely to retard spending for mism with regard to the prospects for an many types of business equipment, but agreement between the President and favorable prices, advancing technology, the Congress that would provide a basis and readily available financing probably for reaching a balanced budget by the would continue to foster rapid expan- year 2002. Such an agreement would sion in office, computing, and commu- need to include controversial constraints nications equipment. The outlook for on the growth of entitlements, but nonresidential construction remained its achievement would have favorable uneven across the country, but such con- effects on financial markets and on busistruction seemed likely to edge higher ness and consumer sentiment more genon balance over the next several quar- erally, thereby tending to offset at least ters. Members noted in this regard that in part any direct effects of reduced fedthe construction of office buildings had eral spending on aggregate demand. strengthened in a number of urban areas. Members anticipated that the external Business inventories currently seemed sector of the economy would continue on the whole to be at desired and sus- to exert some restraint on domestic tainable levels in relation to sales. In the economic activity, though perhaps to a circumstances, inventory accumulation lesser extent than over the past year. In Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 83rd Annual Report, 1996 particular, the growth of U.S. exports inflation and the uncertainties surroundwas expected to accelerate somewhat in ing the outlook. Thus, while the longerassociation with some strengthening on term risks might point toward rising average in the economies of the nation's inflation, there were reasonable proskey trading partners. The economic pects that inflation would remain conrecovery in Mexico from its earlier tained, and any pickup in inflation, financial crisis was already providing a should it occur, was likely to be limited considerable boost to exports from some at least for a time. In the circumstances, parts of the United States. the members concluded that watchful Inflation had remained subdued, but waiting remained the prudent course for the members continued to view the risks policy as they continued to assess ongoas tilted toward increases in the future. ing developments. Because the risks of Labor compensation costs clearly were waiting did not appear to be substantial rising at a faster pace in the context of at this juncture, anticipatory tightening persistently tight labor markets, and an was not yet called for. upturn in core price inflation seemed In the Committee's discussion of posquite possible at some point in the sible adjustments to policy during the absence of some easing of pressures in intermeeting period, members agreed labor markets. However, the members that the retention of an asymmetric recognized that the increase in wage directive toward tightening was consisinflation had been significantly less than tent with their view that the risks would have been anticipated on the basis remained biased toward higher inflation. of historical relationships with labor Accordingly, while they were not sugmarket conditions, and price perfor- gesting that policy should be especially mance also had been more favorable quick to react to incoming information than those relationships would have sug- over the intermeeting period, they did gested. In the circumstances, there was a view the next policy move as more good deal of uncertainty regarding the likely to be in the direction of some outlook for inflation, including the firming than toward easing. In this conpotential degree of utilization in labor nection, some members emphasized that markets, the associated pressures on it would be especially important for the labor costs, and the ability of firms to Committee to act promptly to counter pass higher labor costs into prices in any tendency for price inflation to rise markets that generally continued to be and for higher inflation expectations to described as highly competitive. With become embedded in financial markets the economy operating in the neighbor- and economic decisionmaking more hood of its sustainable potential, rela- generally. tively minor differences in overall eco- At the conclusion of the Committee's nomic growth could have a significant discussion, all the members indicated effect over time on whether inflation that they supported a directive that would tend to trend up or down. called for maintaining the existing In the Committee's discussion of pol- degree of pressure on reserve positions icy for the intermeeting period ahead, and that retained a bias toward the posall the members supported a proposal sible firming of reserve conditions durto maintain an unchanged policy stance ing the intermeeting period. Accordwhile also retaining a bias toward ingly, in the context of the Committee's restraint in the directive. An unchanged long-run objectives for price stability policy was warranted by the quite satis- and sustainable economic growth, and factory performance of the economy and giving careful consideration to eco- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 185 nomic, financial, and monetary develop- domestic nonfinancial debt has expanded ments, the Committee decided that moderately on balance over recent months and has remained in the middle portion of its somewhat greater reserve restraint range. would be acceptable and slightly lesser The Federal Open Market Committee reserve restraint might be acceptable seeks monetary and financial conditions that during the intermeeting period. The will foster price stability and promote susreserve conditions contemplated at this tainable growth in output. In furtherance of these objectives, the Committee at its meetmeeting were expected to be consistent ing in July reaffirmed the ranges it had estabwith relatively strong expansion in M2 lished in January for growth of M2 and M3 and M3 over coming months. of 1 to 5 percent and 2 to 6 percent respec- The Federal Reserve Bank of New tively, measured from the fourth quarter York was authorized and directed, until of 1995 to the fourth quarter of 1996. The monitoring range for growth of total domesinstructed otherwise by the Committee, tic nonfinancial debt was maintained at 3 to to execute transactions in the System 7 percent for the year. For 1997, the Commit- Account in accordance with the follow- tee agreed on a tentative basis to set the same ing domestic policy directive: ranges as in 1996 for growth of the monetary aggregates and debt, measured from the fourth quarter of 1996 to the fourth quarter The information reviewed at this meeting of 1997. The behavior of the monetary aggresuggests that economic activity has contingates will continue to be evaluated in the ued to expand at a moderate pace. Private light of progress toward price level stability, nonfarm payroll employment increased movements in their velocities, and developappreciably further in November, although ments in the economy and financial markets. the civilian unemployment rate edged up to 5.4 percent. Industrial production rose In the implementation of policy for the sharply in November, in part because of a immediate future, the Committee seeks to rebound in motor vehicle assemblies that had maintain the existing degree of pressure on been depressed earlier by work stoppages. reserve positions. In the context of the Com- Consumer spending has posted appreciable mittee's long-run objectives for price stabilgains over recent months after a summer lull. ity and sustainable economic growth, and Housing starts rebounded in November after giving careful consideration to economic, declining in September and October. Busi- financial, and monetary developments, ness fixed investment appears to be growing somewhat greater reserve restraint would moderately after a sharp rise in the third or slightly lesser reserve restraint might quarter. The nominal deficit on U.S. trade in be acceptable in the intermeeting period. goods and services widened substantially in The contemplated reserve conditions are the third quarter from its rate in the second expected to be consistent with relatively quarter. Increases in labor compensation strong expansion in M2 and M3 over coming have trended up this year, and consumer months. price inflation also has picked up owing to larger increases in food and energy prices. Votes for this action: Messrs. Greenspan, Short-term market interest rates have reg- McDonough, Boehne, Jordan, Kelley, istered mixed changes since the Committee Lindsey, McTeer, Meyer, Mses. Phillips, meeting on November 13, 1996, while long- Rivlin, Mr. Stern, and Ms. Yellen. Votes term yields have risen slightly. In foreign against this action: None. exchange markets, the trade-weighted value of the dollar in terms of the other G-10 It was agreed that the next meeting currencies has risen slightly over the interof the Committee would be held on meeting period. Tuesday-Wednesday, February 4-5, Growth of M2 picked up in November, while expansion of M3 moderated somewhat 1997. from its brisk pace in October. For the year The meeting adjourned at 12:40 p.m. through November, M2 is estimated to have grown at a rate in the upper half of the Committee's annual range, and M3 at a rate Donald L. Kohn Digitized a fo r l i F tt R le A S a E bo R v e the top of its range. Total Secretary http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

187 Consumer and Community Affairs In 1996 the Board moved to administer techniques to test large institutions for major changes under revised inter- compliance. agency regulations to carry out the Com- Acting on behalf of the Federal munity Reinvestment Act (CRA). On Financial Institutions Examination January 1, small banks became subject Council and HUD, the Board met statuto examination under the new rules; tory deadlines with the early release of large banks began data collection and in Home Mortgage Disclosure Act statesome instances began developing strate- ments for individual lenders and aggregic plans as the measure of their CRA gate reports for metropolitan areas. performance. The new rules, issued in From the data, the Board noted a marked 1995, emphasize performance in lend- increase in lending to minority and lowing, service, and investment and will income homebuyers, although denial help promote consistency in assessments rates continued to show disparities and reduce compliance burdens for among racial and ethnic groups. many banks. Subsequent to multiyear reviews of The Board acted on a large number of Regulation M (Consumer Leasing) and bank and bank holding company appli- Regulation E (Electronic Fund Transcations that involved CRA protests, fers), the Board completed rulemakings adverse CRA ratings, and issues of fair that better match its consumer regulalending and noncompliance with con- tions to industry developments. In other sumer regulations. Several applications rulewriting, the Board published two involved major bank mergers that elic- proposals, one governing "self tests" ited strong support and opposition from that lenders may conduct under Regulamembers of the public, and all were tion B (Equal Credit Opportunity) to protested on CRA grounds. The Board determine their compliance with fair approved them after extensive analyses, lending laws and another raising the finding in each case that convenience threshold for the coverage of small instiand needs factors were consistent with tutions under Regulation C (Home approval. Mortgage Disclosures) based on asset In the fair lending area, the Board size; the two proposals implement referred discrimination cases regarding amendments to the Equal Credit Opporstate member banks to the Department tunity Act and Home Mortgage Discloof Justice and also forwarded the results sure Act respectively. of a major investigation into a mortgage These matters are discussed below, lender's overage-pricing practices. The along with other actions by the Board in Board referred other cases, which raised the areas of community affairs and conclaims of alleged mortgage discrimina- sumer protection. tion, to the Department of Housing and Urban Development (HUD) for investi- CRA Reform gation. The Board continued to improve the System's examination process for During 1996 the Board began its implefair lending, using enhanced statistical mentation of a revised regulation under Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 83 rd Annual Report, 1996 the Community Reinvestment Act, in conjunction with the other federal working closely with the three other supervisory agencies, issued a document financial supervisory agencies that have that addresses many of the questions CRA responsibilities (the Federal De- more frequently encountered under the posit Insurance Corporation, the Office new regulation. The agencies anticipate of the Comptroller of the Currency, and adding to this document over time as the Office of Thrift Supervision). The new questions arise and are addressed. revised regulation provides more direct guidance to banks and thrift institutions on the nature and extent of their CRA Fair Lending responsibilities and the means by which those obligations will be assessed and Under the Equal Credit Opportunity Act enforced. It creates a more quantitative (ECOA), the Board is required to refer system for assessing CRA performance to the Department of Justice violations that includes reviewing data on the insti- that it has reason to believe constitute a tution's lending, service, and investment "pattern or practice" of discrimination. activities; requires larger institutions to The Board made five referrals during collect additional data for loans to small 1996, three related to race discriminabusinesses and small farms; and allows tion and the others to marital status vioalternative bases of evaluation for cer- lations. Two of the cases involving tain institutions to minimize the regula- alleged race discrimination were under tory burden. active investigation by the Department During 1996 the agencies began of Justice at the close of 1996. After using new examination procedures de- review, the three remaining matters signed to make the examinations for were returned for enforcement by the small institutions less intrusive and more Board. focused on performance. In addition, a Also in 1996, the Department of Jussmall number of banks elected to be tice reached a court-approved settlement examined under the revised regulation's agreement with a lender on a matter lending, investment, and service tests. referred by the Board in late 1995. The The Board approved a strategic plan Board had forwarded information from submitted by a state member bank for a major investigation of loan pricing defining its program for addressing CRA involving "overages" that were allegresponsibilities, as provided by the reg- edly discriminatory. In the settlement, ulation. Further, three banks were which was based on evidence developed granted designation as wholesale insti- by the Board and a Reserve Bank, the tutions under the revised regulation and lender agreed to steps that included paytwo were designated as limited-purpose ing $3.8 million to minority customers institutions. identified by the Department of Justice Some measures taken by the Federal as having been overcharged on a dis- Reserve will assist in implementing the criminatory basis. new CRA rules. A software program The ECOA also requires the referral was developed that assists examiners of certain types of violations of the act, in choosing a statistically reliable sam- other than "pattern and practice," to ple of loans for review; another program HUD. The three cases of that type prepares summaries of demographic and referred during 1996 involved alleged economic information for use in CRA discrimination on the basis of race, examinations. In addition the Board, national origin, and gender. At year-end, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 189 all three were pending final resolution absence of discrimination. Nonetheless, by HUD. access to loan application files and re- The Board continued the refinement lated information enables examiners to of its specialized fair lending school dur- augment the data in making determinaing 1996. The two-week school com- tions regarding unlawful discrimination. prises an extensive range of both con- In addition, since 1994 the Federal ceptual and practical topics. Subjects Reserve has used a two-stage statistical include a historical perspective on the analysis system to aid in the fair-lending development of fair lending law; current examination of large-volume mortgage legal theories of lender liability; and an lenders. In the first stage of the analysis, introduction to fair lending examination examiners use HMDA data recorded by techniques, including off-site prepara- the institution on its loan-application tion, detection techniques for various register to help determine whether race loan products, and methodologies for appears to be a significant factor in a analyzing examination findings. Class bank's lending decisions. The Board work includes lectures, analysis of case substantially enhanced the first-stage histories, and role-playing. During 1996, system during 1996. Instead of basing eighty students attended the fair lending the initial assessment of racial disparischool and received more than seventy ties on a random sample of white and hours of training. An extensive revision minority applications, the first-stage of this school, begun late in 1996 on the program now uses a sample of white basis of proposals from instructors and and minority applicants that have been students to make it more interactive, is matched on the basis of characteristics due for completion in 1997. (such as income, loan amount, and prop- In evaluating compliance with fair erty location) that are available from the lending laws, bank examiners assess HMDA data. decisions in relation to the underwriting When the first-stage analysis indistandards of the lending institution. cates a statistically significant difference They sample approved and denied appli- in the results for white applicants comcations and check whether the institu- pared with those for minority applicants, tion, in applying its lending criteria, has examiners will generally proceed to the implemented standards consistently and second stage of the analysis. In the secfairly and whether any differential treat- ond stage, examiners draw extensive ment warrants further investigation. additional information from the bank's Examiners also review underwriting loan application files. The augmented standards used by the institution in order information allows for a more sophistito identify standards that may raise cated matched-pair statistical analysis concerns in the context of fair lending that identifies specific loan files for enforcement. examiners to review and discuss with To facilitate fair lending reviews, management during their on-site fair examiners often use data collected and lending evaluation. reported under the Home Mortgage Disclosure Act (HMDA). The HMDA data HMDA Data and Lending do not include the wide range of finan- Patterns cial and property-related factors that lenders consider in evaluating loan The Home Mortgage Disclosure Act applications, and therefore these data requires covered mortgage lenders in alone cannot determine the presence or metropolitan areas to disclose data Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 83rd Annual Report, 1996 regarding mortgages for home purchase, these disclosure statements public, and home improvement, and home refinanc- in August, aggregate reports that contain ing. In 1996, depository institutions data for all lenders in a given metropoliand mortgage companies generally were tan statistical area (MSA) became availcovered if they were located in metro- able in printed form at a central deposipolitan areas and had assets of more tory in each of the nation's 330 MS As. than $10 million. Independent mortgage The FFIEC also makes the information companies were covered, regardless of available on microfiche, magnetic tape their asset size, if they originated 100 or (reel and cartridge), PC diskette, and more home purchase loans in the pre- CD-ROM. ceding calendar year. In 1996, 9,539 Lending institutions tend to specialize lenders, consisting of 868 independent in different types of home loans. In mortgage companies and 8,671 other 1995, depository institutions continued mortgage lenders, reported data for cal- to be the predominant source of home endar year 1995.l improvement and multifamily loans. Under HMDA, covered lenders sub- Mortgage companies accounted for mit geographic information about the about 52 percent of the conventional property related to a loan transaction, home purchase loans reported and about the disposition of loan applications, and, 80 percent of the government-backed in most cases, the race or national ori- home purchase loans. gin, income, and sex of applicants and Mortgage originators and institutions borrowers. The Board processes the data in the secondary market for mortgages, and prepares disclosure statements on such as Fannie Mae (the Federal behalf of HUD and member agencies of National Mortgage Association) and the Federal Financial Institutions Freddie Mac (the Federal Home Loan Examination Council (FFIEC).2 Mortgage Corporation) offer a variety of In 1996 the Board prepared roughly home loan programs to benefit lower- 36,600 disclosure statements. The 1995 income and minority households and data contained 11.2 million reported neighborhoods. These programs may loans and applications, an 8 percent account for a continued increase in loans decrease from 1994 that is largely attrib- to these homebuyers. From 1993 to utable to a decline in refinancing activ- 1995 the number of conventional home ity.3 In July, individual institutions made purchase loans extended to lowerincome borrowers increased 21 percent, 1. In September 1996 the Congress amended compared with a 10 percent increase for HMDA to raise the asset threshold for depository higher-income homebuyers over the institutions according to changes in the consumer same period. price index for urban wage and clerical workers Lending to minority homebuyers has since 1975. Beginning in January 1997, a depository institution will be subject to HMDA if its also increased markedly. From 1993 to assets were greater than $28 million at year-end 1995 the number of loans to black appli- 1996. The asset-size measure that determines the cants increased 70 percent, to Hispanic coverage for independent mortgage companies is applicants 48 percent, and to Asian unchanged. applicants 24 percent. The increase for 2. The member agencies are the Board, the FDIC, the National Credit Union Administration, white applicants was 12 percent over the the OCC, and the OTS. same period. 3. A summary of the 1995 HMDA data appears The 1995 data continue to show rates in a series of special tables included in the Federal of credit denial that are higher for black Reserve Bulletin, vol. 8 (September 1996), pp. A68-A75. and Hispanic loan applicants than for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 191 Asian and white applicants even within borrowers and loan applicants. For the same income brackets. In 1995 the loans sold, lenders also identify purdenial rates for conventional home pur- chasers by type of entity. These chase loans overall were 41 percent for expanded data provide opportunities black applicants, 30 percent for His- to assess the relative performance of panic applicants, 13 percent for Asian mortgage lending institutions in serving applicants, and 21 percent for white the credit needs of lower-income and applicants. These rates were all some- minority homebuyers.4 what higher than in 1994. For neighbor- In its oversight of housing activities hoods, the data also show that the rate of by government-sponsored entities, HUD loan denial generally increased with an uses the expanded HMDA data to increase in the proportion of minority help assess the efforts of Fannie Mae residents. and Freddie Mac in attaining goals The data collected under HMDA do for supporting mortgages for low- and not include the wide range of financial moderate-income families and for propand property-related factors that lenders erties in targeted communities. HUD consider in evaluating loan applicants. also makes extensive use of the HMDA Consequently, the data alone do not data as one component of its fair lending provide an adequate basis for determin- reviews. The data assist in the handling ing whether a lender is discriminating of loan applicants' and borrowers' alleunlawfully. But because the data can be gations of lending discrimination filed supplemented by other information with HUD, the Department of Justice, or available to the agencies, they are an state and local agencies; the data also important tool for enforcement of fair assist in the agencies' targeting of lendlending laws. ers for investigation. The important uses of the HMDA data make their accuracy critically Private Mortgage Insurance important. The FFIEC's processing software is programmed to identify errors in The FFIEC also compiles HMDA-like the data submitted by lenders for cor- data pertaining to applications for prirection before disclosure statements and vate mortgage insurance (PMI) on reports for specific MSAs are prepared. behalf of the nation's eight active PMI Since lenders first began submitting companies. PMI typically is required by their HMDA data in case-by-case lenders when they extend conventional (single-record) form rather than aggre- mortgages with small down payments. gated by census tract, the quality has Working through their national trade improved considerably. The proportion association, the Mortgage Insurance of 1995 loan records containing detected Companies of America, the PMI compaerrors was less than 0.5 percent, down nies voluntarily submit their data to from about 4.4 percent in 1991 (the first the FFIEC, which prepares companyyear in which data were reported on a case-by-case basis). 4. See, for example, the discussion of which institutions bear the credit risk of mortgages extended to lower-income and minority homebuy- Other Uses of HMDA Data ers in Glenn B. Canner, Wayne Passmore, and Brian J. Surette, "Distribution of Credit Risk Since 1990 the HMDA data reported Among Providers of Mortgages to Lower-Income by lenders have included information and Minority Homebuyers," Federal Reserve Bulabout the race, sex, and income of letin, vol. 82 (December 1996), pp. 1077-1102. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 83 rd Annual Report, 1996 specific disclosure statements for each of the lending process and then develop of the firms and aggregate reports for findings and action plans. each metropolitan area. These reports During 1996 the Community Affairs are available for public review at the programs sponsored or cosponsored central depositories where HMDA data more than 200 conferences, seminars are available. Like the HMDA data, this and informational meetings on cominformation is also available from the munity development, reinvestment, and FFIEC in other formats, including data fair lending topics. The programs were tape, CD-ROM, and PC diskette.5 attended by about 10,800 bankers, examiners, and representatives of small businesses and community and con- Community Development sumer groups. In addition, staff mem- The Federal Reserve System's Commu- bers of the Community Affairs programs nity Affairs programs identify commu- at the Board and the Reserve Banks nity development and reinvestment made more than 260 presentations at needs along with fair lending issues; and conferences, seminars, and meetings they develop educational, informational, sponsored by banking, governmental, and technical assistance programs to business, and community organizations. facilitate constructive responses by The Reserve Banks' Community banks and their communities. During Affairs programs helped design and con- 1996 the System's Community Affairs duct a wide variety of conferences and programs continued to expand and training programs for bankers and comenhance products and services to help munity representatives that focused on banks and community representatives the revised regulations implementing the assess needs and implement fair lend- Community Reinvestment Act. They ing, community development, and rein- also participated in Federal Reserve and vestment programs. interagency training for examiners who Six Reserve Banks engaged in major conduct CRA assessments of financial efforts to help identify and address barri- institutions. ers to equal access to credit for home- The Reserve Banks of Boston, Philabuyers. The Boston, New York, Cleve- delphia, Richmond, Atlanta, Chicago, land, Chicago, St. Louis, and San Fran- Dallas, Kansas City, Minneapolis, and cisco Banks each identified key par- San Francisco held a variety of conferticipants in the homebuying process in ences and workshops on aspects of comtheir Districts and brought them together munity development finance. with community representatives to Several Reserve Banks developed discuss problems affecting minority programs focused on the development and lower-income homebuyers and of small and minority businesses. The forge collaborative solutions. These Boston Reserve Bank sponsored a concommunity-targeted programs are based ference for Maine bankers, nonprofit on an effort pioneered by the Cleveland lenders, and public officials regarding Reserve Bank in its home city. The pro- microenterprise lending and other gram generally includes the formation resources available to help the financing of task groups that focus on key aspects of Maine's small and start-up businesses. In addition the Boston Bank worked with Maine bankers to help 5. For an analysis of the 1995 private mortgage develop the new Maine Community insurance data, see appendix A of Canner, Passmore, and Surette, "Distribution of Credit Risk." Reinvestment Corporation, a statewide Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 193 multibank lending consortium for scribes conditions in, and possibilities affordable housing; and the Dallas for assistance to, low-income, unincor- Reserve Bank sponsored several semi- porated subdivisions that have sprung nars for small-business owners. The up along the Texas-Mexico border. To San Francisco Reserve Bank held a con- assist bankers and others, the Dallas ference to foster closer working relation- Reserve Bank also developed and pubships among bankers, small businesses, lished Banking on Partnerships: A and organizations providing technical Digest of Community-Based Organizaassistance to small firms. tions in Houston, which profiles the A conference at the Kansas City structure and activities of community Reserve Bank targeted public policy development organizations in the Housissues affecting rural capital markets, ton area. and the New York Reserve Bank con- The Minneapolis Reserve Bank provened a conference on delivering capital duced and distributed a new educational resources for economic development video, Lending in Indian Country, which in non-urban areas. The San Francisco focuses on the challenges and unique Reserve Bank sponsored a conference opportunities in financing business and on electronic banking that focused on real estate development on reservations. how technological changes affect the The Minneapolis Reserve Bank also relationship between consumers and played a leadership role in an effort to their financial institutions. bring together tribal and business lead- In response to a rising number of ers to explore economic development requests for assistance and information initiatives for the economically dison community development investments tressed Pine Ridge Reservation, in by financial institutions, the Community South Dakota. Affairs programs developed or expanded The Federal Reserve Bank of Kansas a variety of publications and other infor- City developed and published Doing mational resources. The Board signifi- the Undoable Deals: A Resource Guide cantly expanded its annual compendium to Financing Housing and Economic entitled Directory: Community Develop- Development. The guide describes a ment Investments, by adding discussions variety of financial and management of investments by state member banks assistance programs available to comto those about investments made by munity development projects. bank holding companies. The directory All twelve Federal Reserve Banks now covers more than 150 existing com- continued to expand and enhance their munity development corporations and Community Affairs newsletters. These investments. The Board's Community publications typically feature infor- Affairs program also assisted other divi- mation on community development sions at the Board in addressing commu- lending and investment programs and nity development policy issues. related CRA, HMDA, and fair lend- Other informational products distrib- ing policies and issues. During 1996, uted by the System's Community Reserve Bank Community Affairs news- Affairs programs covered a broad array letters reached more than 74,000 repreof topics. The Dallas Reserve Bank pub- sentatives of financial institutions, comlished Texas Colonias: A Thumbnail munity organizations, local government Sketch of the Conditions, Issues, Chal- agencies, and others interested in bank lenges and Opportunities. The report, involvement in community development which received national recognition, de- and reinvestment efforts. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 83rd Annual Report, 1996 During 1996 the Banks' Community and provided other briefings and educa- Affairs staffs held more than 1,400 tional training programs for examiners. meetings with bankers, government The Community Affairs programs at the officials, and business and community Atlanta, Richmond, and Kansas City representatives to discuss community Reserve Banks helped develop and development, community reinvestment, implement an interagency training proand related programs being undertaken gram on community development for by bankers and their communities. The examiners located in the Southeast. Richmond Reserve Bank issued commu- In 1996 the capacity and efficiency of nity profiles highlighting community the computerized Community Lending needs and development organizations Analysis System (CLAS) was increased and resources in the areas of Rich- in response to examiner feedback. The mond; Columbia, South Carolina; and system gives examiners detailed eco- Hagerstown, Maryland. The Philadel- nomic and demographic information on phia Reserve Bank published a pro- a bank's community and helps increase file on Williamsport, Pennsylvania. And consistency in the development of CRA the St. Louis Reserve Bank issued assessments and ratings. In addition, the metropolitan-area profiles for Owens- federal banking agencies coordinated boro, Kentucky; Fayetteville-Springdale- with each other in reviewing examiner Rogers, Arkansas; and Springfield, experience with CLAS and developed Missouri. a consensus on which data elements To supplement its outreach activities, and report formats were most useful to the Boston Reserve Bank formed a examiners. Community Development Advisory Council, composed of lenders and repre- Other Regulatory Matters sentatives of public and nonprofit agencies who are knowledgeable about hous- In December, the Board solicited coming and economic development issues. ment regarding issues that the Board The council will meet three times each will address in a study concerning the year with the Reserve Bank President public availability and use of sensitive and staff members of the Community identifying information about consum- Affairs program to discuss regional ers. The study is required by the Ecocommunity development and reinvest- nomic Growth and Regulatory Paperment issues. The Atlanta Reserve Bank work Reduction Act of 1996, which sets developed an extensive database of a March 1997 deadline for reporting to community contacts; and all of the fed- the Congress. Other regulatory actions eral banking regulators are considering taken during the year, some of them also adoption of its database structure. required by the 1996 act, are discussed Another significant part of Board below. and Reserve Bank Community Affairs activities is assisting the Federal Re- Regulation B serve's bank supervisory units regarding (Equal Credit Opportunity) CRA and fair lending. The Board's Community Affairs program helped In December the Board published proconduct consumer compliance and fair posed revisions to Regulation B to carry lending schools, participated in inter- out amendments to the Equal Credit agency efforts to adapt policies for the Opportunity Act. These amendments implementation of revised CRA rules, create a legal privilege for information Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 195 developed by creditors as a result of Review program. The final rule contains "self tests" that they voluntarily con- substantive amendments, including duct to determine their level of compli- changes to the existing exemptions for ance with the ECOA. (In January 1977 securities or commodities transfers. Prithe Department of Housing and Urban marily, however, the revisions simplify Development published a substantially the language and format of the regulasimilar proposal to revise the regula- tion and commentary and delete obsotions carrying out the Fair Housing Act.) lete provisions. In December the Board withdrew a The review of Regulation E served to proposed amendment to Regulation B identify other issues that might warrant that would have eliminated a general regulatory changes. In April the Board prohibition on collecting data relating to published proposed amendments to an applicant's sex, race, color, religion, Regulation E to govern stored-value or national origin. The proposed amend- cards. The proposal also addresses ment would have allowed creditors to general provisions of the regulation, collect these data for any credit product. providing longer error-resolution dead- The Board determined that the issue of lines for new accounts and allowing data collection is more appropriate for electronic disclosures to consumers in the Congress to consider. place of printed notices. Regulation C Regulation M (Home Mortgage Disclosure) (Consumer Leasing) In December the Board published pro- In September the Board published a posed revisions to Regulation C to carry revised Regulation M following a multiout amendments to the Home Mortgage year review under the Board's Regula- Disclosure Act. Those amendments tory Planning and Review program. require an increase in the exemption Regulation M requires lessors to give threshold for depository institutions, consumers uniform disclosures of cost from $10 million to $28 million, based and other lease elements before the lease on the increase in the consumer price becomes legally binding. In its review index for urban wage and clerical work- the Board sought to identify ways that it ers from 1975 to year-end 1996. Under could simplify the regulation to fulfill the statutory amendments, the Board the Congress's intentions more effecwill make future changes to the asset tively. The final rule modernized the threshold annually as appropriate. The regulation to address changes that have amendments also modify the require- taken place in consumer leasing since ments applicable to disclosures for met- 1976, the year the Congress passed the ropolitan areas in which an institution Consumer Leasing Act, has branch offices. The final rule adds disclosures, primarily in connection with motor vehicle leasing. The Board determined that Regulation E these revisions were especially neces- (Electronic Fund Transfers) sary given that about one-third of all In April the Board published revisions passenger cars now delivered to conto Regulation E and the associated staff sumers are leased instead of purchased commentary following a review under and financed. The disclosures concern the Board's Regulatory Planning and charges a consumer might face for early Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 83rd Annual Report, 1996 termination, for example, and how The Board is required to adjust annuscheduled payments are derived. The ally the dollar amount that triggers addi- Board also specified certain aspects of tional disclosure requirements under the format of the disclosures. The Board TILA for mortgage loans that bear fees revised the advertising provisions to above a certain amount. The Home carry out a statutory amendment, allow- Ownership and Equity Protection Act of ing toll-free numbers to substitute for 1994 imposes restrictions and special certain disclosures in radio and televi- disclosure requirements when total sion advertisements. The Board also points and fees payable by the consumer provided that any disclosure or adver- exceed the greater of $400 or 8 percent tisement of a lease rate must inform the of the total loan amount. Under the act, consumer that the rate may not measure the Board must adjust the dollar amount the overall costs of the lease financing. each year according to the percentage This limitation is meant to preclude change in the consumer price index. In inappropriate and erroneous compari- January the Board adjusted the dollar sons of lease costs based on rate infor- amount to $412 for 1996; in December mation offered to consumers by differ- it adjusted the dollar amount to $424 for ent lessors. 1997. In December the Board published In April the Board issued a report to proposed revisions to Regulation M, pri- the Congress, required by the Truth in marily to implement amendments to the Lending Act Amendments of 1995, that Consumer Leasing Act, which had been discussed the feasibility of treating as enacted in September. The proposed finance charges all costs required by revisions streamline the advertising dis- the creditor or paid by the consumer as closures and make several technical an incident of credit; the report also amendments. addressed abusive refinancing practices. The Board determined that, although changing the definition of finance charge Regulation Z may be desirable, changes affecting dis- (Truth in Lending) closure of the finance charge and the In January the Board requested com- annual percentage rate would be signifiment on whether, under the Truth in cant for both creditors and consumers. Lending Act (TILA), cost disclosures The Board concluded that changes, and other rules for open-end home- if any, should be preceded by further secured lines provide adequate con- deliberation and participation from the sumer protection. In November the public. The Board will consider regula- Board reported to the Congress, as re- tory revisions consistent with the report quired by the Riegle Community Devel- in an upcoming review of Regulation Z. opment and Regulatory Improvement In May the Board published proposed Act of 1994. The report describes the revisions to Regulation Z to carry out regulatory framework for open-end the statutory amendments enacted in home equity lines of credit compared 1995 that establish new creditor-liability with that for closed-end credit and dis- rules for closed-end loans secured by cusses information drawn from con- real property or dwellings. The TILA sumer surveys. The report presents the amendments created new tolerances for Board's analysis of issues and its find- accuracy in disclosing the amount of the ings that the current requirements pro- finance charge. The amendments also vide adequate consumer protection. clarify how lenders must disclose cer- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 197 tain fees connected with mortgage loans. addressed technical matters such as the In addition the Board proposed a new effect of a leap year on the calculation of rule regarding the treatment of fees interest, on the annual percentage yield, charged in connection with debt can- and on the annual percentage yield cellation agreements. In September the earned. Board published a final rule adopting In September the Board revised the the revisions. official staff commentary to Regula- In December the Board and HUD tion B (Equal Credit Opportunity). The issued a joint advance notice of pro- update gives guidance on issues such as posed rulemaking to revise disclosures credit scoring and the regulation's that consumers receive under the spousal signature rules. Real Estate Settlement Procedures Act (RESPA) and TILA. Amendments to Economic Effects of the RESPA and TILA require the agencies Electronic Fund Transfer Act to simplify and improve the disclosures where possible and to provide a single In keeping with statutory requirements, format for compliance with both RESPA the Board monitors the effect of the and TILA. The notice solicited public Electronic Fund Transfer Act on the comment on the specific regulatory and compliance costs and consumer benefits legislative changes that might achieve related to electronic fund transfer (EFT) these goals. services. The revisions to Regulation E made in 1996 and discussed above reduce Interpretations somewhat the ongoing burden of com- In March the Board revised the official pliance with the regulation without staff commentary to Regulation Z (Truth materially affecting consumer benefits. in Lending). The update gives guidance The revisions to Regulation E were limon issues relating to reverse mortgages ited because the original regulation and to home-secured loans bearing rates already followed closely the detailed above a certain percentage or fees above requirements of the law. a certain amount. The revisions also In 1996 the Congress amended the address issues of general interest, such Electronic Fund Transfer Act to exempt as a card issuer's responsibilities when a needs-tested programs that are estabcardholder asserts a claim or defense lished or administered by state or local relating to a dispute with a merchant. governments for the electronic transfer In November the Board published of benefits. (The Board expected to proproposed changes to the staff commen- pose an implementing amendment to tary to Regulation Z. The proposed revi- Regulation E in January 1997.) The sions provide guidance on the treatment exemption eliminates uncertainty about of some fees paid for mortgage loans, of potential fraud arising from the EFTA's tolerances for accuracy in disclosing the liability rules and will reduce the cost to finance charge and other costs, and of state and local governments of providdebt cancellation agreements. ing benefits electronically. Under the In May the Board withdrew a pro- exemption, benefit recipients may have posed amendment to the official staff somewhat diminished protections, especommentary to Regulation DD (Truth in cially for unauthorized use. Electronic Savings) because of its narrow scope delivery will, however, likely provide and regulatory burden. The proposal benefit recipients greater overall secu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 83rd Annual Report, 1996 rity than the paper-based systems that small share of electronic transactions, are now in use. but rapid growth continued in 1996: Some economic effects of the Elec- the number of POS transactions rose tronic Fund Transfer Act, both con- nearly one-half, to about 96 million per sumer benefits and compliance burden, month; and the number of POS termican be traced to continued growth in the nals rose about two-thirds, to around use of EFT services. During the 1990s 875,000. the proportion of U.S. households using The incremental costs associated with EFT services has increased at an annual the EFT act are difficult to quantify rate of about 2 percent. Surveys indicate because no one knows how industry that about 85 percent of households now practices would have evolved in the have one or more EFT features on their absence of statutory requirements. The deposit accounts. benefits of the law are also difficult to Automated teller machines are the measure because they cannot be isolated most widely used EFT service. Nearly from consumer protections that would two-thirds of all households currently have been provided in the absence of have ATM cards, and most of the regulation. The available evidence pronation's depository institutions offer vides no indication of serious consumer consumers access to ATMs. Over time, problems with electronic transactions at almost all ATM terminals have become this time. connected to one or more shared net- The Board's database of consumer works, which enhances their accessibil- complaints and inquiries is one source ity to consumers. The monthly average of information on potential problems. In number of ATM transactions increased 1996, eighty of the complaints that were about 10 percent, from 807.4 million in received related to electronic transac- 1995 to 890.3 million in 1996. During tions. The Board forwarded forty-five the same period, the number of installed complaints that did not involve state ATMs rose 13 percent, to 139,134. member banks to other agencies for Direct deposit is another widely used resolution. Of the remaining thirty-five EFT service. More than one-half of all complaints, three involved a possible U.S. households receive funds in their violation of the act or regulation. Examiaccounts via direct deposit by the payer. nation data show that in 1996 about Direct deposit is particularly widespread 94 percent of depository institutions in the public sector, covering more than examined by federal agencies were in one-half of social security payments and full compliance with Regulation E. two-thirds of federal salary and retire- Violations primarily involved failure ment payments. Although less common to provide all required disclosures to in the private sector, direct deposit consumers. has grown substantially in recent years. The proportion of households receiving Compliance Examinations either public-sector or private-sector direct deposits has grown about 5 per- Since 1977 the Federal Reserve System cent per year during the 1990s. has maintained a specialized program Nearly one-third of households now for examining the compliance of state have debit cards, which can be used member banks and of certain foreign at the point of sale to debit a consum- banking organizations with federal laws ers' transaction account. Point-of-sale governing consumer protections in (POS) systems still account for only a financial services. During the 1996 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 199 reporting period (from July 1, 1995, to The Reserve Banks supplement ex- June 30, 1996), the Federal Reserve aminer training through departmental examined 607 state member banks and meetings and special training sessions. 306 foreign banking organizations for In addition the Board's resident examsuch compliance.6 iner program gives the Reserve Bank The Oversight Section of the Board's examiners added perspective through Division of Consumer and Community several weeks' work at the Board, dur- Affairs coordinates compliance exami- ing which they can observe such matters nations, which are conducted by the as how policies are developed and how consumer affairs units of the twelve Fed- the Board coordinates its activities with eral Reserve Banks. The Oversight Sec- those of other agencies that supervise tion reviews a sample of the examina- financial institutions. tions for effectiveness, adherence to The FFIEC is the interagency coordi- System policy, uniformity of approach, nating body charged with developing and the like. uniform examination principles, stan- New examiners from the Federal dards, and report forms. In 1996 the Reserve Banks attend the System's member agencies of the FFIEC collabothree-week basic consumer compliance rated to revise examination procedures school; examiners with eighteen to to reflect changes in consumer laws twenty-four months of field experience and regulations. They adopted changes attend a week-long advanced compli- to examination procedures covering ance school, a two-week fair lending amendments to the Flood Disaster Proschool, and a class in CRA examination tection Act and to the Home Mortgage techniques.7 Disclosure Act. In the 1996 reporting period, the Federal Reserve System conducted three Agency Reports on Compliance basic consumer compliance schools for with Consumer Regulations a total of seventy-five students; five advanced consumer compliance schools Data from the Board, other member for seventy-three students; and two fair agencies of the FFIEC, and other federal lending schools for sixty-two students. supervisory agencies cover the compliance of institutions with the regulations that implement the Equal Credit Oppor- 6. The Federal Reserve examines state- tunity Act, the Electronic Fund Transfer chartered agencies and state-chartered uninsured Act, the Consumer Leasing Act, the branches of foreign banks, which are commercial Truth in Lending Act, the Community lending companies owned or controlled by foreign Reinvestment Act, and the Expedited banks, and organizations operating under section Funds Availability Act; and compliance 25 or 25(a) of the Federal Reserve Act (Edge Act corporations and agreement corporations). Typi- with the prohibition in Regulation AA cally, in comparison with state member banks, against unfair and deceptive practices.8 these institutions conduct relatively few activities The degree of compliance with these that are covered by consumer protection laws. laws and regulations varied widely in 7. In 1996, Federal Reserve examiners attended interagency training for the revised CRA in place of the advanced CRA class. In addition, CRA 8. The federal agencies that supervise financial instruction was included in the advanced con- institutions do not use the same method to compile sumer compliance school while the CRA school compliance data. Consequently, the data in this was being revised to reflect the requirements of report, which are presented in terms of percentthe CRA regulations published by the agencies in ages of all financial institutions, represent general May 1995. conclusions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 83rd Annual Report, 1996 1996 but, overall, showed improvement mal enforcement actions that addressed over 1995. The following section sum- violations of Regulation B as well as of marizes compliance data for the period other consumer compliance regulations. from July 1, 1995, to June 30, 1996. The FDIC issued five formal enforcement actions involving consumer compliance regulations, without distinguish- Equal Credit Opportunity Act ing which of those actions involved (Regulation B) Regulation B. The other agencies that enforce the The five financial regulatory agencies ECOA—the Farm Credit Administrareported a level of full compliance with tion (FCA); the Department of Trans- Regulation B by institutions examined portation; the Small Business Adminisin 1996, 78 percent, that was signifi- tration; and the Grain Inspection, cantly higher than the 1995 level of Packers, and Stockyards Administration 62 percent. The agencies reported that of the Department of Agriculture— 77 percent of the institutions examined reported substantial compliance among that were not in full compliance with the the entities they supervise. The FCAs regulation had between one and five vio- examination and enforcement activities lations (the lowest frequency category), revealed violations of the ECOA that compared with 74 percent in 1995. The resulted in one formal action. The FCA most frequent violations involved the reported that the most frequent violafailure to take the following actions: tions it found involved the failure to collect monitoring information and the • Provide a written notice of adverse timeliness or content of creditors' adaction that contains a statement of verse action notices. action taken, the name and address of The Federal Trade Commission the creditor, an ECOA notice, and the (FTC) concluded an investigation of a name and address of the federal major retailer that resulted in the filing agency that enforces compliance of a consent decree against the company • Collect information, for monitoring for violating the notification provisions purposes, about the race or national of the ECOA. In addition, the FTC origin, sex, marital status, and age of reported a continuation of its work with credit applicants (on applications for other government agencies and with the purchase or refinancing of a princreditor and consumer organizations to cipal residence) increase awareness of, and compliance • Notify the applicant of the action with, the ECOA. taken within the periods specified in the regulation • Give a statement of reasons for Electronic Fund Transfer Act adverse action that is specific and (Regulation E) indicates the principal reasons for the The five financial regulatory agencies credit denial or other adverse action reported that approximately 94 percent • Take a written application for credit of examined institutions were in complifor the purchase or refinancing of a ance with Regulation E, a slight increase principal residence. over the level of compliance reported The Board issued one cease-and- for 1995. Financial institutions most fredesist order addressing violations of quently failed to comply with the fol- Regulation B. The OTS issued four for- lowing provisions: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 201 • Provide a notice of the procedures for The Farm Credit Administration reresolving alleged errors at least once ported that the institutions it supervises each calendar year were in substantial compliance with the • Investigate alleged errors in a prompt regulation. The agency found no violamanner, determine whether an error tions through its examination and enactually occurred, and transmit the forcement activities. results of the investigation and deter- The FTC accepted for public commination to the consumer within ten ment five consent agreements with mabusiness days jor automobile manufacturers address- • Provide initial disclosures at the time ing violations of both Regulation M and a consumer contracts for an EFT ser- Regulation Z (Truth in Lending). The vice or before the first transfer is made proposed orders would settle charges • Provide customers with a statement that all five companies violated Regulaof all required information at least tion M in lease promotions that featured quarterly, or monthly if EFT activity low monthly payments or low down occurred. payments in large, bold print while disclosing additional costs and sometimes The OTS issued two formal enforcecontradictory information in fine print ment actions addressing violations of that was difficult or impossible to read. Regulation E, and the FTC accepted for The complaints in these cases also public comment a consent agreement charged the automobile manufacturers against a telemarketing company for with violations for failing to clearly and failing to obtain written authorization conspicuously disclose various lease from consumers for preauthorized transcosts and terms as required. fers. If accepted, the FTC's proposed The FTC has continued its consumer order would be incorporated into settleand business education efforts. To this ment of a civil penalty action, currently end, the FTC released two brochures pending in federal district court, against addressing leasing issues. The first highthe telemarketer and its dealers. The lighted points to consider when deciding FDIC reported five formal enforcement whether to lease or purchase a vehicle. actions to deal with violations of Regu- The second provided information to lation E and other consumer compliance consumers regarding the lease or purregulations without specifying how chase of residential telephones. many of the five involved electronic fund transfers. Truth in Lending Act (Regulation Z) Consumer Leasing Act The FFIEC agencies reported that nearly (Regulation M) 70 percent of examined institutions were The FFIEC agencies reported substan- in full compliance with Regulation Z, a tial compliance with Regulation M for significant improvement over the 50 perthe 1996 reporting period. As in the cent reported for 1995. The Board and 1995 reporting period, more than 99 per- the OCC showed increases in complicent of the examined institutions were ance, and the NCUA reported a defound to be in full compliance with the crease, while the FDIC and the OTS regulation. The violations noted by the reported unchanged levels of compliagencies involved the failure to adhere ance. Agencies indicated that, of the to specific disclosure requirements. examined institutions not in compliance, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 83rd Annual Report, 1996 63 percent were in the lowest frequency for public comment a consent agreecategory (having between one and five ment with a mortgage banking comviolations), compared with 58 percent in pany. The proposed order in this case 1995. would settle charges that the company The violations of Regulation Z most failed to accurately calculate and disoften observed were the failure to accu- close several items in its mortgage rately disclose the finance charge or to agreements as required by Regulation Z. disclose the payment schedule; to accu- In addition, the FTC dismissed a comrately disclose the annual percentage plaint against a department store allegrate on closed-end credit; to accurately ing that the store had imposed "unreadisclose the amount financed; and to sonable burdens" on cardholders who provide a disclosure that reflects the claimed their cards were used without terms of the legal obligation between authorization. the parties. The FTC released a brochure address- The OTS issued five formal enforce- ing the protections of TILA and Regulament actions that addressed violations tion Z for "high rate, high fee" loans. of Regulation Z, and the FDIC reported five formal enforcement actions involv- Community Reinvestment Act ing consumer compliance regulations (Regulation BB) without distinguishing which of those actions involved Regulation Z. The Board assesses the CRA perfor- Under the Interagency Enforcement mance of state member banks during Policy on Regulation Z, 394 institutions regular compliance examinations and supervised by the Board, the FDIC, the takes the CRA record into account along OCC, or the OTS were required to re- with other factors when acting on applifund $2.8 million to consumers in 1996 cations from state member banks and for improper disclosures. bank holding companies. The Federal The Department of Transportation Reserve System maintains a threeissued a cease and desist consent order faceted program for enforcing and fosagainst a travel agency and a charter tering better bank performance under operator. The complaint in this case the CRA: alleged that the two organizations vio- • Examining institutions to assess comlated Regulation Z by routinely failing pliance to transmit requests for refunds to credit • Disseminating information on comcard issuers within seven days of receipt munity development techniques to of fully documented credit refund bankers and the public through comrequests. munity affairs offices at the Reserve The FTC accepted for public com- Banks ment two consent agreements with ma- • Performing CRA analyses in connecjor automobile manufacturers addresstion with applications from banks and ing violations of Regulation Z. The bank holding companies. proposed orders would settle charges that the companies violated Regula- Under the provisions of the CRA, tion Z in credit promotions by making Federal Reserve examiners review the inadequate and misleading disclosures performance of state member banks in comparable to those in promotions dis- helping to meet the credit needs of their cussed above, in the section on con- communities. When appropriate, examsumer leasing. The FTC also accepted iners suggest ways to improve CRA per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 203 formance. During the 1996 reporting five formal enforcement actions involvperiod, the Federal Reserve conducted ing consumer compliance regulations 596 CRA examinations: 2 banks were without identifying the regulations rated as being in "substantial noncom- involved. pliance" with the CRA, 4 were rated as "needs to improve" in meeting com- Unfair and Deceptive Acts munity credit needs, 417 were rated or Practices "satisfactory," and 173 were rated (Regulation AA) "outstanding."9 The three financial regulatory agencies with responsibility for enforcing Reg- Expedited Funds Availability Act ulation AA's Credit Practices Rule (Regulation CC) reported that more than 99 percent of The FFIEC agencies reported that examined banks were in full compliance 87 percent of the institutions they exam- with the regulation. The most frequent ined were in full compliance with Regu- violation involved the failure to provide lation CC, an increase over the level of a clear and conspicuous disclosure on compliance in the 1995 reporting period. cosigner liability. Of the institutions not in full compliance, 83 percent were in the lowest fre- Applications quency category (between one and five violations). Among all institutions ex- The Federal Reserve System acted on amined, the following five rules were forty-nine bank and bank holding comthe provisions of Regulation CC most pany cases that involved CRA protests often violated: or adverse CRA ratings. The System reviewed another thirteen cases that • Follow special procedures for large involved fair lending and other issues deposits related to compliance with consumer • Adequately train employees and pro- regulations.10 Among the forty-nine vide procedures to ensure compliance cases that raised CRA concerns in 1996, with the regulation seven involved adverse CRA ratings, • Provide immediate availability on forty-one were protested on CRA $100 of deposits not subject to nextgrounds, and one involved both adverse day availability CRA rating issues and protests. • Make funds from certain checks, Several applications for major bank including local or nonlocal checks, acquisitions were filed and all were proavailable for withdrawal within the tested on CRA grounds. The Board times prescribed by the regulation approved the applications, finding in • Provide a disclosure of the institueach case that the convenience and tion's specific availability policy. needs factors involved were consistent The OTS issued two formal enforce- with approval. ment actions regarding violations of Regulation CC, and the FDIC reported 10. In addition, seven cases involving CRA issues and three involving other compliance issues were withdrawn during 1996. The System also 9. Foreign banking organizations and Edge Act reviewed comments submitted in connection with and agreement corporations accounted for 306 of three other applications (not reflected in the above the institutions examined for compliance with con- statistics), which were deemed to be more in the sumer laws; they are not subject to the CRA. nature of consumer complaints than protests. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 83rd Annual Report, 1996 In January the Board approved the tion that made NationsBank the fourth application of Chemical Banking Corpo- largest banking organization in the ration (New York) to acquire The Chase nation. A number of individuals and Manhattan Corporation (New York). As groups had protested the application, a result of the acquisition, The Chase alleging violations of fair lending laws Manhattan Corporation became the larg- and weaknesses in NationsBank's CRA est banking organization in the nation. performance. The Board's approval The Federal Reserve had held public order directed NationsBank to give the meetings in New York City on the appli- Federal Reserve Bank of Richmond a cation in conjunction with the New York copy of any notices for branch closures State Banking Department in November effected in connection with the acquisi- 1995. tion; the order also requires Nations- In January the Federal Reserve held Bank to notify the Reserve Bank of any public meetings in Los Angeles and changes in its preliminary plan for clos- San Francisco on the competing pro- ing branches. posals by Wells Fargo & Company (San Francisco) and First Bank System Consumer Complaints (Minneapolis) to acquire First Interstate Bancorp (Los Angeles). Among the The Federal Reserve investigates comissues raised by the 311 parties that plaints against state member banks and commented in connection with these forwards to the appropriate enforcement meetings were branch closures in agencies complaints that involve other low- to moderate-income neighbor- creditors and businesses (see accompahoods, the availability of banking ser- nying table). The Federal Reserve also vices in California, and potential job monitors and analyzes complaints about losses. unregulated practices. First Bank System ultimately with- In 1996 the Federal Reserve received drew its application after the Securi- 2,955 consumer complaints: 2,378 by ties and Exchange Commission raised mail, 568 by telephone, and 9 in person. issues about the bank's planned stock repurchase program, and in March the Complaints about State Board approved Wells Fargo's applica- Member Banks tion. The Board indicated in its approval order that it would monitor the imple- In 1996 the Federal Reserve investimentation of Wells Fargo's branch clos- gated 1,232 complaints against state ing policy as well as the effect of its member banks (see accompanying branching strategy on the availability of table). About 59 percent involved loan banking services in the communities functions: 5 percent alleged discriminaserved by the bank. As a result of the tion on a prohibited basis, and 54 peracquisition, Wells Fargo became the cent concerned credit denial on nonseventh largest banking organization prohibited bases (such as length of in the nation and remained the sec- residency) and other unregulated lendond largest depository institution in ing practices (such as release or use of California. credit information). Another 27 percent In December the Board approved the of the 1,232 complaints involved disapplication of NationsBank Corporation putes about interest on deposits and (Charlotte, N.C.) to acquire Boatmen's general deposit account practices. The Bancshares, Inc. (St. Louis), an acquisi- remaining 14 percent concerned dis- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 205 putes about electronic fund transfers, categories accounted for a small portion trust services, and miscellaneous bank (5 percent or less) of all consumer compractices. plaints received by the System. The System also received 2,609 in- Many of the complaints about credit quiries about consumer credit and bank- card interest rates and terms raised coning policies and practices. In responding cerns about interest rate increases; to these inquiries, the Board and Federal allegations that banks charged an Reserve Banks gave specific explana- interest rate higher than had been agreed tions of laws, regulations, and banking on transferred account balances; and practices and provided relevant printed concerns about the interest rates charged materials on consumer issues. on cash advances. Complaints about credit card accounts involved a variety of customer service problems, including Unregulated Practices financial institutions' failure to close Under section 18(f) of the Federal Trade accounts as requested; failure to provide Commission Act, the Board monitors requested account information; and complaints about banking practices that imposition of an annual fee after an are not subject to existing regulations account is closed. The miscellaneous and focuses on those complaints that category covered a wide range of issues may be unfair or deceptive. Three cate- including check cashing, release of gories accounted for 13 percent of the liens, and customer service problems. 2,002 complaints about unregulated practices received in 1996 involving Complaints Referred to HUD both state member banks and other institutions: problems involving interest The Federal Reserve continued to refer rates and terms of credit cards (95 com- to HUD complaints that allege vioplaints), other problems involving credit lations of the Fair Housing Act, as card accounts (94), and miscellaneous required by a memorandum of underunregulated practices (80). Each of these standing between HUD and the federal Consumer Complaints to the Federal Reserve System Regarding State Member Banks and Other Institutions, by Subject, 1996 Subject State member Other Total banks institutions' Regulation B (Equal Credit Opportunity) 63 42 105 Regulation E (Electronic Fund Transfers) 35 45 80 Regulation Q (Interest on Deposits) 2 0 2 Regulation Z (Truth in Lending) 144 351 495 Regulation BB (Community Reinvestment) 3 3 6 Regulation CC (Expedited Funds Availability) 18 41 59 Regulation DD (Truth in Savings) 26 31 57 Fair Credit Reporting Act 30 70 100 Fair Debt Collection Practices Act 9 11 20 Fair Housing Act 1 0 1 Real Estate Settlement Procedures Act 1 19 20 Flood insurance 1 2 3 Holder in due course 1 4 5 Unregulated practices 898 1,104 2,002 Total 1,232 1,723 2,955 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

206 83rd Annual Report, 1996 bank regulatory agencies. This memo- the Board joined with the FDIC in randum establishes a set of procedures analyzing the agencies' respective sysfor coordination and cooperation in the tems for categorizing complaints and investigation of lending discrimination researched ways to facilitate data complaints falling under the scope of exchange and analysis. In mid-1996 the the Fair Housing Act. Board initiated similar efforts with the In 1996 the Federal Reserve referred occ. twelve complaints about state member In recent years the Federal Reserve banks to HUD. Investigations completed has received an increasing number of by the Federal Reserve for seven of consumer complaints about credit card the twelve 1996 complaints (and for two mail solicitations that consumers allege that had been pending from 1995) are misleading because they do not revealed no evidence of unlawful disclearly set out the interest rates being crimination; five of the twelve comcharged and the credit limits offered. plaints received in 1996 were pending at The Board has undertaken a study of the year-end. complaints received by the System as well as by the other federal financial regulatory agencies, state attorneys Complaint Program Initiatives general, and state banking departments. To complement the data gathering, the To better understand the type and scope Board included questions for two sucof complaint activity at the federal level, cessive months on the Survey of Conthe Board has undertaken an exchange sumer Attitudes conducted by the Uniof complaint data among the federal versity of Michigan's Survey Research financial regulatory agencies. In 1995 Center. These survey data will help Consumer Complaints Received by the Federal Reserve System, by Type and Function, 1996 Complaints against state member banks Total Not investigated Investigated Bank legally correct Complaint Unable Explanation Goodwill Number Percent s to u f o fi b c t ie a n in t pr o o f v l i a d w ed b N u o rs e re m im en - t re m im en b t u r o s r einformation to consumer or other other accommoaccommodation dation Loans Discrimination alleged Real estate loans 12 1 0 0 5 0 Credit cards 25 2 1 0 12 6 Other loans 32 2 0 3 17 0 Discrimination not alleged Real estate loans 82 7 6 7 26 14 Credit cards 396 32 8 34 117 115 Other loans 181 15 4 18 82 25 Deposits 337 27 8 33 155 33 Electronic fund transfers 35 3 1 4 12 5 Trust services 12 1 1 15 2 Other 120 10 4 16 39 10 Total 1,232 100 33 116 470 210 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 207 define consumers' understanding of the the formation of policies and procedures credit terms used in mail solicitations that affect the program. In 1996 it and identify problems they have experi- focused on the investigation and analyenced. The Board expected to complete sis of complaints alleging unlawful disanalysis of this issue in 1997. crimination (particularly those that may In 1996 the Consumer Complaints involve appraisals), credit scoring, and Section implemented a comprehensive other fair lending issues; the effect of system to replace and consolidate the the Right to Financial Privacy Act and complaint program's current analysis Trade Secrets Act on complaint investitools. Along with other management gations; and the System's jurisdiction in tools, the Complaint Analysis Evalua- investigating complaints about nonbank tion System and Reports (CAESAR) subsidiaries of holding companies. provides the capability to analyze the In September the Consumer Comtypes of discrimination complaints re- plaints section began quarterly conferceived by the Federal Reserve, auto- ence calls with the complaint program matically generate response letters to the management and staff at the Reserve individual complaints, and analyze com- Banks. These calls provide an opporplaint data to determine patterns and tunity to discuss policies and protrends. cedures and specific issues that have In June the Board hosted the third arisen during the course of complaint annual conference for consumer com- investigations. plaint officers, managers, and other staff. The Consumer Complaints Section The conference is an important forum and the Consumer Policies program for obtaining Reserve Bank input into began a series of meetings with the Consumer Complaints Received—Continued Complaints against state member banks Investigated Referred to Factual or Possible other Total contractual bank Pending, agencies complaints Customer Bank dispute— violation— Matter in December 31 error error resolvable bank took litigation only corrective by courts action 0 0 2 0 0 5 21 33 0 3 0 0 0 3 12 37 0 2 0 0 0 10 18 50 0 17 4 0 2 6 286 368 8 71 18 3 1 21 508 904 4 25 4 1 4 14 222 403 9 40 23 3 2 31 388 725 0 5 1 3 0 4 45 80 0 0 1 0 0 2 7 19 5 15 5 1 3 22 216 336 26 178 58 11 12 118 1,723 2,955 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 83rd Annual Report, 1996 offices of selected state attorneys gen- for Financial Counseling and Planning eral and with state and local county con- Education. sumer protection agencies to share infor- In 1996 the Consumer Policies staff mation about complaint procedures and began to develop plans for a major conconsumer education efforts. The goal of sumer education initiative to complethis effort is to establish contact for shar- ment the Board's issuance of a revised ing data and information at the state and Regulation M. The educational program, local levels and to expand the Board's which will be developed in cooperation ability to refer consumers to the proper with industry organizations, regulatory authorities when they have issues that agencies, and consumer groups, is do not fall under the Federal Reserve's expected to be fully operational by jurisdiction. October 1, 1997, when compliance with During 1996, individual staff mem- the new rules becomes mandatory for all bers from the Reserve Banks' consumer lessors. complaint sections continued to work at the Board for several weeks at a time Consumer Advisory Council to gain familiarity with operations in Washington. Eleven Reserve Banks par- The Consumer Advisory Council conticipated in the program. vened in March, June, and October to advise the Board on matters concerning consumer credit protection laws and on Consumer Policies other issues dealing with financial services to consumers. The council's thirty The Consumer Policies program ex- members come from consumer and plores alternatives to regulation for pro- community organizations, financial and tecting consumers in retail financial academic institutions, and state governservices, and it brings research informa- ment. Council meetings are open to the tion to bear more directly on policymak- public. ing. During 1996, Consumer Policies The Council discussed the implemenparticipated in revising disclosures to tation of CRA at each of the three meetaid consumers in shopping for automo- ings. In March, members listed emergbile leases and also provided research ing issues related to the revised CRA analyses for reports on finance charges, rules, including the degree to which home equity lines of credit, funds avail- communities will be part of the examiability, and credit card solicitations. nation process; the need for timely, easy The program expanded efforts to access to examination schedules and educate consumers about mutual funds, CRA evaluations; difficulties in analyzannuities, and other uninsured bank ing small banks' files for loan distribuproducts. It produced public-service tion by income because information is video announcements and distributed not always available; and the possibility them to about 150 television stations in that, because of the new emphasis the top 50 markets in the United States, on lending numbers, some institutions and at year-end it had plans to prepare might give less attention to community public-service radio announcements work. Members also expressed concerns for distribution to 2,200 stations. The about the impact of mergers and acquisimutual funds education program won tions on communities and discussed the Outstanding Educational Program possible strategies for dealing with the Award for 1996 from the Association difficulties. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 209 In the council's June meeting the The report concluded that streamlin- CRA focus was on small-bank examina- ing mortgage closings is easier in contions. Council members reported expe- cept than in practice. The task force rience under the new rules that was found that, whereas the perception may largely positive. They found that exami- be otherwise, most closing or settlement nations were more performance oriented documents are in fact produced for reaand examiners' time on site had been sons other than federal requirements. reduced. The council also discussed the Many result from lender practices, state availability of data on small business or local laws, or secondary market and farm loans. The council members requirements; others result from "an were reminded that data on a census- abundance of caution" on the part of the tract basis remains at the financial insti- lender, and are meant to protect against tution and will be reported to the public future legal claims from consumers. only on an aggregated basis. Out of fifty-four documents associ- In the October meeting, some mem- ated with a conventional, fixed-rate, bers expressed concern that a greater thirty-year mortgage, for example, the CRA emphasis on lending could create task force found that twelve were a disincentive for financial institutions required by federal laws or regulations to make important community devel- such as the Board's Regulation B (Equal opment investments whereas, for some Credit Opportunity) and Regulation Z neighborhood revitalization projects, (Truth in Lending) or HUD's Regulaequity investments and loans to tion X (Real Estate Settlement Procemoderate- and upper-income households dures). These twelve, the task force are essential to successful economic suggested, could possibly be reduced to integration. The council also discussed a five—for example, by consolidating Board proposal to amend Regulation Y notices about mortgage servicing, flood (Bank Holding Companies) designed to hazard, right to an appraisal, and constreamline the application process for trolled business arrangement. mergers and acquisitions. Consumer and The report also suggested undertakcommunity group advocates voiced ing a broad study of consumer experistrong concerns about proposed revi- ences to determine whether "informasions that would shorten the times avail- tion overload" at settlement is a concern able for informal discussions with the and whether required disclosures curapplicants. rently given at settlement are necessary In 1995 the council had established a or should be provided earlier in the task force to explore ways to improve application process. Other recommendathe mortgage loan process for consum- tions were to develop a single disclosure ers and the industry in light of the vast based on good-faith estimates of closing number of documents typically pre- costs and other terms to be updated at sented for the consumer to review and settlement; to prohibit addenda to the sign at closing. The work was under- good-faith estimate and the itemization taken at a time when the Congress had of the amount financed; and to develop introduced bills to consolidate rulewrit- an educational piece identifying the ing authority for most mortgage-related documents used in a typical loan disclosures with the Federal Reserve closing. Board. In October 1996, after a year- Council members discussed the long study, the task force submitted its Board's approach to consumer leasing final report to the council. disclosures in March and June. Leasing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 83rd Annual Report, 1996 represents 25 percent to 30 percent of risks to the banking system. In October, retail sales of autos in the United States members continued the discussion, notand about 65 percent of retail sales of ing the difficulty of developing rules luxury cars. Members discussed the for products that do not yet exist or that disclosures required under the Board's quickly evolve. Generally, members Regulation M (Consumer Leasing), supported a basic level of mandatory including such issues as whether requir- disclosures for all stored-value cards. ing disclosure of a lease rate (one not Other topics on the council's agenda entirely comparable to an annual per- during 1996 included home equity lines centage rate in credit transactions) of credit and the disclosure of finance would be helpful to consumers; how charges (and associated tolerances) best to alert consumers to the financial under the Truth in Lending Act; elecconsequences of terminating a lease tronic banking and ATM surcharges and early; and the need for consumer educa- fees; and issues arising from a proposed tion to ensure that consumers under- substitution of a dollar coin for the dolstand the differences between leasing lar bill. and purchasing an automobile. Roundtable discussions, known as In June the council discussed the cov- the Members Forum, were held at each erage of EBT (electronic benefit trans- meeting and gave council members the fer) programs under the EFT act and opportunity to offer their views on their Regulation E. The council adopted a industries or localities. resolution expressing concern that a statutory exemption being considered by Testimony and Legislative the Congress could leave benefit recipi- Recommendations ents unprotected, and it urged the Board to support provisions protecting recipi- The Board twice addressed issues ents from losses. (The Congress subse- related to the coverage of electronic quently enacted the Personal Responsi- benefit transfer (EBT) programs by the bility and Work Opportunity Act of Electronic Fund Transfer Act and Reg- 1996, creating an exemption from Regu- ulation E, submitting a statement in lation E for needs-tested benefits if the March to the House Committee on programs are established or adminis- Banking and Financial Services and testered by state or local governments.) tifying in June before that committee's The council discussed the potential Subcommittee on Financial Institutions coverage of stored-value cards at all and Consumer Credit. three meetings. In March, members In 1995 the Congress had passed, but talked about the different kinds of cards the President had vetoed, a bill exemptbeing developed and the types of protec- ing from Regulation E any needs-based tions that might apply. Overall, mem- benefits established or administered by bers agreed on the need for balance to the states.11 In the absence of such legisprovide consumers with reasonable pro- lation, Regulation E coverage of EBT tections without putting domestic busi- programs was to become mandatory on nesses at a disadvantage in a global mar- March 1, 1997; and even though the ket where the technology is changing Board had established a modified set of daily. In June, the council discussed the rules for EBT programs, many states Board's proposed rule to require disclosures for certain stored-value products, 11. The President's veto of the bill was unrementioning potential security and other lated to the EBT provisions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 211 continued to express concern about the Regulation E requires disclosure of potential impact. fees imposed by an institution on its In its invited statement the Board reit- own customers but does not require the erated a belief that coverage of EBT institution to disclose ATM surcharges programs was required under the EFTA imposed by others, since it would be but also suggested that a congressional impractical to monitor and disclose the reexamination of the scope of the EFTA dollar amount of a surcharge that might could take account of developments be imposed at any given time by some since its enactment in 1978 and balance other institution nationwide. A surcompeting objectives in light of chang- charge imposed at an ATM must be ing national priorities. The Board noted disclosed on a sign posted at the termialso that if an exemption were limited nal or displayed on the screen, and instito particular categories or to state- tutions are encouraged to give customadministered programs, the existence of ers the option to cancel the transaction different rules could make it difficult to after receiving notice of the fee. implement the one-card, unified national Data on examinations of financial delivery system envisioned by the Fed- institutions show general compliance eral Electronic Benefits Transfer Task with Regulation E and few violations of Force. fee disclosures. Consumer complaint In its June testimony the Board reiter- data suggest few problems with elecated its suggestion that to the extent the tronic transfers generally or with ATM Congress found it necessary to balance fees. the EFTA's consumer protection against The Board commented on two bills. concern about compliance costs on the The first, H.R. 3246, would have nationwide delivery of EBT, the Con- required disclosure at ATMS of all fees gress might reexamine the scope of the imposed in connection with a transaclaw's coverage. The Congress subse- tion, whether imposed by the ATM quently enacted the Personal Responsi- operator, the account-holding institution, bility and Work Opportunity Act of or a national, regional, or local network. 1996, which exempts needs-tested EBT The Board noted that Regulation E, programs that are established or admin- network operating rules, and laws in a istered by state or local governments; number of states already require fee federal and other state programs remain disclosures and therefore the proposed subject to Regulation E. legislation might be unnecessary. The In April the Board testified before Board also questioned whether it is the House Subcommittee on Financial operationally feasible for an operator of Institutions and Consumer Credit on an ATM to disclose fees imposed by the proposed legislation regarding the dis- thousands of account-holding instituclosure of fees imposed on ATM tions whose customers have access to transactions. The Board's testimony on the ATM. ATM fees focused on the current regula- H.R. 3221 would have prohibited tory scheme regarding fee disclosures, ATM surcharges. Suggesting that subdata about consumer complaints, the stantive limitations on prices are better level of compliance with the EFTA left to state legislatures, the Board noted found in bank examinations, and the that in fact few states have set limits on incidence and amount of ATM trans- ATM surcharges. The Board observed action fees reported in Federal Reserve that a prohibition might deter financial surveys. institutions and other ATM operators Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 83rd Annual Report, 1996 from making ATMs widely available to Electronic Fund Transfer Act (Regulaconsumers. Also, a prohibition would tion E), the Consumer Leasing Act not necessarily keep costs down for con- (Regulation M), and the Truth in Lendsumers, as ATM operators could negoti- ing Act (Regulation Z). The testimony ate through the networks for an increase supported allowing the voluntary collecin the amount they receive, and such tion of data for all credit transactions; an increase could be passed on via expressed concerns that open-end credit the account-holding institution to its plans generally and credit card lending customers. specifically raised safety and soundness issues; and stated a need to address solicitation and marketing practices that Recommendations may comply with the letter of the of Other Agencies requirements of consumer-protection Each year the Board asks for recommen- regulations but that, in the agency's dations from the federal supervisory view, constitute "bait and switch" agencies for amending the financial tactics. • services laws or the implementing regulations. The OCC recommended that the Congress generally review and consider alternatives for providing useful but less burdensome disclosures, suggesting that the current disclosures are unnecessarily burdensome on banks and insufficiently beneficial to consumers. The agency also encouraged the Board to clarify Regulation B's prohibition against discrimination based on national origin and issues related to credit scoring systems; and to clarify whether creditors may follow agency regulations for the voluntary collection of restricted information without violating Regulation B. The OCC also asked for Board reconsideration of its decision not to modify the prohibition on collecting monitoring information in nonmortgage loans. Finally, the OCC asked the Board to clarify the rule under Regulation Z for the treatment of fees paid by a consumer for optional services; in the agency's view, such fees should not be included in the finance charge unless expressly stated in the regulation. The FDIC noted its 1996 testimony on proposed amendments to the Equal Credit Opportunity Act (implemented by the Board's Regulation B), the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

213 Litigation During 1996 the Board of Governors Board order, dated March 25, 1996, was a party in eighteen lawsuits filed approving the acquisition by CoreStates that year and was a party in eleven other Financial Corp., Philadelphia, Pennsylcases pending from previous years, for a vania, of Meridian Bancorp, Inc., Readtotal of twenty-nine cases. In 1995 the ing, Pennsylvania (82 Federal Reserve Board had been a party in a total of Bulletin 430). On October 24, 1996, the twenty-two lawsuits. Five of the eight- court of appeals dismissed the petition. een lawsuits filed in 1996 raised ques- The Southeast Raleigh Community tions under the Bank Holding Company Development Corporation v. Board of Act. As of December 31, 1996, twenty- Governors, No. 96-1054 (D.C. Circuit, one cases were pending. filed February 16, 1996), is a petition for review of a Board order dated January 17, 1996, approving the merger of First Bank Holding Company Act— Citizens BancShares, Inc., Raleigh, Review of Board Actions North Carolina, with Allied Bank Capi- In The New Mexico Alliance v. Board of tal, Inc., Sanford, North Carolina (82 Governors, No. 96-9552 (10th Circuit, Federal Reserve Bulletin 232). Petitionfiled December 24, 1996), petitioners ers' motion for a stay was denied on seek review of a Board order dated March 5, 1996. On December 19, 1996, December 16, 1996, approving the petitioners filed a motion for voluntary acquisition by NationsBank Corporation dismissal of the action. and NB Holdings Corporation, both of Inner City Press/Community on the Charlotte, North Carolina, of Boatmen's Move v. Board of Governors, No. 96— Bancshares, Inc., St. Louis, Missouri 4008 (2d Circuit, filed January 19, (83 Federal Reserve Bulletin 221). 1996), is a petition for review of a Board First Baird Bancshares, Inc. v. Board order dated January 5, 1996 (82 Federal of Governors, No. 96-1426 (D.C. Cir- Reserve Bulletin 239) approving the cuit, filed November 18, 1996), is a peti- merger of Chemical Banking Corporation for review of a Board order dated tion and The Chase Manhattan Corpora- November 6, 1996, approving applica- tion, both of New York, New York. On tions of First Commercial Corporation, March 26, 1996, the court denied peti- Little Rock, Arkansas; Arvest Bank tioners' motion for a stay. The case was Group, Inc., Bentonville, Arkansas; and consolidated with Lee v. Board of Gov- TRH Bank Group, Inc., Norman, Okla- ernors, No. 95-4134. homa, to acquire all the shares of The Lee v. Board of Governors, No. 95- Oklahoma National Bank of Duncan, 4134 (2d Circuit, filed August 22, 1995), Duncan, Oklahoma (83 Federal Reserve is a petition for review of two Board Bulletin 41). On November 20, 1996, orders, dated July 24, 1995, approving the court denied petitioners' motion for certain steps of a corporate reorgania stay. zation of U.S. Trust Corporation, Kuntz v. Board of Governors, No. 96- New York, New York, and the acquisi- 1147 (D.C. Circuit, filed April 25, tion of U.S. Trust by The Chase Manhat- 1996), was a petition for review of a tan Corporation, New York, New York Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 83rd Annual Report, 1996 (81 Federal Reserve Bulletin 893). On eral Reserve Bulletin 379). Petitioner's September 12, 1995, the court denied motion for injunctive relief and for a petitioner's motion for an emergency stay of the Board's order was denied on stay of the Board's orders. August 17, 1995. On March 26, 1996, Jones v. Board of Governors, No. 95- the court denied the petition for review 1359 (D.C. Circuit, filed July 17, 1995), (79F.3dll68). was a petition for review of a Board order, dated June 19, 1995, approving Litigation Under the Financial the application by First Commerce Institutions Supervisory Act Corporation, New Orleans, Louisiana, to acquire Lakeside Bancshares, Snyder v. Board of Governors, No. 96- Lake Charles, Louisiana (81 Federal 1403 (D.C. Circuit, filed October 23, Reserve Bulletin 793). On November 15, 1996), is a petition for review of a Board 1995, the court granted the Board's order dated September 11, 1996, prohibmotion to dismiss the petition, and on iting petitioners from further participa- February 22, 1996, the court rejected tion in the banking industry (82 Federal petitioner's motion for reconsideration. Reserve Bulletin 1067). Money Station, Inc. v. Board of Gov- In Clifford v. Board of Governors, ernors, No. 95-1182 (D.C. Circuit, filed No. 96-1342 (D.C. Circuit, filed Sep- March 30, 1995), is a petition for review tember 17, 1996), petitioners seek reof a Board order, dated March 1, 1995, view of a Board order dated August 21, approving notices by Bane One Cor- 1996, denying petitioners' motion to poration, Columbus, Ohio; CoreStates dismiss an enforcement action against Financial Corp., Philadelphia, Pennsyl- them. vania; PNC Bank Corp., Pittsburgh, Long v. Board of Governors, No. 96- Pennsylvania; and KeyCorp, Cleveland, 9526 (10th Circuit, filed July 31, 1996), Ohio, to acquire certain data processing is a petition for review of a Board order assets of National City Corporation, dated July 2, 1996, assessing a civil Cleveland, Ohio, through a joint venture money penalty and imposing a cease (81 Federal Reserve Bulletin 491). On and desist order for violations of the April 23, 1996, a panel of the court of Bank Holding Company Act (82 Fedappeals granted the petition for review eral Reserve Bulletin 871). and vacated the Board's order. The full In Board of Governors v. Scott, No. court subsequently granted the Board's 96-7108 (D.C. Circuit, filed May 31, request for rehearing en bane and 1996), the appellants sought review of vacated the panel's judgment (94 F.3d an order of a magistrate judge enforcing 658). On Dec. 19, 1996, the parties filed an administrative investigatory suba motion for voluntary dismissal of the poena issued by the Board. On Novemaction. ber 15, 1996, the court dismissed the Jones v. Board of Governors, No. 95- petition on appellant's motion. 1142 (D.C. Circuit, filed March 3, In Interamericas Investments, Ltd. v. 1995), was a petition for review of a Board of Governors, No. 96-60326 (5th Board order, dated February 2, 1995, Circuit, filed May 8, 1996), petitioners approving applications by First Com- seek review of a Board order dated merce Corporation, New Orleans, Loui- April 9, 1996, imposing civil money siana, to merge with City Bancorp, Inc., penalties and a cease and desist order New Iberia, Louisiana, and First Bank- against petitioners (82 Federal Reserve shares, Inc., Slidell, Louisiana (81 Fed- Bulletin 609). Petitioners' motion to stay Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 215 the order pending judicial review was Act relating to treatment of fees for debt denied on August 20, 1996. cancellation agreements (12 C.F.R. sec- In Board of Governors v. Hotchkiss, tion 226.4 (d)(3)). On October 18, 1996, Adversary No. 95-3146 (U.S. Bank- the district court denied plaintiffs' ruptcy Court, N.D. Ohio, filed May 1, motion for a temporary restraining 1995), the Board sought a determination order. that a restitution obligation arising from Artis v. Greenspan, No. 96-CVa Board consent order (81 Federal 02105 (D. District of Columbia, filed Reserve Bulletin 406) was nondis- September 11, 1996), is a class comchargeable in bankruptcy. On Decem- plaint alleging race discrimination in ber 15, 1995, the court granted the employment. A related employment dis- Board's motion for summary judgment. crimination case, Artis v. Greenspan, The debtor's notice of appeal, filed on No. 96-CV-02619 (D. District of December 22, 1995, was voluntarily dis- Columbia), was filed November 19, missed on June 21, 1996. 1996. In Board of Governors v. Interameri- Leuthe v. Board of Governors, No. cas Investments, Ltd., No. H-95-565 96-5725 (E.D. Pennsylvania, filed (S.D. Texas, filed February 24, 1995), August 16, 1996), is an action against the Board sought to freeze certain assets the Board and other federal banking of a company pending the administra- agencies challenging the constitutive adjudication of a civil money tionality of the Office of Financial penalty assessment by the Board. On Institution Adjudication. March 1, 1995, the court issued a stipu- In Esformes v. Board of Governors, lated order requiring the company to No. 96-1916 (S.D. Florida, filed deposit $1 million into the registry of July 12, 1996), plaintiffs challenged the the court. Board's denial of an administrative In Board of Governors v. Pharaon, request for confidential supervisory No. 91-CIV-6250 (S.D. New York, information. Plaintiffs' motion for an filed September 17, 1991), the Board expedited hearing was denied on sought to freeze the assets of an indi- August 1, 1996. On October 22, the case vidual pending the administrative adju- was dismissed on plaintiffs' motion. dication of a civil money penalty assess- Kuntz v. Board of Governors, No. 96ment by the Board. On September 17, 1079 (D.C. Circuit, filed March 7, 1991, the court issued an order tempo- 1996), is a petition for review of a Board rarily restraining the transfer or disposi- order, issued under the Federal Reserve tion of the individual's assets. The order Act and the Bank Merger Act, approvhas been extended by agreement. ing the application of The Fifth Third Bank, Cincinnati, Ohio, and The Fifth Third Bank of Columbus, Columbus, Other Actions Ohio, to acquire certain assets and assume certain liabilities of twenty-five American Bankers Insurance Group, branches of NBD Bank, Columbus, Inc. v. Board of Governors, No. 96-CV- Ohio (82 Federal Reserve Bulletin 366). 2383-EGS (D. District of Columbia, In Research Triangle Institute v. filed October 16, 1996), is an action Board of Governors, No. l:96CV00102 seeking declaratory and injunctive relief (M.D. North Carolina, filed February 12, invalidating a new regulation issued by 1996), the plaintiff seeks reimbursement the Board under the Truth in Lending of costs under a contract with the Board. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 83rd Annual Report, 1996 In re Subpoena Duces Tecum, Misc. No. 96-MS^3 (TPJ) (D. District of Columbia, filed February 7, 1996), was an action seeking to compel production of confidential Board documents relating to the supervision of Bankers Trust Company. The case was dismissed on the parties' stipulation on May 20, 1996. Menick v. Greenspan, No. 95-CV- 01916 (D. District of Columbia, filed October 10, 1995), was a complaint alleging discrimination in employment. On November 4, 1996, the action was dismissed on the parties' joint motion. Kuntz v. Board of Governors, No. 95- 1485 (D.C. Circuit, filed September 21, 1995), is a petition for review of a Board order issued under the Federal Reserve Act and the Bank Merger Act approving the application of the Fifth Third Bank, Cincinnati, Ohio, to acquire certain assets and assume certain liabilities of twelve branches of PNC Bank, Ohio, N.A., Cincinnati, Ohio, and to establish certain branches (81 Federal Reserve Bulletin 976). Beckman v. Greenspan, No. 95- 35473 (9th Circuit, filed May 4, 1995), is an appeal of an order dismissing an action against the Board and others seeking damages for alleged violations of constitutional and common law rights. In In re Subpoena Duces Tecum, Misc. No. 95-06 (D. District of Columbia, filed January 6, 1995), the plaintiff sought to enforce a subpoena for predecisional supervisory documents relating to an action by Bank of England Corporation's trustee in bankruptcy against the Federal Deposit Insurance Corporation. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

217 Legislation Enacted Among the legislation enacted during business or customers served; the act 1996, the Economic Growth and Reg- also excludes the notice requirement for ulatory Paperwork Reduction Act, the a branch closing in an emergency acqui- National Securities Markets Improve- sition or when assistance is provided by ment Act, the Electronic Freedom the Federal Deposit Insurance Corporaof Information Act Amendments, and tion (FDIC). the Debt Collection Improvement Act The act permits well-capitalized directly affect the Federal Reserve Sys- banks rated CAMEL 1 or 2 to invest in tem or the institutions it regulates. bank premises in amounts up to 150 percent of the bank's capital and surplus as long as the bank provides the Board Economic Growth and with a thirty-day after-the-fact notice of Regulatory Paperwork Reduction the investment. Act of 1996 The act also permits the Board to On September 30, 1996, the President conduct a full-scope, on-site examinasigned into law the Economic Growth tion of certain well capitalized, well and Regulatory Paperwork Reduction managed state member banks rated Act of 1996 (Pub. L. 104-208, 110 Stat. CAMEL 1 or 2 every eighteen months 3009). The following discussion sum- rather than every twelve months. marizes the portions of the act that significantly affect the Federal Reserve and SAIF/BIF the institutions it regulates. The act capitalizes the Savings Association Insurance Fund (SAIF) at 1.25 per- Powers of State Member Banks cent of insured thrift institution deposits The act modifies the branching require- through a one-time special assessment ments for state member banks by elimi- on SAIF-assessable deposits held as of nating the requirement that they main- March 31, 1995. Weak institutions, as tain capital for their branches as if each well as certain others, may be exempt branch were a separately chartered bank. from the special assessment if the FDIC The act also eliminates the requirement determines it would reduce risk to the that state member banks file a branch SAIF. In addition, the act reduces the application with the Federal Reserve special assessment by 20 percent for System before installing an automatic certain Oakar banks (banks formed by teller machine (ATM) or remote service the merger of SAIF-insured and BIFunit by excluding such entities from the insured institutions) and would reduce definition of a branch. their assessments going forward. In addition, the act eliminates the The act also requires banks, after requirement that state member banks file December 31, 1996, to pay 20 percent branch closing notices for ATMs and of the interest on the bonds that funded for branch relocations that are within the initial capitalization of SAIF (FICO the immediate neighborhood and do bonds), but banks would be required to not substantially affect the nature of the pay a full pro rata share of the interest Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 83 rd Annual Report, 1996 obligation beginning after the earlier tions) engaged in permissible nonbankof December 31, 1999, or the date on ing activities subject to certain investwhich the last savings association ceases ment limitations and to engage de novo to exist. in nonbanking activities that have been The act merges SAIF and the Bank approved only by order. Insurance Fund (BIF) on January 1, Existing law allows the Board to per- 1999, but only if no insured depository mit a BHC to acquire shares of a cominstitution is a savings association on pany engaged in nonbanking activities, that date. including a savings association, if the Previously, both the Bank Merger Act Board determined, after notice and an and the Federal Deposit Insurance opportunity for a hearing, that the com- Act (FDI Act) required advance written pany is engaged in activities so closely approval from the appropriate federal related to banking that they are a proper banking agency to form Oakar banks. incident thereto. The act removes the The act eliminates the duplicative re- requirement that the Board provide an quirement of advance written approval opportunity for a hearing except in cases under the FDI Act for Oakar transac- in which a BHC acquires a savings tions and retains only the requirement association. of advance written approval under the The act exempts BHCs that own thrift Bank Merger Act. institutions from the provisions of the Under the act, the FDIC may refund Savings and Loan Holding Company excess payments from an insured bank Act and requires the Board to solicit or it may credit the excess toward future comments from the Office of Thrift payments from that bank. In addition, if Supervision (OTS) on any BHC acquithe balance in BIF exceeds the balance sition of a thrift institution and to conrequired to meet the designated reserve sult with the OTS on examinations and ratio applicable to such fund, the excess enforcement actions for BHCs that own shall be refunded to insured banks. thrift institutions. The act eliminates notices of new director or senior executive officers (914 Bank Holding Company Act notices) currently required for banks The act allows well capitalized and well chartered within the past two years or managed bank holding companies that have undergone a change in control (BHCs) that control generally well capi- within the past two years. However, the talized and well managed depository act gives the Board discretion to require institutions, to engage de novo, without notice in connection with the review advance Board approval, in nonbanking of a prompt corrective action plan or activities approved by regulation. In otherwise. The act retains 914 notices addition, to be eligible for this excep- for undercapitalized and troubled banks tion, the BHC or its subsidiaries must and allows an extension of up to ninety not be subject to an administrative en- days of the period to disapprove an offiforcement action or a cease and desist cer or director. order pursuant to section 8 of the FDI The act eliminates the requirement Act during the preceding twelve-month that Board approval be obtained to make period. The act also establishes a a divestiture of shares effective for purstreamlined process for these well run poses of the BHC Act. BHCs to obtain Board approval to The act permits the Board to allow acquire companies (except thrift institu- a BHC and its subsidiaries five years, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 219 instead of two, to dispose of stock Deposit Institution Management acquired in satisfaction of a debt pre- Interlocks Act viously contracted. It also grants the Under the Deposit Institution Manage- Board authority to extend the five-year ment Interlocks Act (DIMIA), the act period to ten years in certain situations. permits banks and BHCs with assets The act amends the BHC Act to perof up to $2.5 billion (increased from mit nonbank banks to grow more than $1 billion) to have interlocking manage- 7 percent per year without losing their ment with nonaffiliated institutions with exemption under the BHC Act. The act assets of up to $1.5 billion (increased also amends the definition of credit from $500 million) provided that the card bank for purposes of the BHC institutions are not located in the same Act to permit these institutions to offer community or metropolitan statistical credit cards secured by certain types of area. It also permits grandfathered interdeposits. locks to continue indefinitely and The act permits the Board to exempt restores the Board's authority to grant BHCs that control nonbank banks, trust exemptions under DIMIA, subject to banks, credit card banks, Edge Act and certain conditions. agreement corporations, and industrial loan companies from the anti-tying provisions of the BHC Act. In addition, the Insider Lending Restrictions act permits the OTS to make exceptions to the anti-tying provisions of the Home The act permits the Board to exempt Owners' Loan Act if the exceptions from insider lending restrictions prefwould not be contrary to the purposes of erential loans to executive officers and the anti-tying provisions and if they con- directors of a subsidiary of a company form to the exceptions granted by the that controls a state member bank under Board. the following conditions: the officer or The act excludes from the definition director does not participate in major of a BHC a qualified family partnership policy-making functions of the bank, (QFP). A QFP is defined as a general or and the assets of the subsidiary do not limited partnership that (1) does not con- exceed 10 percent of the consolidated trol more than one registered BHC, assets of a company that controls the (2) does not engage (except indirectly) bank and the subsidiary (and is not conin any business activity, (3) has no trolled by any other company). investments other than those permitted The act also excludes from the insider by a BHC, (4) is not obligated on any lending restrictions a state member debt (either directly or as a guarantor), bank's company-wide benefit or comand (5) has partners, all of whom are pensation plan as long as it is widely either individuals related to each other available to employees of the bank and by blood, marriage or adoption, or as long as it does not give any officer, is a trust for the primary benefit of director or principal shareholder (or such individuals. The act requires related interest) preference over other QFPs to file a statement with the Board employees of the bank. indicating, among other things, the basis for their eligibility, the activities Examination Activities and investments of the QFP, and an agreement to be subject to limited To make examinations by federal bankexaminations. ing agencies well coordinated, the act Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 83rd Annual Report, 1996 requires them to have their examiners exemption to be adjusted annually in the consult with each other, coordinate their future in accordance with changes in the examinations of depository institutions, CPI. The act also gives institutions an and resolve any inconsistencies in their alternative method for making HMD A exam recommendations. The act also data publicly available by allowing indirects the federal banking agencies to formation to be maintained at the bank's consider appointing an "examiner-in- home or branch offices as long as the charge" to coordinate examinations of public notice states that such informadepository institutions. tion is available upon request. Audits Equal Credit Opportunity Act The act eliminates the requirement for The act creates a legal privilege for attestation by an independent auditor information developed by creditors under the FDI Act. The act also permits through "self-tests" that are conducted the internal audit committees of certain to determine the level or effectiveness of insured depository institutions to consist their compliance with the Equal Credit of some (but not a majority) of inside Opportunity Act (ECOA), provided that directors, rather than entirely outside appropriate corrective action is taken to directors, if the appropriate federal address any possible violations. banking agency determines that the insti- Privileged information may not be tution has encountered hardships in obtained by a government agency for retaining and recruiting a sufficient num- use in an examination or investigation ber of competent outside directors to relating to fair lending compliance, or serve on the committee. by a government agency or credit applicant in any civil proceeding in which a violation of ECOA is alleged. The act Truth in Savings also provides that a challenge to a credi- Five years after enactment, the act elimi- tor's claim of privilege may be filed in nates civil liability for violations Truth any court or administrative law proceedin Savings Act. The act also repeals ing with appropriate jurisdiction. The the definition of 'indoor lobby sign," act directs the Board to promulgate final exempts certain credit unions from regulations implementing these changes the act and eliminates any disclosure within six months of enactment. requirements for rollover certificates of deposit with terms of less than thirty Real Estate Settlement days. Procedures Act The act directs the Board and the Home Mortgage Disclosure Act Department of Housing and Urban With regard to the Home Mortgage Dis- Development (HUD) to simplify and closure Act (HMDA), the act increases improve the disclosure requirements on the exempt asset level (the level below transactions subject to both the Real which institutions are exempt from Estate Settlement Procedures Act HMDA) from $10 million to $28 mil- (RESPA) and the Truth in Lending Act lion, a percentage rise equal to the (TILA). This includes providing a cumulative percentage increase in the "single format" for such disclosures. CPI since 1975. The act requires the The Board and HUD must propose new Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 221 regulations within six months of enact- secured" credit transactions. This ment or, when necessary, submit legisla- change is effective September 30, 1995. tive recommendations to "simplify and unify" RESPA and TIL A disclosures. Fair Credit Reporting Act The measure also establishes less onerous procedures for lenders to inform The act amends the Fair Credit Reportborrowers that mortgage servicing may ing Act (FCRA) and grants the Board be transferred by the lender to another interpretive authority, in consultation entity. with the other federal banking agencies, for determining how the provisions of Truth in Lending Act FCRA apply to banking institutions regulated by the federal banking agen- The act permits the Board to exempt cies (for example, national and state classes of transactions, except for cer- member banks). The act also directs the tain high-cost mortgages, from coverage Board to report to the Congress by under all or part of TILA if the Board March 31, 1997, on the availability to determines that coverage does not pro- the public of sensitive identifying inforvide a meaningful benefit to consumers. mation about consumers, the possibility The act lists several factors the Board that such information could be used for must take into account in determining financial fraud and the potential for whether to exempt transactions. In addi- fraud, or risk of loss, if any, to insured tion, the act allows "sophisticated bor- depository institutions. The report is rowers" (which it defines as those with also to include any suggestions for legisan annual earned income of more than lative change. $200,000 and net assets of more than $1 million) to waive their rights to receive TILA disclosures. Electronic Fund Transfer Act The act also provides an alternative The act directs the Board to report to the disclosure requirement for adjustable- Congress no later than six months after rate residential mortgages (ARMs). The enactment on whether the Electronic alternative may provide that payments Fund Transfer Act (EFTA) could be may "increase or decrease substanapplied to electronic stored-value prodtially" as long as the statement also ucts without adversely affecting their indicates the maximum future interest cost, development, and operation, and rate and payments on a $10,000 loan whether alternatives to regulation can originated at a recent interest rate. better achieve the purposes of the EFTA. The act allows the Board and other In addition, the act prohibits the Board agencies to reduce or spread out restitufrom taking any regulatory action tion required for TILA violations in regarding stored-value products for cases where full, immediate restitution either three months after the report to would jeopardize the safety and soundthe Congress or nine months after enactness of the institution. The act also corment, whichever is later. rects an error in the 1995 TILA amendments that unintentionally provided retroactive relief from civil liability for Consumer Leasing Act certain TILA violations with regard to "any" consumer credit transaction. The The act directs the Board to issue regact limits the relief to "closed-end home ulations updating and clarifying leas- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 83rd Annual Report, 1996 ing requirements and definitions and hensive supervision or regulation in addressing other consumer leasing its home country, the Board may still issues. The Board must issue model dis- approve the bank's application to estabclosure forms for consumer leasing lish a U.S. office if the bank's home which, if properly used by lessors, will country is actively working to establish constitute compliance with required dis- a system of bank supervision and if closure requirements. all other factors are consistent with The act modifies lease advertising approval. The act directs the Board, in requirements. It eliminates three disclo- exercising this authority, to consider sures currently required in lease adver- whether the bank has implemented protising: consumer liability at lease-end cedures to combat money laundering. for the difference between the proper- The act also imposes a processing deadty's anticipated fair market value and its line for such applications. appraised actual value; the "amount or The act permits the Board to allow method of determining the amount" of banks to invest up to 20 percent of their any such liability; and the disclosure of capital and surplus in an Edge or agreeany purchase option, including the ment corporation if the Board deteroption price. mines that an investment greater than Instead, lease advertisements that 10 percent would hot be unsafe or contain certain "trigger terms" (such unsound. | as the amount of any payment) must The act eliminates the requirement clearly and conspicuously state the fol- that banks (except foreign banks and lowing terms: that the transaction is a their affiliates) file consolidated reports lease; the total of initial payments with the appropriate federal banking required on or before lease consumma- agency if any of their extensions of tion and delivery of the property; any credit, in the aggregate, are secured required security deposit; the number, directly or indirectly by 25 percent or amount and timing of scheduled pay- more of any class of shares of the same ments; and, in leases in which the con- insured depository institution. sumer has an end-of-term liability based on the property's residual value, that Bank Service Companies an extra charge may be imposed at lease-end. The act expands the types of entities included under the definition of a bank service corporation (redefined as a bank Foreign Banks service company) to include limited liability companies. It defines "limited lia- The act requires the Board to reduce bility company" as a company, partnerburden and avoid unnecessary duplica- ship, trust, or similar business entity that tion in examining branches and agencies provides that a member or manager of of foreign banks. It also eliminates the the entity is not personally liable for a requirement of annual on-site exams for liability of the entity solely because that branches and agencies of foreign banks person is a member or manager of it. and provides instead that they be exam- This amendment allows bank service ined as frequently as would a state mem- companies to take advantage of the limber bank. ited liability rules typically available to The act provides that, even if a for- corporations and the flow-through tax eign bank is not subject to compre- benefits available to partnerships. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 223 Regulatory Relief The act requires the Board to submit to the Congress, within 180 days of The act requires each federal banking enactment, a report on actions being agency to review its regulations every taken or to be taken to eliminate and ten years to identify outdated or other- conform inconsistent and duplicative wise unnecessary regulatory require- accounting and reporting requirements, ments imposed on insured depository as required by section 121 of the FDIC institutions. The review must allow for Improvement Act. Section 121 requires public comment. Each agency must pub- regulators to use uniform accounting lish in the Federal Register a summary principles consistent with, or no less of the comments and the agency's stringent than, generally accepted response and report to the Congress on accounting principles (GAAP). the comments and on any legislative The act repeals 12 U.S.C., section changes necessary to eliminate regula- 1833, which requires the Board to report tory burdens. annually to the Congress on, among In addition, the act amends the Riegle other things, the number of formal and Community Development and Regu- informal supervisory, administrative, latory Improvement Act of 1994 to and civil enforcement actions initiated require each federal banking agency to each year; the number of individuals determine whether existing regulations and institutions against whom civil require insured depository institutions money penalties were assessed; and a and insured credit unions to produce description of all other enforcement unnecessary internal written policies efforts and initiatives relating to unsafe and, if appropriate, to eliminate such and unsound practices, criminal mispolicies. conduct, and insider abuse. The act also repeals 12 U.S.C., section 3912, which requires the Board to report annually to the Congress on certain aspects of the Reports Requirements international lending operations of bank- The act eliminates 12 U.S.C., section ing institutions. 251, which requires the Board to publish an annual report on the availability of credit to small businesses. However, the Farmers and Ranchers in act creates a new requirement that, Drought-Stricken Areas within twelve months of enactment and The act declares the sense of the Conevery sixty months thereafter, the gress to be that bank regulators should Board—in consultation with other fedwork with farmers and ranchers in eral banking agencies, the Small Busidrought areas to allow them to meet ness Administration, and the Secretary their financial obligations to be met of Commerce—report to the Congress without imposing burdens on them. on the availability of credit to small businesses. The report should include a description of the demand for, and avail- National Securities Markets ability of, credit, the range of credit Improvement Act of 1996 options and types of credit products available, and the credit needs and types The National Securities Markets Imof risks associated with lending to small provement Act of 1996 (Pub. L. 104businesses. 290, 110 Stat. 3416) affects the Board's Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 83 rd Annual Report, 1996 authority in two ways. First, the Board ing whether a FOIA request should no longer has the authority to regulate receive expedited processing and they loans to certain registered broker- indicate when the agency must specify dealers unless it finds that such rules are the amount of information that was necessary or appropriate in the public withheld from the requestor. interest or for the protection of inves- The FOIA amendments also limit the tors. Second, it repeals section 8(a) of situations in which the Board may the Securities Exchange Act, which lim- obtain a stay of judicial proceeding on ited sources of broker-dealer funding the basis of a FOIA backlog, and they and required nonmember banks that modify the content, timetable, and proengage in such lending to file agree- cedures for filing annual reports to the ments with the Federal Reserve. Congress under FOIA. Electronic Freedom of Debt Collection Improvement Act Information Act Amendments of 1996 of 1996 On April 26, 1996, the Congress passed Under the Electronic Freedom of Infor- the Debt Collection Improvement Act of mation Act Amendments of 1996, 1996, (Pub. L. 104-134, 110 Stat. 1321- (Pub. L. 104-231, 110 Stat. 3048), fed- 376), which amended the Federal Finaneral agencies, including the Board, are cial Management Act of 1994 by requirrequired to make any records processed ing that all federal payments (defined as and disclosed in response to a request federal wage, salary, retirement, benefit, under the Freedom of Information Act and reimbursement payments) be made (FOIA) routinely available for public electronically within ninety days of inspection and copying if the agency enactment. The act allows a waiver of determines that they "have become or this requirement if the recipient of the are likely to become the subject of sub- federal payment certifies in writing sequent requests." The act also requires that he or she does not have an account agencies to maintain reference material with a financial institution. This general or a guide to aid the public in making waiver expires as of January 1, 1999, at a FOIA request. In addition, agencies which time all federal payments must be must make certain records created on or made electronically unless the Secretary after November 1, 1996, available to the of the Treasury finds that compliance public by electronic means. would impose a hardship or that the The act also increases the time limit class or types of checks or other cirfor responding to FOIA requests from cumstance do not require electronic ten to twenty working days and encour- payment. • ages agencies that experience difficulties in meeting FOIA's time limits to promulgate regulations providing for "multitrack processing" of FOIA requests. In addition, the act allows additional time for responding to a FOIA request if unusual circumstances are involved, such as the volume of records sought. The act defines the term "compelling need" for purposes of determin- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

225 Banking Supervision and Regulation The 1990s have been a period of signifi- of such institutions grew 77 percent. cant growth in the Federal Reserve's And although the number of bank holdresponsibilities for banking oversight as ing companies and their nonbank subwell as change in its approach to such sidiaries declined between 1990 and oversight. Much of the increased re- 1995, the assets of these groups grew sponsibility stems from 1991 legislation markedly over the period (54 percent); in which the Congress expanded the most of the asset growth was in the Federal Reserve's supervisory authority "section 20" companies, nonbank subover the U.S. activities of foreign bank- sidiaries engaged in underwriting corpoing organizations. The purpose of the rate securities. bill was to fill certain gaps in the super- The growth of the Federal Reserve's vision and regulation of such activities supervisory responsibilities has inand to ensure that U.S. banking policies creased the demands on the System's are applied fairly and consistently to all resources. In response, the Federal entities that conduct banking in the Reserve has, over the past few years, United States. The legislation, the For- adapted its approach to the supervisory eign Bank Supervision Enhancement process to make it more focused on risk, Act of 1991 (FBSEA), involved 400 more sensitive to the burden it places on institutions with assets of more than institutions, and more cost-effective. $700 billion.1 In the past, examinations and inspec- All told, from 1990 through 1995, tions have focused on regulatory comaggregate assets under the Federal Re- pliance and on assessing the financial serve's supervision more than doubled, strength of an institution by reconciling and despite a dramatic consolidation accounts, reviewing individual transwithin the U.S. banking system during actions, and analyzing the institution's that period, the number of institutions financial condition. In recent years, the Federal Reserve supervised however, improved technology and remained relatively stable, at approxi- financial innovations have enabled mately 7,000. Among state member banks to develop financial products that banks, which account for a large portion can quickly alter their balance sheets of the Federal Reserve's oversight and change their exposure to risk. As a responsibility, the number of state result, supervisory authorities can no member banks remained at around 1,000 longer rely solely on periodic assessbetween 1990 and 1995, while the assets ments of an institution's balance sheet position at a point in time, but must ensure that the institution has adequate 1. Before passage of FBSEA, primary responsiprocedures to identify, measure, monibility for supervising and examining the U.S. branches and agencies of foreign banking organi- tor, and control its risk exposure. zations lay with the licensing agencies—the states Important changes have been impleor the Office of the Comptroller of the Currency. mented or are in the process of being In carrying out its responsibilities for foreign adopted based on a fundamental review banking organizations before FBSEA, the Federal Reserve relied mainly on examinations conducted of the Federal Reserve's examination by the states. procedures. These changes include Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 83rd Annual Report, 1996 • Refocusing on the areas of greatest tem. In overseeing these organizations, risk to a bank and on an assessment the Federal Reserve primarily seeks to of the bank's risk-management proce- promote their safe and sound operation dures and capabilities and their compliance with laws and • Customizing examinations to fit the regulations, including the Bank Secrecy size, activities, and risks of the Act and consumer and civil rights laws.2 institution The Federal Reserve also examines the • Developing a streamlined examina- following specialized activities of these tion program for smaller institutions institutions: information systems, fidu- • Adapting the existing approach to ciary activities, mutual fund activities, examination, which is based on an government securities dealing and broinstitution's legal structure, to a kering, municipal securities dealing, framework based on the institution's securities clearing activities, and securifunctional or business lines ties underwriting and dealing through • Conducting a greater portion of an special subsidiaries. examination off-site The Federal Reserve also has respon- • Improving communications with ex- sibility for the supervision of (1) all amined institutions Edge Act corporations and agreement • Cooperating more closely with inter- corporations, (2) the international operanal auditors and outside accountants tions of state member banks and U.S. • Placing greater emphasis on market bank holding companies, and (3) the discipline, and using positive incen- operations of foreign banking compatives to encourage prudent oversight nies in the United States.3 by management. The Federal Reserve exercises important regulatory influence over the entry The Federal Reserve has adopted a into, and the structure of, the U.S. bankrisk-focused approach to examinations ing system through its administration as the principal vehicle for implementof the Bank Holding Company Act, the ing these changes. The risk-focused Bank Merger Act for state member approach highlights the importance of the management process for identifying, measuring, monitoring, and controlling 2. The Board's Division of Consumer and risk. It gives examiners more flexibility Community Affairs is responsible for coordinating in planning and conducting examina- the Federal Reserve's supervisory activities with regard to the compliance of banking organizations tions. The risk-focused approach also with consumer and civil rights. To carry out this places more attention on an institution's responsibility, the Federal Reserve specifically internal controls and on analysis and trains a number of its bank examiners to evaluate planning before the on-site examination institutions with regard to such compliance. The begins. chapter of this REPORT covering consumer and community affairs describes these regulatory responsibilities. Compliance with other statutes and regulations, which is treated in this chapter, is Scope of Responsibilities for the responsibility of the Board's Division of Bank- Supervision and Regulation ing Supervision and Regulation and the Reserve Banks, whose examiners also check for safety and The Federal Reserve is the federal soundness. supervisor and regulator of all U.S. bank 3. Edge Act corporations are chartered by the Federal Reserve, and agreement corporations are holding companies and of statechartered by the states, to provide all segments of chartered commercial banks that are the U.S. economy with a means of financing intermembers of the Federal Reserve Sys- national trade, especially exports. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 227 banks, and the Change in Bank Control of capital, earnings, asset and liability Act for bank holding companies and management, liquidity, and sensitivity state member banks. Also, the Federal to market risk, and (5) a review for Reserve is responsible for imposing compliance with applicable laws and margin requirements on securities trans- regulations. actions. In carrying out these responsibilities, the Federal Reserve coordinates State Member Banks its supervisory activities with other federal and state regulatory agencies and At the end of 1996, 1,014 state-chartered with the bank regulatory agencies of banks were members of the Federal other nations. Reserve System (excluding nondepository trust companies and private banks). These banks represented about 11 per- Supervision for Safety and cent of all insured commercial banks Soundness and held about 25 percent of all insured commercial bank assets. To ensure the safety and soundness of The guidelines for Federal Reserve banking organizations, the Federal examinations are fully consistent with Reserve conducts on-site examinations, section 10 of the Federal Deposit Insurand inspections and off-site surveillance ance Act as amended by section 111 of and monitoring; it also undertakes enthe Federal Deposit Insurance Corporaforcement and other supervisory actions. tion Improvement Act of 1991, and by the Riegle Community Development Examinations and Inspections and Regulatory Improvement Act of The Federal Reserve conducts examina- 1994. A full-scope, on-site examination tions of state member banks, branches is required at least once during each and agencies of foreign banks, Edge Act twelve-month period for all depository corporations, and agreement corpora- institutions; however, certain welltions. Because many elements reviewed capitalized and well-managed instituat bank holding companies and their tions with assets of less than $250 milnonbank subsidiaries differ from bank lion may be examined every eighteen examinations, the Federal Reserve con- months. ducts inspections of holding companies During 1996, the Federal Reserve and their subsidiaries. Pre-examination Banks conducted 606 examinations planning and on-site review of opera- (some of them jointly with the state tions are integral parts of ensuring the agencies), and state banking departsafety and soundness of financial institu- ments conducted 324 independent retions. Regardless of whether it is an quired examinations. examination or inspection, the review entails (1) an assessment of the quality Bank Holding Companies of the processes in place to identify, measure, monitor and control risk expo- At year-end 1996, the number of bank sures, (2) an appraisal of the quality holding companies totaled 5,998. These of the institution's assets, (3) an evalua- organizations controlled 7,213 insured tion of management which includes an commercial banks and held approxiassessment of internal policies, proce- mately 93 percent of the assets of all dures, controls, and operations, (4) an insured commercial banks in the United assessment of the key financial factors States. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 83rd Annual Report, 1996 Federal Reserve guidelines call for junction with state bank supervisory annual inspections of large bank holding authorities in New York and California, companies and smaller companies with against the Bangkok Metropolitan significant nonbank assets. Small com- Bank, PCL, Bangkok, Thailand, which panies (those with assets less than resulted in the bank's consent to termi- $150 million) that do not have problems nate its U.S. banking operations. The are selected for inspection on a sample action arose from serious unsafe and basis, and medium-sized companies unsound banking practices and viola- ($150 million to $500 million in assets) tions of law, including misleading and that do not have problems are inspected false statements made to regulatory offion a three-year cycle. The inspection cials, creation of false records, diversion focuses on the operations of the parent of loan proceeds benefitting insiders, holding company, its nonbank subsidi- and extensions of credits to nominee aries, and the overall condition of the borrowers. consolidated organization. In other significant matters, the Board In judging the financial condition of Governors assessed civil money penof subsidiary banks, Federal Reserve alties totaling $5.9 million, including a examiners consult the examination $3.5 million fine against a foreign bank reports of the federal and state banking for violations, by its section 20 subsidiauthorities that have primary responsi- ary, of the Board of Governors' revenue bility for the supervision of these banks, limit, and a $300,000 fine against a forthereby minimizing duplication of effort eign bank and one of its U.S. branches and reducing the burden on banking based on their lack of compliance with organizations. In 1996 the Federal the Bank Secrecy Act and with an exist- Reserve inspected 1,674 bank holding ing written agreement. Two cases incompanies. Altogether, Federal Reserve volving fines totaling $1.7 million are examiners conducted 1,922 bank hold- under appeal in federal courts. ing company inspections, 149 of which The Board of Governors also continwere conducted off-site, and state ued to address the misconduct of some examiners conducted 73 independent former Bankers Trust officials who were inspections. involved with improper transactions involving leveraged derivatives; the Board issued consent orders limiting, among Enforcement Actions, Civil other things, the individuals' ability to Money Penalties, and market such transactions at other bank- Suspicious Activity Reporting ing organizations and by assessing fines. In 1996, the Federal Reserve Banks All final enforcement orders issued recommended, and members of the by the Board of Governors and all writ- Board's staff initiated and worked on, ten agreements executed by the Federal 133 enforcement cases involving 285 Reserve Banks in 1996 are available to separate actions, such as cease and the public. In addition to formal enforcedesist orders, written agreements, re- ment actions, the Federal Reserve Banks moval and prohibition orders, and civil completed eighty-four informal enforcemoney penalties. Of these, 66 cases ment actions, such as memorandums of involving 129 actions were completed understanding and resolutions from the by year-end. board of directors. Of particular note was the action that The Federal Reserve adopted an interthe Board of Governors took, in con- agency rule, effective April 1, 1996, that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 229 simplifies the process for reporting sus- troller of the Currency (OCC), and the pected crimes and suspicious activities Office of Thrift Supervision (OTS). involving money laundering or the Bank Secrecy Act. The new reporting system Fiduciary Activities enables a banking organization to report The Federal Reserve has supervisory such activity by filing a single form, the responsibility for institutions that hold interagency Suspicious Activity Report, more than $7.3 trillion of discretionary with the Department of the Treasury's and nondiscretionary assets in various Financial Crimes Enforcement Network. fiduciary capacities. This group of insti- The report goes into a computer datatutions includes 319 state-chartered base accessible by all appropriate fedmember banks and trust companies, eral and state banking and law enforce- 83 nonmember trust companies that are ment authorities. subsidiaries of bank holding companies, and 13 entities which are branches or agencies of foreign banking organiza- Specialized Examinations tions or edge corporation subsidiaries of domestic banking institutions. The Federal Reserve conducts special- On-site examinations are essential to ized examinations of banking organizaensure the safety and soundness of tions regarding electronic data processfinancial institutions that have fiduciary ing, fiduciary activities, government operations. These examinations include securities dealing and brokering, (1) an evaluation of management, polimunicipal securities dealing, securities cies, audit and control procedures, and clearing, and securities underwriting and risk management, (2) an assessment of dealing through so-called section 20 the quality of trust assets, (3) an assesssubsidiaries. The Federal Reserve also ment of earnings, (4) a review for conreviews state member banks and bank flicts of interest, and (5) a review for holding companies that act as transfer compliance with laws, regulations, and agents. general fiduciary principles. During 1996, Federal Reserve examiners con- Electronic Data Processing ducted 206 on-site trust examinations of state member banks and trust compa- Under the Interagency EDP Examinanies, branches and agencies of foreign tion Program, the Federal Reserve banking organizations or edge corporaexamines the electronic data processing tion subsidiaries of domestic banking (EDP) activities of state member banks, institutions which held approximately U.S. branches and agencies of foreign $6.6 trillion in fiduciary assets. banks, Edge Act and agreement corporations and independent data centers that Government Securities Dealers provide EDP services to these instituand Brokers tions. During 1996, the Federal Reserve conducted 411 EDP examinations. The The Federal Reserve is responsible for Federal Reserve also was the lead examining the government securities agency on four examinations of large dealing and brokering of state member Multiregional Data Processing Servicers banks and foreign banks for compliance examined on an interagency basis with with the Government Securities Act of the Federal Deposit Insurance Corpo- 1986 and regulations of the Department ration (FDIC), the Office of the Comp- of Treasury. Forty-two state member Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

230 83rd Annual Report, 1996 banks and six state branches of foreign approved activities to no more than banks have notified the Board that they 5 percent of total revenues for each secare currently government securities tion 20 securities subsidiary. This limit dealers or brokers that are not otherwise was subsequently increased in Septemexempt from Treasury's regulations. ber 1989 to 10 percent. In January 1993, During 1996 the Federal Reserve con- the Board adopted an optional indexed ducted examinations of broker-dealer revenue test that reflects the changes in activities in government securities at the level and structure of interest rates state member banks and foreign banks. since 1989. In January 1989, the Board approved applications by bank holding companies Municipal Securities Dealers to underwrite and deal in corporate and and Clearing Agencies sovereign debt and equity securities, The Securities Act Amendments of 1975 subject, in each case, to reviews of made the Board responsible for super- managerial and operational infrastrucvising state member banks and bank ture and other conditions and requireholding companies that act as municipal ments or firewalls, specified by the securities dealers or as clearing agen- Board. In approving this broader range cies. The Board supervises thirty-eight of activities, the Board also adopted banks that act as municipal securities more restrictive firewalls than those condealers and three clearing agencies that tained in its 1987 approval order. act as custodians of securities involved Based on its experience supervising in transactions settled by booking these section 20 subsidiaries and develentries. In 1996 the Federal Reserve opments in the securities markets since examined all three of the clearing agen- the revenue test was adopted, the Board cies and 21 of the banks that deal in concluded in December 1996 that a secmunicipal securities. tion 20 firm could derive up to 25 percent of its revenue from underwriting and dealing in ineligible securities. In Securities Subsidiaries of Bank light of this action and an accounting Holding Companies change concerning the treatment of Section 20 of the Banking Act of 1933 interest earned on securities that may (the Glass-Steagall Act) prohibits the be held by a member bank, the Board affiliation of a member bank with a com- concurrently eliminated the optional pany that is "engaged principally" in indexed revenue test. Also, during 1996, underwriting or dealing in securities. the Board eased or eliminated three of The Board in 1987 approved proposals the firewalls imposed on the operations by banking organizations to underwrite of section 20 subsidiaries, and continued and deal on a limited basis in specified work on an extensive review of all other classes of bank "ineligible" securities firewalls in order to eliminate unneces- (that is, commercial paper, municipal sary regulatory burden and enable secrevenue bonds, conventional residential tion 20 subsidiaries to operate in an mortgage-related securities, and securi- efficient, effective manner. This effort tized consumer loans) in a manner con- resulted in the publication for comment sistent with section 20 of the Glass- early in January 1997 of a proposal to Steagall Act and the Bank Holding eliminate most firewalls and to modify Company Act. At that time, the Board the remaining ones to ease compliance limited revenues from these newly burdens. It was proposed that remaining Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 231 firewalls be formally adopted as operat- An integral part of the bank surveiling standards applicable to section 20 lance function is an automated system subsidiaries. which is used to estimate examination At year-end 1996 forty bank holding ratings for all banks and to identify companies held section 20 subsidiaries banks with the potential to become critiauthorized to underwrite and deal in cally undercapitalized over a two year ineligible securities. Of these, twenty- horizon. In 1996, the Federal Reserve two could underwrite any debt or equity undertook a validation effort for this sursecurity; three could underwrite any veillance model. debt security; and fifteen could under- The Federal Reserve also continued write only the limited types of debt to implement revisions and additions to securities approved by the Board in its bank holding company surveillance 1987. The Federal Reserve uses special- system to further assist supervisory staff ized procedures for reviewing opera- in evaluating the financial profiles of tions of these securities subsidiaries; it individual bank holding companies. conducted 40 such inspections in 1996. During 1996, quarterly screens evaluating capital markets activities and liquid- Transfer Agents ity for consolidated bank holding companies were completed. These changes Federal Reserve examiners also conduct were augmented by the development of examinations of state member banks and a set of "parent only' screens which bank holding companies that are regfocus on the bank holding companies' istered transfer agents. Among other individual (nonconsolidated) operations. things, transfer agents counter-sign and Other efforts were undertaken during monitor the issuance of securities, regis- 1996 to support and enhance the effecter their transfer, and exchange or contiveness of Federal Reserve surveillance vert such securities. During 1995, Fedand monitoring activities. For example, eral Reserve examiners conducted onthe System introduced PRISM, Perforsite examinations at 77 of the 170 banks mance Report Information and Surveiland bank holding companies registered lance Monitoring. PRISM provides as transfer agents with the Board. access to National Information Center (NIC) data on banks, bank holding com- Surveillance and Monitoring panies, banking subsidiaries of bank The Federal Reserve monitors the finan- holding companies, and Off-Site Risk cial condition and performance of indi- Analysis (Surveillance). The Federal vidual banking organizations and of the Reserve also implemented a new interaggregate banking system as a whole to nal system to access Uniform Bank Peridentify areas of supervisory concern. formance Reports in March, 1996. Reserve Banks and the Board use auto- The Federal Reserve also completed a mated surveillance screening systems to review of the definitions of commercial identify organizations with poor or dete- banks, savings bank, and bank holding riorating financial profiles and to iden- companies used by various divisions of tify adverse trends affecting the banking the Board, the Reserve Banks, and the system. Information from these surveil- FDIC. The result was standard definilance activities is then used to intensify tions of these commonly selected instianalysis and allocate additional exami- tutional groupings to assist the Board nation resources to institutions vulner- and Reserve Banks in providing consisable to deterioration. tent figures to division management, the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 83rd Annual Report, 1996 Board, and the public. Automated moni- banks, Edge Act corporations, and bank toring systems continue to rely heavily holding companies, principally at the on the information in the regulatory U.S. head offices of these organizations, reports filed by banking organizations. where the ultimate responsibility for To ensure the timeliness and accuracy of their foreign offices lies. In 1996 the the reports, the Federal Reserve main- Federal Reserve conducted on-site fulltains the Regulatory Reports Monitoring scope and targeted-scope examinations System to track domestic and foreign of eleven foreign branches of state membanking organizations that file late or ber banks and sixty-nine foreign subsidinaccurately. iaries of Edge Act corporations and bank The Federal Reserve actively partici- holding companies. All of the examinapates with other federal and state bank- tions abroad were conducted with the ing authorities in efforts to enhance sur- cooperation of the supervisory authoriveillance tools; currently, the Federal ties of the countries in which they took Reserve chairs the Federal Financial place; when appropriate, the examina- Institutions Examination Council Task tions were coordinated with the Office Force on Surveillance. of the Comptroller of the Currency. Also, examiners made forty-nine visitations to the overseas offices of U.S. International Activities banks to obtain financial and operating information, and in some instances, to The Federal Reserve plays a critical role evaluate their compliance with correcin the supervision and regulation of the tive measures or to test-check adherence international activities of U.S. banking to safe and sound banking practices. organizations and the U.S. activities of foreign banking organizations. The Board provides authorization and regu- Foreign Branches of Member Banks lation of foreign branches of member Under provisions of the Federal Reserve banks; overseas investments by member Act and of the Board's Regulation K banks, Edge Act corporations and agree- (International Banking Operations), ment corporations, and bank holding member banks must obtain Board companies; and investments by bank approval to establish branches in foreign holding companies in export trading countries. In reviewing proposed forcompanies. The Board also charters eign branches, the Board considers the Edge Act corporations. In addition, the requirements of the law, the condition of Board acts on applications by foreign the bank, and the bank's experience in banking organizations to acquire U.S. international business. In 1996 the Fedbanks; to establish U.S. branches, ageneral Reserve approved the opening of cies, representative offices, and commer- 25 foreign branches of 15 banks. By the cial lending company subsidiaries; and end of 1996, 96 member banks were to engage in nonbanking activities in the operating 771 branches in foreign coun- United States. tries and overseas areas of the United States; 66 national banks were operating 586 of these branches, and 30 state Foreign Office Operations of U.S. member banks were operating the Banking Organizations remaining 185 branches. In addition, The Federal Reserve examines the inter- 23 nonmember banks were operating national operations of state member 34 branches in foreign countries. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 233 Edge Act and Agreement Corporations although pursuant to Regulation K, most foreign investments may be made under Edge Act corporations are international general-consent procedures that involve banking organizations chartered by only after-the-fact notification to the the Board to provide all segments of Board. the U.S. economy with a means of financing international business, especially exports. An agreement corpora- Export Trading Companies tion is a state-chartered or federally In 1982 the Bank Export Services Act chartered company that enters into an amended section 4 of the Bank Holding agreement with the Board not to exer- Company Act to permit bank holding cise any power that is impermissible for companies, their subsidiary Edge Act or an Edge Act corporation. agreement corporations, and bankers' Under sections 25 and 25 (A) of the banks to invest in export trading compa- Federal Reserve Act, Edge Act and nies, subject to certain limitations and agreement corporations may engage in after Board review. The purpose of this international banking and foreign finanamendment was to allow effective parcial transactions. These corporations, ticipation by bank holding companies in which usually are subsidiaries of memthe financing and development of export ber banks, may (1) conduct a deposit trading companies. The Export Trading and loan business in states other than Company Act Amendments of 1988 that of the parent provided that the busiprovide additional flexibility for bank ness is strictly related to international holding companies engaging in export transactions and (2) make foreign trading activities. Since 1982 the Fedinvestments that are broader than those eral Reserve has acted affirmatively on of member banks because they can notifications by forty-eight bank holding invest in foreign financial organizations, companies. such as finance companies and leasing companies, as well as in foreign banks. In 1996, the Federal Reserve U.S. Activities of Foreign Banks approved one new Edge Act corporation and seven new agreement corporations. The Federal Reserve has broad authority At year-end, seventy-three Edge Act to supervise and regulate the U.S. activiand agreement corporations, with total ties of foreign banks that engage in parent-only assets of $40 billion at yearbanking and related activities in the end, were operating with forty-two United States through branches, agendomestic branches. During the year, the cies, representative offices, commercial Federal Reserve examined all seventylending companies, Edge Act corporathree corporations. tions, banks, and certain nonbank companies. Foreign banks continue to be significant participants in the U.S. bank- Foreign Investments ing system. As of year-end 1996, Under the Federal Reserve Act and the 281 foreign banks from 60 countries Bank Holding Company Act, U.S. bank- operated 432 state-licensed branches ing organizations may engage in activ- and agencies (of which 25 are insured ities overseas with the authorization by the FDIC) as well as 66 branches and of the Board. Significant investments agencies licensed by the OCC (of which require advance review by the Board, 6 have FDIC insurance). These foreign Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 83rd Annual Report, 1996 banks also directly owned 10 Edge Act dinate the efforts of the various U.S. corporations and 4 commercial lending supervisory agencies. companies. In addition, they held an The second part of the program is a equity interest of at least 25 percent in review of the financial and operational 90 U.S. commercial banks. Altogether, profile of each FBO to assess its general these U.S. offices of foreign banks con- ability to support its U.S. operations and trol approximately 20 percent of U.S. to determine what risks, if any, the banking assets. These foreign banks also FBO poses through its U.S. operations. operated 138 representative offices. An Together, these two processes provide additional 115 foreign banks operated in critical information to the U.S. superthe United States solely through a repre- visors in a logical, uniform, and timely sentative office. manner. During 1996 the Federal The Federal Reserve has acted to Reserve continued to implement proensure that all state-licensed and feder- gram goals through coordination with ally licensed branches and agencies other supervisory agencies and the receive an on-site examination at least development of financial and risk once during each twelve-month period assessments of foreign banking organieither by the Federal Reserve or by a zations and their U.S. operations. state or other federal regulator. The Federal Reserve conducted or participated with state and federal regulatory authori- Technical Assistance ties in 704 examinations during 1996. The Foreign Bank Supervision Enhance- In 1996 the System provided staff for ment Act of 1991 requires Federal technical assistance missions and train- Reserve approval of the establishment ing sessions on bank supervisory matof branches, agencies, commercial lendters to a number of central banks in ing company subsidiaries, and reprecountries of the former Soviet Union, sentative offices by foreign banks in Eastern Europe, Asia, the Caribbean, the United States. In 1996, the Federal and Latin America. Reserve approved applications by 19 foreign banks from 12 foreign countries to establish branches, agencies, and representative offices. Supervisory Policy The Federal Reserve amended its guide- Joint Program for Supervising the lines on risk-based capital by incorporat- U.S. Operations of Foreign Banking ing a measure for market risk. In addi- Organizations tion, the Federal Reserve approved for public comment two proposals to amend In 1995 the Federal Reserve, in coopera- the capital guidelines in other areas. tion with the other federal and state The Federal Reserve made substantial banking supervisory agencies, formally progress in revising its examination and adopted the joint program for supervis- inspection processes to enhance its ing the U.S. operations of foreign bank- effectiveness and address changes in the ing organizations. The program has two banking industry, and improving supermajor parts. The first focuses primarily visory reporting and disclosure by the on those FBOs that have multiple U.S. banking industry. In concert with the operations and is intended to better coor- other agencies, the Federal Reserve also Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 235 issued a major revision to the Uniform risk by January 1, 1998. The final rule Financial Institutions Rating System. was based on a supplement to the Basle Accord that was issued January 1996. Risk-Based Capital Standards Interest rate risk. On June 26, 1996, The risk-based capital requirements the Federal Reserve along with the adopted by the Federal Reserve in 1989 FDIC and OCC issued a Joint Agency remained in effect and were expanded in Policy Statement describing a common 1996. These requirements implement framework for the supervision of interthe international risk-based capital stan- est rate risk in banking institutions. This dards that were proposed by the Basle framework calls for a review of the Committee on Banking Regulation and qualitative characteristics and adequacy Supervisory Practices (Basle Super- of an institution's interest rate risk manvisors' Committee) and endorsed by the agement as well as an assessment of risk Group of Ten (G-10) countries in July to its earnings and the economic value 1988..3 The standards include a frame- of its capital. The framework is consiswork for calculating risk-adjusted assets tent with 1995 revisions to risk-based and assigning assets to broad categories capital regulations that incorporated based primarily on credit risk. Banking the exposure of that economic value to organizations are expected to maintain changes in interest rates as an important capital equal to at least 8 percent of their element in the evaluation of capital risk-adjusted assets. adequacy. To supplement the risk-based capital The policy statement describes sound standards, the Federal Reserve in 1990 practices for managing interest rate risk, also issued leverage guidelines setting emphasizing the importance of adequate forth minimum ratios of capital to total oversight by the board of directors and assets to be used in the assessment of an senior management and a compreheninstitution's capital adequacy. sive risk management process that identifies, measures, and controls interest Amendments rate risk. The agencies also indicated that During 1996 the Board adopted amend- they are no longer pursuing a standardments to its risk-based capital guidelines ized supervisory measure for interest in the following areas. rate risk, as had been proposed in 1995. In lieu of any standardized measure, Market risk. On September 6, 1996, the agencies will rely on surveillance the Federal Reserve, together with the screens and, during the examination pro- FDIC and OCC, issued a final rule that cess, the bank's own measurement sysincorporated into the risk-based capital tem to evaluate the level of a bank's framework a capital charge for market risk. Consistent with this framework, risk associated with foreign exchange some modest revisions are being made and commodity activities and with the to the Call Report in 1997 to enhance trading of debt and equity instruments. supervisory monitoring capabilities with Regulated institutions with significant respect to interest rate risk. market risk exposure must measure their market risk exposure using an internal Proposed Rules risk measurement model subject to certain regulatory criteria and begin hold- During 1996, the Federal Reserve ing capital in support of their market approved for public comment two pro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 83 rd Annual Report, 1996 posals to amend its capital adequacy Risk-Focused Safety and Soundness guidelines. Examinations and Inspections Over the last several years, a committee Collateralized transactions. On of senior staff from the Federal Reserve August 16, 1996, the Federal Reserve, System has undertaken a review of the together with the OCC, FDIC, and OTS, examination and inspection processes to issued a proposal to amend the riskidentify near- and long-term opportubased capital standards to make uniform nities for enhancing the effectiveness, the agencies' treatment for transactions efficiency, and responsiveness of the secured by qualifying collateral. Under supervisory process and to address the the proposal, regulated institutions changing and ever complex banking and would be allowed to hold less capital financial environment. The committee for certain transactions collateralized made a number of recommendations, with a positive margin by cash or qualiwhich the Federal Reserve has begun fying securities. The comment period to implement in its efforts to provide for the proposal closed on October 15, a more risk-focused approach to the 1996. A final amendment is expected in supervision of banking organizations. 1997. On May 24, 1996, the Federal Reserve's Division of Banking Super- Technical modifications. In Novem- vision and Regulation issued examiner ber 1996 the Federal Reserve approved guidance to explain the changes now a proposal to amend its risk-based being implemented in the examination and leverage capital guidelines for and inspection process and to outline state member banks in order to elimi- other areas where further changes will nate inconsistencies among the capi- occur. In summary, the Federal Reserve tal standards of the banking agencies. has adopted a risk-focused approach to At the same time, the Federal Reserve examinations that places greater reliapproved a similar proposal for bank ance on effective planning, as well as on holding companies. The proposed the tailoring of each examination to the amendments pertain to the risk-based size and activities of the subject bank capital treatment of presold one- to or bank holding company. Under this four-family residential properties, junior approach, examiners place greater liens on one- to four-family residential emphasis on evaluating the adequacy of properties, and investments in mutual an institution's management process for funds. In addition, the proposals would identifying, measuring, monitoring, and simplify the leverage capital guide- controlling risk. When this process is lines. The Federal Reserve expects that determined to be sound, the level of the proposals will be issued on a joint transaction testing conducted by exambasis with the other agencies in early iners can be reduced, commensurate 1997. with the quality of management practices and the materiality of the activities being reviewed. Risk Management Guidance Coordination with Other Throughout 1996 the Federal Reserve Supervisors continued to focus on the adequacy of risk management practices and controls The Federal Reserve has also sought to at banking organizations. increase coordination with other bank- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 237 ing agencies and to improve supervision analysis of derivatives-related discloin an environment of interstate bank- sures of the top ten U.S. banks that deal ing. As part of these efforts, the Fed- in derivatives. This analysis summarizes eral Reserve in April 1996 approved the accounting standards that influenced two initiatives, the State/Federal Pro- the 1995 disclosures in the annual tocol and the Model Agreement, which reports of these banks; it also reviews address the supervision of state- the improvements since 1993 in qualitachartered banks operating across state tive and quantitative disclosures about lines. the credit and market risks of deriva- The protocol is a statement of prin- tives and about the earnings effect of ciples by the Federal Reserve, the FDIC, derivatives activities. and the Conference of State Bank Super- In November 1996 the Basle Commitvisors on behalf of the state banking tee on Banking Supervision and the Indepartments. It provides that the appro- ternational Organisation of Securities priate federal regulator and home state Commissions issued their second joint supervisor will endeavor to coordinate report on the public disclosure of tradthe supervision of interstate banks, par- ing and derivatives activities of banks ticularly those with assets of $1 billion and securities firms worldwide. Using or more, so as to reduce regulatory bur- an analytical framework developed by den and minimize duplicative regulatory the Federal Reserve, the report surveys actions, while fostering the safe and the trading and derivatives activities dissound operation of the banks. closed in the 1995 annual reports of a The Model Agreement specifies the sample of the largest, internationally actions that the appropriate federal regu- active banks and securities firms in the lator and the home state supervisor G-10 countries and notes improvements would take to fulfill the goals of the made since 1993. protocol, that is, the seamless supervision and examination of interstate, state- Retail Sales of Nondeposit chartered banks. Further, on Novem- Investment Products ber 14, 1996, the Federal Reserve along with the FDIC and all of the state bank- On December 30, 1996, the Board the ing departments signed a Nationwide OCC, and the FDIC published a notice State/Federal Supervisory Agreement, seeking comment on amendments to which was based on the April 1996 Regulation H and Regulation K that Model Agreement. would establish professional qualification requirements for state member banks and for branches and agencies of Derivatives Disclosures foreign banks that engage in sales of The Federal Reserve, the other federal certain securities to retail customers. banking regulators, and industry groups The amendments are based on the procontinued their efforts to improve the fessional qualification requirements for quality of bank disclosures of deriva- registered representatives of brokertives activities to make these activities dealers. more transparent to the public and regu- The proposed regulation would latory authorities. In September 1996 require that certain forms be filed with the Division of Banking Supervision and the Board, including registration infor- Regulation published in the Federal mation for a bank employee who solic- Reserve Bulletin its second annual its, recommends, purchases, or sells cer- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 83rd Annual Report, 1996 tain securities for retail customers. The To expand the use of NIC, training regulation also would require such seminars were conducted for staff mememployees and their immediate super- bers throughout the System, and new visors to take one of two qualifying applications were developed to make the examinatons given by the securities vast amount of NIC data more easily industry as a precondition to selling. accessible to the staff. In addition, Continuing education requirements also efforts have been made to make NIC would be imposed. data and software available to state banking agencies for their use as a supervisory tool. National Information Center The Division of Banking Supervision Use of Automation and Regulation has overall responsibility for the management of the National To increase efficiency in the examina- Information Center (NIC). NIC contains tion of state member banks, the Federal data bases that are maintained at the Reserve has applied new technology to Board of Governors and made available many routine aspects of an examiner's to staff members at the Board, the work. This effort has led to development Reserve banks, and other federal and of an automated system, referred to as state banking agencies. NIC comprises the Examiner Workstation, that autostructure data for banks, nonbanks, and mates much of the quantitative analysis bank holding companies; international of banking organizations, including data for U.S. holding companies and for- sampling and evaluation of loan and eign banking organizations with activi- investment portfolios. Automation has ties in the United States; financial infor- also been applied to the planning and mation, such as Call Report data for documentation of examinations. These banks and FR-Y report data for bank changes should help examiners identify holding companies; and supervisory and evaluate risks more efficiently. information based on inspections and To assist in the supervision of U.S. examinations. branches and agencies of foreign bank- During 1996, software development ing organizations (FBOs), the Federal continued to improve the usefulness Reserve is developing an automated sysof NIC through the use of distributed tem, referred to as the FBO Desktop, technologies. This effort, begun in 1995, that provides information for use in is designed to exploit the Federal off-site reviews, including information Reserve System's recently implemented on foreign financial systems, foreign intranet and the expanding use of client/ accounting standards, and the financial server applications. Implementation of performance of FBOs with U.S. operathese improvements began in 1996 and tions. Supervisory staff throughout the will be accomplished through several System will be able to access this inforphases through 1998. In addition, much mation electronically and will be able to progress was made in 1996 toward review and comment on performance providing the public access to noncon- reports online. fidential NIC information. In early 1997 a public Internet page will be available Staff Training to provide access to banking structure information, balance sheets, and income The Supervisory Education Program statements. trains staff members having supervisory Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 239 or regulatory responsibilities at the and thereby provide a higher degree of Reserve Banks, at the Board of Gover- cross training among staff members. nors, and at state banking departments. The System participates in training Students from supervisory counterparts offered by the Federal Financial Instiin foreign countries attend on a space- tutions Examination Council (FFIEC) available basis. The program provides and, to a limited extent, in the training training at the basic, intermediate, and offered by certain other regulatory agenadvanced levels for the four disciplines cies. Activities include developing and of bank supervision: bank examinations, implementing basic and advanced trainbank holding company inspections, ing in various emerging issues as well as surveillance and monitoring activities, in such specialized areas as trust activiand applications analysis. Classes may ties, international banking, information be conducted in Washington, D.C., or at systems, activities of municipal securiregional locations and may be held ties dealers, capital markets, payment jointly with regulators of other financial systems risk, white collar crime, prepainstitutions. The program is designed to ration and presentation of testimony, increase the student's knowledge of the real estate lending, management, and total supervisory and regulatory process instructor training. The System also Number of Sessions of Training Programs for Banking Supervision and Regulation, 1996 Program Total Regional Schools or seminars conducted by the Federal Reserve Core schools Introduction to examinations 10 6 Financial institution analysis 15 10 Loan analysis 8 5 Bank management 6 3 Effective writing for banking supervision staff 19 19 Management skills 22 19 Conducting meetings with management 19 19 Other schools Real estate lending seminar 6 Specialized lending seminar 3 Senior forum for current banking and regulatory issues 4 Bank operations 3 Bank applications 1 Bank holding company inspections 8 Basic entry-level trust 1 Advanced trust 1 Consumer compliance examination I 3 Consumer compliance examination II 5 Fair lending 3 Information systems and emerging technology risk management 3 Information systems continuing education 2 Intermediate information systems examination 1 Capital markets seminars 23 10 Section 20 securities seminar 4 3 Internal controls 3 3 Seminar for senior supervisors of foreign central banks' 2 1 Other agencies conducting courses 2 Federal Financial Institutions Examination Council 68 11 Office of the Comptroller of the Currency 2 Federal Bureau of Investigation3 1 ' V NOTE. .. . Not applicable. 3. Co-sponsored by the Federal Reserve, the Federal 1. Conducted jointly with the World Bank. Deposit Insurance Corporation, the Office of Thrift Super- 2. Open to Federal Reserve employees. vision, the 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

240 83rd Annual Report, 1996 co-hosts the World Bank Seminar for Federal Financial Institutions students from developing countries. Examination Council During 1996 the Federal Reserve con- The FFIEC prescribes uniform federal ducted a variety of schools and semiprinciples and standards for the examinars, and Federal Reserve staff members nation of depository institutions, proparticipated in several courses offered motes coordination of bank supervision by or cosponsored with other agencies, among the federal banking agencies, and as shown on the accompanying table. encourages better coordination of fed- In 1996 the Federal Reserve trained eral and state regulatory activities. Dur- 3,730 students in System schools, 1,446 ing 1996, Federal Reserve staff memin schools sponsored by the FFIEC, and bers participated in the following FFIEC 124 in other schools, for a total of 5,300, projects. including 242 representatives from foreign central banks. The number of student days of training was 27,169 in 1996; 27,856 in 1995; 25,036 in 1994; Uniform Financial Institutions and 26,938 in 1993. Rating System The Federal Reserve System also gave scholarship assistance to the states On December 9, 1996, the FFIEC recfor training their examiners in Federal ommended that the Federal Reserve and Reserve and FFIEC schools. Through the other banking agencies adopt revithis program 768 state examiners were sions to update the Uniform Financial trained: 407 in Federal Reserve courses, Institutions Rating System (UFIRS). 352 in FFIEC programs, and 9 in other UFIRS is an internal supervisory rating courses. During 1996 the Federal system used by the federal banking Reserve also continued its participation agencies to provide consistency among in joint core-supervision schools with them in their evaluation of financial the FDIC. institutions and in their choice of institu- Every staff member seeking an exam- tions requiring special supervisory atteniner's commission is required to pass tion or concern. Adopted in November the Core Proficiency Examination, 1979, UFIRS is commonly referred to as which includes a core content area and a the CAMEL rating system, with each of specialty of the student's choice (Safety the letters of the word referring to one of and Soundness, Consumer Affairs, the five rating components of the sys- Trust, or EDP). In 1996, 115 students tem. On December 19, 1996, the Federal took the examination. Reserve adopted the revisions, which Status of Students Registered for the Core Proficiency Examination, 1996 Specialty area Student status Core Safety and Electronic data Consumer Trust soundness processing In queue, year-end 1995 24 20 3 0 1 Registrants added 124 106 14 4 0 Test taken 115 100 13 3 1 Passed 110 79 11 3 1 Failed 5 21 2 0 0 In queue, year-end 1996 33 26 4 1 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

Banking Supervision and Regulation 241 are to be used in examinations begin- banking organizations, the Uniform ning after January 1, 1997. Interagency Trust Rating System, and The revisions include the adoption of the Uniform Interagency Rating System a sixth rating component, which covers for Data Processing Operations. a bank's sensitivity to market risks. With the addition of this component, the rating system will be referred to Revisions to the Call Report as CAMELS: (C) capital adequacy, (A) asset quality, (M) management, In December the Federal Reserve and (E) earnings, (L) liquidity, and (S) sensi- the other federal banking agencies tivity to market risks. The revised sys- announced revisions to the bank Reports tem highlights a bank's processes to of Condition and Income (Call Report) identify, measure, monitor, and control to adopt generally accepted accounting risks in each of the component and principles (GAAP) as the reporting basis composite ratings, particularly in the in areas of the Call Reports where they management component. At community were not already in effect, effective with banks, the sensitivity component will the March 1997 report date. The change primarily be used to indicate the exam- brings the accounting principles used iner's assessment of the exposure to, for bank regulatory reports into conforand management of, interest rate risk. mity with the GAAP reporting basis At larger regional and money center used in bank holding company FR Y banks, the component will also encom- reports, savings association Thrift pass price and foreign exchange risks Financial Reports, and general-purpose when these risks are significant to the financial statements. The change is also bank. consistent with the objectives of section 307 of the Riegle Community Development and Regulatory Improvement Act of 1994, which requires the federal Disclosure of the Components of banking agencies to work jointly to the Supervisory Rating Systems develop a single form for the filing of Acting upon a recommendation of the core information by banks, savings asso- FFIEC, the Federal Reserve in Novem- ciations, and bank holding companies. ber instructed Reserve Bank staff mem- During 1996, the FFIEC also implebers to disclose to a bank's management mented several improvements to the and its directors, beginning January 1, Call Report to focus on bank liquidity 1997, the ratings given to the bank under ratios and certain capital and asset the various supervisory rating systems. amounts used in the calculation of regu- The Federal Reserve believes that such latory capital ratios. The improvements, disclosure will better focus management effective with the March 1996 report, attention on possible areas of weakness provide the agencies with better data on and the need for timely corrective short-term liabilities and assets for action. The policy applies to the follow- liquidity purposes and information necing rating systems: CAMELS for state essary for the supervision of bank activimember banks, BOPEC for bank hold- ties in other areas. ing companies, CAMEO for Edge and The FFIEC issued three substantially agreement corporations and overseas revised report forms that improve the subsidiaries of U.S. banks, ROCA for ability of the banking agencies to moni- U.S. branches and agencies of foreign tor compliance with regulations that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

242 83rd Annual Report, 1996 impose restrictions on the extension of 1994, the federal banking agencies bank loans to certain insiders of another reviewed their implementations of their bank and to provide better information common statutory and supervisory on the risk exposure to U.S. banks from policies. Under the auspices of the international lending. The FFIEC also FFIEC, staff members of the agencies announced revisions to the Report of formed sixty-five interagency working Assets and Liabilities of U.S. Branches groups to eliminate inconsistencies and Agencies of Foreign Banks to adopt and outmoded and duplicative require- GAAP and certain other disclosures to ments. The agencies submitted a joint maintain consistency with the bank Call report to the Congress on September 23, Report. 1996, that covered this work as well In December the FFIEC announced as the results of the agencies' own interthat approximately thirty items deemed nal reviews of their regulations and unnecessary will be deleted from the policies to address the streamlining Call Report, effective with the requirements of section 3O3(a)(l) (for March 1997 reporting date. Also in the further details, see chapter on Regulaannouncement were new items to be tory Simplification). added to the Call Report; among them are items related to the adoption of Appraisal Subcommittee GAAP, the potential level of bank exposures to interest rate risk, and the need The FFIEC Appraisal Subcommittee for better data on bank involvement in was established under title XI of the credit derivatives. Financial Institutions Reform, Recovery, and Enforcement Act of 1989, in part to monitor the states' programs Mortgage Servicing Rights for the licensing and certification of In June, the Financial Accounting Stan- appraiser for compliance with the statdards Board issued Statement No. 125, ute. The subcommittee is made up of "Accounting for Transfers and Servic- one staff member from each of the ing of Financial Assets and Extinguish- FFIEC agencies and the Department of ments of Liabilities," thereby revising Housing and Urban Development. the accounting and reporting standards Section 315 of the Riegle Community for all servicing assets, including mort- Development and Regulatory Improvegage servicing rights and related assets. ment Act of 1994 directed the subcom- In response to this statement, the FFIEC mittee to encourage states to develop in December issued interim guidance on reciprocity agreements with each other. reporting and capital treatment for ser- The agreements would allow appraisers vicing rights. The agencies are expected licensed or certified in one state to to issue, in 1997, a proposed amend- perform appraisals in other states and ment to their capital adequacy rules with would determine appropriate fees and regard to the treatment of servicing requirements for temporary practice rights and related assets. provisions established by states for appraisers. On October 21, the subcommittee issued a proposed policy state- Review of Regulations and Policies ment with guidelines on temporary prac- In accordance with section 303(a)(2) of tice and reciprocity, and it expects to the Riegle Community Development take action on the proposal in early and Regulatory Improvement Act of 1997. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 243 Regulation of the U.S. Banking acquired, the convenience and needs of Structure the community to be served, and the potential public benefits and competi- The Board administers the Bank Holdtive effects of the proposal. In 1996 the ing Company Act, the Bank Merger Act, Federal Reserve acted on 1,528 bank and the Change in Bank Control Act holding company and related applicafor bank holding companies and state tions or notices. The Federal Reserve member banks. In doing so, the Federal approved 336 proposals to organize Reserve acts on a variety of proposals bank holding companies; approved that directly or indirectly affect the 119 proposals to merge existing bank structure of U.S. banking at the local, holding companies; approved 331 proregional, and national levels. The Board posals by existing bank holding compaalso has primary responsibility for regnies to acquire or retain banks; approved ulating the international operations of 536 and denied 2 requests by existing domestic banking organizations and the companies to acquire nonbank firms overall U.S. banking operations of forengaged in activities closely related to eign banks, whether conducted directly banking; and approved 204 other applithrough a branch or agency or indirectly cations. Data on these and related bank through a banking or commercial lendholding company decisions are shown ing subsidiary (treated above in the secin the accompanying table. tion on International Activities). Bank Merger Act Bank Holding Company Act The Bank Merger Act requires that all By law, a company must obtain the Fed- proposed mergers of insured depository eral Reserve's approval if it is to form a institutions be acted upon by the approbank holding company by acquiring priate federal banking agency. If the control of one or more banks. Once institution surviving the merger is a state formed, a bank holding company must member bank, the Federal Reserve has receive the Federal Reserve's approval primary jurisdiction. During 1996, the before acquiring additional banks or Federal Reserve approved 133 merger nonbanking companies. The Bank Hold- applications. As required by law, each ing Company Act was amended in 1996 merger is described in this REPORT (in to permit bank holding companies that table 16 of the Statistical Tables are well run and satisfy specific criteria chapter). to commence certain nonbanking activi- When the FDIC, the OCC, or the ties on a de novo basis without prior OTS has jurisdiction over a merger, the approval from the Board, and to estab- Federal Reserve is asked to comment on lish an expedited prior-notice proce- the competitive factors to assure compadure for other activities and for small rable enforcement of the antitrust proviacquisitions. sions of the act. The Federal Reserve In reviewing an application or notice and those agencies have adopted stanfiled by a bank holding company for dard terminology for assessing competiprior Board approval, the Federal tive factors in merger cases to assure Reserve considers factors including the consistency in administering the act. financial and managerial resources of The Federal Reserve submitted 842 the applicant, the future prospects of reports on competitive factors to the both the applicant and the firm to be other federal banking agencies in 1996. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

244 83 rd Annual Report, 1996 Change In Bank Control Act with the FDIC, the OCC, and the OTS to develop more uniform and stream- The Change in Bank Control Act lined procedures for implementing the requires persons seeking control of a Change in Bank Control Act. As disbank or bank holding company to obtain cussed further below, many of the proapproval from the appropriate federal posed revisions became part of a broader banking agency before the transaction effort by the Board to improve and occurs. Under the act, the Federal revise Regulation Y. In 1996, the Fed- Reserve is responsible for reviewing eral Reserve acted on 162 proposed changes in the control of state member changes in control of state member banks and of bank holding companies. banks and bank holding companies. In so doing, the Federal Reserve must review the financial position, competence, experience, and integrity of the Public Notice of Federal Reserve acquiring person; consider the effect on Decisions the financial condition of the bank or bank holding company to be acquired; Each decision by the Federal Reserve and determine the effect on competition that involves a bank holding company, in any relevant market. bank merger, or a change in control, is The appropriate federal banking agen- effected by an order or announcement. cies are required to publish notice of Orders state the decision along with each proposed change in control and the essential facts of the application or to invite public comment, particularly notice, and the basis for the decision; from persons located in the markets announcements state only the decision. served by the institution to be acquired. All orders and announcements are re- The federal banking agencies are also leased immediately to the public; they required to assess the qualifications of are subsequently reported in the Board's each person seeking control. During weekly H.2 statistical release and in 1996 the Federal Reserve worked the monthly Federal Reserve Bulletin. Bank Holding Company Decisions by the Federal Reserve, Domestic Applications, 1996 Action under authority delegated by the Board of Governors Direct action by the Director of the Office Proposal Board of Governors Division of Banking of the Federal Total Supervision and Reserve Banks Secretary Regulation Approved Denied Approved Denied Approved Approved Permitted Formation of holding company 15 0 0 0 3 254 64 336 Merger of holding company 18 0 0 0 12 89 0 119 Retention of bank 2 0 0 0 0 00 2 Acquisition Bank 49 0 0 0 9 271 0 329 Nonbank 147 2 0 0 29 0 360 538 Bank service corporation ... 0 0 0 0 7 54 37 98 Other 15 0 47 0 o 44 0 106 Total 246 2 47 0 60 712 461 1,528 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 245 The H.2 release also contains announce- Community Reinvestment Act, fair ments of applications and notices lending, and competitive issues. received by the Federal Reserve but not In December of 1996, the Board yet acted on. granted Federal Reserve membership to a newly-formed state chartered uninsured trust company that proposed to Timely Processing of Applications act as a clearinghouse for the multilateral netting of foreign exchange trans- The Federal Reserve maintains target actions. The clearinghouse was intended dates and procedures for the processing to be a mechanism for reducing settleof applications. These target dates proment risk in the global foreign exchange mote efficiency at the Board and the market. At the same time, the Board Reserve Banks and reduce the burden approved the related notices of eight on applicants. The time allowed for a U.S. and Canadian banking organizadecision ranges from thirty to sixty days, tions to invest in the uninsured trust depending on the type of application or company. notice. During 1996, 96 percent of the During the year, the Board continued decisions met this standard. to act on proposals involving the establishment and/or expansion of a section 20 subsidiary by a bank holding Delegation of Applications company. In connection with one of those proposals, the Board significantly Historically, the Board has delegated reduced the operating restrictions applicertain regulatory functions—including cable to "riskless principal" activities. the authority to approve, but not to deny, In subsequent months, the Board took certain types of applications—to the several more actions to reduce further Reserve Banks, to the director of the the operating restrictions, or "fire- Board's Division of Banking Supervision and Regulation and to the Secretary walls," related to section 20 activities, of the Board. The delegation of respon- and raised the limit on a section 20 sibility for applications permits staff company's "ineligible revenue" from members at both the Board and the 10 percent to 25 percent. In connection Reserve Banks to work more efficiently with one of the section 20 proposals, the by removing routine cases from the Board also permitted a bank holding Board's agenda. In 1996, 80 percent of company to act as a primary clearing the applications processed were acted firm for professional floor traders tradon under delegated authority. ing for their own accounts on two U.S. futures exchanges. The Board had previously denied this activity for the same Banking and Nonbanking Proposals bank holding company in 1991. In the course of acting on various During 1996, the Board approved sev- other nonbanking proposals filed by foreral merger proposals involving some of eign and domestic bank holding compathe largest banking organizations in the nies, the Board expanded the scope of United States, including a proposal to permissible data processing activities to form the largest bank holding company. facilitate electronic banking and permit- As with similar prior cases, these pro- ted one bank holding company to mainposals generated many comments from tain stronger relationships with mutual the public, particularly with respect to funds for which it planned to provide Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

246 83 rd Annual Report, 1996 investment advisory and administrative cally related to bank safety and soundservices. ness and the integrity of the banking structure. Applications by State Member Banks Financial Disclosure by State Member Banks State member banks must obtain the permission of the Federal Reserve to open State member banks must disclose cernew domestic branches, to make invest- tain information of interest to investors ments in bank premises that exceed if they issue securities registered under 100 percent of capital stock, and to add the Securities Exchange Act of 1934. to their capital bases from sales of sub- This information includes financial ordinated debt. State member banks reports and proxy statements. By statmust also give six months' notice of ute, the Federal Reserve's financial distheir intention to withdraw from mem- closure rules must be substantially simibership in the Federal Reserve, although lar to those issued by the Securities and the notice period may be shortened or Exchange Commission (SEC). At the eliminated in specific cases. end of 1996, thirty-six state member banks, most of which are small or medium-sized institutions, were regis- Stock Repurchases by Bank tered with the Federal Reserve under the Holding Companies Securities Exchange Act. A bank holding company sometimes purchases its own shares from its share- Bank Secrecy Act holders. When the company borrows the money to buy the shares, the transaction The Currency and Foreign Transactions increases the debt of the bank holding Reporting Act (the Bank Secrecy Act) company and simultaneously decreases was originally designed as a means to its equity. Relatively larger purchases create and maintain records of various may undermine the financial condition financial transactions that otherwise of a bank holding company and its bank would not be identifiable in an effort to subsidiaries. The Federal Reserve may trace the proceeds of illegal activities. In object to stock repurchases by holding recent years, the Bank Secrecy Act has companies that fail to meet certain stan- been regarded as a primary tool in the dards, including the Board's capital fight against money laundering. The guidelines. In 1996 the Federal Reserve records required to be reported and reviewed fifty-four proposed stock maintained by financial institutions repurchases by bank holding companies, under the Bank Secrecy Act provide law all of which were acted upon under dele- enforcement authorities with data usegated authority either by the Reserve ful in the detection and prevention of Banks or by the Secretary of the Board. unlawful activity. The Federal Reserve, through its examination process and other off-sight measures, monitors com- Enforcement of Other Laws pliance with the requirements of the and Regulations Bank Secrecy Act by the institutions it The Board is also responsible for the supervises. enforcement of various laws, rules and In 1996 the Federal Reserve issued regulations other than those specifi- new procedures for the banking com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 247 munity to use in reporting suspicious Securities Regulation activities related to money laundering and other financial crimes. The proce- Under the Securities Exchange Act of dures are designed to lessen the report- 1934, the Board is responsible for reguing burden on financial institutions and lating credit in certain transactions to make the reports more useful in the involving the purchase or carrying of investigation of money laundering and securities. The Board limits the amount other banking crimes. The Federal of credit that may be provided by securi- Reserve acted as the lead regulatory ties brokers and dealers (Regulation T), agency in the development of the new by banks (Regulation U), and by other procedures. lenders (Regulation G). Regulation X The Federal Reserve also used applies these credit limitations, or marnew interagency anti-money-laundering gin requirements, to certain borrowers examination procedures as required by and to certain credit extensions, such as section 404 of the Riegle Community credit obtained from foreign lenders by Development and Regulatory Improve- U.S. citizens. ment Act of 1994. The Federal Reserve Several regulatory agencies enforce acted as the lead regulatory agency in compliance with the Board's securithe development and subsequent revi- ties credit regulations. The SEC, the sion of the interagency examination National Association of Securities procedures. Dealers, and the national securities The Federal Reserve, through its exchanges examine brokers and dealers appointed senior staff representative, for compliance with Regulation T. The continued to provide expertise and guid- federal banking agencies examine banks ance to the Bank Secrecy Act Advisory under their respective jurisdictions for Council, a committee created by Con- compliance with Regulation U. The gressional mandate to propose addi- compliance of other lenders with Regtional anti-money laundering measures ulation G is examined by the Board, to be taken under the Bank Secrecy Act. the Farm Credit Administration, the Also, through the Special Investigations National Credit Union Administration, and Examinations Section, the Federal or the OTS, according to the jurisdiction Reserve has assisted in the investigation involved. At the end of 1996, 774 lendof money laundering activities and pro- ers were registered under Regulation G, vided anti-money laundering training and 503 came under the Board's superto designated staff members at each vision. Of these 503, the Federal Re- Reserve Bank. serve regularly inspects 249 either bien- The Federal Reserve has also partici- nially or triennially, according to the pated extensively in the Financial type of credit they extend. An additional Action Task Force, which in 1996 pro- 254 lenders are exempted from periodic vided anti-money-laundering training on-site inspections by the Federal to numerous foreign governments and Reserve but are monitored through the central banking authorities. In addition, filing of periodic regulatory reports. a representative of the Federal Reserve During 1996, Federal Reserve examinparticipated in the Financial Action Task ers inspected 148 lenders for compli- Force review of the progress made in ance with Regulation G. adopting and implementing anti-money- In general, Regulations G and U laundering measures by certain foreign impose credit limits on loans secured governments. by publicly held equity securities when Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

248 83rd Annual Report, 1996 the purpose of the loan is to purchase or In April the Board adopted a revised carry those or other publicly held equity version of Regulation T. The amendsecurities. Regulation T limits the ments are part of the Board's periodic amount of credit that brokers and deal- review of its regulations and reflect coners may extend when the credit is used sideration of the comments submitted in to purchase or carry publicly held debt response to proposed amendments pubor equity securities. Collateral for such lished in 1995. The final rule eliminates loans at brokers and dealers must be restrictions on the ability of brokersecurities in one of the following catego- dealers to arrange for credit; increases ries: those traded on national securities the type and number of domestic and exchanges, certain over-the-counter foreign securities that may be bought on (OTC) and foreign stocks that the Board margin and increases the loan value of designates as having characteristics some securities that are already marginsimilar to those of stocks listed on the able; deletes Board rules regarding national exchanges, bonds that meet cer- options transactions in favor of the rules tain requirements, or mutual funds regu- of the options exchanges; and reduces lated by the SEC. restrictions on transactions involving The Federal Reserve monitors the foreign persons, foreign securities, and market activity of all OTC stocks to foreign currency. determine which of them are subject to At the same time, the Board proposed the Board's margin regulations. The further amendments to Regulation T, G, Board publishes the resulting List of and U. The proposed amendments would Marginable OTC Stocks quarterly. In allow broker-dealers to extend good 1996, the OTC list was revised in Feb- faith credit on any non-equity security ruary, May, August, and November. rather than only those currently permit- The November OTC list contained ted in the Board's rules; allow trans- 4,718 stocks. actions involving non-equity securities Pursuant to a 1990 amendment to to be effected in an account not subject Regulation T, the Board publishes a list to the restrictions of the Regulation T's of foreign stocks that are eligible for margin account; remove restrictions on margin treatment at broker-dealers on the ability of broker-dealers to calculate the same basis as domestic margin secu- required margin for non-equity securirities. In 1996, the foreign list was ties; and modify the method for deterrevised in February, May, August, and mining which equity securities are sub- November. The November foreign list ject to the Board's margin requirements contained 1,965 foreign stocks. under Regulations G, T and U. Loans by State Member Banks to their Executive Officers, 1995-96 Range of interest Period Number Amount (dollars) rates charged (percent) 1995 October 1-December 31 726 31,421,000 4.0-19.5 1996 January 1-March 31 717 34,334,000 3.0-18.0 April 1-June 30 762 31,960,000 5.0-21.0 July 1-September 30 756 37,498,000 4.5-18.0 SOURCE. Call Report. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 249 Under section 8(a) of the Securities Loans To Executive Officers Exchange Act, a nonmember domestic or foreign bank may lend to brokers or Under Section 22(g) of the Federal dealers posting registered securities as Reserve Act, state member banks must collateral only if the bank has filed an include in each quarterly Call Report agreement with the Board that it will all extensions of credit made by the comply with all the statutes, rules, and bank to its executive officers since the regulations applicable to member banks date of the bank's previous report. The regarding credit on securities. The accompanying table summarizes this Board processed no new agreements information. from January to October 1996. In October 1996 the Congress enacted the National Securities Markets Improve- Federal Reserve Membership ment Act of 1996, which repealed section 8(a) of the Securities Exchange Act At the end of 1996, 3,701 banks were and limited the Board's authority under members of the Federal Reserve Syssection 7 of the Securities Exchange Act tem. Member banks operated 40,963 to impose margin requirements on borbranches on December 31, 1996, and rowings by certain broker-dealers. accounted for 39 percent of all commer- In November the Board published an cial banks in the United States and for interpretation of Regulations G, T, and 69 percent of all commercial banking U in light of the enactment of the offices. • National Securities Markets Improvement Act of 1996. The interpretation reflects the statutory repeal of section 8(a) of the Securities Exchange Act and makes clear that the Board has not made a finding that it is necessary or appropriate either in the public interest or for the protection of investors to impose rules on borrowings by brokerdealers otherwise exempt under the new legislation. At the same time, the Board published proposed amendments to Regulations G, T, and U to implement the new legislation and further the policies behind its adoption. In 1996, the Securities Regulation Section of the Board's Division of Banking Supervision and Regulation issued thirty interpretations of the margin regulations. Those that presented sufficiently important or novel issues were published in the Securities Credit Transactions Handbook, which is part of the Federal Reserve Regulatory Service. These interpretations serve as a guide to the margin regulations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

251 Regulatory Simplification In 1978 the Board of Governors estab- well-managed banks (Regulation Y). lished the Regulatory Improvement Also, certain rules under Regulation Y Project in the Office of the Secretary to for section 20 subsidiaries were revised help minimize the burdens imposed by to increase the revenue limits, clarify regulation. In 1986 the Board reaffirmed rules for administering the revenue test its commitment to regulatory improve- with respect to interest income on secument, renaming the project the Regula- rities held for a bank's own account, and tory Planning and Review Section and ease or amend the firewall restrictions. assigning supervision of its work to the Board's Committee on Banking Super- Comprehensive Reviews vision and Regulation. The purposes of the regulatory Section 3O3(a)(l) of the Riegle Comimprovement and simplification func- munity Development and Regulatory tion are to ensure that the economic Improvement Act of 1994 requires the consequences for small business are federal banking agencies to cooperate in considered when regulations are written, conducting a systematic review of their to afford interested parties the opportu- regulations and written policies to nity to participate in designing regula- improve efficiency, reduce unnecessary tions and comment on them, and to costs, eliminate inconsistencies, elimiensure that regulations are written in nate outmoded and duplicative requiresimple and clear language. Staff mem- ments, promote uniformity among the bers continually review regulations for regulations and policies of the agencies, their adherence to these objectives. and reduce regulatory burden "consis- In 1996 the Board's regulatory review tent with the principles of safety and activity increased from a handful of soundness, statutory law and policy, and actions per year to more than a dozen the public interest." As required by the significant reviews of Board regulations act, a progress report on these efforts, and policies. As part of the 1996 com- Joint Report: Streamlining of Regulaprehensive regulatory review process, tory Requirements, was submitted to the two regulations were rescinded (Regula- Congress in September. tions R and V); three were simplified As part of promoting uniformity and updated (E, M, and S); and four among the banking agencies, the Board were in the process of comprehensive adopted an interagency system for ratreview at year-end (H, K, Y, and CC). ing a bank's financial condition and Additional actions included deleting adopted interagency guidelines for detransitional rules for reserve require- termining the safety and soundness stanments (Regulation D); increasing the dards for asset quality and earnings. tolerance for closed-end credit trans- In addition to the streamlining efforts actions (Regulation Z); revising the required by the Riegle act, the Board in lending-rule prohibitions for insiders at 1996 engaged in internal activities such member banks and their affiliates (Regu- as reviewing all supervisory and regulalation O); and streamlining the applica- tory (SR) letters issued by the Division tion process for well-capitalized and of Banking Supervision and Regulation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

252 83rd Annual Report, 1996 The SR letters, which communicate exempted preauthorized transfers to or supervisory policy and guidance to the from accounts at small institutions to Reserve Banks, were reviewed to deter- reduce the burden of compliance for mine whether the policy was still appli- institutions that do not offer any other cable, whether it had been incorporated electronic fund transfer service. into the appropriate examination manu- The final rule also exempts from als or the Federal Reserve Regulatory Regulation E the transfer of funds for Service, and whether it had been super- certain purchases and sales of unreguseded by a subsequent letter. An updated lated securities if the broker-dealer that list of "active" letters was sent to the handles the transaction is regulated by Reserve Banks after the review. another federal agency, such as the The significant regulatory improve- Securities and Exchange Commission or ments made by the Board in 1996, as the Commodity Futures Trading Comnoted in the joint interagency report to mission. The final rule also extends the the Congress, are discussed below. exemption to all securities or commodities held in book-entry form by the Federal Reserve Banks on behalf of the Regulation D Department of the Treasury and other Reserve Requirements of federal agencies. (In April the Board Depository Institutions also proposed amendments to Regula- The Board revised Regulation D in tion E; see the chapter on Consumer and December to simplify and update it and Community Affairs.) thereby also to reduce the burden it imposes on institutions. In general, the Regulation H changes delete certain transitional rules Membership of State Banking relating to reserve requirements, NOW Institutions in the Federal Reserve accounts, de novo institutions, "dissimi- System lar" mergers, and other matters that no longer have significant effect. The Board began a review of Regulation H with an eye toward simplifying, updating, and reorganizing the regula- Regulation E tion. In particular, the Board is revising Electronic Fund Transfers the regulation to eliminate out-dated In April, following a comprehensive requirements and conditions that are review, the Board approved a final rule not absolutely necessary for memberwhich simplified the language and for- ship, to make regulatory language easier mat of each section of Regulation E and to understand, and to reorganize the constated the requirements more clearly. tents to make the provisions more easily The Board shortened the final rule by referenced. The Board anticipates final 15 percent, largely by deleting obsolete action on the revised regulation during provisions and transferring explanatory the first quarter of 1997. material to the commentary. Changes to the rule included revisions of the exist- Regulation K ing exemption for transfers of securities International Banking Operations and commodities as well as an increase in the asset size cutoff for the exemp- The Board took several actions in 1996 tion of small institutions, from $25 mil- to remove obsolete or superseded porlion to $100 million. The Board also tions of Regulation K and to reduce Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Regulatory Simplification 253 unnecessary regulatory burden. As part amendment to the Consumer Leasing of these actions, the Board amended the Act. rules allowing foreign banks to establish U.S. representative offices, required foreign banks to select a home state, Regulation O removed the restrictions on certain Loans to Executive Officers, mergers by U.S. bank subsidiaries of Directors, and Principal foreign banks outside of the home state, Shareholders of Member Banks and prohibited foreign banks from using The Board revised Regulation O in their U.S. branches or agencies to man- November to allow insiders of a bank age activities through offshore offices and of the bank's affiliates to obtain that could not be managed by a U.S. loans under a company-wide employee bank at its foreign branches or subsidibenefit plan. The final rule also simpliaries. In addition, the Board also estabfies the procedures for a bank's board of lished criteria for evaluating the contindirectors to exclude executive officers ued operation of a foreign bank in the and directors of affiliates from policy- United States. making functions of the bank and The Board began a comprehensive thereby from the restrictions of Regulareview of Regulation K that will focus tion O. on streamlining processes and making U.S. banking organizations more competitive internationally. At the same Regulation S time, the review will consider all aspects Reimbursement for Providing of foreign bank regulation with an eye Financial Records; Recordkeeping toward adopting further streamlining Requirements for Certain Financial and burden reduction measures as well Records as further liberalizations, especially as provided in the Riegle-Neal Interstate The Board took separate actions on two Banking and Branching Efficiency Act provisions of Regulation S during 1996. of 1994. In July the Board updated and streamlined subpart A, which implements the Right to Financial Privacy Act (RFPA). Regulation M As part of the revision, the Board Consumer Leasing increased the fees that financial institu- In September the Board revised Regu- tions may charge a government authorlation M to simplify and clarify the ity for providing financial records pursurequired disclosures for car leasing and ant to a request under the RFPA. other types of consumer lease trans- Earlier in the year the Board added actions. The changes focused on auto- subpart B to the regulation. The new mobile leasing because of the increased subpart cross-references the substantive use of such leases. The Board's action provisions of a joint rule adopted by the revised the disclosure format, adopted a Board and the Department of the Treatotal-payments disclosure that will sury relating to the recordkeeping facilitate comparisons, and required a requirements for transmittals of funds mathematical progression that shows under the Bank Secrecy Act. The joint how the monthly lease payment is calcu- rule is intended to assist in the investilated. The revisions also implemented gation and prosecution of moneythe advertising provisions of a 1995 laundering activities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 83 rd Annual Report, 1996 Regulation T the competitiveness of bank holding Credit by Brokers and Dealers companies by eliminating unnecessary regulatory burden and operating restric- In April the Board amended Regulation tions and by streamlining the applica- T to provide significant regulatory relief tion and notice provision. The proposal, to broker-dealers. The changes elimiwhich was published for comment in nated restrictions on the ability of August, reorganizes and expands the broker-dealers to arrange for credit, regulatory list of nonbanking activities increased the type and number of and removes outmoded, superseded, or domestic and foreign securities that may unnecessary restrictions on those activibe bought on margin, increased the loan ties that would not apply to insured value of some securities that are already banks that conduct the same types of marginable, deleted Board rules regardactivities. ing options transactions in favor of The proposal also includes significant the rules of the options exchanges, and amendments to the tying restrictions. reduced restrictions on transactions One proposed amendment eliminates the involving foreign persons, foreign secu- Board's regulatory extension of the antirities, and foreign currency. The Board tying statute to bank holding companies also made technical changes to the rules and their nonbank subsidiaries, thus subto provide clarification and update jecting these entities to the same general references. antitrust laws that govern their com- In November the Board issued an petitors. Other proposed amendments interpretation of the margin regulations broaden the product exception and the in response to the enactment of the types of arrangements to which the tra- National Securities Markets Improveditional bank product exception applies. ment Act of 1996. Under this legisla- The Board expects to take action on tion, the Board no longer has the authorthe comprehensive review proposal and ity to regulate certain loans to registered tying provisions in 1997. broker-dealers unless it finds that such In addition to the proposal, the Board rules are necessary or appropriate in the also issued several amendments or interpublic interest or for the protection of pretations to Regulation Y. A final investors. amendment to the Board's interpretive The interpretation makes it clear that rule regarding investment adviser activithe Board has not made such a finding ties permits a bank holding company and that provisions in its margin regula- (and its bank and nonbank subsidiaries) tions for which the Board no longer has to purchase, in a fiduciary capacity, general authority are without effect. The securities of an investment company Board also requested public comment advised by the bank holding company. on the regulatory amendments to reflect To take advantage of this provision, the the new legislation. purchase must be specifically authorized by the terms of the instrument creating the fiduciary relationship, by court order, Regulation Y or by the law of the jurisdiction under Bank Holding Companies and which the trust is administered. Change in Bank Control In October the Board announced an During 1996 the Board conducted an interim rule to implement provisions of extensive review of Regulation Y and the Economic Growth and Regulatory issued a proposal designed to improve Paperwork Act. The new rule estab- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Regulatory Simplification 255 lishes expedited procedures for well ing Act Amendments of 1995. The capitalized bank holding companies amendments establish new creditorthat also meet other criteria to obtain liability rules for closed-end loans Board approval for certain acquisitions secured by real property or dwellings and certain nonbanking activities. The and consummated on or after Septemaffected acquisitions are those of smaller ber 30, 1995, and establish several tolercompanies that engage in any permis- ances for accuracy in disclosing the sible nonbanking activities listed in amount of the finance charge. Creditors Regulation Y, and the affected nonbank- have no civil or administrative liability ing activities are those that the Board if the finance charge and affected disclohas approved only by order. sures are within the applicable toler- During the year the Board also ances. The amendments also clarify how approved changes to three areas affect- lenders must disclose fees connected ing section 20 subsidiaries of bank hold- with mortgage loans. ing companies—firewalls, revenue lim- In addition to the changes required by its, and treatment of income earned on the statute, the revised regulation also securities. In general, the amendments includes a new rule regarding the treatmodify the interlock restriction, elimi- ment of fees charged in connection with nate the cross-marketing restriction, and debt cancellation agreements. This rule ease the financial assets restriction. is similar to the existing rule for credit In December the Board raised the insurance premiums and provides for limit on the amount of revenue that a more uniform treatment of these fees. section 20 subsidiary may derive from underwriting and dealing in securities. Under the new rules, the permissible Regulation CC revenue limit will change from 10 per- Availability of Funds and cent to 25 percent of the subsidiary's Collection of Checks total revenue. The revenue limit is designed to ensure that a section 20 The Board continued its comprehensive subsidiary will not be engaged princi- review of Regulation CC. The proposed pally in underwriting and dealing in amendments arising from the review are securities in violation of section 20 of primarily technical in nature and do not the Glass-Steagall Act. represent any major policy changes. In In a separate announcement the Board some cases, the amendments also reduce clarified that interest income earned on the compliance burden for depository the types of debt securities that a mem- institutions. ber bank could hold for its own account Proposed changes to subpart B, which shall not be treated as revenue from governs availability schedules and disunderwriting or dealing in securities for closures, address a variety of issues, purposes of section 20. Interest earned including the treatment of deposits on these securities will continue to be received at "contractual" branches, included in total revenue. such as affiliates. In general, proposed amendments provide more flexibility for banks giving hold notices under emer- Regulation Z gency conditions, clarify the various Truth in Lending media through which written notices The Board revised Regulation Z in Sep- may be given, delete certain requiretember to incorporate the Truth in Lend- ments for notice content, and revise Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 83rd Annual Report, 1996 the model forms in appendix C of the antee application would be filed; howregulation. ever, the Federal Reserve System would Other proposed changes to subpart B be able to process such an application clarify the interaction between Regula- under existing fiscal agency procedures. tion CC and the Uniform Commercial Code, set forth rules for checks drawn on certain U.S. territories, and address other check collection matters. In conjunction with the proposal, the Board is requesting comment on several items: the time required for a bank to qualify a returned check for automated processing, the provisions regarding the extension of the midnight deadline, and the extent of a presenting bank's preferred claim against a closed paying bank. Rescission of Regulations R andV As a result of the Board's periodic regulatory review process, the Board determined that two of its regulations, Regulations R and V, were obsolete and no longer necessary. Both regulations were subsequently rescinded. Regulation R (Relations with Dealers in Securities Under Section 32 of the Banking Act of 1933), restated the statutory language of Section 32 of the Glass-Steagall Act and set forth the only exemption to the act adopted by the Board. The Board determined that the existing exemption in the regulation was no longer necessary in view of interpretations of the act developed since 1969. The Board also noted that having a substantive regulation solely to restate a statutory provision is unnecessary. Regulation V (Loan Guarantees for Defense Production), implemented the Defense Production Act of 1950 and was intended to permit defense agencies to enter into defense-related contracts without regard to whether appropriations had been made for the underlying projects. A subsequent amendment to the act made it unlikely that a loan guar- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

257 Federal Reserve Banks The Riegle-Neal Interstate Banking in January 1998. Special transitional and Branching Efficiency Act of 1994 arrangements will allow for the tempopaved the way for interstate branch rary operation of multiple accounts. banking upon its 1997 implementation; During 1996 the Federal Reserve held it thus has significant implications for 10,077 accounts for financial instituthe account relationships between the tions, a 0.8 percent increase over 1995. Federal Reserve Banks and depository Also in 1996, the Federal Reserve institutions. In 1996, Federal Reserve Banks completed significant milestones staff members conducted a series of in- in their plan to transfer mainframe comterviews with selected depository insti- puter operations to the System's three tutions to anticipate the new account consolidated data centers, managed by relationships that would best meet the the Federal Reserve Automation Serorganizational and business needs of vices (FRAS): the banking industry and the Federal Reserve as interstate branching devel- • Fully converted to the new centralops. Through the interview process, ized automated clearinghouse applicathe Federal Reserve devised an account tion (Fed ACH) model that would facilitate a single • Moved the Automated Standard debtor-creditor relationship between Application for Payments system, which the Federal Reserve and any depository supports federal grant payments, to institution while offering the flexible the central application processing information benefits of a distributed environment account structure. • Transfered applications in eleven For a given institution, the new model Districts to shared processing environprovides a single (master) account, held ments (the remaining Reserve Bank, at one Reserve Bank, where all credits Kansas City, is scheduled to move to a and debits arising from financial trans- shared environment in the first quarter actions with the Federal Reserve would of 1997) be settled and through which reserve • Converted four Reserve Banks to and risk management activities would the new centralized book-entry securibe conducted. Optional subaccounts ties application, the National Bookcould be used to define subsets of finan- Entry System (the eight other Banks will cial transaction information. The sub- convert to it by the first quarter of 1998) accounts could be used by depository • Scheduled the new Statistical institutions to segregate financial infor- Analysis and Reporting application for mation by geographic region, opera- Systemwide implementation beginning tional function, or other criteria. Thus, in 1997. an institution could centralize all financial information or could segregate In other activity, The Federal Reserve information on financial transactions Banks essentially completed the deploybased on its own organizational ment of all elements of Fednet, the new structure. telecommunications network. Fednet The single-account model was provides a consistent level of service to approved in April and will be available all points in the Federal Reserve System Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

258 83rd Annual Report, 1996 and improves on the reliability, security, fees that, over the long run, recover all and disaster recovery capabilities of the the direct and indirect costs of providing previous system. The Federal Reserve services to depository institutions, as Bank of New York, the last of the well as the imputed costs, such as the Reserve Banks to convert to the new income taxes that would have been paid network, plans to complete the conver- and the pretax return on equity that sion of depository institutions to Fednet would have been earned had the serin 1998. vices been provided by a private firm. The Reserve Banks began the devel- These imputed costs are collectively opment of a new version of Fedline referred to as the private sector adjustsoftware, which for the first time would ment factor (PSAF).1 Over the past ten operate under the Microsoft Windows years, the Federal Reserve System has operating system. Fedline provides the recovered 100.7 percent of its priced interface to Federal Reserve applica- services costs, including the PSAF. tions for many depository institutions. Overall, 1996 fees charged for Fedline for Windows is scheduled to be priced services increased approximately available for implementation by deposi- 2.1 percent over the 1995 levels. This tory institutions in 1998. rise is the net result of several changes The remainder of this chapter details in fees: increases for forward collection the 1996 results in Federal Reserve check products, reductions for ACH Bank priced services, currency and coin operations, and fiscal agency services, and reports on examinations, income 1. The imputed costs that are part of the PSAF and expenses, holding of securities and are interest on debt, return on equity, income and loans, and major construction activity. sales taxes, and assessments for deposit insurance from the Federal Deposit Insurance Corporation. In addition, assets and personnel costs of the Board of Governors that are directly related to Developments in Federal Reserve priced services are allocated to the Reserve Banks' Priced Services priced services. In the pro forma statements at the end of this chapter, expenses of the Board of The Monetary Control Act of 1980 Governors are included in operating expenses, and requires the Federal Reserve to establish assets of the Board are part of long-term assets. Activity in Federal Reserve Priced Services, 1996, 1995, and 1994 Thousands of items except as noted Percentage change Service 1996 1995 1994 1995-96 1994-95 Commercial checks 15,486,833 15,465,209 16,479,161 .1 -6.2 Funds transfers 84,871 77,742 73,611 9.2 5.6 Securities transfers 4,125 3,689 3,693 11.8 -.1 Commercial ACH 2372,108 2,046,086 1,736,863 15.9 17.8 Noncash collection 1,069 838 643 27.6 30.3 Cash transportation 36 61 94 -41.0 -35.1 NOTE. Amounts in bold are restatements due to a securities transfers, the number of transactions originated change in definition or to correct previously reported on line and off line; in ACH, the total number of commererrors. cial items processed; in noncash collection, the number of Activity in commercial checks is defined as the total items on which fees are assessed; in cash transportation, number of commercial checks collected, including both the number of registered mail shipments and FRBprocessed and fine-sort items; in funds transfers and arranged armored carrier stops. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 259 transactions, increases for ACH account in 1995. The volume of checks deposservicing and non-automated products, ited that required processing by Federal and no change for funds transfers, Reserve Banks increased 2.8 percent. book-entry securities, and electronic In preparation for the 1997 implemenconnections. tation of interstate banking, the Federal The revenue from priced services in Reserve Banks introduced the Nation- 1996 was $787.2 million, other income wide City Sort product, their first was $28.7 million, and costs were national check product with uniform $789.3 million, resulting in net revenue pricing. It permits collecting banks to of $26.6 million and a recovery rate of make a single deposit of checks drawn 103.4 percent of costs, including the on city institutions across the country. In PSAF.2 In 1995 the System's revenue addition, one District began to offer a was $0.4 million more than total costs, companion product for checks drawn on resulting in a recovery rate of 100.1 per- institutions located in regional check cent, including the PSAF but before processing availability zones. the cumulative effect of a change in To enhance the efficiency of the check accounting principle. The change in collection system, the Reserve Banks accounting resulted in a net loss of continued to expand the use of electron- $18.9 million and a recovery rate of ics in check processing. During 1996, 97.6 percent. 9.3 percent (approximately 1.4 billion) of all checks presented to paying banks were presented electronically, an in- Check Collection crease of nearly 40 percent over the Federal Reserve Bank operating 1995 level. Depository institutions also expenses and imputed costs for commer- continued to expand their use of eleccial check services in 1996 totaled tronic information products to provide $570.7 million. Revenue from check timely cash-management information operations totaled $588.1 million, and to their corporate customers. Also, by other income amounted to $22.5 mil- year-end 1996, all Federal Reserve lion, resulting in income before income offices offered depository institutions the taxes of $39.9 million. ability to make all adjustment requests The Reserve Banks handled 15.5 bil- electronically. Reserve Banks began to lion checks, about the same number as accept electronic adjustment requests in 1995. The volume of checks depos- from institutions within their territories ited in fine-sort deposit products, requir- in 1995. ing the depositing bank to presort items The Reserve Banks also continued to by paying bank, declined 11.9 percent, expand their offerings of check image compared with a 16.5 percent decrease capture and storage products to support paying banks' use of electronic check 2. See the pro forma statements at the end of products. At least one office in each this chapter. Other income is the revenue from of the Philadelphia, Atlanta, Chicago, investment of clearing balances net of earnings St. Louis, Kansas City, and San Francredits, an amount known as net income on clearcisco Districts introduced image proding balances. Total cost is the sum of operating expenses, imputed costs (interest on debt, interest ucts during the year. The Cleveland, on float, sales taxes, and the Federal Deposit Insur- Minneapolis, and Dallas Banks introance Corporation assessment), imputed income duced similar products in 1995. taxes, and the targeted return on equity. Net reve- In October 1996 the New York Bank nue is revenue plus net income on clearing balances minus total cost. closed the Jericho Regional Check Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 83rd Annual Report, 1996 Processing Center (RCPC) and consoli- Also during 1996, 475 of the approxidated check processing operations at its mately 8,400 on-line depository insti- East Rutherford (N.J.) Operations Cen- tutions began receiving funds transfers ter. In addition, the Bank consolidated in the new expanded message format. the processing of all adjustment requests All on-line institutions must be able at the Utica RCPC. to receive transfers in the new format by June 1997 and to send transfers in the new format by December 1997. The Funds Transfer and Net Settlement expanded format will have several benefits: Federal Reserve Bank operating expenses and imputed costs for Fedwire • Reduce manual interventions in the funds transfer and net settlement sertransfer process vices totaled $71.1 million. Revenue • Eliminate the need to truncate from Fedwire and net settlement operapayment-related information when fortions totaled $94.7 million, and other warding through Fedwire payment income amounted to $2.9 million, resultorders that were received via other ing in income before income taxes of large-value transfer systems $26.4 million. • Allow additional information about the originator and beneficiary of a trans- Funds Transfer fer to be included in the transfer mes- The number of Fedwire funds transfers sage, as required by the Bank Secrecy originated increased 9.2 percent, to Act rules adopted by the Department of 84.9 million—82.6 million value (mone- the Treasury. tary) transfers and 2.3 million nonvalue messages. The higher volume is due Net Settlement largely to sharply increased mutual fund activity, aggressive marketing of cash The Federal Reserve provides net management services by depository settlement services to approximately institutions, and, to a lesser extent, 170 local private-sector clearing and increased mortgage activity and settlement arrangements and to four securities-related settlement payments. nationwide arrangements. These ar- Fees charged for Fedwire transfers rangements enable participants to settle remained unchanged from 1995 fees. their net positions either via Fedwire In October 1996 the Board approved funds transfers using special settlement a December 8, 1997, effective date to accounts at Federal Reserve Banks or open the Fedwire funds transfer service via accounting entries, which are posted at 12:30 a.m. eastern time. Previously, to participants' Federal Reserve acthe Board determined that expanding the counts by Federal Reserve Banks. Fedwire funds transfer service to eigh- Two of the national arrangements, the teen hours per day, from the current ten Clearing House Interbank Payments hours per day, could be useful to the System (CHIPS) and the Participants private sector in reducing settlement risk Trust Company (PTC), process and net in the foreign exchange markets and large-dollar transactions, CHIPS for eliminating an operational barrier to interbank funds transfers and PTC potentially important innovations in pri- for the settlement of mortgage-backed vately provided payment and settlement securities transactions. The two other services. national arrangements, Visa ACH and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 261 the National Clearing House Asso- the Federal Reserve Banks. In 1996, parciation, process and net small-dollar ticipants requested 62 percent fewer transactions—Visa for automated clear- extensions, and the duration of exteninghouse transactions and National sions fell 53 percent. Clearing House for check payments. Also in 1996, four Federal Reserve The majority of local clearing arrange- Banks converted their Fedwire securiments are check clearinghouses. ties transfer applications to the new centralized application known as the National Book-Entry System. The Book-Entry Securities remaining Federal Reserve Banks are Federal Reserve Bank operating ex- scheduled to convert to the new applicapenses and imputed costs for book-entry tion by early 1998. securities transfer services totaled $16.2 million. Revenue from book-entry Automated Clearinghouse securities operations totaled $16.6 million, and other income amounted to Federal Reserve Bank operating ex- $0.5 million, resulting in income before penses and imputed costs for automated income taxes of $0.9 million. The Fed- clearinghouse (ACH) services totaled eral Reserve Banks processed 4.1 mil- $63.7 million. Revenue from ACH lion transfers of government agency operations totaled $77.4 million, and securities on the Fedwire book-entry other income amounted to $2.4 million, securities transfer system during the resulting in income before income taxes year, an 11.8 percent increase over the of $16.2 million. The Reserve Banks 1995 level.3 Fees charged for book-entry processed 2.4 billion commercial ACH securities transfers remained unchanged transactions during the year, an increase from 1995. of 15.9 percent over 1995 volume lev- On January 2, 1996, a firm closing els. In October the Reserve Banks comtime of 3:15 p.m. eastern time for the bined the interregional and intraregional origination of securities transfers and transaction fees (representing a 16.7 per- 3:30 p.m. eastern time for reversals cent reduction for interregional transbecame effective. These closing times actions) and reduced the presort deposit were implemented to reduce market fee by 10 percent. uncertainty about the final closing time During 1996 the Reserve Banks comdue to ad hoc closing hour extensions. pleted their conversion to the new con- These extensions are needed at times solidated Fed ACH software, which is to accommodate significant operational installed at FRAS. The software proproblems at depository institutions or at cesses ACH transactions on a flow basis and gives customers more deposit and 3. The revenues, expenses, and volumes re- delivery options. Customers can trace flected here are for transfers of securities issued ACH transactions or files of transactions by federal government agencies, government- electronically, check the status of a file sponsored enterprises, and international instiin process, and obtain limited informatutions, such as the World Bank. The Fedwire tion from the Federal Reserve's datasecurities transfer service also provides custody, transfer, and settlement services for securities of base on other ACH participants. Many the U.S. Treasury. The Reserve Banks act as fiscal of these new features will be available agents when they transfer Treasury securities, and in 1997. the Treasury Department assesses fees for the The consolidated processing environservices. See the section on fiscal agency services in this chapter for more details. ment has cut processing costs, enabling Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 83rd Annual Report, 1996 the Reserve Banks to reduce transaction nonstandard currency packaging and fees. It also has enabled the Reserve nonstandard frequency of access to Banks to eliminate the interregional, services. presort, and local deposit deadlines. Additional changes to the ACH fee schedule that will be implemented Float during 1997 will fully reflect the pro- Federal Reserve float increased in 1996 cessing efficiencies of the Fed ACH to a daily average of $413.4 million; it environment. was $338.8 million in 1995. The Federal Reserve recovers the cost of float associ- Noncash Collection ated with priced services through fees for those services. Federal Reserve Bank operating expenses and imputed costs for noncash collection services totaled $4.9 million. Developments in Currency Revenue from noncash operations and Coin totaled $5.2 million, and other income amounted to $0.2 million, resulting in The Federal Reserve continued to work income before income taxes of $0.5 mil- closely with Treasury and other agenlion. The number of noncash collection cies to deter the counterfeiting and launitems (maturing coupons and bonds) dering of U.S. currency. In March the processed by the Reserve Banks Federal Reserve began distributing the increased 27.5 percent, to more than new Series 1996 $100 note, the first 1 million items. In 1996 the Reserve note since the 1920s to be totally rede- Banks implemented a national fee signed. The Series 1996 note has several schedule for the noncash collection new features—an enlarged portrait, service. color-shifting ink, a watermark, concen- Two Federal Reserve sites process tric fine lines, and a universal Federal noncash items—the Cleveland Bank and Reserve seal. The distribution of the the Jacksonville Branch of the Atlanta Series 1996 $50 note is scheduled for Bank. In 1996 the New York Reserve 1997. Bank stopped presenting noncash items The Federal Reserve's cost to print to members of the New York Clearing new currency in 1996 was $403 million. House; the Chicago Reserve Bank con- Treasury's Bureau of Engraving and tinued to present noncash items through Printing produced 9.8 billion Federal the Chicago Clearing House. Reserve notes in 1996 and charged the Federal Reserve $40 per thousand notes. During 1996, 13 percent of the Cash Services notes produced were the new Series Federal Reserve Bank operating ex- 1996 $100 note, 45 percent were the penses and imputed costs for cash ser- $1 denomination, and the remaining vices totaled $5.2 million. Revenue from 42 percent were the $2 through $50 cash operations totaled $5.2 million, and denominations. other income amounted to $0.2 million, Reserve Bank operating expenses for resulting in income before income taxes processing and storing currency and of $0.2 million. Special priced cash ser- coin, including priced cash services, vices include cash transportation, coin totaled $279 million. The Federal wrapping services, and the provision of Reserve supplies currency and coin to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 263 the public through approximately 9,500 In April the Board approved a new depository institutions throughout the cash access policy, to be effective in United States. The value of currency May 1998, that provides greater consisand coin in circulation increased 9 per- tency in Reserve Bank cash service cent in 1996 and exceeded $440 billion levels. It establishes a base level of curby year-end. During 1996, the Reserve rency access to all depository institu- Banks received more than 23.7 billion tions at no charge but restricts the num- Federal Reserve notes in deposits from ber of offices served and the frequency depository institutions and paid more of access. Depository institutions that than 24.3 billion Federal Reserve notes meet minimum volume thresholds will to depository institutions. be able to obtain more frequent free The Federal Reserve Banks continued access. Additional access, beyond the converting their currency processing free service level, will be priced. operations to the Banknote Processing Systems (BPS) 3000. Before a recent upgrade, the equipment was referred to Developments in Fiscal Agency as ISS 3000 machines. At the end of and Government Depository 1996, 126 of the BPS 3000 machines Services were in use at the Reserve Banks. The Federal Reserve plans to install a total The Federal Reserve Act provides that, of 128 processors at the Reserve Banks when required by the Secretary of the and to complete the conversion in 1997. Treasury, Federal Reserve Banks will Expenses of the Federal Reserve Banks for Fiscal Agency and Depository Services, 1996, 1995, and 1994 Thousands of dollars Agency and service 1996 1995 1994 DEPARTMENT OF THE TREASURY Bureau of the Public Debt Savings bonds 78,765.8 80,934.6 86,216.0 Treasury Direct 26,788.8 30,117.4 23,865.3 Commercial book entry 27,009.0 27,705.9 22,950.5 Marketable Treasury issues 22,349.9 22,830.3 19,813.4 Definitive securities and Treasury coupons ... 3,498.5 3,860.6 3,924.2 Total 158,502.0 165,448.8 156,769.4 Financial Management Service Treasury tax and loan and Treasury general account 38,828.2 35,749.3 34,487.1 Government check processing 22,604.1 24,347.4 22,998.9 Automated clearinghouse 20,557.0 22,238.0 24,502.0 Government agency deposits 3,366.1 3,823.5 4,602.2 Fedwire funds transfers 455.3 357.9 416.9 Other services 17,346.3 16,376.7 13,842.9 Total 103,157.1 102,892.8 100,850.0 Other Total 3,554.6 4,017.5 3,545.7 Total, Treasury 265,213.6 272,359.1 261,165.1 OTHER FEDERAL AGENCIES Securities services 18,788.8 18,547.2 15,282.7 Food coupons 25,287.6 24,251.4 22,653.9 Postal money orders 5,722.9 5,467.8 5,486.3 Total, other agencies 49,799.3 48,266.4 43,422.9 Total 315,012.9 320,625.5 304,588.0 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

264 83rd Annual Report, 1996 act as "fiscal agents" and "deposi- the federal government by depository tories" of the United States. As fiscal institutions. agents for the Department of the Treasury, Reserve Banks provide debt- Marketable Treasury Securities related services, such as issuing, servicing, and redeeming marketable Treasury Reserve Bank operating expenses for securities and U.S. savings bonds, and activities related to marketable Treasury processing secondary market transfers securities amounted to $52.6 million. initiated by depository institutions. As The Reserve Banks processed more than depositories, Reserve Banks collect and 445,000 commercial tenders for governdisburse funds on behalf of the federal ment securities in Treasury auctions. In government. The Reserve Banks also 1996 the volume of commercial tenders provide fiscal agency services on behalf decreased 26.2 percent from 1995 volof several domestic and international ume levels. Commercial tender processgovernment agencies. ing was consolidated at the New York, In October 1996 a new fiscal agency Chicago, and San Francisco Banks in policy was adopted to clarify the 1996. Reserve Banks' unique statutory rela- The Reserve Banks operate two booktionship with the Treasury and other entry securities systems for the custody government entities. The policy identi- and transfer of Treasury securities—the fies guidelines for managing a request Fedwire book-entry securities transfer or directive for new services (without system and Treasury Direct. Almost competitive bidding) from a government all book-entry Treasury securities— agency; outlines the criteria for deter- 97.6 percent of the par value outstandmining whether to respond to a com- ing at year-end 1996—were maintained petitive procurement request from a on Fedwire, and 2.4 percent of the total government agency for financial ser- was maintained on Treasury Direct. vices; establishes uniform and consis- The Reserve Banks processed tent practices for cost accounting, 9.0 million Fedwire transfers of Treareporting, and billing for fiscal and sury securities, a decrease of 1.6 percent depository services on a full-cost or from the 1995 level. In addition, the other appropriate basis; and defines the Banks processed 21.6 million interest terms and conditions for providing ser- and principal payments for both Treavices to government agencies. sury and agency securities. The fees In 1996 the total cost of providing charged to depository institutions for fiscal agency and depository services to sending and receiving Fedwire transfers Treasury amounted to $265.2 million. In of Treasury book-entry securities are the addition, the Reserve Banks provide ser- same as those charged to them for transvices to other government agencies; the fers of government agency securities. cost of providing services to other gov- The Federal Reserve keeps a portion of ernment agencies was $49.8 million in the fee for transfers of Treasury securi- 1996. ties to cover its settlement expenses; the remainder of the fee is remitted to Treasury. Fiscal Agency Securities Services The Philadelphia Bank operates Trea- The Federal Reserve Banks handle mar- sury Direct, a system of book-entry ketable Treasury securities and savings securities accounts for nondepository bonds and monitor collateral pledged to institutions and individuals planning to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 265 hold their Treasury securities to matu- tions; only the Pittsburgh and Kansas rity. The Treasury Direct system con- City offices print savings bonds. tains more than 1.8 million accounts. During 1996 the Reserve Banks pro- Other Initiatives cessed 450 thousand tenders for Trea- The Reserve Banks maintain custody sury Direct customers seeking to purof definitive (physical) and book-entry chase Treasury securities at Treasury securities pledged as collateral by auctions, and they handled 2.0 million depository institutions holding deposits reinvestment requests. The volume of from Treasury and other government tenders decreased 44.3 percent, and agencies. In 1996 the Reserve Banks the volume of reinvestment requests monitored the value of the definitive increased 14.5 percent, compared with securities by pricing them according to 1995 levels. In addition, the Philadeltheir market value (marking them to phia Bank issued 7.3 million payments market). The Reserve Banks will mark for discounts, interest, and redemption book-entry securities to market after proceeds; 2.7 million payments for savcompletion of the conversion to the ings bonds; and more than 61 thousand National Book-Entry System. interest payments for definitive Treasury issues. The Federal Reserve also worked with Treasury's Financial Management The Federal Reserve also worked Service to expand the Treasury Offset with Treasury's Bureau of the Public Program on a pilot basis. The Offset Debt to implement, on a pilot basis, an Program electronically compares inforoption that permits selected Treasury mation about delinquent debts owed to Direct investors to pay for securities the U.S. government with information with an ACH debit to their bank about payments being issued by the govaccount. ernment. If a match occurs, the program applies the payment to the delinquent Savings Bonds debt. Reserve Bank operating expenses for savings bond activities amounted to Depository Services $78.8 million. The Reserve Banks printed and mailed 55.1 million savings The Reserve Banks maintain Treasury's bonds on behalf of Treasury's Bureau of funds account, accept deposits of federal the Public Debt, a decrease of 9.6 pertaxes and fees, pay checks drawn on cent from 1995. The Banks processed Treasury's account, and make electronic 8.2 million original-issue transactions. payments on behalf of Treasury. Redemption, reissue, and exchange transactions totaled 664,000, an increase Federal Tax Payments of 4.3 percent over 1995. The Reserve Banks also responded to 1.7 million ser- Reserve Bank operating expenses for vice calls from owners of savings bonds, federal tax payment activities were an increase of 12.7 percent from 1995. $38.8 million. The Reserve Banks pro- Savings bond operations are per- cessed 6.3 million advices of credit from formed at five Reserve Bank offices: depository institutions accepting tax Buffalo, Pittsburgh, Richmond, Minne- deposits from businesses and individuapolis, and Kansas City. All of these als. The Reserve Banks also received a offices process savings bond transac- small portion of tax payments directly, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

266 83rd Annual Report, 1996 representing about 1 percent of the total pons and discounts to first-time purchasvalue. Depository institutions that re- ers of government securities through ceive tax payments may place the funds Treasury Direct. All recurring Treasury in a Treasury tax and loan account or Direct payments and many definitive remit the funds to a Reserve Bank. securities interest payments are made The Reserve Banks assisted with the via the ACH. implementation of the Treasury's Elec- Following successful tests of digital tronic Federal Tax Payment System imaging technology, Treasury's Finan- (EFTPS), which automates the flow of cial Management Service issued their federal tax deposits from businesses. specific requirements for the use of The system became operational in Octo- check images archived at Reserve ber. Tax payments made via EFTPS Banks, which will improve the Treaflow to Treasury one day sooner than sury's check reconciliation and claims they do under the paper-based process, processing. In response, the Reserve improving Treasury's investment oppor- Banks, as fiscal agents, designed and tunities and enabling it to manage its began to build a check imaging system cash flows more efficiently. The Reserve composed of two fundamental elements: Banks have developed and implemented (1) a capture subsystem, consisting of new payment mechanisms for use by image-enabled check reader-sorters and taxpayers who must send their payments temporary image storage facilities, and on the same day their tax liability is (2) an archive and retrieval subsystem, established. containing an indexed database configured for long-term storage and retrieval of images of paid Treasury checks. The Payments Processed for Treasury image-based system will replace the Operating expenses for government pay- existing microfilm-based check trunment operations amounted to $47 mil- cation service, eliminate the manual lion. During the year, Treasury contin- research associated with microfilm, and ued to increase the proportion of its reduce the time required to make paid payments made electronically. The num- Treasury check information available ber of ACH transactions processed for for research and inquiry. Treasury amounted to 625 million, an increase of 4.4 percent over the 1995 Services Provided to Other Entities volume. The majority of government payments made via the ACH are for When required to do so by the Secretary social security, pension, and salary pay- of the Treasury or when required or ments. Treasury also uses the ACH to permitted to do so by federal statute, the make some payments to vendors. Reserve Banks perform fiscal agency The Reserve Banks processed securities services and depository ser- 436 million government checks, a vices for other domestic and interdecrease of 5.2 percent from 1995. The national agencies. Depending on the Reserve Banks also issued 1.3 million authority under which services are profiscal agency checks, which are used vided, the Reserve Banks may (1) faciliprimarily to pay semiannual interest on tate the issuance of government agency registered, definitive Treasury notes and book-entry securities that are eligible to bonds and Series H and HH savings be transferred over Fedwire, (2) provide bonds. They are also used to pay the custody for the stock of unissued, definiprincipal of matured securities and cou- tive securities, (3) maintain and update Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 267 balances of outstanding book-entry and Each year, the division assesses comdefinitive securities for issuers, (4) per- pliance with the policies established by form various other securities servicing the Federal Open Market Committee activities, and (5) maintain funds (FOMC) by examining the accounts and accounts for some government agencies. holdings of the System Open Market Account (SOMA) at the Federal Reserve Bank of New York and the foreign cur- Food Coupons rency operations conducted by the Bank. Reserve Bank operating expenses for In addition, a public accounting firm food coupon services were $25.3 mil- certifies the schedule of participated lion in 1996. The Reserve Banks asset and liability accounts and the redeemed 3.6 billion food coupons, a related schedule of participated income decrease of 7.1 percent from 1995. accounts at year-end. Division person- The Account Management Agent nel follow up on the audit results. (AMA) system was completed in Copies of the external audit reports are March. The AMA system is used by the furnished to the FOMC as are reports on Department of Agriculture's Food and the division's follow-up. Consumer Service to establish and monitor adherence to limits on federal funding to states for food coupons. The Income and Expenses Federal Reserve, the Department of Agriculture, and the Department of the The accompanying table summarizes the Treasury are continuing to work on income, expenses, and distributions of enhancements in the area of fraud net earnings of the Federal Reserve detection. Banks for 1996 and 1995. Income was $25,164 million in 1996 and $25,395 million in 1995. Total Examinations expenses were $2,111 million ($1,639 Section 21 of the Federal Reserve Act million in operating expenses, $309 milrequires the Board of Governors to order lion in earnings credits granted to an examination of each Federal Reserve depository institutions, and $163 million Bank at least once per year, and the in assessments for expenditures by the Board assigns this responsibility to its Board of Governors). The cost of new Division of Reserve Bank Operations currency was $403 million. Revenue and Payment Systems. Since 1995 the from financial services was $787 mildivision has engaged a public account- lion. Unreimbursed expenses for sering firm to audit the combined financial vices provided to Treasury amounted to statements of the Reserve Banks. In $38 million. addition, for 1996 the firm audited the The profit and loss account showed a year-end financial statements of the net loss of $1,639 million. The loss was Dallas, Richmond, and New York primarily a result of realized and unreal- Reserve Banks; the division audited the ized losses on assets denominated in year-end financial statements of the foreign currencies revalued to reflect other nine Banks and conducted reviews current market exchange rates. Statutory of their administrative controls and their dividends to member banks totaled compliance with federal statutes and $256 million, $25 million more than in regulations and with policies of the 1995. This rise reflects an increase in System. the capital and surplus of member banks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

268 83rd Annual Report, 1996 and a consequent increase in the paid-in 1996 were $390,268 million, an increase capital stock of the Reserve Banks. of $14,199 million from 1995 (see Payments to Treasury totaled $20,083 accompanying table). From 1995 to million, compared with $23,389 million 1996, their holdings of U.S. government in 1995. The payments consist of all net securities increased $14,196 million, income after the deduction of dividends and loans increased $4 million. and after the deduction of the amount Also during the period from 1995 to necessary to bring the surplus of the 1996, the average rate of interest Reserve Banks to the level of capital decreased from 6.34 percent to 6.12 perpaid-in. Also in 1996, the System made cent on holdings of government securia lump-sum payment of $106 million ties and decreased from 5.62 percent to to the U.S. Treasury from the surplus 5.27 percent on loans. account of the Federal Reserve Banks, as required by statute. In the Statistical Tables chapter of Volume of Operations this REPORT, table 6 details income and Table 9, in the Statistical Tables chapter, expenses of each Federal Reserve Bank shows the volume of operations in the for 1996, and table 7 shows a condensed principal departments of the Federal statement for each Bank for the years Reserve Banks for the years 1993 1914 to 1996. A detailed account of the through 1996. assessments and expenditures of the Board of Governors appears in the next chapter—Board of Governors Financial Federal Reserve Bank Premises Statements. Construction continued in 1996 on the new headquarters building for the Min- Holdings of Securities and Loans neapolis Bank and the expansion and Average daily holdings of securities and renovation of the headquarters building loans by Federal Reserve Banks during of the Cleveland Bank. Income, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 1996 and 1995 Millions of dollars Item 1996 1995 Current income 25,164 25,395 Current expenses 1,948 1,818 Operating expenses' 1,639 1,568 Earnings credits granted 309 251 Current net income 23,216 23,577 Net additions to (deductions from, - ) current net income -1,639 896 Cost of unreimbursed services to Treasury 38 38 Assessments by the Board of Governors 565 531 For expenditures of Board 163 161 For cost of currency 403 370 Net income before payments to Treasury 20,975 23,903 Dividends paid 256 231 Transferred to surplus2 635 283 Payments to Treasury2 20,083 23,398 NOTE. Components may not sum to totals because of 2. In addition to the amounts shown, $106 million in rounding. Federal Reserve Bank surplus was transferred to the 1. Includes a net periodic credit for pension costs of Treasury as statutorily required. Digitized $f1o4r0 .F5R mAilSlioEnR in 1996 and $119.2 million in 1995. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 269 The Atlanta Bank purchased property San Francisco Bank's Seattle, Portland, for its new Birmingham Branch build- and Salt Lake City Branches. ing and began the project's design The New York Bank closed its phase. The Atlanta Bank also retained Jericho, New York, check processing design consultants for its new head- facility, and the Kansas City Bank sold quarters building project in Atlanta. its old Omaha, Nebraska, Branch build- Multiyear renovation programs con- ing. The Chicago Bank contracted to tinued for the New York Bank's head- lease space for processing checks in a quarters building, the Kansas City new building that is under construction Bank's Oklahoma City Branch, and the in Des Moines, Iowa. Securities and Loans of Federal Reserve Banks, 1994-96 Millions of dollars except as noted U.S. Item and year Total government Loans2 securities' Average daily holdings11 1994 354,001 353,740 261 1995 376,069 375,867 202 1996 390,268 390,063 206 Earnings 1994 19,259 19,247 11 1995 23,837 23,826 11 1996 23,895 23,884 11 Average interest rate (percent) 1994 5.44 5.44 4.39 1995 6.34 6.34 5.62 1996 6.12 6.12 5.27 NOTE. Components may not sum to totals because of 2. Does not include indebtedness assumed by the Fedrounding. eral Deposit Insurance Corporation. 1. Includes federal agency obligations. 3. Based on holdings at opening of business. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 83rd Annual Report, 1996 Pro Forma Financial Statements for Federal Reserve Priced Services Pro Forma Balance Sheet for Priced Services, December 31, 1996 and 1995 Millions of dollars Item 1996 1995 Short-term assets (Note 1) Imputed reserve requirements on clearing balances 658.3 504.2 Investment in marketable securities ... 5,924.7 4,537.8 Receivables 69.0 63.7 Materials and supplies 3.2 10.6 Prepaid expenses 26.5 19.4 Items in process of collection 7,548.4 2,397.4 Total short-term assets 14,230.1 7,533.1 Long-term assets (Note 2) Premises 393.5 356.6 Furniture and equipment 171.1 170.3 Leases and leasehold improvements .. 31.0 24.2 Prepaid pension costs 287.4 242.1 Total long-term assets 883.0 793.1 Total assets 15,113.1 8,326.2 Short-term liabilities Clearing balances and balances arising from early credit of uncollected items 12,366.3 5,154.8 Deferred-availability items 1,765.1 2,284.5 Short-term debt 98.7 93.7 Total short-term liabilities 14,230.1 7,533.1 Long-term liabilities Obligations under capital leases 2.3 3.8 Long-term debt 196.9 164.3 Postretirement/postemployment benefits obligation 178.6 176.1 Total long-term liabilities 377.8 344.3 Total liabilities 14,607.9 7,877.4 Equity 505.2 448.8 Total liabilities and equity (Note 3) 15,113.1 8,326.2 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 271 Pro Forma Income Statement for Federal Reserve Priced Services, 1996 and 1995 Millions of dollars Item 1996 1995 Revenue from services provided to depository institutions (Note 4) 787.2 738.8 Operating expenses (Note 5) 666.0 655.2 Income from operations 121.2 83.6 Imputed costs (Note 6) Interest on float 21.9 19.0 Interest on debt 17.3 16.2 Sales taxes 11.6 22.1 FDIC insurance 0.0 50.8 6.3 63.7 Income from operations after imputed costs 70.4 19.9 Other income and expenses (Note 7) Investment income 315.8 259.6 Earnings credits -287.1 28.7 -233.2 26.4 Income before income taxes 99.1 46.3 Imputed income taxes 29.6 14.4 Income before cumulative effect of a change in accounting principle 69.5 31.9 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) 69.5 12.6 MEMO: Targeted return on equity (Note 11).. 42.9 31.5 NOTE. Components may not sum to totals because of The priced services financial statements consist of these rounding. tables and the accompanying notes. Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 1996 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 787.2 588.1 94.7 16.6 77.4 5.2 5.2 Operating expenses (Note 5) 666.0 527.0 68.2 15.6 60.8 4.4 5.0 Income from operations 121.2 61.1 26.4 1.0 16.6 .8 .2 Imputed costs (Note 6) 50.8 43.7 2.9 .6 2.9 A .2 Income from operations after imputed costs 70.4 17.4 23.5 .4 13.7 A .0 Other income and expenses, net (Note 7) 28.7 22.5 2.9 .5 2.4 2 .2 Income before income taxes . 99.1 39.9 26.4 .9 16.2 .5 .2 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 83rd Annual Report, 1996 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 $2.8 million in 1996 and cash items in process of collection (CIPC) stated on a $2.7 million in 1995. The credit to expenses under SFAS basis comparable to that of a commercial bank. It reflects 87 (see 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 the federal funds rate. Imputed costs consist of interest on float, interest on debt, 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 $45.3 million in 1996 and $35.4 million in among priced services according to the ratio of operating 1995 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 1996 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 795.4 long-term debt and equity in a proportion equal to the Unrecovered float 12.4 ratio of long-term debt to equity for the fifty largest bank Float subject to recovery 783.0 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 78.4 sists of the taxes that would have been paid and the return As-of adjustments 382.0 on capital that would have been provided had priced Direct charges 116.4 services been furnished by a private-sector firm. Other Per-item fees 206.2 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 273 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- 1996 1995 week closing float and interterritory check float, which may be recovered from depositing institutions through Net income 70.2 12.6 Amortization of the initial adjustments to the institution's reserve or clearing baleffect of implementing ance or by valuing the float at the federal funds rate and SFAS87 -10.5 -10.4 billing the institution directly. Float recovered through Deferred costs of automation per-item fees is valued at the federal funds rate and has consolidation -6.3 -.1 been added to the cost base subject to recovery in 1996. 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 53.4 21.5 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 $6.3 million of automation consolidation costs for 1996 and $0.1 milfederal funds rate to the required portion of the clearing lion for 1995. The Reserve Banks plan to recover these balances, adjusted for the net effect of reserve requireamounts, along with a finance charge, by the end of the ments on clearing balances. year 2001. After-tax return on equity has not been allo- Because clearing balances relate directly to the Federal cated by service because it relates to the organization as a Reserve's offering of priced services, the income and cost whole. associated with these balances are allocated to each service based on each service's ratio of income to total (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

275 Board of Governors Financial Statements The financial statements of the Board were audited by Price Waterhouse, independent public accountants, for 1996 and 1995. 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, 1996 and 1995, 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, 1996 and 1995, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued a report dated March 25, 1997 on our consideration of the Board's internal controls and a report dated March 25, 1997 on its compliance with laws and regulations. UJP March 25, 1997 Arlington, Virginia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

276 83rd Annual Report, 1996 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEET As of December 31, 1996 1995 ASSETS CURRENT ASSETS Cash $ 15,712,258 $16,142,195 Accounts receivable 2,561,975 1,900,155 Transfers receivable—surplus Federal Reserve Bank earnings (Note 1) 659,862,602 — Prepaid expenses and other assets 2,247,391 1,225,022 Total current assets 680,384,226 19,267,372 PROPERTY, BUILDINGS, AND EQUIPMENT, NET (Note 4) 61,110,184 59,781,623 Total assets $741,494,410 $79,048,995 LIABILITIES AND FUND BALANCE CURRENT LIABILITIES Accounts payable and accrued liabilities $ 10,435,545 $ 7,580,371 Accrued payroll and related taxes 6,804,678 4,868,497 Transfers payable—surplus Federal Reserve Bank earnings (Note 1) 659,862,602 — Accrued annual leave 6,966,327 6,601,004 Capital lease payable (current portion) — 75,840 Unearned revenues and other liabilities 2,263,338 2,184,882 Total current liabilities 686,332,490 21,310,594 CAPITAL LEASE PAYABLE (non-current portion) — 232,638 ACCUMULATED RETIREMENT BENEFIT OBLIGATION (Note 2) 466,056 — ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (Note 3) 18,171,722 17,074,588 ACCUMULATED POSTEMPLOYMENT BENEFIT OBLIGATION (Note 3) 1,409,343 1,093,400 FUND BALANCE 35,114,799 39,337,775 Total liabilities and fund balance $741,494,410 $79,048,995 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 277 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENT OF REVENUES AND EXPENSES AND FUND BALANCE For the years ended December 31, 1996 1995 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $ 162,642,400 $161,347,900 Other revenues (Note 5) 9,789,141 10,240,830 Total operating revenues 172,431,541 171,588,730 BOARD OPERATING EXPENSES Salaries 106,353,644 100,412,576 Retirement and insurance contributions 18,417,943 16,394,955 Contractual services and professional fees 11,159,490 11,240,373 Depreciation and net losses on disposals 8,626,785 7,525,971 Travel 4,942,020 4,920,996 Equipment and facilities rental 4,356,715 3,853,657 Postage and supplies 4,263,382 4,523,272 Utilities 4,189,203 4,155,038 Software 3,907,874 3,362,342 Repairs and maintenance 3,417,539 3,689,603 Printing and binding 2,665,188 3,144,178 Other expenses (Note 5) 4,354,734 3,915,489 Total operating expenses 176,654,517 167,138,450 BOARD OPERATING REVENUES (UNDER) OVER EXPENSES (4,222,976) 4,450,280 ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 403,232,215 370,206,037 Expenses for currency printing, issuance, retirement, and shipping 403,232,215 370,206,037 CURRENCY ASSESSMENTS OVER (UNDER) EXPENSES — — TOTAL REVENUES (UNDER) OVER EXPENSES (4,222,976) 4,450,280 FUND BALANCE, Beginning of year 39,337,775 34,887,495 TRANSFERS TO THE U.S. TREASURY Transfers and accrued transfers from surplus Federal Reserve Bank earnings (Note 1) 5,623,716,034 — Transfers and accrued transfers to the U.S. Treasury (Note 1) (5,623,716,034) — FUND BALANCE, End of year $ 35,114,799 $ 39,337,775 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 83rd Annual Report, 1996 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENT OF CASH FLOWS Increase (Decrease) in Cash For the years ended December 31, 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Board operating revenues (under) over expenses $ (4,222,976) $ 4,450,280 Adjustments to reconcile operating revenues (under) over expenses to net cash provided by operating activities: Depreciation and net losses on disposals 8,626,785 7,525,971 (Increase) in transfers receivable—surplus Federal Reserve Bank earnings . (659,862,602) — Increase in accumulated postretirement benefits 1,097,134 800,142 Increase in accumulated retirement benefits 466,056 — Increase (decrease) in accumulated postemployment benefits 315,943 (226,618) (Increase) decrease in accounts receivable, prepaid expenses, and other assets (1,684,189) 438,229 Increase in accrued annual leave 365,323 377,085 Increase in accounts payable and accrued liabilities 2,855,174 2,129,494 Increase in transfers payable—surplus Federal Reserve Bank earnings 659,862,602 — Increase in payroll payable and related taxes 1,936,181 948,432 Increase in unearned revenues and other liabilities 78,456 332,268 Net cash provided by operating activities 9,833,887 16,775,283 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals of furniture and equipment 70,500 12,112 Capital expenditures (10,334,324) (15,594,485) Net cash used in investing activities (10,263,824) (15,582,373) NET (DECREASE) INCREASE IN CASH (429,937) 1,192,910 CASH BALANCE, Beginning of year 16,142,195 14,949,285 CASH BALANCE, End of year $ 15,712,258 $16,142,195 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 NOTES TO FINANCIAL STATEMENTS years 1996 and 1995, and the Board was not assessed a contribution for these years. Excess Plan assets will continue to fund future years' contributions. The Board is not (1) SIGNIFICANT ACCOUNTING POLICIES accountable for the assets of this plan. Board Operating Revenues and Expenses— A small number of Board employees participate in the Assessments made on the Federal Reserve Banks for Civil Service Retirement System (CSRS) or the Federal Board operating expenses and capital expenditures are Employees' Retirement System (FERS). The Board calculated based on expected cash needs. These assess- matches employee contributions to these plans. These ments, other operating revenues, and operating expenses defined benefits plans are administered by the Office of are recorded on the accrual basis of accounting. Personnel Management. The Board's contributions to Issuance and Redemption of Federal Reserve Notes— these plans totaled $201,500 and $802,200 in 1996 and The Board incurs expenses and assesses the Federal 1995 respectively. The Board has no liability for future Reserve Banks for the costs of printing, issuing, shipping, payments to retirees under these programs, and it is not and retiring Federal Reserve Notes. These assessments accountable for the assets of the plans. and expenses are separately reported in the statements of Effective January 1, 1996, Board employees covered revenues and expenses because they are not Board operat- under the System's Plan are also covered under a Benefits ing transactions. Equalization Plan (BEP). Benefits paid under the BEP Property, Buildings and Equipment—The Board's are limited to those benefits that cannot be paid from the property, buildings and equipment are stated at cost less System's Plan because of limitations imposed by Sections accumulated depreciation. Depreciation is calculated on a 401(a)(17), 415(b), and 415(e) of the Internal Revenue straight-line basis over the estimated useful lives of the Code of 1986. Pension costs attributed to the BEP reduce assets, which range from 4 to 10 years for furniture and the pension costs of the System's Plan. The net periodic equipment and from 10 to 50 years for building equip- pension cost of the BEP for 1996 included the following ment and structures. Upon the sale or other disposition of components: a depreciable asset, the cost and related accumulated depreciation are removed from the accounts and any gain Service cost (benefits attributed to employee or loss is recognized. services during the year) $260,868 Federal Reserve Bank Surplus Earnings—The Omni- Interest cost on projected benefit obligation .. 102,594 bus Budget Reconciliation Act of 1993 requires that Amortization of unrecognized net liabilitiy .. 102,594 surplus Federal Reserve Bank earnings be transferred from the Banks to the Board and then to the U.S. Treasury Net periodic pension cost $466,056 for the period October 1, 1996 to September 30, 1998. Although these pension costs are recorded using the Prior to this time the Federal Reserve Banks made their accrual basis of accounting in accordance with Statement transfers directly to the Treasury. The Board accounts for of Financial Accounting Standards No. 87, "Employers' these transfers when earned and due, which may result in Accounting for Pensions" (FAS 87), the Board's current transfers receivable and payable as of the balance sheet policy is to fund the cost of these benefits on a pay-asdate. you-go basis. Estimates—The preparation of financial statements in The net periodic pension cost was determined using a accordance with generally accepted accounting principles 7 percent discount rate and average compensation growth requires management to make estimates that affect the of 5 percent. reported amounts of assets and liabilities at the date of the The FAS 87 accumulated benefit obligation at Decemfinancial statements and the reported amounts of revenue ber 31, 1996, comprises: and expenses during the reporting period. Reclassifications—Certain 1995 disclosures have been Accumulated benefit obligation reclassified to conform with the 1996 presentation, the Vested $ 218,000 effect of which is immaterial. Nonvested 21,000 Total $ 239,000 (2) RETIREMENT BENEFITS Substantially all of the Board's employees participate Plan assets at fair value $ 0 in the Retirement Plan for Employees of the Federal Less: Actuarial present value of projected Reserve System (System Plan). The System's Plan is a benefit obligation (1,589,924) multiemployer plan which covers employees of the Fed- Projected benefit obligation in excess eral Reserve Banks, the Board, and the Plan Administraof plan assets (1,589,924) tive Office. Employees of the Board who entered on duty Less: Unrecognized net transition prior to 1984 are covered by a contributory defined beneobligation 1,363,041 fits program under the System's Plan. Employees of the Unrecognized prior service cost (190,000) Board who entered on duty after 1983 are covered by a non-contributory defined benefits program under the Sys- Unrecognized net (gain)/loss (49,173) tem's Plan. Contributions to the System's Plan are actu- Unfunded pension cost $ (466,056) arially determined and funded by participating employers at amounts prescribed by the System Plan's administrator. The liability as of December 31, 1996, was determined Based on actuarial calculations, it was determined that using a 7.25 percent discount rate. The average rate of employer funding contributions were not required for the compensation increase used was 5 percent per year. The Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 83rd Annual Report, 1996 Board has elected to amortize the unrecognized prior the assumed health care cost trend rate would increase service cost over 14.3 years. the accumulated postretirement benefit obligation by $2,543,145 at December 31, 1996, and the net periodic benefit cost by $184,055 for the year. The assumed salary (3) OTHER BENEFIT PLANS trend rate for measuring the increase in postretirement Employees of the Board may also participate in the benefits related to life insurance was an average of Federal Reserve System's Thrift Plan. Under the Thrift 5 percent. Plan, members may contribute up to a fixed percentage of The above accumulated postretirement benefit obligatheir salary. Board contributions are based upon a fixed tion is related to the Board sponsored health benefits and percentage of each member's basic contribution and were life insurance programs. The Board has no liability for $4,644,100 in 1996 and $4,320,400 in 1995. future payments to employees who continue coverage The Board also provides certain defined benefit health under the federally sponsored programs upon retiring. and life insurance for its active employees and retirees Contributions for active employees participating in fedunder Federal and Board sponsored programs. The net erally sponsored programs totaled $3,553,400 and periodic postretirement benefit cost for 1996 and 1995 $3,477,300 in 1996 and 1995 respectively. included the following components: The Board provides certain postemployment benefits to eligible employees after employment but before retire- 1996 1995 ment. Effective January 1, 1994, the Board adopted Service cost (benefits Statement of Financial Accounting Standards No. 112, attributed to employee Employers' Accounting for Postemployment Benefits services during the (FAS 112), which requires that employers providing year) $ 195,016 $ 418,649 postemployment benefits to their employees accrue the Interest cost on accumulated cost of such benefits. Prior to January 1994, postemploypostretirement benefit ment benefit expenses were recognized on a pay-asobligation 1,461,103 1,441,350 you-go basis. Amortization of gains and losses 372,253 (80) (4) PROPERTY, BUILDINGS, AND EQUIPMENT The following is a summary of the components of the Net periodic postretirement Board's fixed assets, at cost, net of accumulated benefit cost $2,028,372 $1,859,919 depreciation. As of December 31, Although postretirement benefits are recorded using the accrual basis of accounting in accordance with FAS 1996 1995 106, the Board's current policy is to fund the cost of these Land and benefits on a pay-as-you-go basis. improvements $ 1,301,314 $ 1,301,314 Buildings 65,343,600 65,298,136 The FAS 106 accumulated postretirement benefit obli- Furniture and gation at December 31, 1996 and 1995 comprises: equipment • 54,592,393 52,215,976 121,237,307 118,815,426 1996 1995 Less accumulated (reclassified) depreciation __6^0,127,123 59,033,803 Retirees $14,393,309 $14,061,087 Total property, Fully eligible active plan e b q u u il i d p i m ng e s n t a nd $ 61,110,184 $ 59,781,623 participants 3,512,825 3,528,612 Other active plan participants 3,422,992 3,773,612 (5) OTHER REVENUES AND OTHER EXPENSES 21,329,126 21,363,311 The following are summaries of the components of Unrecognized net loss (3,157,404) (4,288,723) Other Revenues and Other Expenses. Liability for accumulated For the years postretirement benefit ended December 31, obligation $18,171,722 $17,074,588 1996 1995 Other Revenues The liability for the accumulated postretirement benefit Data processing obligation and the net periodic benefit cost was deter- revenue $4,612,476 $ 4,100,517 mined using a 7.25 percent discount rate. Unrecognized National losses of $3,157,404 result from changes in the discount Information rate used to measure liabilities. Under FAS 106, the Center 1,974,295 2,070,267 Board may have to record some of these unrecognized Subscription losses in operations in future years. The assumed health revenue 1,583,193 1,648,931 care cost trend rate for measuring the increase in costs Reimbursable from 1996 to 1997 was 9.5 percent. These rates were services to assumed to gradually decline to an ultimate rate of other agencies . 424,940 383,752 5.5 percent in the year 2005 for the purpose of calculating Miscellaneous 1,194,237 2,037,363 Total other the December 31, 1996, accumulated postretirement revenues $9,789,141 $10,240,830 benefit obligation. The effect of a 1-percent increase in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 281 Other Expenses Tuition, registration, and membership fees $1,290,090 $ 1,413,233 Cafeteria operations, net 870,429 788,506 Subsidies and contributions ... 646,194 755,857 Miscellaneous 1,548,021 957,893 Total other expenses $4,354,734 $ 3,915,489 (6) COMMITMENTS The Board has entered into several operating leases to secure office, training, and warehouse space for periods ranging from one to nine years. Minimum future commitments under those leases having an initial or remaining noncancelable lease term in excess of one year at December 31, 1996, are as follows: 1997 $ 3,724,037 1998 3,645,048 1999 3,681,559 2000 3,938,055 after 2000 17,121,831 $32,110,530 Rental expenses under the operating leases were $3,930,689 and $3,301,186 in 1996 and 1995 respectively. (7) FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL The Board is one of the five member agencies of the Federal Financial Institutions Examination Council (the "Council"). During 1996 and 1995, the Board paid $224,600 and $269,040 respectively, in assessments for operating expenses of the Council. These amounts are included in subsidies and contributions for 1996 and 1995. During 1996 and 1995, the Board paid $127,100 and $126,900 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 83rd Annual Report, 1996 1. Detailed Statement of Condition of All Federal Reserve Banks Combined, December 31, 1996 and 1995 Thousands of dollars Item 1996 1995 ASSETS Gold certificate account 11,048,036 11,050,060 Special drawing rights certificate account . 9,718,000 10,168,000 Coin ... 591,170 424,452 Loans and securities Loans to depository institutions 85,337 135,440 Federal agency obligations Bought outright 2,224,700 2,633,995 Held under repurchase agreement. 1,612,000 1,100,000 U.S. Treasury securities Bought outright Bills 190,646,505 183,115,712 Notes 150,921,721 151,013,150 Bonds 49,338,894 44,068,604 Total bought outright 390,907,120 378,197,466 19,971,000 12,762,000 Held under repurchase agreement.. 410,878,120 390,959,466 Total U.S. Treasury securities. 414,800,157 394,828,901 Total loans and securities Items in process of collection Transit items 11,740,684 4,179,015 Other items in process of collection. 1,387,061 1,101,279 Total items in process of collection 13,127,745 5,280,294 Bank premises Land 191,902 166,903 Buildings (including vaults) 934,260 882,954 Building machinery and equipment 241,454 230,523 Construction account 194,470 128,934 Total bank premises 1,562,087 1,409,314 Less depreciation allowance ... 329,185 283,562 Bank premises, net 1,232,901 1,125,753 Other assets Furniture and equipment . 1,230,372 1,192,205 Less depreciation 706,846 671,613 Total furniture and equipment, net 523,526 520,592 Denominated in foreign currencies1 19,263,604 21,099,289 Interest accrued 3,891,457 4,101,149 Premium on securities 6,004,465 5,410,827 Overdrafts 5,666 22,920 Prepaid expenses 991,247 865,525 Suspense account 3,029 13,398 Real estate acquired for banking-house purposes. 10,103 11,507 Other 299,326 312,533 Total other assets. 30,992,423 32,357,740 Total assets 481,510,432 455,235,200 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 285 1.—Continued Item 1996 1995 LIABILITIES Federal Reserve Notes Outstanding (issued to Federal Reserve Banks) 526,825,836 481,044,070 Less held by Federal Reserve Banks -100,304,015 -80,108,642 Total Federal Reserve notes, net 426,521,822 400,935,428 Deposits Depository institutions 24,523,700 29,611,156 U.S. Treasury, general account 7,741,937 5,979,193 Foreign, official accounts 167,401 386,182 Other deposits Officers' and certified checks 26,206 25,622 International organizations 107,766 114,289 Other2 758,690 794,904 Total other deposits 892,662 934,815 Deferred credit items 7,830,936 5,049,121 Other liabilities Discount on securities 3,844,113 3,613,735 Sundry items payable 102,613 95,718 Suspense account 4,500 15,153 All other 783,259 681,8954 Total other liabilities 4,734,485 4,406,5014 Total liabilities 472,412,942 447,302,396 4 CAPITAL ACCOUNTS Capital paid in 4,601,745 3,966,402 Surplus 4,495,745 3,966,402 Other capital accounts3 0 0 Total liabilities and capital accounts . 481,510,432 455,235,200 4 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 $8,291.8 million in 1996 and 3. During the year, includes undistributed net income, $7,316.6 million in 1995 were invested in securities which is closed out on December 31. issued by foreign governments, and the balance was 4. Corrections of data reported in 82nd Annual Report, invested with foreign central banks and the Bank for 1995. International Settlements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

286 83rd Annual Report, 1996 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1996 and 1995 Millions of dollars Total Boston Item 1996 1995 1996 1995 ASSETS Gold certificate account 11,048 11,050 661 575 Special drawing rights certificate account 9,718 10,168 636 511 Coin 591 424 13 17 Loans To depository institutions 85 135 Other 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 2,225 2,634 131 130 Held under repurchase agreements 1,612 1,100 0 0 U.S. Treasury securities Bought outright' 390,907 378,197 23,000 18,600 Held under repurchase agreements 19,971 12,762 0 0 Total loans and securities 414,800 394,829 23,131 18,736 Items in process of collection 13,128 5,280 706 299 Bank premises 1,233 1,126 95 94 Other assets Denominated in foreign currencies2 19,264 21,099 830 799 Allother 11,729 11,258 534 459 Interdistrict Settlement Account 0 0 1,024 7,063 Total assets 481,510 455,235 27,629 28,552 LIABILITIES Federal Reserve notes 426,522 400,935 25,417 26,175 Deposits Depository institutions 24,524 29,611 1,048 1,414 U.S. Treasury, general account 7,742 5,979 0 0 Foreign, official accounts 167 386 6 5 Other 893 935 38 33 Total deposits 33,326 36,911 1,092 1,452 Deferred credit items 7,831 5,049 511 359 4,734 4,407 268 225 Other liabilities and accrued dividends3 472,413 447,302 27,289 28,211 Total liabilities CAPITAL ACCOUNTS 4,602 3,966 172 171 Capital paid in 4,496 3,966 168 171 Surplus 0 0 0 0 Other capital accounts Total liabilities and capital accounts 481,510 455,235 27,629 28,552 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) 526,826 481,044 30,331 31,502 Less: Held by Bank 100,304 80,109 4,914 5,327 Federal Reserve notes, net 426,522 400,935 25,417 26,175 Collateral for Federal Reserve notes Gold certificate account 11,048 11,050 Special drawing rights certificate account 9,718 10,168 Other eligible assets 0 0 U.S. Treasury and federal agency securities 405,756 379,717 Digitized Tfootra Fl cRoAllaSteErRal 426,522 400,935 http://fraser.stlouisfed.org/ For notes see end of table. Federal Reserve Bank of St. Louis

Tables 287 2.—Continued New York Philadelphia Cleveland Richmond 1996 1995 1996 1995 1996 1995 1996 1995 4,049 4,273 423 433 624 621 919 862 3,385 3,903 396 413 543 584 835 790 21 20 43 26 25 24 113 71 0 0 9 1 0 0 0 0 0 0 0 0 0 0 0 0 827 1,047 86 114 131 152 184 202 1,612 1,100 0 0 0 0 0 0 145,377 150,316 15,129 16,408 22,976 21,802 32,416 29,047 19,971 12,762 0 0 0 0 0 0 167,787 165,225 15,224 16,523 23,106 21,954 32,600 29,249 1,796 764 476 254 688 265 1,064 552 150 146 50 49 108 66 128 127 5,128 5,654 924 923 1,257 1,476 1,416 1,698 5,783 5,378 356 413 530 524 910 907 -27,599 -26,517 -1,762 -237 5,007 220 3,821 3,822 160,499 158,846 16,131 18,797 31,889 25,734 41,805 38,077 139,364 139,004 13,822 16,223 29,861 23,524 38,736 34,912 8,167 8,658 1,297 1,702 856 1,161 1,275 1,555 7,742 5,979 0 0 0 0 0 0 62 283 7 6 9 10 11 11 410 433 9 29 43 40 88 86 16,381 15,353 1,313 1,737 909 1,211 1,374 1,652 883 734 261 251 280 232 698 592 1,796 1,642 194 206 261 250 369 338 158,425 156,733 15,590 18,416 31,311 25,217 41,177 37,494 1,051 1,057 273 190 292 259 318 292 1,023 1,057 268 190 286 259 310 292 0 0 0 0 0 0 0 0 160,499 158,846 16,131 18,797 31,889 25,734 41,805 38,077 183,368 167,545 16,172 19,585 32,850 26,869 45,352 41,346 44,004 28,541 2,351 3,362 2,989 3,344 6,616 6,435 139,364 139,004 13,822 16,223 29,861 23,524 39,736 34,912 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

288 83rd Annual Report, 1996 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1996 and 1995—Continued Millions of dollars Atlanta Chicago Item 1996 1995 1996 1995 ASSETS Gold certificate account 769 556 1,140 1,220 Special drawing rights certificate account 745 523 979 1,079 Coin 81 66 70 35 Loans To depository institutions 18 Other 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 148 122 241 304 Held under repurchase agreements 0 0 0 0 U.S. Treasury securities Bought outright' 26,087 17,558 42,364 43,602 Held under repurchase agreements 0 0 0 0 Total loans and securities 26,236 17,689 42,623 43,906 Items in process of collection 1,556 688 1,537 519 Bank premises 80 77 110 110 Other assets Denominated in foreign currencies2 1,890 1,954 2,296 2,401 Allother 631 460 1,006 1,119 Interdistrict Settlement Account -511 13,362 157 -3,016 Total assets 31,477 35,375 49,919 47^74 LIABILITIES Federal Reserve notes 27,511 31,186 44,858 41,758 Deposits Depository institutions 1,708 2,481 2,574 3,539 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 14 13 17 16 Other 54 21 120 160 Total deposits 1,775 2,515 2,712 3,716 Deferred credit items 1,033 660 808 463 318 236 479 492 Other liabilities and accrued dividends3 9,637 34,597 48,857 46,428 Total liabilities CAPITAL ACCOUNTS 425 389 537 473 Capital paid in 415 389 524 473 Surplus 0 0 0 0 Other capital accounts 31,477 35^75 49,919 47,374 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 34,458 36,869 51,546 48,453 Federal Reserve notes outstanding (issued to Bank) 6,947 5,683 6,688 6,695 Less: Held by Bank Federal Reserve notes, net 27,511 31,186 44,858 41,758 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 Digitizedb foourg hFtR bAacSk EunRd er matched sale-purchase transactions. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 289 2.—Continued St. Louis Minneapolis Kansas City Dallas San Francisco 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995 474 484 168 203 321 382 433 405 1,067 1,036 419 490 144 180 280 342 399 376 957 977 29 20 19 20 56 41 49 49 74 37 29 9 7 4 7 3 1 0 15 103 0 0 0 0 0 0 0 0 0 0 104 121 34 48 70 101 80 85 188 209 0 0 0 0 0 0 0 0 0 0 18,312 17,308 5,896 6,828 12,244 14,451 13,998 12,262 33,108 30,016 0 0 0 0 0 0 0 0 0 0 18,445 17,437 5,936 6,879 12,321 14,555 14,078 12,348 33,312 30,328 666 220 639 450 843 361 1,284 333 1,873 574 31 30 111 54 56 55 155 158 160 159 476 486 481 563 737 797 1,197 1,414 2,631 2,935 411 408 151 180 293 352 344 319 780 739 -2,694 357 -453 -1,082 -650 -2,610 218 3,287 23,441 5,351 18,257 19,932 7,195 7,448 14,258 14,276 18,156 18,689 64,295 42,137 16,769 18,427 5,503 5,990 12,435 12,267 15,340 15,570 56,905 35,901 718 876 721 741 817 1,119 1,730 2,178 3,612 4,188 0 0 0 0 0 0 0 0 0 0 4 3 4 4 5 5 9 9 20 20 32 30 8 2 21 26 18 21 51 55 754 909 732 746 844 1,150 1,757 2,208 3,683 4,262 292 195 653 412 463 361 374 258 1,575 533 216 205 96 102 171 194 178 161 388 357 18,031 19,736 6,985 7,250 13,912 13,972 17,649 18,196 62,551 41,053 114 98 107 99 175 152 257 246 880 542 112 98 104 99 171 152 250 246 865 542 0 0 0 0 0 0 0 0 0 0 18,257 19,932 7,195 7,448 14,258 14,276 18,156 18,689 64,295 42,137 19,480 20,751 7,027 7,143 14,148 13,880 21,005 19,726 71,088 47,377 2,711 2,324 1,524 1,153 1,713 1,613 5,666 4,156 14,182 11,476 16,769 18,427 5,503 5,990 12,435 12,267 15,340 15,570 56,905 35,901 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

290 83rd Annual Report, 1996 3. Federal Reserve Open Market Transactions, 1996 Millions of dollars Type of security and transaction Jan. Feb. Mar. Apr. U.S. TREASURY SECURITIES Outright transactions (excluding matched transactions) Treasury bills Gross purchases 0 Gross sales 0 Exchanges 31,476 Redemptions 0 Others within 1 year Gross purchases .. 0 Gross sales 0 Maturity shift 2,048 Exchanges -3,287 Redemptions 1,228 1 to 5 years Gross purchases , 0 Gross sales 0 Maturity shift -2,048 Exchanges 3,287 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 Net change in U.S. Treasury securities FEDERAL AGENCY OBLIGATIONS Outright transactions Gross purchases Gross sales Redemptions Repurchase agreements Gross purchases Gross sales Net change in agency obligations Total net change in System Open Market Account. oooo oooo ooo 0 0 39,332 0 0 0 2,476 -7,575 0 0 0 -1,908 5,175 0 0 -818 1,500 0 0 -20 900 260,425 259,186 16,040 28,802 ooo 0 0 30,556 0 0 0 0 0 0 274,290 275,979 6,230 6,230 oooo oooo oooo ooo 88 0 32,218 0 35 0 3,511 -4,824 787 1,899 0 -3,511 4,824 479 0 0 0 1,065 0 0 0 3,566 0 787 251,623 253,482 251,086 251,510 31,602 46,449 27,706 50,345 -11,523 -1,689 4,433 854 0 0 1,228 9,793 10,893 -2,328 13,851 ooo 0 0 0 0 108 82 765 5,640 2,372 765 4,640 3,372 0 892 -1,082 -1,689 5,325 -228 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 0 40,467 0 0 0 5,107 -5,448 0 0 0 -4,049 3,748 0 0 -1,058 1,700 o o o o ooo 3,311 0 0 0 0 6,502 0 9,901 0 0 0 0 0 0 0 0 31,726 32,368 34,271 32,791 38,661 29,037 27,247 400,152 0 0 0 0 0 0 0 0 0 0 1,240 0 0 0 0 1,275 0 0 0 0 0 0 0 0 0 2,807 2,780 2,371 1,623 3,818 2,259 29,070 0 -4,415 -3,580 2,890 -1,770 -5,655 -1,950 -41,394 0 300 0 485 0 0 0 1,776 0 0 1,279 0 0 0 0 3,177 0 0 0 0 0 0 0 0 0 -2,807 -1,409 -2,371 -1,623 -2,102 -2,259 -24,087 0 3,694 1,780 2,890 1,395 2,715 1,950 31,458 0 0 297 0 0 0 0 776 0 0 0 0 0 0 0 0 0 0 -1,371 0 0 1,716 0 -1,531 0 721 900 0 375 1,470 0 6,666 0 0 900 0 0 0 0 1,965 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -20 0 0 900 0 0 1,470 0 3,270 3,311 0 3,716 0 0 6,502 0 17,094 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 787 259,135 248,534 267,438 265,397 234,992 268,304 227,577 272,117 3,085,685 259,595 249,277 268,975 264,536 238,036 267,128 226,505 273,872 3,083,315 30,688 43,048 46,151 45,202 36,014 33,836 36,383 78,067 449,711 24,984 41,666 37,779 56,286 33,374 33,020 36,665 68,901 445,759 5,244 3,950 6,836 -6,508 -404 1,993 7,293 7,412 17,890 0 0 0 0 0 0 16 40 52 5,722 5,138 3,145 4,372 6,488 2,863 1,334 -1,390 231 6,578 2,560 7,066 ooo 0 0 0 0 27 63 8,500 4,536 12,683 7,544 4,436 11,051 956 73 1,569 -5,552 -331 3,562 ooo 9,264 9,471 -217 7,076 o o ot 0 0 1,637 8,041 75,599 8,787 74,682 -758 -720 6,654 17,169 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

292 83rd Annual Report, 1996 4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31, 1994-96 Millions of dollars December 31 Change Description 1996 1995 1994 1995-96 1994-95 U.S. TREASURY SECURITIES Held outright' 405,613 390,534 372,561 15,079 17,973 By remaining maturity Bills 1-91 days 106,063 101,564 98,129 4,499 3,435 92 days to 1 year 99,289 93,888 87,291 5,401 6,597 Notes and bonds 1 year or less 29,045 41,419 34,212 12,374 7,207 More than 1 year through 5 years .. 95,608 90,031 10,205 10,335 -4,758 More than 5 years through 10 years 33,782 31,469 28,053 2,313 3,416 More than 10 years 41,826 36,921 34,845 4,905 2,076 By type Bills ... 205,353 195,451 185,420 9,902 10,031 Notes .. 150,922 151,013 144,143 -91 6,870 Bonds .. 49,339 44,069 42,998 5,270 1,071 Repurchase agreements . 19,971 12,762 9,565 7,209 3,197 MSPs, foreign accounts . 14,706 12,336 8,041 2,370 4,295 MSPs, in the market 0 0 0 0 0 FEDERAL AGENCY SECURITIES Held outright1 2,225 2,634 3,637 -409 -1,003 By remaining maturity 1 year or less 1,223 1,241 1,737 -18 -496 More than 1 year through 5 years .. 520 841 1,387 -321 -546 More than 5 years through 10 years 457 527 488 -70 39 More than 10 years 25 25 25 0 0 By issuer Federal Farm Credit Banks 912 912 1,050 0 -138 Federal Home Loan Banks 115 230 796 115 -566 Federal Land Banks 17 66 66 -49 0 Federal National Mortgage Association 1,181 1,425 1,725 -244 280 Repurchase agreements 1,612 1,025 1,025 512 75 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, 1996 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 187,300 60 6,385,550 1,060 163 46,899,060 1,284 53,471,910 New York 239,900 216 27,541,815 3,715 86 168,490,246 4,018 196,271,961 Philadelphia ... 212,900 58 5,988,500 1,142 69 41,877,821 1,270 48,079,221 Cleveland 191,000 • 48 4,930,500 1,307 72 44,684,645 1,428 49,806,145 Richmond 188,300 77 7,218,400 1,880 166 64,373,601 2,124 71,780,301 Atlanta 201,825 76 7,292,355 2,142 45 70,652,995 2,264 78,147,175 Chicago 212,200 96 9,690,300 2,067 59 82,345,034 2,223 92,247,534 St. Louis 218,500 54 4,926,200 1,072 64 36,161,093 1,191 41,305,793 Minneapolis ... 200,300 48 4,904,250 1,122 115 41,435,496 1,286 46,540,046 Kansas City ... 186,800 54 5,201,700 1,527 90 52,267,893 1,672 57,656,393 Dallas 188,100 57 5,537,400 1,402 43 50,584,238 1,503 56,309,738 San Francisco . 265,900 87 9,922,200 2,266 100 97,824,927 2,454 108,013,027 Federal Reserve Automation Service 24 2,633,200 490 6 25,659,004 520 28,292,204 Total 104,666,350 955 102,172,370 21,192 1,078 823,256,053 23,237 927,921,448 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

294 83rd Annual Report, 1996 6. Income and Expenses of Federal Reserve Banks, 1996 Dollars Item Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 10,855,101 169,855 935,475 224,228 143,085 U.S. Treasury and federal agency securities 23,883,718,256 1,328,674,303 9,207,282,770 944,101,600 1,381,391,105 Foreign currencies 442,816,416 18,896,077 118,021,601 21,090,551 29,047,617 Priced services 787,152,182 68,101,941 105,327,217 41,360,600 50,295,275 Other 39,761,493 576,197 29,467,510 1,401,162 480,092 Total 25,164,303,448 1,416,418,373 9,461,034,573 1,008,178,141 1,461,357,174 CURRENT EXPENSES Salaries and other personnel expenses 1,006,237,552 56,459,570 222,438,121 50,391,766 53,550,324 Retirement and other benefits 275,931,941 16,636,188 60,622,434 13,698,530 14,888,487 Net periodic pension costs' . -139,543,043 37,961 -140,036,216 43,984 20,260 Fees 31,753,785 1,835,046 4,857,577 490,508 1,999,164 Travel 46,582,951 2,199,279 6,740,068 2,176,419 2,720,440 Software expenses 57,120,579 1,194,182 12,293,707 1,620,432 1,715,340 Postage and other shipping costs 77,894,743 37,277,676 6,243,477 1,452,609 2,112,996 Communications 10,422,139 496,413 2,210,764 438,003 737,434 Materials and supplies 59,935,472 3,300,843 11,236,321 3,536,052 3,511,575 Building expenses Taxes on real estate 26,377,402 3,938,107 2,372,936 1,661,625 1,761,763 Property depreciation 56,045,236 4,324,247 11,108,195 2,370,332 2,552,760 Utilities 31,142,631 2,501,732 7,034,835 2,519,547 1,796,113 Rent 34,685,964 649,961 15,451,188 235,803 950,184 Other 28,899,672 710,151 7,415,742 1,331,057 543,605 Equipment Purchases 7,923,447 344,187 1,370,179 371,480 236,008 Rentals 33,626,775 75,687 2,898,504 268,867 204,359 Depreciation 135,798,828 4,028,526 18,772,134 4,976,336 4,671,434 Repairs and maintenance 79,279,701 4,181,153 12,569,765 3,085,572 3,993,813 Earnings-credit costs 308,815,188 22,298,335 57,722,661 26,490,515 13,693,294 Other 50,811,422 3,107,799 11,265,662 1,453,270 3,298,036 Shared costs, net2 0 -1,393,774 11,229,265 11,985,034 14,202,201 Recoveries -53,191,381 -9,384,887 -7,849,084 -2,870,308 -1,053,259 Expenses capitalized3 -2,851,630 -279,886 -11,574 -248,610 -307,071 Total 2,163,699^76 154,538,495 337,956,661 127,478,823 127,799,260 Reimbursements -215,838,443 -9,277,655 -45,178,441 -17,575,267 -23,081,004 Net expenses 1,947,860,932 145,260,840 292,778,220 109,903,556 104,718,256 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 98,986 497,264 1,453,956 1,665,412 3,106,781 1,132,022 234,579 1,193,457 1,920,176,715 1,447,549,323 2,604,222,099 1,099,849,063 375,188,745 783,759,786 824,448,395 1,967,074,352 32,780,978 43,238,826 52,591,299 10,880,489 11,105,863 16,927,827 27,679,158 60,556,131 61,682,563 94,986,455 99,321,687 36,284,780 44,328,737 50,787,341 52,781,544 81,894,041 834,082 1,009,511 1,149,075 474,745 411,312 131,661 366,610 3,459,538 2,015,573,324 1,587,281,379 2,758,738,116 1,149,154,489 434,141,438 852,738,637 905,510,286 2,114,177,519 110,117,153 83,881,847 99,978,837 44,011,658 48,727,463 62,433,596 59,301,723 114,945,493 30,822,962 24,678,827 26,322,214 13,838,725 12,642,030 15,852,699 17,828,950 28,099,895 33,731 71,874 81,108 12,683 22,995 21,910 42,212 104,455 12,366,967 1,852,166 2,437,091 958,584 1,846,427 567,911 1,059,163 1,483,182 5,480,584 4,169,096 5,327,316 2,441,321 2,916,360 3,035,657 3,191,057 6,185,354 26,667,126 2,384,244 2,601,072 1,546,866 1,823,462 1,178,404 1,251,513 2,844,231 3,383,975 4,804,834 4,467,170 2,475,824 3,726,625 4,379,151 2,306,464 5,263,942 1,148,842 952,818 829,346 529,532 547,661 946,005 811,422 773,899 6,538,378 6,308,862 6,169,448 3,667,918 2,167,666 4,108,932 3,611,090 5,778,387 2,243,390 2,026,479 3,945,631 399,311 2,657,695 766,510 2,012,054 2,591,901 5,508,151 4,615,785 5,934,590 2,512,757 902,838 3,731,839 5,158,229 7,325,512 2,948,280 2,356,215 2,404,383 1,650,416 990,220 1,433,872 2,316,422 3,190,596 10,437,429 3,507,679 1,251,464 433,358 875,624 454,280 315,119 123,876 2,968,646 3,183,981 5,096,523 1,009,406 790,187 950,657 2,284,549 2,615,168 1,155,327 649,833 733,135 287,123 602,695 572,038 450,120 1,151,324 27,788,934 619,349 822,942 116,848 288,514 87,133 120,425 335,213 62,533,625 8,459,956 9,130,673 2,678,690 3,042,241 3,617,359 5,034,986 8,852,867 18,670,041 9,224,871 7,577,002 2,861,990 2,593,476 2,682,032 3,680,762 8,159,224 28,452,428 30,097,127 38,264,577 12,101,176 5,575,322 14,193,748 29,408,823 30,517,182 4,769,686 4,861,696 6,079,156 2,430,871 1,757,905 3,319,431 3,384,377 5,083,533 -146,742,179 16,918,488 24,550,070 12,551,571 10,344,011 19,061,475 15,320,978 11,972,859 -13,996,837 -3,050,351 -3,774,065 -1,251,069 -835,725 -641,514 -5,275,667 -3,208,615 -264,804 -467,926 -131,863 -126,062 -361,352 -476,346 -95,162 -80,973 203,031,835 212,107,750 250,097,821 107,139,497 103,644,337 142,276,779 153,519,610 224,108,507 -23,770,024 -12,103,535 -15,867,204 -9,132,559 -16,164,191 -19,087,772 -6,605,375 -17,995,417 179,261,811 200,004,215 234,230,617 98,006,938 87,480,146 123,189,007 146,914,235 226,113,090 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

296 83rd Annual Report, 1996 6. Income and Expenses of Federal Reserve Banks, 1996—Continued Dollars Item Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 23,216,442,516 1,271,157,533 9,168,256,354 898,274,585 1,356,638,917 Additions to and deductions from (-) current net income4 Profits on sales of U.S. Treasury and federal agency securities 32,085,211 1,713,733 12,393,112 1,326,192 1,865,492 Other additions 120,935 13,452 29,675 13,075 20,969 Total additions 32,206,146 1,727,185 12,422,787 1,339,267 1,886,462 Losses on foreign exchange transactions -1,668,198,783 -71,851,579 -444,393,928 -79,991,068 -108,832,757 Other deductions -3,099,220 -3,701 -70,454 -2,872 -5,047 Total deductions -1,671,298,002 -71,855,280 -444,464,381 -79,993,940 -108,837,805 Net addition to or deductions from (—) current net income -1,639,091,856 -70,128,095 -432,041,594 -78,654,673 -106,951,343 Cost of unreimbursed Treasury services 37,624,539 1,737,950 3,832,199 2,567,250 1,656,301 Assessments by Board Board expenditures5 .. 162,642,400 6,850,400 43,327,900 7,726,800 10,590,300 Cost of currency 402,517,040 26,277,921 139,553,061 16,286,645 23,617,286 Net income before payment to U.S. Treasury 20,974,566,681 1,166,163,167 8,549,501,600 793,039,217 1,213,823,687 Dividends paid 255,884,343 10,270,121 65,359,812 12,379,866 16,242,448 Payments to U.S. Treasury (interest on Federal Reserve notes) 14,565,623,555 826,506,487 6,119,190,289 552,651,198 853,616,778 Statutory transfer 5,517,716,032 328,055,909 2,370,171,099 145,005,453 310,237,212 Surplus transfer -106,000,000 -4,565,563 -28,237,496 -5,082,760 -6,915,406 Transferred to surplus 635,342,750 1,330,650 -5,219,600 83,002,700 33,727,250 Surplus, January 1 3,966,401,950 170,838,300 1,056,615,650 190,191,200 258,766,800 Surplus, December 31 4,495,744,700 167,603,387 1,023,158,554 268,111,140 285,578,644 NOTE. Components may not sum to totals because of 3. Includes expenses for labor and materials temporounding. rarily capitalized and charged to activities when the prod- 1. The effect of Financial Accounting Standards ucts are consumed. Board's Statement of Financial Accounting Standards 4. Includes reimbursement from the U.S. Treasury for No. 87, Employers' Accounting for Pensions (SFAS 87). uncut sheets of Federal Reserve notes, gains and losses on The System Retirement Plan for employees is recorded the sale of Reserve Bank buildings, counterfeit currency on behalf of the System on the books of the Federal that is not charged back to the depositing institution, and Reserve Bank of New York. This resulted in a reduction stale Reseve Bank checks that are written off. in expenses of $140,566,144 in 1996. The Retirement 5. For additional details, see the preceding chapter: Benefits Equalization Plan is recorded by each Federal Board of Governors Financial Statements. Reserve Bank. 2. 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 1,836,311,513 1,387,277,163 2,524,507,498 1,051,147,550 346,661,291 729,549,631 758,596,050 1,888,064,429 2,550,311 1,775,062 3,601,822 1,483,547 537,476 1,129,151 1,087,883 2,621,430 8,540 23,086 4,535 165 38 140 6,653 609 2,558,850 1,798,148 3,606,356 1,483,712 537,513 1,129,291 1,094,536 2,622,039 -122,606,494 -163,590,523 -198,815,916 -41,204,351 -41,617,846 -63,832,062 -103,651,708 -227,810,550 -16,879 -1,675,175 -10,443 -2,800 -3,692 -614,123 -9,262 -684,771 -122,623,373 -165,265,698 -198,826,359 -41,207,151 -41,621,538 -64,446,185 -103,660,970 -228,495,321 -120,064,523 -163,467,551 -195,220,003 -39,723,439 -41,084,025 -63,316,894 -102,566,434 -225,873,283 4,260,915 3,790,153 3,790,785 2,129,229 3,518,067 2,624,738 2,200,845 5,516,107 11,850,200 16,120,200 19,530,400 4,060,700 4,038,400 6,370,200 10,054,000 22,122,900 35,049,171 31,308,982 41,922,553 18,498,878 6,013,202 12,315,411 15,631,347 36,042,583 1,665,086,705 1,172,590,278 2,264,043,757 986,735,304 292,007,597 644,922,388 628,143,424 1,598,509,556 17,981,905 24,885,584 30,568,828 6,430,939 6,122,245 10,052,800 15,007,452 40,582,344 1,168,388,993 786,280,315 1,587,279,932 693,121,299 215,945,494 457,250,081 453,449,062 851,943,628 452,209,508 325,321,528 581,873,097 270,789,367 62,303,308 154,613,858 149,169,760 367,965,934 -7,790,611 -10,394,802 -12,633,079 -2,618,190 -2,644,464 -4,055,991 -6,586,194 -14,475,444 26,506,300 36,102,850 64,321,900 16,393,700 7,636,550 23,005,650 10,517,150 338,017,650 291,516,000 388,961,900 472,715,750 97,969,750 98,952,900 151,770,650 246,448,050 541,655,000 310,231,689 414,669,948 524,404,571 111,745,260 103,944,986 170,720,309 250,379,006 865,197,206 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

298 83rd Annual Report, 1996 7. Income and Expenses of Federal Reserve Banks, 1914-96 Dollars Assessments by Net additions Board of Governors Federal Reserve Bank Current Net or and period income expenses deductions (-) Board Costs expenditures of currency All Banks 1914-15 . 2,173,252 2,018,282 5,875 302,304 1916 5,217,998 2,081,722 -193,001 192,277 1917 16,128,339 4,921,932 -1,386,545 237,795 1918 67,584,417 10,576,892 -3,908,574 382,641 1919 102,380,583 18,744,815 -4,673,446 594,818 1920 181,296,711 27,548,505 -3,743,907 709,525 1921 122,865,866 33,722,409 -6,314,796 741,436 1922 50,498,699 28,836,504 ^,441,914 722,545 1923 50,708,566 29,061,539 -8,233,107 702,634 1924 38,340,449 27,767,886 -6,191,143 663,240 1925 41,800,706 26,818,664 -4,823,477 709,499 1926 47,599,595 24,914,037 -3,637,668 721,724 1,714,421 1927 43,024,484 24,894,487 -2,456,792 779,116 1,844,840 1928 64,052,860 25,401,233 -5,026,029 697,677 805,900 1929 70,955,496 25,810,067 -4,861,642 781,644 3,099,402 1930 36,424,044 25,357,611 -93,136 809,585 2,175,530 1931 29,701,279 24,842,964 311,451 718,554 1,479,146 1932 50,018,817 24,456,755 -1,413,192 728,810 1,105,816 1933 49,487,318 25,917,847 -12,307,074 800,160 2,504,830 1934 48,902,813 26,843,653 -4,430,008 1,372,022 1,025,721 1935 42,751,959 28,694,965 -1,736,758 1,405,898 1,476,580 1936 37,900,639 26,016,338 485,817 ,679,566 2,178,119 1937 41,233,135 25,294,835 -1,631,274 ,748,380 1,757,399 1938 36,261,428 25,556,949 2,232,134 ,724,924 1,629,735 1939 38,500,665 25,668,907 2,389,555 ,621,464 1,356,484 1940 43,537,805 25,950,946 11,487,697 ,704,011 1,510,520 1941 41,380,095 28,535,547 720,636 ,839,541 2,588,062 1942 52,662,704 32,051,226 -1,568,208 1,746,326 4,826,492 1943 69,305,715 35,793,816 23,768,282 2,415,630 5,336,118 1944 104,391,829 39,659,496 3,221,880 2,296,357 7,220,068 1945 142,209,546 41,666,453 -830,007 2,340,509 4,710,309 1946 150,385,033 50,493,246 -625,991 2,259,784 4,482,077 1947 158,655,566 58,191,428 1,973,001 2,639,667 4,561,880 1948 304,160,818 64,280,271 -34,317,947 3,243,670 5,186,247 1949 316,536,930 67,930,860 -12,122,274 3,242,500 6,304,316 1950 275,838,994 69,822,227 36,294,117 3,433,700 7,315,844 1951 394,656,072 83,792,676 -2,127,889 4,095,497 7,580,913 1952 456,060,260 92,051,063 1,583,988 4,121,602 8,521,426 1953 513,037,237 98,493,153 -1,058,993 4,099,800 10,922,067 1954 438,486,040 99,068,436 -133,641 4,174,600 6,489,895 1955 412,487,931 101,158,921 -265,456 4,194,100 4,707,002 1956 595,649,092 110,239,520 -23,436 5,339,800 5,603,176 1957 763,347,530 117,931,908 -7,140,914 7,507,900 6,374,195 1958 742,068,150 125,831,215 124,175 5,917,200 5,973,240 1959 886,226,116 131,848,023 98,247,253 6,470,600 6,384,083 1960 1,103,385,257 139,893,564 13,874,702 6,533,700 7,455,011 1961 941,648,170 148,253,719 3,481,628 6,265,100 6,755,756 1962 1,048,508,335 161,451,206 -55,779 6,654,900 8,030,028 1963 1,151,120,060 169,637,656 614,835 7,572,800 10,062,901 1964 1,343,747,303 171,511,018 725,948 8,655,200 17,229,671 1965 1,559,484,027 172,110,934 1,021,614 8,576,396 23,602,856 1966 1,908,499,896 178,212,045 996,230 9,021,600 20,167,481 1967 2,190,403,752 190,561,166 2,093,876 10,769,596 18,790,084 1968 2,764,445,943 207,677,768 8,519,996 14,198,198 20,474,404 1969 3,373,360,559 237,827,579 -557,553 15,020,084 22,125,657 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 299 7.—Continued Payments to U.S. Treasury Div p i a d i e d nds Statutory Interest on T1V t 1 o t id ni s cl fo u t*l r TC p TlP l l>C u H s Ll T 1 t r o l a u . n I s l u < S i l r f C P p T I l i T u C P s C H l transfers4 Federal Reserve (section 13b) (section 7) notes 217,463 1,742,775 6,804,186 1,134,234 1,134,234 5,540,684 48,334,341 5,011,832 2,703,894 70,651,778 5.654,018 60,724,742 82,916,014 6,119,673 59,974,466 15,993,086 6,307,035 10,850,605 -659,904 6,552,717 3,613,056 2,545,513 6,682,496 113,646 -3,077,962 6,915,958 59,300 2,473,808 7,329,169 818,150 8,464,426 7,754,539 249,591 5,044,119 8,458,463 2,584,659 21,078,899 9,583,911 4,283,231 22,535,597 10,268,598 17,308 -2,297,724 10,029,760 -7,057,694 9,282,244 2,011,418 11,020,582 8,874,262 -916,855 8,781,661 -60,323 6,510,071 8,504,974 297,667 27,695 607,422 7,829,581 227,448 102,880 352,524 7,940,966 176,625 67,304 2,616,352 8,019,137 119,524 -419,140 1,862,433 8,110,462 24,579 -425,653 4,533,977 8,214,971 82,152 -54,456 17,617,358 8,429,936 141,465 -4,333 570,513 8,669,076 197,672 49,602 3,554,101 8,911,342 244,726 135,003 40,327,237 9,500,126 326,717 201,150 48,409,795 10,182,851 247,659 262,133 81,969,625 10,962,160 67,054 27,708 81,467,013 11,523,047 35,605 75,283,818 86,772 8,366,350 11,919,809 166,690,356 18,522,518 12,329,373 193,145,837 21,461,770 13,082,992 196,628,858 21,849,490 13,864,750 254,873,588 28,320,759 14,681,788 291,934,634 46,333,735 15,558,377 342,567,985 40,336,862 16,442,236 276,289,457 35,887,775 17,711,937 251,740,721 32,709,794 18,904,897 401,555,581 53,982,682 20,080,527 542,708,405 61,603,682 21,197,452 524,058,650 59,214,569 22,721,687 910,649,768 -93,600,791 23,948,225 896,816,359 42,613,100 25,569,541 687,393,382 70,892,300 27,412,241 799,365,981 45,538,200 28,912,019 879,685,219 55,864,300 30,781,548 1,582,118,614 -465,822,800 32,351,602 1,296,810,053 27,053,800 33,696,336 1,649,455,164 18,943,500 35,027,312 1,907,498,270 29,851,200 36,959,336 2,463,628,983 30,027,250 39,236,599 3,019,160,638 39,432,450 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

300 83rd Annual Report, 1996 7. Income and Expenses of Federal Reserve Banks, 1914-96—Continued Dollars Assessments by Net additions Board of Governors Federal Reserve Bank Current Net or and period income expenses deductions (-)' Board Costs expenditures of currency 1970... 3,877,218,444 276,571,876 11,441,829 21,227,800 23,573,710 1971... 3,723,369,921 319,608,270 94,266,075 32,634,002 24,942,528 1972... 3,792,334,523 347,917,112 -49,615,790 35,234,499 31,454,740 1973... 5,016,769,328 416,879,377 -80,653,488 44,411,700 33,826,299 1974... 6,280,090,965 476,234,586 -78,487,237 41,116,600 30,190,288 1975... 6,257,936,784 514,358,633 -202,369,615 33,577,201 37,130,081 1976... 6,623,220,383 558,128,811 7,310,500 41,827,700 48,819,453 1977... 6,891,317,498 568,851,419 -177,033,463 47,366,100 55,008,163 1978... 8,455,309,401 592,557,841 -633,123,486 53,321,700 60,059,365 1979... 10,310,148,406 625,168,261 -151,148,220 50,529,700 68,391,270 1980.. 12,802,319,335 718,032,836 -115,385,855 62,230,800 73,124,423 1981.. 15,508,349,653 814,190,392 -372,879,185 63,162,700 82,924,013 1982.. 16,517,385,129 926,033,957 -68,833,150 61,813,400 98,441,027 1983.. 16,068,362,117 1,023,678,474 -400,365,922 71,551,000 152,135,488 1984.. 18,068,820,742 1,102,444,454 -412,943,156 82,115,700 162,606,410 1985.. 18,131,982,786 1,127,744,490 1,301,624,294 77,377,700 173,738,745 1986.. 17,464,528,361 1,156,867,714 1,975,893,356 97,337,500 180,779,673 1987.. 17,633,011,623 1,146,910,699 1,796,593,917 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 1,254,613,365 89,579,700 175,043,736 1990.. 23,476,603,651 1,349,725,812 2,099,328,472 103,752,200 193,006,998 1991.. 22,553,001,815 1,429,322,157 405,729,320 109,631,000 261,316,379 1992.. 20,235,027,938 1,474,530,523 -987,787,687 128,955,300 295,400,692 1993.. 18,914,250,574 1,657,799,914 -230,267,919 140,465,600 355,947,291 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 1996 . 25,164,303,448 1,947,860,932 -1,676,716,395 162,642,400 402,517,040 Total, 1914-96. 417,408,838,469 30,546,980,808 6,085,772,300 2,314,254,908 4,389,133,107 Aggregate for each Bank, 1914-96 Boston 22,414,593,032 2,030,182,865 187,976,722 85,524,286 259,235,953 New York 134,171,636,114 5,365,393,4843 1,811,445,415 618,126,986 1,367,423,806 Philadelphia 16,115,422,370 1,687,961,908 205,658,739 106,218,018 178,533,574 Cleveland 27,027,211,371 1,918,000,632 300,307,613 162,215,990 272,544,152 Richmond 33,033,422,980 2,610,753,951 351,633,057 137,625,176 385,287,134 Atlanta 18,683,112,041 2,814,165,967 538,236,305 193,757,060 242,024,665 Chicago. 55,939,695,781 3,946,149,380 739,777,471 304,762,572 557,191,544 St. Louis 14,325,900,930 1,544,659,281 117,815,766 65,227,172 167,905,719 Minneapolis 7,770,380,589 1,427,947,359 155,356,159 66,103,815 79,181,368 Kansas City 16,790,020,529 1,957,825,838 208,702,935 94,021,509 180,437,076 Dallas 21,389,825,744 1,909,602,182 509,794,465 156,962,073 217,674,139 San Francisco 49,747,616,989 3,334,337,961 959,067,653 323,710,251 481,693,977 Total 417,408,838,469 30,546,980,808 6,085,772,300 2,314,254,908 4,389,133,107 NOTE. Components may not sum to totals because of as statutorily required (1996); and was increased by transrounding. fer of $11,131,013 from reserves for contingencies 1. For 1987 and subsequent years, includes the cost of (1955), leaving a balance of $4,495,744,698 on Decemservices provided to the Treasury by Federal Reserve ber 31, 1996. Banks for which reimbursement was not received. 3. Reduced $776,102,763 million related to the Sys- 2. The $4,730,416,899 transferred to surplus was tem Retirement Plan. See note 1, table 6. reduced by direct charges of $500,000 for charge-off 4. Represents transfers made as a franchise tax from on Bank premises (1927), $139,299,557 for contributions 1917 to 1932; transfers made under section 13b of the to capital of the Federal Deposit Insurance Corporation Federal Reserve Act from 1935 to 1947; and transfers (1934), $3,657 net upon elimination of section 13b sur- made under section 7 of the Federal Reserve Act for plus (1958), and $106,000,000 transferred to the Treasury 1996. 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 paid t S ra ta n t s u f t e o r r s y 4 Fed In er te a r l e R st e o se n rve (s t e o c t s io u n rp l 1 u 3 s b) ( t s o e c s t u io rp n l u 7 s ) 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 23,389,366,647 283,075,250 255,884,343 5,517,716,032 14,565,623,555 635,342,750 3,648,914,095 5,669,043,225 372,195,871,378 -3,657 4,730,416,8992 145,739,134 335,448,147 19,564,040,184 135,411 182,263,775 994,043,947 2,438,546,477 124,111,327,621 -433,412 1,088,652,621 180,644,268 151,286,760 13,728,621,798 290,661 287,524,122 267,503,570 315,162,589 24,086,374,111 -9,906 305,727,843 210,908,799 458,582,190 29,258,068,063 -71,517 323,902,108 290,271,992 334,351,353 14,916,440,658 5,491 430,331,290 475,290,267 607,337,668 50,236,363,729 11,682 552,366,404 104,921,102 273,552,460 12,167,994,403 -26,515 119,483,078 100,731,338 67,561,823 6,073,679,505 64,874 110,466,663 146,394,749 161,617,171 14,279,519,545 -8,674 178,916,250 235,741,109 149,831,892 18,968,510,799 55,337 261,242,678 496,723,819 375,764,696 44,804,930,959 -17,089 889,540,067 3,648,914,095 5,669,043,225 372,195,871,378 -3,657 4,730,416,899 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

302 83rd Annual Report, 1996 Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks and Branches, December 31, 1996 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 95,224,464 7,393,282 124,691,246 94,550,556 NEW YORK. 20,330,426 122,029,100 48,319,639 190,679,165 145,563,196 Buffalo 887,844 3,807,652 2,886,511 7,582,008 4,809,426 PHILADELPHIA 2,251,556 59,430,181 6,635,069 68,316,805 49,746,796 CLEVELAND . 2,298,644 81,855,115 7,000,010 91,153,769 82,114,215 Cincinnati 2,246,599 15,185,611 8,385,938 25,818,147 12,116,195 Pittsburgh 1,658,376 10,570,100 5,945,626 18,174,102 13,712,888 RICHMOND. 6,111,681 61,613,424 18,820,236 86,545,340 70,815,818 5,708,457 Baltimore 6,476,335 27,100,992 4,568,965 38,146,293 27,697,064 Charlotte 3,129,645 27,402,251 4,737,485 35,269,381 29,517,951 ATLANTA.... 25,407,225 11,500,082 4,094,354 41,001,661 34,036,441 4,346,050 Birmingham... 2,116,535 1,885,999 1,749,485 5,752,019 3,441,437 Jacksonville... 1,732,270 17,104,571 2,851,236 21,688,077 17,679,620 '48,365 Miami 3,810,291 12,929,718 2,728,485 19,468,493 13,921,990 Nashville 603,199 2,153,118 2,385,502 5,141,819 2,624,172 New Orleans.. 3,497,233 5,535,272 2,826,816 11,859,322 8,167,263 CHICAGO... 5,033,326 116,667,902 13,887,161 135,588,390 101,468,479 Detroit 797,734 5,443,037 3,593,208 9,833,979 8,527,778 ST. LOUIS. 700,378 18,554,937 5,298,206 24,553,521 17,843,826 Little Rock. 1,148,492 3,085,929 1,110,099 5,344,519 4,234,004 Louisville.. 700,075 3,308,312 1,131,238 5,139,624 3,630,568 Memphis... 1,135,623 4,334,482 2,538,967 8,009,072 5,111,680 MINNEAPOLIS. 8,876,249 103,395,475 7,753,083 120,024,808 100,267,078 Helena 1,954,514 9,278,687 526,787 11,759,987 10,496,799 KANSAS CITY. 2,048,446 17,690,589 8,227,232 27,966,267 19,636,087 Denver 3,187,962 5,777,563 3,311,080 12,276,605 8,247,316 Oklahoma City.. 646,386 10,627,823 2,880,901 14,155,109 12,202,209 Omaha 6,534,583 10,987,009 1,401,083 18,922,675 15,719,619 DALLAS 28,512,492 103,908,815 18,570,460 150,991,767 137,763,658 El Paso 262,477 2,737,583 902,921 3,902,982 3,360,141 Houston 2,205,500 5,025,337 1,318,755 8,549,592 7,109,258 San Antonio . 482,284 5,019,470 2,649,439 8,151,194 6,353,620 SAN FRANCISCO 15,599,928 70,371,626 18,273,912 104,245,466 77,998,128 Los Angeles 3,891,887 51,907,298 9,168,091 64,967,276 51,962,990 Portland 2,733,212 9,085,898 2,453,483 14,272,593 12,419,951 Salt Lake City 494,556 7,002,496 2,357,975 9,855,028 8,143,018 Seattle 324,772 9,192,083 2,771,774 12,288,629 9,890,153 Total 191,902,236 1,128,729,998 241,454,495 1,562,086,729 1,232,901,388 10,102,871 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, 1993-96 Operation 1996 1995 1994 1993 Millions of pieces (except as noted) Loans (thousands) 6 6 8 6 Currency received and counted 23,436 22,594 20,166 20,768 Currency verified and destroyed 8,686 8,911 7,244 7,376 Coin received and counted 8,654 7,578 6,950 7,690 Checks handled U.S. government checks 436 460 470 480 Postal money orders 206 203 200 192 All other 15,487 15,465 16,479 19,009 Government securities transfers' 13 13 13 12 Transfer of funds 83 76 72 70 Automated clearinghouse transactions Commercial2 2,372 2,046 1,737 1,486 Government 625 599 574 555 Food stamps redeemed 3,637 3,954 4,229 4,198 Millions of dollars Loans 25,350 22,854 22,853 20,760 Currency received and counted 375,399 345,318 277,685 290,989 Currency verified and destroyed 148,394 113,828 76,620 79,599 Coin received and counted 1,175 1,112 1,045 1,143 Checks handled U.S. government checks 462,647 490,299 504,479 534,236 Postal money orders 25,831 24,835 23,764 22,207 All other 11,584,276 11,567,820 12,079,107 14,066,518 Government securities transfers' 160,637,460 149,764,431 144,702,226 146,220,304 Transfer of funds 249,140,021 222,954,083 211,201,540 207,629,814 Automated clearinghouse transactions Commercial2 8,287,711 7,817,323 7,094,246 6,454,742 Government 1,250,472 1,117,452 948,984 885,011 Food stamps redeemed 18,669 20,862 21,867 21,661 1. Beginning with the 1994 Annual Report, "Govern- ing for the fiscal area, where complex definitional changes ment securities transfers" replaced the previous time have occurred over the reported years. series that included "Issues, redemptions, and exchanges 2. The volume and value of commercial automated of U.S. Treasury and federal agency securities." This clearinghouse transactions were adjusted for earlier years change was made to enable consistent time series report- to correct a reporting error. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

304 83rd Annual Report, 1996 10. Federal Reserve Bank Interest Rates on Loans to Depository Institutions, December 31, 1996 Extended credit3 Adjustment Seasonal Reserve Bank credit' credit2 First thirty days After thirty days of borrowing of borrowing All Federal Reserve Banks 5.00 5.35 5.00 5.85 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. The flexible rate is on seasonal credit takes into account rates on market reestablished on the first business day of each two-week sources of funds and ordinarily is reestablished on the reserve maintenance period. At the discretion of the Fedfirst business day of each two-week reserve maintenance eral Reserve Bank, the flexible rate may be charged on period; however, it is never lower than the discount rate extended-credit loans that are outstanding less than thirty applicable to adjustment credit. See section 201.3(b) of days. Regulation A. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 305 11. Reserve Requirements of Depository Institutions, December 31, 1996 Requirements Type of deposit Percentage of deposits Effective date Net transaction accounts' $0 million-$49.3 million2 3 1-2-97 More than $49.3 million3 10 1-2-97 Nonpersonal time deposits4 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. The exemption applies only to the Federal Reserve Bulletin. Under the Monetary Con- accounts that would be subject to a 3 percent reserve trol Act of 1980, depository institutions include commer- requirement. Effective with the reserve maintenance cial banks, mutual savings banks, savings and loan asso- period beginning January 2, 1997, for depository instituciations, credit unions, agencies and branches of foreign tions that report weekly, and with the period beginning banks, and Edge Act corporations. January 16, 1997, for institutions that report quarterly, the 1. Transaction accounts include all deposits against exemption was raised from $4.3 million to $4.4 million. which the account holder is permitted to make withdraw- 3. The reserve requirement was reduced from 12 perals by negotiable or transferable instruments, payment cent to 10 percent on April 2, 1992, for institutions that orders of withdrawal, or telephone or preauthorized trans- report weekly, and on April 16, 1992, for institutions that fers for the purpose of making payments to third persons report quarterly. or others. However, accounts subject to the rules that 4. For institutions that report weekly, the reserve repermit no more than six preauthorized, automatic, or quirement on nonpersonal time deposits with an original other transfers per month (of which no more than three maturity of less than 1 xh years was reduced from 3 permay be by check, draft, debit card, or similar order cent to 1V2 percent for the maintenance period that began payable directly to third parties) are savings deposits, not December 13, 1990, and to zero for the maintenance transaction accounts. period that began December 27, 1990. For institutions 2. The Monetary Control Act of 1980 requires that the that report quarterly, the reserve requirement on nonperamount of transaction accounts against which the 3 per- sonal time deposits with an original maturity of less man cent reserve requirement applies be modified annually by l'/2 years was reduced from 3 percent to zero on Jan- 80 percent of the percentage change in transaction uary 17, 1991. accounts held by all depository institutions, determined as The reserve requirement on nonpersonal time deposits of June 30 each year. Effective with the reserve mainte- with an original maturity of 1 xh years or more has been nance period beginning January 2, 1997, for depository zero since October 6, 1983. institutions that report weekly, and with the period begin- 5. The reserve requirement on Euroccurency liabilities ning January 16, 1997, for institutions that report quar- was reduced from 3 percent to zero in the same manner terly, the amount was decreased from $52.0 million to and on the same dates as the reserve requirement on $49.3 million. nonpersonal time deposits with an original maturity of Under the Garn-St Germain Depository Institutions less than 1 Vi 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 83rd Annual Report, 1996 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 required for writing options on securities, setting it at Governors pursuant to the Securities Exchange Act of 30 percent of the current market value of the stock 1934, limit the amount of credit to purchase and carry underlying the option. On September 30, 1985, the Board "margin securities" (as defined in the regulations) when changed the required margin on individual stock options, such value is collateralized by securities. Margin require- allowing it to be the same as the option maintenance ments on securities are the difference between the market margin required by the appropriate exchange or selfvalue (100 percent) and the maximum loan value of regulatory organization; such maintenance margin rules collateral as prescribed by the Board. Regulation T was must be approved by the Securities and Exchange adopted effective October 15, 1934; Regulation U, effec- Commission. tive May 1, 1936; Regulation G, effective March 11, 1. From October 1, 1934, to October 31, 1937, the 1968; and Regulation X, effective November 1, 1971. requirement was the margin "customarily required" by On January 1, 1977, the Board of Governors for the the brokers and dealers. first time established in Regulation T the initial margin 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, 1996 and 1995 Millions of dollars, except as noted Member banks Nonmember Item Total banks Total National State 1996 ASSETS Loans and investments 3,211,239 2,384,136 1,836,658 547,478 827,103 Gross loans 2,401,121 1,811,560 1,437,274 374,287 589,561 Net loans 2,397,057 1,809,279 1,435,469 373,810 587,778 Investments 810,117 572,576 399,384 173,191 237,542 U.S. Treasury and federal agency securities 310,423 193,631 136,587 57,044 116,791 Other 499,695 378,944 262,797 116,147 120,750 Cash assets, total 209,017 166,724 131,481 35,243 42,294 LIABILITIES Deposits, total 2,601,607 1,905,957 1,486,568 419,389 695,650 Interbank 41,671 35,069 26,976 8,093 6,602 Other transaction 724,824 543,799 423,598 120,201 181,024 Other nontransaction 2,038,896 1,456,829 1,136,788 320,044 582,066 Equity capital 365,328 275,227 207,627 67,601 90,101 Number of banks 9,653 3,776 2,755 1,021 5,877 1995 ASSETS Loans and investments 3,057,022 2,227,141 1,667,536 559,605 829,881 Gross loans 2,249,343 1,663,974 1,276,481 387,493 585,369 Net loans 2,224,639 1,661,360 1,274,454 386,905 583,279 Investments 807,679 563,167 391,055 172,112 244,513 U.S. Treasury and federal agency securities 328,556 207,122 151,811 55,311 121,433 Other 479,124 356,044 239,244 116,801 123,079 Cash assets, total 198,843 157,221 117,556 39,664 41,622 LIABILITIES Deposits, total 2,465,251 1,758,543 1,328,485 430,058 706,708 Interbank 38,710 31,468 21,999 9,470 7,242 Other transaction 773,794 574,908 428,781 146,127 198,886 Other nontransaction 1,930,233 1,344,046 1,024,899 319,147 586,187 Equity capital 335,432 246,282 180,887 65,394 89,150 Number of banks 10,143 3,929 2,937 992 6,214 NOTE. Components may not sum to totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

308 83rd Annual Report, 1996 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-96, and Month-End 1996 Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasury and cial Treafederal agency securities draw- sury Period Other Gold ing cur- Held All Federal stock4 rights rency under Loans Float • other2 Reserve Total certif- out- Total o B u o t u ri g g h h t t r c e h p a u s r e - assets3 ic a a c t - e s i ta n n g d 5 agree- count ment 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 All 14 0 6,679 22,726 3,648 1943 11,543 11,543 0 5 681 10 0 12,239 21,938 4,094 1944 18,846 18,846 0 80 815 4 0 19,745 20,619 4,131 1945 24,252 24,252 0 249 578 2 0 15,091 20,065 4,339 1946 23,350 23,350 0 163 580 1 0 24,093 20,529 4,562 1947 22,559 22,559 0 85 535 1 0 23,181 22,754 4,562 1948 23,333 23,333 0 223 541 1 0 24,097 24,244 4,589 1949 18,885 18,885 0 78 534 2 0 19,499 24,427 4,598 1950 20,778 20,725 53 67 1,368 3 0 22,216 22,706 4,636 1951 23,801 23,605 196 19 1,184 5 0 25,009 22,695 4,709 1952 24,697 24,034 663 156 967 4 0 25,825 23,187 4,812 1953 25,916 25,318 598 28 935 2 0 26,880 22,030 4,894 1954 24,932 24,888 44 143 808 1 0 25,885 21,713 4,985 1955 24,785 24,391 394 108 1,585 29 0 26,507 21,690 5,008 1956 24,915 24,610 305 50 1,665 70 0 26,699 21,949 5,066 1957 24,238 23,719 519 55 1,424 66 0 25,784 22,781 5,146 1958 26,347 26,252 95 64 1,296 49 0 27,755 20,534 5,234 1959 26,648 26,607 41 458 1,590 75 0 28,771 19,456 5,311 1960 27,384 26,984 400 33 1,847 74 0 29,338 17,767 5,398 1961 28,881 30,478 159 130 2,300 51 0 31,362 16,889 5,585 1962 30,820 28,722 342 38 2,903 110 0 33,871 15,978 5,567 1963 33,593 33,582 11 63 2,600 162 0 36,418 15,513 5,578 1964 37,044 36,506 538 186 2,606 94 0 39,930 15,388 5,405 Digitized for FRASER http://fraserF.osrt lnoouteiss fseede .eonrdg o/f table. Federal Reserve Bank of St. Louis

Tables 309 14.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with reserves7 Federal Reserve Banks Other Cur- Re- Trea- Other Federal rency quired sury Federal Reserve in clearcash Reserve liacir- ing With Curhold- ac- 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 bal- 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 c E e x s - s9 Banks 4,951 288 51 96 25 118 0 0 1,636 0 1,585 51 5,091 385 51 73 28 208 0 0 1,890 0 1,822 68 5,325 218 57 5 18 298 0 0 1,781 0 0 0 4,403 214 96 12 15 285 0 0 1,753 0 1,654 99 4,530 225 11 3 26 276 0 0 1,934 0 0 0 4,757 213 38 4 19 275 0 0 1,898 0 1,884 14 4,760 211 51 19 20 258 0 0 2,220 0 2,161 59 4,817 203 16 8 21 272 0 0 2,212 0 2,256 -44 4,808 201 17 46 19 293 0 0 2,194 0 2.250 -56 4,716 208 18 5 21 301 0 0 2,487 0 2,424 63 4,686 202 23 6 21 348 0 0 2,389 0 2,430 -41 4,578 216 29 6 24 393 0 0 2,355 0 2,428 -73 4,603 211 19 6 22 375 0 0 2,471 0 2,375 96 5,360 222 54 79 31 354 0 0 1,961 0 1,994 -33 5,388 272 8 19 24 355 0 0 2,509 0 1,933 576 5,519 284 3 4 128 360 0 0 2,729 0 1,870 859 5,536 3,029 121 20 169 241 0 0 4,096 0 2,282 1,814 5,882 2,566 544 29 226 253 0 0 5,587 0 2,743 2,844 6,543 2,376 244 99 160 261 0 0 6,606 0 4,622 1,984 6,550 3,619 142 172 235 263 0 0 7,027 0 5,815 1,212 6,856 2,706 923 199 242 260 0 0 8,724 0 5,519 3,205 7,598 2,409 634 397 256 251 0 0 11,653 0 6,444 5,209 8,732 2,213 368 1,133 599 284 0 0 4,026 0 7,411 6,615 11,160 2,215 867 774 586 291 0 0 12,450 0 9,365 3,085 15,410 2,193 799 793 485 256 0 0 13,117 0 11,129 1,988 20,499 2,303 579 1,360 356 339 0 0 12,886 0 11,650 1,236 25,307 2,375 440 1,204 394 402 0 0 14,373 0 12,748 1,625 28,515 2,287 977 862 446 495 0 0 15,915 0 14,457 1,458 28,952 2,272 393 508 314 607 0 0 16,139 0 15,577 562 28,868 1,336 870 392 569 563 0 0 17,899 0 16,400 1,499 28,224 1,325 1,123 642 547 590 0 0 20,479 0 19,277 1,202 27,600 1,312 821 767 750 106 0 0 16,568 0 15,550 1,018 27,741 1,293 668 895 565 714 0 0 17,681 0 16,509 1,172 29,206 1,270 247 526 363 746 0 0 20,056 0 19,667 389 30,433 1,270 389 550 455 in 0 0 19,950 0 20,520 -570 30,781 761 346 423 493 839 0 0 20,160 0 19,397 763 30,509 796 563 490 441 907 0 0 18,876 0 18,618 258 31,158 767 394 402 554 925 0 0 19,005 0 18,903 102 31,790 775 441 322 426 901 0 0 19,059 0 19,089 -30 31,834 761 481 356 246 998 0 0 19,034 0 19,091 -57 32,193 683 358 272 391 1,122 0 0 18,504 0 18,574 -70 32,591 391 504 345 694 841 0 0 18,174 310 18,619 -135 32,869 377 485 217 533 941 0 0 17,081 2,544 18,988 637 33,918 422 465 279 320 1,044 0 0 17,387 2,544 18,988 96 35,338 380 597 247 393 1,007 0 0 17,454 3,262 20,071 645 37,692 361 880 171 291 1,065 0 0 17,049 4,099 20,677 471 Digitized f3o9r, 6F1R9ASE6R12 820 229 321 1,036 0 0 18,086 4,151 21,663 574 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

310 83rd Annual Report, 1996 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-96 and Month-End 1996—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasury and cial Treafederal agency securities draw- sury Period Other Gold ing curu H n e d l e d r Loans Float1 ot A h l e l r2 R Fe e d se e r r v a e l Total stock4 c ri e g r h ti t f s - r o en u c t- y Total ou B t o ri u g g h h t t 10 r c e h p a u s r e - assets3 ic a a c t - e s i t n an g d 5 agree- count ment '' 1965 40,768 40,478 290 137 2,248 187 0 43,340 13,733 5,575 1966 44,316 43,655 661 173 2,495 193 0 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 1990 259,786 241,432 18,354 190 2,566 0 39,880 302,421 11,058 10,018 20,404 1991 288,429 272,531 15,898 218 1,026 0 34,524 324,197 11,059 10,018 21,017 1992 308,518 300,424 8,094 675 3,350 0 30,278 342,820 11,056 8,018 21,452 1993 349,865 336,653 13,212 94 963 0 33,394 384,316 11,053 8,018 22,101 1994 378,746 368,156 10,590 223 740 0 33,441 413,150 11,051 8,018 22,912 1995 394,693 380,831 13,862 136 231 0 33,483 428,543 11,050 10,168 23,951 1996 414,715 393,132 21,583 85 5,297 0 32,222 452,319 11,048 9,718 24,798 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 Federa1 ReserveBanks Other reserves7 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 - e F i o g r n - Other counts 3 , a b n a c l e - s ca a p n it d al3 R F B e e a s d n e e r k r v a s e l r c e a o n n i c d n y 8 qu R ir e e - d 9 ce E ss x 9 - -12 42,056 760 668 150 355 211 0 0 18,447 4,163 22,848 -238 44,663 1,176 416 174 588 -147 0 0 19,779 4,310 24,321 -232 47,226 1,344 1,123 135 563 -773 0 0 21,092 4,631 25,905 -182 50,961 695 703 216 747 -1,353 0 0 21,818 4,921 27,439 -700 53,950 596 1,312 134 807 0 0 1,919 22,085 5,187 28,173 -901 57,903 431 1,156 148 ,233 0 0 1,986 24,150 5,423 30,033 -460 61,068 460 2,020 294 999 0 0 2,131 27,788 5,743 32,496 1,035 66,516 345 1,855 325 840 0 0 2,143 25,647 6,216 32,044 98 12 72,497 317 2,542 251 1,419 13 0 0 2,669 27,060 6,781 35,268 -1,360 79,743 185 2,113 418 1,275 13 0 0 2,935 25,843 7,370 37,011 -3,798 86,547 483 7,285 353 1,090 0 0 2,968 26,052 8,036 35,197 -1,103 14 93,717 460 10,393 352 1,357 0 0 3,063 25,158 8,628 35,461 -1,535 103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,615 -1,265 114,645 240 4,196 368 1,256 0 0 4,275 31,152 10,538 42,694 -893 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 -1,442 154,908 429 5,033 328 ,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 ,041 0 1,490 5,940 27,141 211,995 447 7,588 287 917 0 1,812 6,088 46,295 230,205 454 5,313 244 1,027 0 ,687 7,129 40,097 247,649 395 8,656 347 548 0 ,605 7,683 37,742 260,456 450 6,217 589 1,298 0 ,618 8,486 36,713 n.a. n.a. n.a. 286,965 561 8,960 369 242 0 1,963 8,147 36,695 307,759 636 17,697 968 ,706 0 3,945 8,113 25,467 334,706 508 7,492 206 372 0 5,897 7,984 26,181 365,299 377 14,809 386 397 0 6,332 9,292 28,614 403,762 335 7,161 250 876 0 4,239 11,959 26,550 424,192 270 5,979 386 932 0 5,171 12,342 24,441 450,660 249 7,742 167 892 0 6,601 13,829 17,922 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

312 83 rd Annual Report, 1996 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-96, and Month-End 1996—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasury and cial Treafederal agency securities draw- sury Period Other Gold ing cur- Held All Federal stock4 rights rency under Loans Float' other2 Reserve Total certif- out- Total o B ut o r u ig g h h t t 10 r c e h p a u s r e - assets3 ic a a c t - e s i ta n n g d 5 agree- count ment11 1996 Jan. ... 380,842 380,842 0 15 1,136 0 31,379 413,372 11,052 10,168 24,105 Feb. ... 379,153 379,153 0 18 372 0 30,317 410,860 11,053 10,168 24,194 Mar. ... 384,478 379,582 4,896 43 128 0 31,468 455,057 11,053 10,168 24,279 Apr. ... 384,250 384,250 0 93 1,011 0 31,623 452,063 11,052 10,168 24,372 May ... 390,828 383,774 7,054 155 -203 0 30,270 421,050 11,051 10,168 24,455 June ... 393,388 386,302 7,086 636 22 0 31,462 394,046 11,050 10,168 24,531 July .... 400,454 384,714 15,740 1,718 446 0 33,722 436,340 11,050 10,168 24,620 Aug. ... 394,903 389,291 5,612 339 298 0 31,230 426,770 11,050 9,718 24,710 Sept. ... 394,571 386,219 8,352 1,654 625 0 31,370 428,220 11,050 9,718 24,801 Oct. ... 398,134 387,334 10,800 162 1,270 0 32,168 431,734 11,049 9,718 24,866 Nov. ... 405,210 394,899 10,311 188 907 0 30,894 440,210 11,049 9,718 24,922 Dec. ... 414,715 393,132 21,583 85 5,297 0 32,222 452,319 11,048 9,718 24,978 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. 1. Beginning in 1960, figures reflect a minor change in 7. Beginning in November 1979, includes reserves concept; see Federal Reserve Bulletin, vol. 47 (February of member banks, Edge Act corporations, and U.S. agen- 1961), p. 164. cies and branches of foreign banks. Beginning on 2. Principally acceptances and, until August 21, 1959, November 13, 1980, includes reserves of all depository industrial loans, authority for which expired on that date. institutions. 3. For the period before April 16, 1969, includes the Beginning in 1984, data on "Currency and coin" and total of Federal Reserve capital paid in, surplus, other "Required" and "Excess" reserves changed from daily capital accounts, and other liabilities and accrued divi- to biweekly basis. dends, less the sum of bank premises and other assets, 8. Between December 1, 1959, and November 23, and is reported as "Other Federal Reserve accounts"; 1960, part was allowed as reserves; thereafter all was thereafter, "Other Federal Reserve assets" and "Other allowed. Federal Reserve liabilities and capital" are shown 9. Estimated through 1958. Before 1929, data were separately. available only on call dates (in 1920 and 1922 the call 4. Before January 30, 1934, includes gold held in date was December 29). Beginning on September 12, Federal Reserve Banks and in circulation. 1968, the amount is based on close-of-business figures for 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 reserve funds Deposits, other Member bank than reserves, with reserves8 Federal Reserve Banks Other Cur- Re- Trea- Other Federal rency quired sury Federal Reserve in clearcash Reserve liacir- ing With Curhold- ac- bilities c t u io la n - ings6 T su re r a y - e F i o g r n - Other counts 3 bal- ca a p n it d al3 R F B e e a d s n e e r k r v a s e l r c e a o n n i c n d y 8 qu R ir e e - d 9 Ex- 412,690 273 8,210 165 406 0 5,193 11,832 19,929 414,008 279 5,632 209 318 0 5,437 13,062 16,331 416,289 314 7,021 191 348 0 5,561 12,714 19,180 417,746 288 11,042 166 360 0 5,770 12,559 14,637 422,411 265 3,757 160 300 0 5,879 13,148 20,806 424,801 280 7,701 183 326 0 5,895 13,371 18,699 428,767 261 6,836 166 278 0 5,972 14,817 25,080 432,118 277 5,149 171 293 0 6,059 14,007 14,175 430,429 286 7,700 265 368 0 6,269 13,744 14,728 433,268 281 5,897 176 363 0 6,516 14,066 16,801 440,943 273 4,857 170 292 0 6,556 14,219 15,575 450,660 249 7,742 167 892 0 6,601 13,829 17,922 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 83rd Annual Report, 1996 15. Number of Banking Offices in the United States, December 31, 1995 and 1996 (Commercial banks' State- Type of office, chartered Total Member number, and change savings Total Nonmember banks Total National State BANKS Number, Dec. 31, 1995 .. 10,422 9,910 3,863 2,822 1,041 6,047 512 Changes during 1996 New banks 166 148 59 52 7 89 18 Banks converted into branches -529 -518 -263 -191 -72 -255 -11 Ceased banking operation2 -62 -50 -19 -14 -5 -31 -12 Other3 0 0 61 18 43 -61 0 Net change -425 -420 -162 -135 -27 -258 -5 Number, Dec. 31,1996 .. 9,997 9,490 3,701 2,687 1,014 5,789 507 BRANCHES AND ADDITIONAL OFFICES Number, Dec. 31, 1995 .. 61,518 58,072 39,718 29,790 9,928 18,354 3,446 Changes during 1996 New branches 2,688 2,487 1,673 1,215 458 814 201 Branches converted from banks . ... 529 516 290 213 77 226 13 Discontinued2 -1,949 -1,870 -1,537 -1,035 -502 -333 -79 Other3 o 43 819 1 147 -328 -776 -43 Net change 1,268 1,176 1,245 1,540 -295 -69 92 Number, Dec. 31,1996 .. 62,786 59,248 40,963 31,330 9,633 18,285 3,538 1. For purposes of this table, banks are entities that defined as an insured bank in section 3(h) of the FDIC are defined as banks in the Bank Holding Company Act Act. Covers entities in the United States or its territories as amended and implemented in Federal Reserve Regula- or possessions (affiliated insular areas). tion Y. Banks generally consist of any institution that 2. Institutions that no longer meet the Regulation Y accepts demand deposits and is engaged in the business definition of bank. of making commercial loans or any institution that is 3. 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, 1996 Chemical Bank, New York, New York to merge Centura Bank, Rocky Mount, North Carolina with Chase Manhattan Bank, N.A., New York, to merge with First Commercial Bank, Asheville, New York1 North Carolina SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (12/22/95) (12/22/95) 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 (1/5/96) (1/19/96) The applicant has assets of $142 billion; the target The applicant has assets of $5.3 billion; the target has assets of $98 billion. The parties operate in the has assets of $177 million. The parties operate in same market. The banking factors and consider- the same market. The banking factors and considations relating to the convenience and needs of the erations relating to the convenience and needs of community are consistent with approval. the community are consistent with approval. Bank of Clarke County, Berryville, Virginia to PremierBank & Trust, Elyria, Ohio to acquire acquire assets and liabilities o/the Stephens City, assets and liabilities of 11 branches of Bank One Virginia, branch of First Union National Bank Cleveland, N.A., Cleveland, Ohio of Virginia, Roanoke, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (1/25/96) (12/12/95) 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 (1/25/96) (1/11/96) The applicant has assets of $540 million; the tar- The applicant has assets of $114 million; the target gets have assets of $119 million. The parties do has assets of $8 million. The parties operate in the not operate in the same market. The banking facsame market. The banking factors and consider- tors and considerations relating to the convenience ations relating to the convenience and needs of the and needs of the community are consistent with community are consistent with approval. approval. Home Bank, Signal Hill, California to acquire United Jersey Bank, Hackensack, New Jersey assets and liabilities of the Signal Hill branch of to merge with Summit Bank, Chatham, Southern California Bank, Downey, California New Jersey SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (1/8/96) (12/22/95) 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 (1/17/96) (2/5/96) The applicant has assets of $425 million; the target The applicant has assets of $13.1 billion; the target has assets of $5 million. The parties operate in the has assets of $5.6 billion. The parties operate in same market. The banking factors and consider- the same market. The banking factors and considations relating to the convenience and needs of the erations relating to the convenience and needs of community are consistent with approval. the community are consistent with approval. United Jersey Bank, Hackensack, New Jersey 1. The institution or group of institutions to merge with Flemington National Bank and named before the italicized words is referred to Trust Company of New Jersey, Flemington, subsequently as the applicant, and the institution New Jersey or group of institutions named after the italicized SUMMARY REPORT BY THE ATTORNEY GENERAL words is referred to subsequently as the target. (12/22/95) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

316 83rd Annual Report, 1996 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1996—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. (2/5/96) The applicant has assets of $13.1 billion; the target has assets of $289 million. The parties operate in Valliwide Bank, Fresno, California to merge the same market. The banking factors and consid- with Commerce Bank of San Luis Obispo, NA, erations relating to the convenience and needs of San Luis Obispo, California the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (2/6/96) Fifth Third Bank, Cincinnati, Ohio to acquire The proposed transaction would not be signifiassets and liabilities of 8 branches of NBD Bank, cantly adverse to competition. Dayton, Ohio BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (2/20/96) (12/22/95) The applicant has assets of $1.6 billion; the target The proposed transaction would not be signifi- has assets of $103 million. The parties do not cantly adverse to competition. operate in the same market. The banking factors and considerations relating to the convenience and BASIS FOR APPROVAL BY THE FEDERAL RESERVE (2/7/96) needs of the community are consistent with The applicant has assets of $9.1 billion; the targets approval. have assets of $177 million. The parties operate in the same market. The banking factors and consid- The Ohio Bank, Findlay, Ohio to acquire assets erations relating to the convenience and needs of and liabilities of the Carey, Ottawa, Glandorf, the community are consistent with approval. Leipsic, and Columbus Grove branches of Society National Bank, Cleveland, Ohio Fifth Third Bank of Columbus, Columbus, SUMMARY REPORT BY THE ATTORNEY GENERAL Ohio to acquire assets and liabilities of 17 (1/25/96) branches of NBD Bank, Columbus, Ohio The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (12/22/95) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (2/22/96) cantly adverse to competition. The applicant has assets of $516 million; the tar- BASIS FOR APPROVAL BY THE FEDERAL RESERVE gets have assets of $7 million. The parties operate (2/7/96) in the same markets. The banking factors and The applicant has assets of $1.0 billion; the targets considerations relating to the convenience and have assets of $319 million. The parties operate in needs of the community are consistent with the same market. The banking factors and consid- approval. erations relating to the convenience and needs of the community are consistent with approval. Chippewa Valley Bank, Rittman, Ohio to acquire assets and liabilities of the Doylestown The Bank of Waverly, Waverly, Virginia to and Clinton branches of First National Bank of acquire assets and liabilities of the Courtland Ohio, Akron, Ohio and Franklin branches of First Union National SUMMARY REPORT BY THE ATTORNEY GENERAL Bank of Virginia, Roanoke, Virginia (2/6/96) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (1/25/96) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (2/23/96) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $132 million; the tar- (2/15/96) gets have assets of $30 million. The parties oper- The applicant has assets of $57 million; the targets ate in the same market. The banking factors and have assets of $36 million. The parties do not considerations relating to the convenience and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 317 16.—Continued needs of the community are consistent with SUMMARY REPORT BY THE ATTORNEY GENERAL approval. (2/6/96) The proposed transaction would not be significantly adverse to competition. Security Dollar Bank, Niles, Ohio to acquire assets and liabilities of one branch of National BASIS FOR APPROVAL BY THE FEDERAL RESERVE City Bank, Northeast, Akron, Ohio (3/13/96) The applicant has assets of $646 million; the target SUMMARY REPORT BY THE ATTORNEY GENERAL has assets of $406 million. The parties operate in (2/6/96) the same market. The banking factors and consid- The proposed transaction would not be signifierations relating to the convenience and needs of cantly adverse to competition. the community are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (2/29/96) F&M Bank, Kaukauna, Wisconsin to acquire The applicant has assets of $134 million; the target assets and liabilities of the Little Chute Branch has assets of $1 million. The parties operate in the of TCF Bank Wisconsin, Milwaukee, Wisconsin same market. The banking factors and considerations relating to the convenience and needs of the SUMMARY REPORT BY THE ATTORNEY GENERAL community are consistent with approval. (2/28/96) The proposed transaction would not be significantly adverse to competition. The State Bank of Jerseyville, Jerseyville, Illinois to acquire assets and liabilities of the BASIS FOR APPROVAL BY THE FEDERAL RESERVE Brighton, Illinois, branch of Mercantile Bank (3/21/96) of Illinois, Alton, Illinois The applicant has assets of $104 million; the target has assets of $500 thousand. The parties operate in SUMMARY REPORT BY THE ATTORNEY GENERAL the same market. The banking factors and consid- (2/28/96) erations relating to the convenience and needs of The proposed transaction would not be signifithe community are consistent with approval. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/5/96) F&M Bank-Lakeland, Woodruff, Wisconsin The applicant has assets of $96 million; the target to merge with Bradley Bank, Tomahawk, has assets of $10 million. The parties do not Wisconsin operate in the same market. The banking factors SUMMARY REPORT BY THE ATTORNEY GENERAL and considerations relating to the convenience and (3/14/96) needs of the community are consistent with The proposed transaction would not be signifiapproval. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE Texas State Bank, McAUen, Texas to merge with (3/21/96) The Border Bank, Hidalgo, Texas The applicant has assets of $102 million; the target has assets of $36 million. The parties operate in SUMMARY REPORT BY THE ATTORNEY GENERAL the same market. The banking factors and consid- (2/6/96) erations relating to the convenience and needs of The proposed transaction would not be signifithe community are consistent with approval. cantly adverse to competition. j BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/13/96) Capital City Bank, Tallahassee, Tallahassee, The applicant has assets of $646 million; the target Florida to merge with First Federal Bank, Tallahas assets of $120 million. The parties operate in hassee, Florida the same market. The banking factors and consid- SUMMARY REPORT BY THE ATTORNEY GENERAL erations relating to the convenience and needs of (3/28/96) the community are consistent with approval. The proposed transaction would not be significantly adverse to competition. Texas State Bank, McAllen, Texas to merge with BASIS FOR APPROVAL BY THE FEDERAL RESERVE First State Bank & Trust, Mission, Texas (4/1/96) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

318 83rd Annual Report, 1996 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1996—Continued The applicant has assets of $670 million; the target erations relating to the convenience and needs of has assets of $232 million. The parties operate in the community are consistent with approval. the same market. The banking factors and considerations relating to the convenience and needs of Elkridge Bank, Elkridge, Maryland to merge the community are consistent with approval. with Odenton Federal Savings and Loan Association, Odenton, Maryland Johnstown Bank & Trust Company, SUMMARY REPORT BY THE ATTORNEY GENERAL Johnstown, Pennsylvania to merge with The (2/28/96) Moxham National Bank of Johnstown, Johns- The proposed transaction would not be signifitown, Pennsylvania cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (4/4/96) (4/10/96) The proposed transaction would not be signifi- The applicant has assets of $195 million; the target cantly adverse to competition. has assets of $34 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 (4/2/96) the community are consistent with approval. The applicant has assets of $592 million; the target has assets of $196 million. The parties operate in Marine Midland Bank, Buffalo, New York to the same market. The banking factors and considacquire assets and liabilities of River Bank erations relating to the convenience and needs of America, New Rochelle, New York the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (3/28/96) Johnstown Bank & Trust Company, The proposed transaction would not be signifi- Johnstown, Pennsylvania to merge with The cantly adverse to competition. First National Bank of Garrett, Garrett, Pennsylvania BASIS FOR APPROVAL BY THE FEDERAL RESERVE (4/12/96) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $20.3 billion; the target (4/4/96) has assets of $1.5 billion. The parties operate in The proposed transaction would not be signifithe same market. The banking factors and considcantly adverse to competition. erations relating to the convenience and needs of BASIS FOR APPROVAL BY THE FEDERAL RESERVE the community are consistent with approval. (4/2/96) The applicant has assets of $592 million; the target Vectra Bank, Denver, Colorado to merge with has assets of $44 million. The parties operate in Southwest State Bank, Denver, Colorado the same market. The banking factors and consid- SUMMARY REPORT BY THE ATTORNEY GENERAL erations relating to the convenience and needs of (3/14/96) the community are consistent with approval. The proposed transaction would not be significantly adverse to competition. Johnstown Bank & Trust Company, BASIS FOR APPROVAL BY THE FEDERAL RESERVE Johnstown, Pennsylvania to merge with The (4/17/96) Armstrong County Trust Company, The applicant has assets of $416 million; the target Kittanning, Pennsylvania has assets of $114 million. The parties operate in SUMMARY REPORT BY THE ATTORNEY GENERAL the same market. The banking factors and consid- (2/28/96) erations relating to the convenience and needs of The proposed transaction would not be signifi- the community are consistent with approval. cantly adverse to competition. Crestar Bank (MD), Bethesda, Maryland to BASIS FOR APPROVAL BY THE FEDERAL RESERVE (4/10/96) acquire assets and liabilities of Mellon Bank (MD), Rockville, Maryland The applicant has assets of $592 million; the target has assets of $51 million. The parties operate in SUMMARY REPORT BY THE ATTORNEY GENERAL the same market. The banking factors and consid- (3/28/96) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 319 16.—Continued The proposed transaction would not be signifi- The applicant has assets of $131 million; the target cantly adverse to competition. has assets of $130 million. The parties operate in the same market. The banking factors and consid- BASIS FOR APPROVAL BY THE FEDERAL RESERVE (4/19/96) erations relating to the convenience and needs of The applicant has assets of $1.6 billion; the target the community are consistent with approval. has assets of $220 million. The parties operate in the same market. The banking factors and consid- Pioneer Bank, Mapleton, Minnesota to merge erations relating to the convenience and needs of with The First National Bank of Elmore, the community are consistent with approval. Elmore, Minnesota SUMMARY REPORT BY THE ATTORNEY GENERAL Midland American Bank, Midland, Texas to (3/28/96) merge with Stanton National Bank, Stanton, The proposed transaction would not be signifi- Texas cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/14/96) (5/20/96) The proposed transaction would not be signifi- The applicant has assets of $27 million; the target cantly adverse to competition. has assets of $25 million. The parties do not operate in the same market. The banking factors BASIS FOR APPROVAL BY THE FEDERAL RESERVE (4/24/96) and considerations relating to the convenience and The applicant has assets of $140 million; the target needs of the community are consistent with has assets of $20 million. The parties do not approval. operate in the same market. The banking factors and considerations relating to the convenience and Wesbanco Bank Wheeling, Wheeling, West needs of the community are consistent with Virginia to merge with Bank of Weirton, approval. Weirton, West Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL Triangle Bank, Raleigh, North Carolina to (5/14/96) acquire assets and liabilities o/the Scotland Neck The proposed transaction would not be signifibranch of Southern Bank and Trust Company, cantly adverse to competition. Mount Olive, North Carolina BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (5/21/96) (3/28/96) The applicant has assets of $618 million; the target The proposed transaction would not be signifi- has assets of $177 million. The parties operate in cantly adverse to competition. the same market. The banking factors and consid- BASIS FOR APPROVAL BY THE FEDERAL RESERVE erations relating to the convenience and needs of (4/24/96) the community are consistent with approval. The applicant has assets of $820 million; the target has assets of $6 million. The parties operate in the Harris Trust and Savings Bank, Chicago, same market. The banking factors and consider- Illinois to acquire assets and liabilities of 63 ations relating to the convenience and needs of the branches of Household Bank, F.S.B., Prospect community are consistent with approval. Heights, Illinois SUMMARY REPORT BY THE ATTORNEY GENERAL Republic Bank, Philadelphia, Pennsylvania to (6/10/96) merge with First Executive Bank, Philadelphia, The proposed transaction would not be signifi- Pennsylvania cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3/28/96) (5/29/96) The proposed transaction would not be signifi- The applicant has assets of $13.1 billion; the tarcantly adverse to competition. gets have deposits of $3.0 billion. The parties BASIS FOR APPROVAL BY THE FEDERAL RESERVE operate in the same markets. The banking factors (5/2/96) and considerations relating to the convenience and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

320 83rd Annual Report, 1996 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1996—Continued needs of the community are consistent with SUMMARY REPORT BY THE ATTORNEY GENERAL approval. (6/26/96) The proposed transaction would not be signifi- Centura Bank, Rocky Mount, North Carolina cantly adverse to competition. to acquire assets and liabilities of the Greens- BASIS FOR APPROVAL BY THE FEDERAL RESERVE boro, Raleigh, and Wilmington branches of (7/11/96) Essex Savings Bank, F.S.B., Virginia Beach, The applicant has assets of $127 million; the target Virginia has assets of $13 million. The parties do not SUMMARY REPORT BY THE ATTORNEY GENERAL operate in the same market. The banking factors (5/14/96) and considerations relating to the convenience and The proposed transaction would not be signifi- needs of the community are consistent with cantly adverse to competition. approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5/30/96) Tri-City Bank and Trust Company, Blountville, The applicant has assets of $5.5 billion; the targets Tennessee to acquire assets and liabilities of have assets of $76 million. The parties operate in the Kingsport and Johnson City branches of the same markets. The banking factors and consid- National Bank of Commerce, Memphis, erations relating to the convenience and needs of Tennessee the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (6/26/96) Croghan Colonial Bank, Fremont, Ohio to The proposed transaction would not be signifimerge with Union Bank and Savings Company, cantly adverse to competition. Bellevue, Ohio BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (7/18/96) (4/24/96) The applicant has assets of $237 million; the tar- The proposed transaction would not be signifi- gets have assets of $3 million. The parties operate cantly adverse to competition. in the same markets. The banking factors and BASIS FOR APPROVAL BY THE FEDERAL RESERVE considerations relating to the convenience and (6/10/96) needs of the community are consistent with The applicant has assets of $246 million; the target approval. has assets of $97 million. The parties operate in the same market. The banking factors and consid- Centura Bank, Rocky Mount, North Carolina erations relating to the convenience and needs of to merge with First Community Bank, Gastonia, the community are consistent with approval. North Carolina Baylake Bank, Sturgeon Bay, Wisconsin to SUMMARY REPORT BY THE ATTORNEY GENERAL merge with The Bank, Manawa, Wisconsin (6/10/96) The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (4/24/96) The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7/19/96) cantly adverse to competition. The applicant has assets of $5.6 billion; the target BASIS FOR APPROVAL BY THE FEDERAL RESERVE has assets of $124 million. The parties do not (6/12/96) operate in the same market. The banking factors The applicant has assets of $316 million; the target and considerations relating to the convenience and has assets of $58 million. The parties do not 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 Compass Bank, Jacksonville, Florida to merge approval. with Community First Bank, Jacksonville, Silsbee State Bank, Silsbee, Texas to acquire Florida assets and liabilities of the Buna branch of First SUMMARY REPORT BY THE ATTORNEY GENERAL Bank of Texas, Tomball, Texas (5/14/96) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 321 16.—Continued The proposed transaction would not be signifi- The applicant has assets of $1.3 billion; the target cantly adverse to competition. has assets of $76 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 (7/22/96) the community are consistent with approval. The applicant has assets of $607 million; the target has assets of $313 million. The parties operate in the same market. The banking factors and consid- Centura Bank, Rocky Mount, North Carolina erations relating to the convenience and needs of to merge with FirstSouth Bank, Burlington, the community are consistent with approval. North Carolina SUMMARY REPORT BY THE ATTORNEY GENERAL DeMotte State Bank, DeMotte, Indiana to (7/23/96) acquire assets and liabilities of the Hebron The proposed transaction would not be signifibranch of NBD Bank, N.A., Indianapolis, cantly adverse to competition. Indiana BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (8/30/96) (7/11/96) The applicant has assets of $5.8 billion; the target The proposed transaction would not be signifi- has assets of $156 million. The parties do not cantly adverse to competition. operate in the same market. The banking factors and considerations relating to the convenience and BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7/23/96) needs of the community are consistent with The applicant has assets of $140 million; the target approval. has assets of $10 million. The parties operate in the same market. The banking factors and consid- First Banking System-Burlington, Burlington, erations relating to the convenience and needs of Wisconsin to acquire assets and liabilities o/the the community are consistent with approval. Genoa City and Pell Lake, Wisconsin, branches of American National Bank and Trust Com- Triangle Bank, Raleigh, North Carolina to pany of Chicago, Chicago, Illinois merge with Granville United Bank, Oxford, SUMMARY REPORT BY THE ATTORNEY GENERAL North Carolina (7/31/96) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (7/23/96) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (9/5/96) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $229 million; the tar- (8/2/96) gets have deposits of $18 million. The parties The applicant has assets of $836 million; the target operate in the same market. The banking factors has assets of $60 million. The parties do not and considerations relating to the convenience and operate in the same market. The banking factors needs of the community are consistent with and considerations relating to the convenience and approval. needs of the community are consistent with approval. First Community Bank, Buckhannon, West Virginia to acquire assets and liabilities of the ValliWide Bank, Fresno, California to merge Grafton and Rowlesburg, West Virginia, with The Bank of Commerce, N.A., Auburn, branches of Huntington National Bank of California West Virginia, Charleston, West Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL SUMMARY REPORT BY THE ATTORNEY GENERAL (7/23/96) (8/8/96) 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 (8/21/96) (9/11/96) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

322 83rd Annual Report, 1996 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1996—Continued The applicant has assets of $340 million; the tar- Summit Bank, Hackensack, New Jersey to gets have deposits of $24 million. The parties merge with Central Jersey Savings Bank, SLA, operate in the same market. The banking factors East Brunswick, New Jersey and considerations relating to the convenience and SUMMARY REPORT BY THE ATTORNEY GENERAL needs of the community are consistent with (10/1/96) approval. The proposed transaction would not be significantly adverse to competition. The First Trust & Savings Bank, Aurelia, Iowa BASIS FOR APPROVAL BY THE FEDERAL RESERVE to merge with Cleghorn State Bank, Cleghorn, (10/18/96) Iowa The applicant has assets of $19.6 billion; the target SUMMARY REPORT BY THE ATTORNEY GENERAL has assets of $462 million. The parties operate in (7/31/96) the same market. The banking factors and consid- The proposed transaction would not be signifi- erations relating to the convenience and needs of cantly adverse to competition. the community are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9/13/96) Compass Bank, Jacksonville, Florida to merge The applicant has assets of $18 million; the target with Enterprise National Bank of Jacksonville, has assets of $12 million. The parties operate in Jacksonville, Florida the same markets. The banking factors and considerations relating to the convenience and needs of SUMMARY REPORT BY THE ATTORNEY GENERAL the community are consistent with approval. (10/1/96) The proposed transaction would not be significantly adverse to competition. 1st United Bank, Boca Raton, Florida to merge with First National Bank of Lake Park, BASIS FOR APPROVAL BY THE FEDERAL RESERVE Lake Park, Florida (10/22/96) The applicant has assets of $651 million; the target SUMMARY REPORT BY THE ATTORNEY GENERAL has assets of $159 million. The parties operate in (8/26/96) the same market. The banking factors and consid- The proposed transaction would not be signifierations relating to the convenience and needs of cantly adverse to competition. the community are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (10/17/96) The applicant has assets of $446 million; the target Manufacturers and Traders Trust Company, has assets of $67 million. The parties operate in Buffalo, New York to acquire assets and liabilithe same market. The banking factors and consid- ties of the Ossining and White Plains branches erations relating to the convenience and needs of of GreenPoint Bank, New York, New York the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (10/29/96) Marine Midland Bank, Buffalo, New York to The proposed transaction would not be signifiacquire assets and liabilities of Morgan Guar- cantly adverse to competition. anty Trust Company of New York, New York, BASIS FOR APPROVAL BY THE FEDERAL RESERVE New York (10/30/96) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $10.8 billion; the tar- (10/1/96) gets have assets of $8 million. The parties operate The proposed transaction would not be signifi- in the same market. The banking factors and concantly adverse to competition. siderations relating to the convenience and needs of the community are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (10/18/96) The applicant has assets of $22.6 billion; the target Texas Bank, Weatherford, Texas to acquire has assets of $3.0 billion. The parties operate in assets and liabilities of the Benbrook, Burleson, the same market. The banking factors and consid- Cleburne, Crowley, Glen Rose, Granbury, erations relating to the convenience and needs of Hillsboro, and Weatherford branches of Bank the community are consistent with approval. of America Texas, NA, Irving, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 323 16.—Continued SUMMARY REPORT BY THE ATTORNEY GENERAL operate in the same market. The banking factors (10/29/96) and considerations relating to the convenience and The proposed transaction would not be signifi- needs of the community are consistent with cantly adverse to competition. approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11/20/96) Citizens Banking Co., Sandusky, Ohio to acquire assets and liabilities of three branches of The applicant has assets of $332 million; the tar- EST National Bank, Elyria, Ohio gets have assets of $148 million. The parties operate in the same market. The banking factors and SUMMARY REPORT BY THE ATTORNEY GENERAL considerations relating to the convenience and (11/21/96) needs of the community are consistent with The proposed transaction would not be signifiapproval. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE Summit Bank, Hackensack, New Jersey to (12/24/96) merge with Bank of Mid-Jersey, Bordentown, The applicant has assets of $245 million; the tar- New Jersey gets have assets of $18 million. The parties oper- SUMMARY REPORT BY THE ATTORNEY GENERAL ate in the same market. The banking factors and (11/21/96) considerations relating to the convenience and The proposed transaction would not be signifi- needs of the community are consistent with cantly adverse to competition. approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE Mergers Approved Involving Wholly Owned (12/6/96) Subsidiaries of the Same Bank Holding The applicant has assets of $19.5 billion; the target Company has assets of $650 million. The parties operate in the same market. The banking factors and consid- The following transactions involve banks that are erations relating to the convenience and needs of subsidiaries of the same bank holding company. In each case, the summary report by the Attorney the community are consistent with approval. General indicates that the transaction would not have a significantly adverse effect on competition Tehama County Bank, Red Bluff, California to because the proposed merger is essentially a coracquire assets and liabilities of the Willows and porate reorganization. The Board of Governors, Orland branches of Wells Fargo Bank, N.A., the Federal Reserve Bank, or the Secretary of the San Francisco, California Board of Governors, whichever approved the SUMMARY REPORT BY THE ATTORNEY GENERAL application, determined that the competitive (12/2/96) effects of the proposed transaction, the financial The proposed transaction would not be signifiand managerial resources and prospects of the cantly adverse to competition. banks concerned, as well as the convenience and BASIS FOR APPROVAL BY THE FEDERAL RESERVE needs of the community to be served were consis- (12/11/96) tent with approval. The applicant has assets of $138 million; the targets have assets of $22 million. The parties do not Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

324 83rd Annual Report, 1996 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1996—Continued Assets Date of Institution' (millions approval of dollars) Firstar Bank Minocqua, Minocqua, Wisconsin 96 1-10-96 Merger Firstar Bank Madison, N.A., Madison, Wisconsin 1,100 Firstar Bank Wisconsin, Madison, Wisconsin 1 200 1-10-96 Merger Firstar Bank Wausau, N.A., Wausau, Wisconsin 173 Firstar Bank Grantsburg, N.A., Grantsburg, Wisconsin 128 Firstar Bank Eau Claire, N.A., Eau Claire, Wisconsin 292 Firstar Bank Rice Lake, N.A., Rice Lake, Wisconsin 163 Firstar Bank Manitowoc, Manitowoc, Wisconsin 269 Firstar Bank Oshkosh, N.A., Oshkosh, Wisconsin 322 Firstar Bank Green Bay, Green Bay, Wisconsin 267 Firstar Bank Fond du Lac, N.A., Fond du Lac, Wisconsin 417 Firstar Bank Sheboygan, N.A., Sheboygan, Wisconsin 575 Firstar Bank Appleton, Appleton, Wisconsin 188 Community Bank of Mississippi, Forest, Mississippi 138 1-17-96 Merger Community Bank (3 branches), Indianola, Mississippi 117 Chemical Bank Bay Area, Bay City, Michigan 253 1-22-96 Merger Chemical Bank Huron Standish Michigan 58 Farmers State Bank of Conrad, Conrad, Montana 62 1-24-96 Merger Farmers State Bank of Cut Bank, Cut Bank, Montana 27 Mercantile Bank Overland Park Kansas 608 1-25-96 Merger Mercantile Bank of Kansas City, Kansas City, Missouri 1,158 First Community Bank Glasgow Montana 85 2-1-96 Merger Culbertson State Bank Culbertson Montana 16 Vectra Bank Denver Colorado 313 2-1-96 Merger Vectra Bank of Boulder, Boulder, Colorado 80 First Virginia Bank-Commonwealth, Grafton, Virginia 160 2-29-96 Merger First Virginia Bank of Tidewater (4 branches), Norfolk, Virginia .... 63 Farmers Bank of Maryland, Annapolis, Maryland 590 2-29-96 Merger First Virginia Bank-Maryland (Edgewater branch), Upper Marlboro, Maryland 7 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Tables 325 16.—Continued Assets Date of Institution' (millions approval of dollars) Westamerica Bank, San Rafael, California 2,120 3-8-96 Merger Napa Valley Bank, Napa, California 275 Rocky Mountain Bank, Billings, Mountain 149 3-12-96 Merger Security State Bank, Plenty wood, Montana 63 Citizens Commercial & Savings Bank, Flint, Michigan 2,053 4-11-96 Merger Second National Bank of Saginaw, Saginaw, Michigan 710 National Bank of Royal Oak, Royal Oak, Michigan 175 State Bank of Standish, Standish, Michigan 110 Second National Bank of Bay City, Bay City, Michigan 166 Grayling State Bank, Grayling, Michigan 83 Morgan Guaranty Trust Co. of NY, New York, New York ... 143,400 4-29-96 Merger J.R Morgan Delaware, Wilmington, Delaware 3,000 Signet Bank, Richmond, Virginia 10,700 4-29-96 Merger Signet Bank, N.A., Falls Church, Virginia 640 First Virginia Bank-Shenandoah Valley, Woodstock, Virginia 392 5-23-96 Merger First Virginia Bank-Central, Charlottesville, Virginia 114 West One Bank, Idaho, Boise, Idaho 4,700 6-17-96 Merger U.S. Bank of Idaho, N.A., Coeur d'Alene, Idaho 127 F & M Bank-Hallmark, Springfield, Virginia 126 7-10-96 Merger F & M Bank-Potomac, Herndon, Virginia 63 Fairfax Bank & Trust Company, Fairfax, Virginia 255 California United Bank, Encino, California 7-24-96 Merger 434 California United Bank, NA, Encino, California 381 BancFirst, Oklahoma City, Oklahoma 7-26-96 Merger 1,200 The Bank of Commerce, McLoud, Oklahoma 18 Boulder Valley Bank & Trust, Boulder, Colorado 7-26-96 Merger 72 Mountain Parks Bank-East, Evergreen, Colorado Mountain Parks Bank-West, Breckenridge, Colorado 191 The Bank of Louisville, Louisville, Colorado 157 39 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

326 83rd Annual Report, 1996 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1996—Continued Assets Date of Institution' (millions approval of dollars) Yellowstone Bank, Laurel, Montana 68 8-20-96 Merger Yellowstone Bank, Absarokee, Montana 15 Yellowstone Bank, Billings, Montana 34 Yellowstone Bank, Columbus, Montana 41 Mercantile Bank of Polk County, Des Moines, Iowa ... 327 8-28-96 Merger Mercantile Bank of the Bluffs, Council Bluffs, Iowa ... 83 Mercantile Bank of Boone, Boone, Iowa 103 Mercantile Bank of Centerville, Centerville, Iowa 65 Mercantile Bank of Chariton, Chariton, Iowa 40 Mercantile Bank of Clay County, Spencer, Iowa 49 Mercantile Bank of Humboldt County, Humboldt, Iowa 70 Mercantile Bank of Jasper County, Newton, Iowa 143 Mercantile Bank of Lyon County, Rock Rapids, Iowa .. 45 Mercantile Bank of Marshalltown, Marshalltown, Iowa 68 Mercantile Bank of Mount Ayr, Mount Ary, Iowa 49 Mercantile Bank of Onawa, Onawa, Iowa 42 Mercantile Bank of Osceola County, Sibley, Iowa 36 Mercantile Bank of Pella, Pella, Iowa 99 Crestar Bank MD, Bethesda, Maryland 1,700 9-25-96 Merger Crestar Bank, FSB, Baltimore, Maryland 2,500 Crestar Bank DC, Vienna, Virginia 1,400 9-26-96 Merger Crestar Bank, Richmond, Virginia 14,200 Crestar Bank MD, Bethesda, Maryland 4,200 The Bank of New York, New York, New York 41,559 10-7-96 Merger The Bank of New York, NJ, West Paterson, New Jersey 4,061 The Putnam Trust Company, Greenwich, Connecticut .. 766 First Virginia Bank-Colonial, Richmond, Virginia 736 10-10-96 Merger First Virginia Bank-South Hill, South Hill, Virginia ... 86 Bank of Gainesville, Gainesville, Missouri 82 10-16-96 Merger Douglas County Bank, Ava, Missouri 33 First Knoxville Bank, Knoxville, Tennessee 87 10-25-96 Merger Bank of Madisonville, Madisonville, Tennessee 86 United Southern Bank, Morristown, Tennessee 37 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) Chase Manhattan Bank, New York, New York 261,859 10-28-96 Merger Chase Manhattan Bank, NA, Morristown, New Jersey 5,427 Fifth Third Bank of Kentucky, Inc., Louisville, Kentucky 1,800 11-1-96 Merger Fifth Third Savings Bank of Western Kentucky, F.S.B., Mayfield, Kentucky 254 Fifth Third Bank of Northeastern Ohio, Cleveland, Ohio 2,557 11-1-96 Merger Fifth Third Savings Bank of Northern Ohio, F.S.B., Kent, Ohio 219 Fifth Third Bank of Northern Kentucky, Inc., Florence, Kentucky ... 1,046 11-1-96 Merger Fifth Third Savings Bank of Northern Kentucky, F.S.B., Hebron, Kentucky 201 Kent City State Bank, Kent City, Michigan 87 11-8-96 Merger The Grant State Bank, Grant, Michigan 26 Aliant Bank, Alexander City, Alabama 214 11-15-96 Merger First Montgomery Bank, Montgomery, Alabama . 178 Elmore County Bank, Wetumpka, Alabama 64 Mercantile Bank of Lawrence, Lawrence, Kansas 258 12-2-96 Merger Mercantile Bank, Overland Park, Kansas 1,700 FCNB Bank, Frederick, Maryland . 521 12-11-96 Merger Elkridge Bank, Elkridge, Maryland 219 1. Each proposed transaction was to be effected under include the acquisition of certain assets and liabilities of the charter of the first-named bank. The entries are in the affiliated bank, chronological order of approval. Some transactions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

328 83rd Annual Report, 1996 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1996—Continued Mergers Approved Involving a Nonoperating the surviving bank by the holding company, the Institution with an Existing Bank merger would have no effect on competition. The The following transactions have no significant Board of Governors, the Federal Reserve Bank, or effect on competition; they merely 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 Adams Bank & Trust Company, Ogallala, Nebraska 160 1-17-96 Merger Adams Savings & Loan Association of Grant, Chappell, Nebraska ... Adams Bank & Trust Company, Ogallala, Nebraska . 160 1-18-96 Merger Adams Savings & Loan Association of North Platte, Chappell, Nebraska Mercantile Bank of Jackson County, Kansas City, Missouri 1-25-96 Merger Mercantile Bank of Kansas City, Kansas City, Missouri .... 1,158 Bank of Isle of Wight, Smithfield, Virginia 34 2-8-96 Merger BIW Acquisition Bank, Suffolk, Virginia .. Bank of Tazewell County, Tazewell, Virginia 177 4-24-96 Merger NBI Interim Bank, Blacksburg, Virginia Citizens Acquisition Subsidiary, Inc., Tazewell, Virginia 5-22-96 Merger Citizens Bank of Tazewell, Tazewell, Virginia 49 Adams Bank & Trust Company, Ogallala, Nebraska 160 5-29-96 Merger Adams Savings & Loan Association of Chappell, Chappell, Nebraska. BH Acquisition Subsidiary, Inc., Mechanicsville, Virginia 9-13-96 Merger Hanover Bank, Mechanicsville, Virginia 99 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

330 83rd Annual Report, 1996 Board of Governors of the Federal Reserve System December 31,1996 Members Term expires January 31, ALAN GREENSPAN, of New York, Chairmanx 2006 ALICE M. RlVLlN, of Pennsylvania, Vice Chair1 .. 2010 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 LAURENCE H. MEYER, of Missouri 2002 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 staff Director £dwin M Tmman) Winthrop P. Hambley, Special Assistant ~ . , . T T c to the Board Larry J. Promisel, Steiwor ^. ^ . , , . Associate Director TT7 f o Diane E. Werneke, Special Assistant ^, , . . T o o to the Board Charles J. Siegman, 5em r O Associate Director Portia W. Thompson, Equal Employment , „, „ , , . ~. n Opportunity Programs Adviser Dale W" Henderson> Associate Director 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 m Assistant Director Scott G. Alvarez, Associate General Kafen H Joh Assistant Director Counsel _ . ' ^. f T mjr n- u ,1 A* A L+ A • . Catherine L. Mann, Assistant Director Richard M. Ashton, Associate , ., ' . ^. n t XTr o T General Counsel RalPh W- Smith' Jr" Assistant Director Oliver Ireland, Associate General Counsel DIVISION OF MONETARY AFFAIRS Kathleen M. O'Day, Associate General Donald L. Kohn, Director Counsel David E. Lindsey, Deputy Director Brian R Madigan' Associate Director „ . . ,, . . „ , Richard D. Porter, Deputy Associate Kathenn e THT. Wruheatl ey, AAssistant General Director Vincent R. Reinhart, Assistant Director Normand R.V. Bernard, Special Assistant to the Board 1. The designations as Chairman and Vice Chair expire on June 20, 2000, and June 24, 2000, respectively, unless the service of these members of the Board shall Digitized hfaovre FteRrmAiSnaEteRd sooner. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 331 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 David S. Jones, Assistant Director Jack Dennis, Jr., Assistant Director Stephen A. Rhoades, Assistant Director Earl G. Hamilton, Assistant Director Charles S. Struckmeyer, Assistant Director Jeffrey C. Marquardt, Assistant Director Alice Patricia White, Assistant Director John H. Parrish, Assistant Director Joyce K. Zickler, Assistant Director Florence M. Young, Assistant Director John J. Mingo, Senior Adviser Glenn B. Canner, Adviser OFFICE OF STAFF DIRECTOR FOR MANAGEMENT DIVISION OF BANKING SUPERVISION S. David Frost, Staff Director AND REGULATION Sheila Clark, Equal Employment Richard Spillenkothen, Director Opportunity Programs Director Stephen C. Schemering, Deputy Director William A. Ryback, Associate Director OFFICE OF THE CONTROLLER Herbert A. Biern, Deputy Associate George E. Livingston, Controller Director Stephen J. Clark, Assistant Controller Roger T. Cole, Deputy Associate Director (Programs and Budgets) James I. Garner, Deputy Associate Director Darrell R. Pauley, Assistant Controller Howard A. Amer, Assistant Director (Finance) Gerald A. Edwards, Jr., Assistant Director Stephen M. Hoffman, Jr., Assistant DIVISION OF HUMAN Director RESOURCES MANAGEMENT James V. Houpt, Jr., Assistant Director David L. Shannon, Director Jack P. Jennings, Assistant Director John R. Weis, Associate Director Michael G. Martinson, Assistant Director Joseph H. Hayes, Jr., Assistant Director Rhoger H Pugh, Assistant Director Fred Horowitz, Assistant Director Sidney M. Sussan, Assistant Director Molly S. Wassom, Assistant Director William C. Schneider, Jr., Project Director, National Information Center Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

332 83rd Annual Report, 1996 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 OFFICE OF THE INSPECTOR GENERAL Edward T. Mulrenin, Assistant Director Brent L. Bowen, Inspector General Day W. Radebaugh, Jr., Assistant Director Donald L. Robinson, Assistant Inspector Elizabeth B. Riggs, Assistant Director General Richard C. Stevens, Assistant Director Barry R. Snyder, Assistant Inspector General Federal Open Market Committee December 31,1996 Members ALAN GREENSPAN, Chairman, Board of Governors WILLIAM J. McDoNOUGH, Vice Chairman, President, Federal Reserve Bank of New York EDWARD G. BOEHNE, President, Federal Reserve Bank of Philadelphia JERRY L. JORDAN, President, Federal Reserve Bank of Cleveland EDWARD W. KELLEY, JR., Board of Governors LAWRENCE B. LlNDSEY, Board of Governors ROBERT D. McTEER, JR., President, Federal Reserve Bank of Dallas LAURENCE H. MEYER, Board of Governors SUSAN M. PHILLIPS, Board of Governors ALICE M. RIVLIN, Board of Governors GARY H. STERN, President, Federal Reserve Bank of Minneapolis JANET L. YELLEN, Board of Governors Alternate Members J. ALFRED BROADDUS, JR., President, Federal Reserve Bank of Richmond JACK GUYNN, President, Federal Reserve Bank of Atlanta MICHAEL H. MOSKOW, President, Federal Reserve Bank of Chicago ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco ERNEST T. PATRIKIS, First Vice President, Federal Reserve Bank of New York Officers DONALD L. KOHN, J. VIRGIL MATTINGLY, JR., Secretary and Economist General Counsel NORMAND R.V BERNARD, THOMAS C. BAXTER, JR., Deputy Secretary Deputy General Counsel JOSEPH R. COYNE, MICHAEL J. PRELL, Assistant Secretary Economist GARY P. GILLUM, EDWIN M. TRUMAN, Assistant Secretary Economist Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 333 Federal Open Market Committee—Continued RICHARD W. LANG, HARVEY ROSENBLUM, Associate Economist Associate Economist DAVID E. LINDSEY, CHARLES J. SIEGMAN, Associate Economist Associate Economist FREDERIC S. MISHKIN, THOMAS D. SIMPSON, Associate Economist Associate Economist LARRY J. PROMISEL, MARK S. SNIDERMAN, Associate Economist Associate Economist ARTHUR J. ROLNICK, DAVID J. STOCKTON, Associate Economist Associate Economist PETER R. FISHER, Manager, System Open Market Account During 1996 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 31,1996 Members District 1—WILLIAM M. CROZIER, JR., Chairman of the Board, Bank of Boston Corporation, Boston, Massachusetts District 2—WALTER V. SHIPLEY, Chairman and Chief Executive Officer, The Chase Manhattan Corporation, New York, New York District 3—WALTER E. DALLER, JR., Chairman, President, and Chief Executive Officer, Harleysville National Bank and Trust Company, Harleysville, Pennsylvania District 4—FRANK V. CAHOUET, Chairman, President, and Chief Executive Officer, 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—THOMAS H. JACOBSEN, Chairman, President, and Chief Executive Officer, Mercantile Bancorporation 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 T. DOYLE, Chairman and Chief Executive Officer, Texas First Bank - Texas City, Texas City, Texas District 12—WILLIAM F. ZUENDT, President, Wells Fargo & Company, San Francisco, California Officers RICHARD G. TILGHMAN, President FRANK V. CAHOUET, Vice President HERBERT V. PROCHNOW, Secretary Emeritus Digitized for FRASER JAMES E. ANNABLE, Co-Secretary http://fraser.stlouisfed.org/ WILLIAM J. KORSVIK, Co-Secretary Federal Reserve Bank of St. Louis

334 83rd Annual Report, 1996 Federal Advisory Council—Continued Directors ROGER L. FITZSIMONDS RICHARD M. KOVACEVICH CHARLES E. NELSON The Federal Advisory Council met on Feb- from each of the twelve Federal Reserve ruary 1-2, May 2-3, September 5-6, and Districts, is required by law to meet in Wash- November 7-8, 1996. 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 2, May 3, September 6, and Novem- consult with, and advise, the Board on all ber 8, 1996. The council, which is composed matters within the jurisdiction of the Board, of one representative of the banking industry Consumer Advisory Council December 31,1996 Members RICHARD S. AMADOR, President and Chief Executive Officer, CHARO Community Development Corporation, Los Angeles, California THOMAS R. BUTLER, President and Chief Operating Officer, NOVUS Services, Inc., Riverwoods, Illinois ROBERT A. COOK, Partner, Hudson Cook, LLP, Crofton, Maryland ALVIN J. COWANS, President and Chief Executive Officer, McCoy Federal Credit Union, Orlando, Florida ELIZABETH G. FLORES, Consultant, Laredo, Texas HERIBERTO FLORES, President and Chief Executive Officer, Brightwood Development Corporation, Springfield, Massachusetts EMANUEL FREEMAN, President, Greater Germantown Housing Development Corporation, Philadelphia, Pennsylvania DAVID C. FYNN, Senior Vice President, National City Bank, Regulatory Risk Manager, National City Corporation, Cleveland, Ohio ROBERT G. GREER, Chairman of the Board, Bank of Tanglewood, 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 TERRY JORDE, President and Chief Executive Officer, Towner County State Bank, Cando, North Dakota FRANCINE C. JUSTA, Executive Director, Neighborhood Housing Services of New York, New York, New York EUGENE I. LEHRMANN, Immediate Past President, American Association of Retired Persons, Madison, Wisconsin ERROL T. LOUIS, Treasurer and Manager, Central Brooklyn Federal Credit Union, Brooklyn, New York WILLIAM N. LUND, Director, Office of Consumer Credit Regulation, State of Maine, Augusta, Maine RONALD A. PRILL, Vice President, Credit, Dayton Hudson Corporation, Minneapolis, Digitized forM FiRnnAeSsEotRa http://frasLeISr.As tlRoIuCisEf,e dE.xoercgu/ tive Director, Fair Housing Center, Toledo, Ohio Federal RJOeHseNr vRe. BRaInNkE oSf, SPtr.e Lsoidueisnt, General Motors Acceptance Corporation, Detroit, Michigan

Directories and Meetings 335 Consumer Advisory Council—Continued MARGOT SAUNDERS, Managing Attorney, National Consumer Law Center, Washington, D.C ANNE B. SHLAY, Associate Director, Institute for Public Policy Studies, Temple University, Philadelphia, Pennsylvania REGINALD J. SMITH, Vice Chairman and Chief Executive Officer, United Missouri Bank Mortgage Company, Kansas City, Missouri GREGORY D. SQUIRES, Professor of Sociology, University of Wisconsin-Milwaukee, Milwaukee, Wisconsin GEORGE P. SURGEON, Chief Financial Officer and Executive Vice President, Shorebank Corporation, Chicago, Illinois 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 THEODORE J. WYSOCKI, JR., Executive Director, CANDO, Chicago, Illinois LILY K. YAO, Chair and Chief Executive Officer, Pioneer Federal Savings Bank, Honolulu, Hawaii Officers KATHARINE W. MCKEE, Chair JULIA W. SEWARD, Vice Chair Associate Director, Vice President and Corporate Center for Community Self-Help, Community Reinvestment Officer, Durham, North Carolina Signet Banking Corporation, Richmond, Virginia 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 28, June 27, and October 24, 1996. 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 31,1996 Members E. LEE BEARD, President and Chief Executive Officer, First Federal Savings and Loan Association of Hazleton, Hazleton, Pennsylvania BARRY C. BURKHOLDER, President and Chief Executive Officer, Bank United of Texas FSB, Houston, Texas MICHAEL T. CROWLEY, JR., President and Chief Executive Officer, Mutual Savings Bank, Milwaukee, Wisconsin GEORGE L. ENGELKE, JR., President and Chief Executive Officer, Astoria Federal Savings and Loan Association, Lake Success, New York DOUGLAS A. FERRARO, President and Chief Executive Officer, Bellco First Federal Credit Union, Englewood, Colorado BEVERLY D. HARRIS, President, Empire Federal Savings and Loan Association, Livingston, Montana Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

336 83rd Annual Report, 1996 Thrift Institutions Advisory Council—Continued DAVID F. HOLLAND, Chairman, President, and Chief Executive Officer, Boston Federal Savings Bank, Burlington, Massachusetts CHARLES R. RINEHART, Chairman and Chief Executive Officer, Home Savings of America, FSB, Irwindale, California JOSEPH C. SCULLY, Chairman and Chief Executive Officer, St. Paul Federal Bank for Savings, Chicago, Illinois 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 E. LEE BEARD, President DAVID F. HOLLAND, 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 1, June 28, Septem- advises, the Board on issues pertaining to the ber 27, and December 6, 1996. 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 31,1996 Chairman1 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 John C. Whitehead William J. McDonough Thomas W. Jones Ernest T. Patrikis Buffalo Joseph J. Castiglia Carl W. Turnipseed3 PHILADELPHIA Donald J. Kennedy Edward G. Boehne Joan Carter 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 John T. Ryan III Harold J. Swart3 RICHMOND2 Claudine B. Malone J. Alfred Broaddus, Jr. Robert L. Strickland Walter A. Varvel Baltimore Michael R. Watson William J. Tignanelli3 Charlotte James O. Roberson Dan M. Bechter3 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 337 Officers of Federal Reserve Banks and Branches- Continued Chairmanl President Vice President BANK or Branch Deputy Chairman First Vice President in charge of Branch ATLANTA Hugh M. Brown Jack Guynn James M. McKee Daniel E. Sweat, Jr. Patrick K. Barron Birmingham Donald E. Boomershine FredR. Herr3 Jacksonville Joan Dial Ruffier James D. Hawkins3 Miami R. Kirk Landon James T. Curry III Nashville Paula Lovell Melvyn K. Purcell New Orleans Lucimarian Roberts Robert J. Musso CHICAGO2 Robert M. Healey Michael H. Moskow Lester H. William C. Conrad McKeever, Jr. Detroit Florine Mark David R. Allardice3 ST. LOUIS John F. McDonnell Thomas C. Melzer Susan S. Elliott W. Legrande Rives Little Rock .... Janet M. Jones Robert A. Hopkins Louisville John A. Williams Thomas A. Boone John V. Myers John P. Baumgartner Memphis Jean D. Kinsey Gary H. Stern MINNEAPOLIS David A. Koch Colleen K. Strand Lane W. Basso John D. Johnson Helena A. Drue Jennings Thomas M. Hoenig KANSAS CITY Jo Marie Dancik Richard K. Rasdall Peter I. Wold CarlM. Gambs3 Denver Barry L. Eller Kelly J. Dubbert Oklahoma City LeRoy W. Thorn Bradley C. Cloverdyke Omaha Cece Smith Robert D. McTeer, Jr. DALLAS Roger R. Helen E. Holcomb Hemminghaus El Paso Patricia Z. Holland-Branch Sammie C. Clay Houston Isaac H. Kempner III Robert Smith III3 San Antonio Carol L. Thompson James L.Stull3 SAN FRANCISCO Judith M. Runstad Robert T. Parry James A. Vohs John F. Moore Los Angeles Anita E. Landecker Mark L. Mullinix3 Portland Ross R. Runkel Raymond H. Laurence3 Salt Lake City Gerald R. Sherratt Andrea P. Wolcott Seattle George F. Russell, Jr. Gordon R. G. Werkema4 NOTE. A current list of these officers appears each Oriskany, New York; East Rutherford New Jersey; month in the Federal Reserve Bulletin. Columbus, Ohio; Charleston, West Virginia; Columbia, 1. The Chairman of a Federal Reserve Bank serves, by South Carolina; Indianapolis, Indiana; Milwaukee, statute, as Federal Reserve Agent. Wisconsin; Des 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

338 83rd Annual Report, 1996 Conference of Chairmen served as its vice chair. Martha Maher, of the as its secretary and Niel D. Willardson, of The chairmen of the Federal Reserve Banks the Federal Reserve Bank of Minneapolis, are organized into the Conference of Chair- served as its assistant secretary. men, which meets to consider matters of common interest and to consult with, and advise, the Board of Governors. Such meet- Directors ings, attended also by the deputy chairmen, were held in Washington on May 29 and 30, The following list of directors of Federal and on December 4 and 5, 1996. Reserve Banks and Branches shows for each The members of the Executive Commit- director the class of directorship, the directee of the Conference of Chairmen during tor's principal organizational affiliation, and 1996 were Cece Smith, chair; A. William the date the director's term expires. Each Reynolds, vice chairman; and John F. Federal Reserve Bank has a nine-member McDonnell, member. board: three Class A and three Class B directors, who are elected by the member com- On December 5, 1996, the conference mercial banks, and three Class C directors, elected its Executive Committee for 1997; who are appointed by the Board of Goverit named Judith M. Runstad as chair, John F. nors of the Federal Reserve System. McDonnell as vice chairman, and Donald J. Kennedy as the third member. Class A directors represent the member banks in each Federal Reserve District. Conference of Presidents Class B and Class C directors represent the public and are chosen with due, but not The presidents of the Federal Reserve Banks exclusive, consideration to the interests of are organized into the Conference of Presiagriculture, commerce, industry, services, dents, which meets periodically to consider labor, and consumers; they may not be offimatters of common interest and to consult cers, directors, or employees of any bank or with, and advise, the Board of Governors. bank holding company. In addition, Class C Robert D. McTeer, President of the Feddirectors may not be stockholders of any eral Reserve Bank of Dallas, served as chairbank or bank holding company. man of the conference in 1996, and Thomas For the election of Class A and Class B M. Hoenig, President of the Federal Reserve directors, the Board of Governors classifies Bank of Kansas City, served as its vice chairthe member banks of each Federal Reserve man. Helen E. Holcomb, of the Federal District into three groups. Each group, which Reserve Bank of Dallas, served as its seccomprises banks with similar capitalization, retary. Esther L. George, of the Federal elects one Class A director and one Class B Reserve Bank of Kansas City, served as its director. Annually, the Board of Governors assistant secretary. designates one of the Class C directors as On December 5, 1996, the conference chairman of the board and Federal Reserve elected Thomas M. Hoenig as its chairman Agent of each District Bank, and it desigfor 1997 and Jerry L. Jordan, President of nates another Class C director as deputy the Federal Reserve Bank of Cleveland, as chairman. its vice chairman. Federal Reserve Branches have either five Conference of First or seven directors, a majority of whom are Vice Presidents appointed by the parent Federal Reserve Bank; the others are appointed by the Board The Conference of First Vice Presidents of of Governors. One of the directors appointed the Federal Reserve Banks was organized in by the Board is designated annually as chair- 1969 to meet periodically for the consider- man of the board of that Branch in a manner ation of operations and other matters. prescribed by the parent Federal Reserve Sandra Pianalto, First Vice President of Bank. the Federal Reserve Bank of Cleveland, For the name of the chairman and deputy served as chair of the conference in 1996, chairman of the board of directors of each Federal Reserve Bank of Cleveland, served Reserve Bank and of the chairman of each Digitized afnodr FCRoAllSeEenR K. Strand, First Vice President Branch, see the preceding table, "Officers http://fraser.stlouisfed.org/ of the Federal Reserve Bank of Minneapolis, of Federal Reserve Banks and Branches." Federal Reserve Bank of St. Louis

Directories and Meetings 339 Term expires Dec. 31 DISTRICT l—BOSTON Class A G. Kenneth Perine President and Chief Executive Officer, National 1996 Bank of Middlebury, Middlebury, Vermont Jane C. Walsh President, Northmark Bank, 1997 North Andover, Massachusetts Marshall N. Carter Chairman and Chief Executive Officer, 1998 State Street Bank and Trust Company, Boston, Massachusetts Class B 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 Robert R. Glauber Adjunct Lecturer, John F. Kennedy School of 1998 Government, Harvard University, Cambridge, Massachusetts Class C John E. Flynn Executive Director, The Quality Connection, 1996 East Dennis, Massachusetts Jerome H. Grossman, M.D.. .Chairman and Chief Executive Officer, 1997 Health Quality, LLC, Boston, Massachusetts William C. Brainard Chairman, Department of Economics, 1998 Yale University, New Haven, Connecticut DISTRICT 2—NEW YORK Class A 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 Robert G. Wilmers Chairman, President, and Chief Executive 1998 Officer, Manufacturers and Traders Trust Company, Buffalo, New York Class B Ann M. Fudge President, Maxwell House Coffee Company, 1996 White Plains, New York Eugene R. McGrath Chief Executive Officer, Consolidated Edison 1997 Company of New York, Inc., New York, New York William C. Steere, Jr Chairman and Chief Executive Officer, 1998 Pfizer Inc., New York, New York Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

340 83rd Annual Report, 1996 Term expires Dec. 31 DISTRICT 2, NEW YORK—Continued Class C John C. Whitehead Chairman, AEA Investors Inc., New York, New York 1996 Thomas W. Jones Vice Chairman, President, and Chief Operating 1997 Officer, Teachers Insurance and Annuity Association-College Retirement Equities Fund, New York, New York Peter G. Peterson Chairman, The Blackstone Group, 1998 New York, New York BUFFALO BRANCH Appointed by the Federal Reserve Bank Louise Woerner Chairman and Chief Executive Officer, HCR, 1996 Rochester, New York William E. Swan President and Chief Executive Officer, 1997 Lockport Savings Bank, Lockport, New York Mark W. Adams Owner and Operator, Adams Poultry Farm, 1997 Naples, New York Kathleen R. Whelehan Regional President, Rochester Southern Region, 1998 Marine Midland Bank, Rochester, New York Appointed by the Board of Governors Joseph J. Castiglia Former Vice Chairman, President, and Chief 1996 Executive Officer, Pratt & Lambert United, Inc., Buffalo, New York Louis J. Thomas Director, District 4, United Steelworkers of 1997 America, Buffalo, New York Bal Dixit President and Chief Executive Officer, 1998 Newtex Industries, Inc., Victor, New York DISTRICT 3—PHILADELPHIA Class A 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 Albert B. Murry .President and Chief Executive Officer, 1998 Lebanon Valley National Bank, Lebanon, Pennsylvania Class B J. Richard Jones President and Chief Executive Officer, 1996 Jackson-Cross Company, Philadelphia, Pennsylvania Robert D. Bums President and Chief Executive Officer, 1997 Burns Foods, Inc., Milford, Delaware Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 341 Term expires Dec. 31 DISTRICT 3, Class B—Continued Howard E. Cosgrove Chairman, President, and Chief Executive 1998 Officer, Delmarva Power and Light Company, Wilmington, Delaware Class C Joan Carter President and Chief Operating Officer, 1996 UM Holdings Ltd., Haddonfield, New Jersey Donald J. Kennedy Business Manager, International Brotherhood of 1997 Electrical Workers, Local Union No. 269, Trenton, New Jersey Charisse R. Lillie Partner, Ballard, Spahr, Andrews & Ingersoll, 1998 Philadelphia, Pennsylvania DISTRICT 4—CLEVELAND Class A 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 David A. Daberko Chairman and Chief Executive Officer, 1998 National City Corporation, Cleveland, Ohio Class B Thomas M. Nies President, Cincom Systems, Inc., Cincinnati, Ohio 1996 Michele Tolela Myers President, Denison University, Granville, Ohio 1997 I. N. Rendall Harper, Jr. President and Chief Executive Officer, 1998 American Micrographics Company, Inc., Monroeville, Pennsylvania Class C 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 A. William Reynolds Chief Executive, Old Mill Group, Hudson, Ohio 1998 CINCINNATI BRANCH Appointed by the Federal Reserve Bank Judith G. Clabes President and Chief Executive Officer, 1996 Scripps Howard Foundation, Cincinnati, Ohio Phillip R. Cox President, Cox Financial Corporation, 1996 Cincinnati, Ohio Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

342 83rd Annual Report, 1996 Term expires Dec. 31 DISTRICT 4, CINCINNATI BRANCH Appointed by the Federal Reserve Bank—Continued Jerry A. Grundhofer Chairman, President, and Chief Executive 1997 Officer, Star Bane Corporation, Cincinnati, Ohio Jean R. Hale President and Chief Executive Officer, Pikeville 1998 National Bank & Trust, Pikeville, Kentucky Appointed by the Board of Governors 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 Thomas Revely III President and Chief Executive Officer, 1998 Cincinnati Bell Supply Co., Cincinnati, Ohio PITTSBURGH BRANCH Appointed by the Federal Reserve Bank Randall L. C. Russell President and Chief Executive Officer, Ranbar 1996 Technology, Inc., Glenshaw, Pennsylvania Vacancy 1996 Thomas J. O' Shane Chairman, President, and Chief Executive 1997 Officer, First Western Bancorp, Inc., New Castle, Pennsylvania Edward V. Randall, Jr. President and CEO/Pittsburgh, PNC Bank, NA, 1998 Pittsburgh, Pennsylvania Appointed by the Board of Governors Sandra L. Phillips Executive Director, Pittsburgh Partnership for 1996 Neighborhood Development, Pittsburgh, Pennsylvania John T. Ryan III Chairman, President, and Chief Executive 1997 Officer, Mine Safety Appliances Company, Pittsburgh, Pennsylvania Gretchen R. Haggerty Vice President and Treasurer, USX Corporation, 1998 Pittsburgh, Pennsylvania DISTRICT 5—RICHMOND Class A Robert M. Freeman Chairman, Signet Banking Corporation, 1996 Richmond, Virginia Philip L. McLaughlin President, Horizon Bancorp, Inc., 1997 Greenbrier Valley National Bank, Lewisburg, West Virginia George A. Didden III Chairman and Chief Executive Officer, 1998 The National Capital Bank of Washington, Washington, D.C. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 343 Term expires Dec. 31 DISTRICT 5, RICHMOND—Continued Class B 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 Craig A. Ruppert President and Owner, The Ruppert Companies, 1998 Ashton, Maryland Class C Stephen Brobeck Executive Director, Consumer Federation of 1996 America, Washington, D.C. Claudine B. Malone President, Financial & Management 1997 Consulting, Inc., McLean, Virginia Robert L. Strickland Chairman, Lowe's Companies, Inc., 1998 Winston-Salem, North Carolina BALTIMORE BRANCH Appointed by the Federal Reserve Bank Morton I. Rapoport, M.D. ...President and Chief Executive Officer, 1996 University of Maryland Medical System, Baltimore, Maryland Thomas J. Hughes Second Vice Chairman, Navy Federal Credit 1997 Union, Merrifield, Virginia F. Levi Ruark Chairman, President, and Chief Executive Officer, 1997 The National Bank of Cambridge, Cambridge, Maryland Jeremiah E. Casey Chairman, First Maryland Bancorp, 1998 Baltimore, Maryland Appointed by the Board of Governors 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 Daniel R. Baker President and Chief Executive Officer, 1998 Tate Access Floors, Inc., Jessup, Maryland CHARLOTTE BRANCH Appointed by the Federal Reserve Bank 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

344 83rd Annual Report, 1996 Term expires Dec. 31 DISTRICT 5, CHARLOTTE BRANCH Appointed by the Federal Reserve Bank—Continued J. Walter McDowell President and Chief Executive Officer, 1997 Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina William G. Stevens President and Chief Executive Officer, 1998 Greenwood Bank & Trust, Greenwood, South Carolina Appointed by the Board of Governors Dennis D. Lowery Chairman and Chief Executive Officer, 1996 Continental Industrial Chemicals, Inc., Charlotte, North Carolina Joan H. Zimmerman President, Southern Shows, Inc., 1997 Charlotte, North Carolina James O. Roberson President, Research Triangle Foundation of 1998 North Carolina, Research Triangle Park, North Carolina DISTRICT 6—ATLANTA Class A 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 Waymon L. Hickman Chairman and Chief Executive Officer, First 1998 Farmers and Merchants National Bank, Columbia, Tennessee Class B 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 Larry W. Kinderman President and Chief Executive Officer, 1998 Stockham Valves & Fittings, Inc., Birmingham, Alabama Class C 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 David R. Jones President and Chief Executive Officer, 1998 AGL Resources, Inc., Atlanta, Georgia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 345 Term expires Dec. 31 DISTRICT 6, ATLANTA—Continued BIRMINGHAM BRANCH Appointed by the Federal Reserve Bank Julian W. Banton Chairman, President, and Chief Executive 1996 Officer, SouthTrust Bank of Alabama, NA, Birmingham, Alabama Marlin D. Moore, Jr. Chairman, Pritchett-Moore, Inc., 1997 Tuscaloosa, Alabama Columbus Sanders President, Consolidated Industries, Inc., 1997 Huntsville, Alabama J. Stephen Nelson Chairman and Chief Executive Officer, 1998 First National Bank of Brewton, Brewton, Alabama Appointed by the Board of Governors Donald E. Boomershine President, The Better Business Bureau, Inc., 1996 Birmingham, Alabama D. Bruce Carr International Representative, Laborers' 1997 International Union of North America, Gadsden, Alabama Patricia B. Compton President, Patco, Inc., Georgiana, Alabama 1998 JACKSONVILLE BRANCH Appointed by the Federal Reserve Bank William G. Smith, Jr. President and Chief Executive Officer, Capital 1996 City Bank Group, Tallahassee, Florida Terry R. West Chief Executive Officer, Jax Navy Federal 1997 Credit Union, Jacksonville, Florida Arnold A. Heggestad Chester Holloway Professor of Finance and 1997 Director of Entrepreneurial Programs, University of Florida, Gainesville, Florida Royce B. Walden Vice President, SouthTrust Securities, 1998 Orlando, Florida Appointed by the Board of Governors Joan D. Ruffier General Partner, Sunshine Cafes, Orlando, Florida 1996 Patrick C. Kelly Chairman and Chief Executive Officer, 1997 Physician Sales & Service, Inc., Jacksonville, Florida Judy R. Jones President, J. R. Jones and Associates, 1998 Tallahassee, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

346 83rd Annual Report, 1996 Term expires Dec. 31 DISTRICT 6, ATLANTA—Continued MIAMI BRANCH Appointed by the Federal Reserve Bank Pat L. Tornillo, Jr Executive Vice President, United Teachers 1996 of Dade, Miami, Florida Steven C. Shimp President, O-A-K/Florida, Inc., 1996 Fort Myers, Florida Carlos A. Migoya South Florida Regional President, First Union 1997 National Bank of Florida, Miami, Florida E. Anthony Newton President and Chief Executive Officer, 1998 Island National Bank and Trust Company, Palm Beach, Florida Appointed by the Board of Governors Michael T. Wilson President, Vinegar Bend Farms, Inc., 1996 Belle Glade, Florida Kaaren Johnson-Street Vice President of Minority Business 1997 Development, Enterprise Florida, Miami, Florida R. Kirk Landon Chairman, American Bankers Insurance Group, 1998 Miami, Florida NASHVILLE BRANCH Appointed by the Federal Reserve Bank Williams E. Arant, Jr. Chairman, First Knoxville Bank, 1996 Knoxville, Tennessee Jack J. Vaughn President, Hospitality & Attractions Group, 1997 Gaylord Entertainment Company, Nashville, Tennessee John E. Seward, Jr. President and Chief Executive Officer, Paty 1997 Lumber Co., Inc., Piney Flats, Tennessee Dale W. Polley President, First American National Bank, 1998 Nashville, Tennessee Appointed by the Board of Governors 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 Frances F. Marcum Chairman and Chief Executive Officer, Micro 1998 Craft, Inc., Tullahoma, Tennessee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 347 Term expires Dec. 31 DISTRICT 6, ATLANTA—Continued NEW ORLEANS BRANCH Appointed by the Federal Reserve Bank Howard C. Gaines Chairman, First National Bank of Commerce, 1996 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 Howell N. Gage Chairman and Chief Executive Officer, 1998 Merchants Bank, Vicksburg, Mississippi Appointed by the Board of Governors 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 Lucimarian Roberts President, Mississippi Coast Coliseum 1998 Commission, Biloxi, Mississippi DISTRICT 7—CHICAGO Class A David W. Fox Chairman and Chief Executive Officer (Retired), 1996 Northern Trust Corporation, Chicago, Illinois Stefan S. Anderson Chairman, President, and Chief Executive Officer, 1997 First Merchants Corporation, Muncie, Indiana Arnold C. Schultz Chairman, President, and Chief Executive Officer, 1998 Grundy National Bank, Grundy Center, Iowa Class B 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 Donald J. Schneider President, Schneider National, Inc., 1998 Green Bay, Wisconsin Class C Robert M. Healey Member, Illinois State Labor Relations Board, 1996 Chicago, Illinois Lester H. McKeever, Jr Managing Partner, Washington, Pittman & 1997 McKeever, Chicago, Illinois Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

348 83rd Annual Report, 1996 Term expires Dec. 31 DISTRICT 7, Class C—Continued Arthur C. Martinez Chairman and Chief Executive Officer, Sears 1998 Roebuck and Co., Hoffman Estates, Illinois DETROIT BRANCH Appointed by the Federal Reserve Bank William E. Odom Chairman and Chief Executive Officer, Ford 1996 Motor Credit Company, Dearborn, Michigan Charles E. Allen President and Chief Executive Officer, Graimark 1996 Realty Advisors, Inc., Detroit, Michigan Charles R. Weeks Chairman and Chief Executive Officer, Citizens 1997 Banking Corporation, Flint, Michigan Richard M. Bell President and Chief Executive Officer, 1998 The First National Bank of Three Rivers, Three Rivers, Michigan Appointed by the Board of Governors Florine Mark President and Chief Executive Officer, 1996 The WW Group, Inc., Farmington Hills, Michigan Timothy D. Leuliette President and Chief Operating Officer, 1997 Penske Corporation, Detroit, Michigan Stephen R. Polk Chairman and Chief Executive Officer, 1998 R. L. Polk & Co., Detroit, Michigan DISTRICT 8—ST. LOUIS Class A W. D. Glover Chairman and Chief Executive Officer, 1996 First 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 Douglas M. Lester Chairman and Chief Executive Officer, 1998 Sea Change Corp., Bowling Green, Kentucky Class B 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 Richard E. Bell President and Chief Executive Officer, 1998 Riceland Foods, Inc., Stuttgart, Arkansas Class C Veo Peoples, Jr. Partner, Peoples & Hale, St. Louis, Missouri 1996 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 349 Term expires Dec. 31 DISTRICT 8, Class C—Continued Susan S. Elliott President and Chief Executive Officer, Systems 1997 Service Enterprises, Inc., St. Louis, Missouri John F. McDonnell Chairman, McDonnell Douglas Corporation, 1998 St. Louis, Missouri LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank Lee Frazier President, Trinity Healthcare, 1996 Little Rock, Arkansas 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 Mark A. Shelton III President, M. A. Shelton Farming Company, 1998 Wabbaseka, Arkansas Appointed by the Board of Governors 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 Betta M. Carney Chairman and Chief Executive Officer, World 1998 Wide Travel Service, Inc., Little Rock, Arkansas LOUISVILLE BRANCH Appointed by the Federal Reserve Bank Charles D. Storms President and Chief Executive Officer, 1996 Red Spot Paint and Varnish Company, Inc., Evansville, Indiana Robert M. Hall Owner, East Fork Growers Farm, Seymour, Indiana 1996 Thomas E. Spragens, Jr President, Farmers National Bank, 1997 Lebanon, Kentucky Orson Oliver President, Mid-America Bank of Louisville & 1998 Trust Co., Louisville, Kentucky Appointed by the Board of Governors John A. Williams Chairman and Chief Executive Officer, 1996 Computer Services, Inc., Paducah, Kentucky Debbie Scoppechio Chairman, President, and Chief Executive 1997 Officer, Creative Alliance, Inc., Louisville, Kentucky Roger Reynolds President and Chief Executive Officer, Material 1998 Resource Planners, Inc., Louisville, Kentucky Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

350 83rd Annual Report, 1996 Term expires Dec. 31 DISTRICT 8, ST. LOUIS—Continued MEMPHIS BRANCH Appointed by the Federal Reserve Bank Katie S. Winchester President and Chief Executive Officer, 1996 First Citizens National Bank, Dyersburg, Tennessee John C. Kelley, Jr. President, Memphis Banking Group, First 1996 Tennessee Bank, Memphis, Tennessee Lewis F. Mallory, Jr. Chairman, President, and Chief Executive 1997 Officer, NBC Capital Corporation, Starkville, Mississippi Anthony M. Rampley President and Chief Executive Officer, 1998 Arkansas Glass Container Corporation, Jonesboro, Arkansas Appointed by the Board of Governors 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 John V. Myers President, Better Business Bureau, 1998 Memphis, Tennessee DISTRICT 9—MINNEAPOLIS Class A Jerry B. Melby President, First National Bank, 1996 Bowbells, North Dakota William S. Pickerign President, The Northwestern Bank of 1997 Chippewa Falls, Chippewa Falls, Wisconsin Dale J. Emmel President, First National Bank of Sauk Centre, 1998 Sauk Centre, Minnesota Class B Clarence D. Mortenson President, M/C Professional Associates Inc., 1996 Pierre, South Dakota Kathryn L. Ogren Owner, Bitterroot Motors, Missoula, Montana 1997 Dennis W. Johnson President, TMI Systems Design Corporation, 1998 Dickinson, North Dakota Class C David A. Koch Chairman, Graco, Inc., Minneapolis, Minnesota 1996 Jean D. Kinsey Professor, Consumption Economics, Director, 1997 Retail Food Industry Center, University of Minnesota, St. Paul, Minnesota Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 351 Term expires Dec. 31 DISTRICT 9, Class C— Continued James J. Howard Chairman, President, and Chief Executive 1998 Officer, Northern States Power Company, Minneapolis, Minnesota HELENA BRANCH Appointed by the Federal Reserve Bank Donald E. Olsson, Jr President, Ronan State Bank, Ronan, Montana 1996 Sandra M. Stash Manager, Montana Facilities, Atlantic Richfield 1996 Company (ARCO), Anaconda, Montana Ronald D. Scott President and Chief Executive Officer, 1997 The First State Bank of Malta, Malta, Montana Appointed by the Board of Governors Lane W. Basso President, Deaconess Medical Center, 1996 Billings, Montana Matthew J. Quinn President, Carroll College, Helena, Montana 1997 DISTRICT 10—KANSAS CITY Class A L. W. Menefee Chairman, Union Colony Bank, Greeley, Colorado 1996 Samuel P. Baird President, Farmers State Bank & Trust Co., 1997 Superior, Nebraska William L. McQuillan President, Chief Executive Officer, and Director, 1998 City National Bank, Greeley, Nebraska Class B Charles W. Nichols Managing Partner, Davison & Sons Cattle 1996 Company, Arnett, Oklahoma Vacancy 1997 Frank A. Potenziani M&T Trust, Albuquerque, New Mexico 1998 Class C 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 Jo Marie Dancik Office Managing Partner, Ernst & Young, 1998 Denver, Colorado DENVER BRANCH Appointed by the Federal Reserve Bank Peter R. Decker President, Peter R. Decker & Associates, 1996 Denver, Colorado Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

352 83rd Annual Report, 1996 Term expires Dec. 31 DISTRICT 10, DENVER BRANCH Appointed by the Federal Reserve Bank—Continued Richard I. Ledbetter President and Chief Executive Officer, 1997 First National Bank of Farmington, Farmington, New Mexico Clifford E. Kirk President and Chief Executive Officer, First 1997 National Bank of Gillette, Gillette, Wyoming Albert C. Yates President, Colorado State University, 1998 Ft. Collins, Colorado Appointed by the Board of Governors Teresa N. McBride President and Chief Executive Officer, McBride 1996 and Associates, Inc., Albuquerque, New Mexico Vacancy 1997 Peter I. Wold Partner, Wold Oil & Gas Company, 1998 Casper, Wyoming OKLAHOMA CITY BRANCH Appointed by the Federal Reserve Bank William H. Braum President, Braum Ice Cream Co., 1996 Oklahoma City, Oklahoma Michael S. Samis President and Chief Executive Officer, 1997 Macklanburg-Duncan Co., Oklahoma City, Oklahoma Betty Bryant Shaull President-Elect and Director, Bank of Cushing 1998 and Trust Company, Cushing, Oklahoma Dennis M. Mitchell President, Citizens Bank of Ardmore, 1998 Ardmore, Oklahoma Appointed by the Board of Governors Hans Helmerich President and Chief Executive Officer, 1996 Helmerich & Payne, Inc., Tulsa, Oklahoma Victor R. Schock President and Chief Executive Officer, Credit 1997 Counseling Centers, Tulsa, Oklahoma Barry L. Eller Senior Vice President and General Manager, 1998 MerCruiser, Stillwater, Oklahoma OMAHA BRANCH Appointed by the Federal Reserve Bank 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 Robert L. Peterson Chairman, President, and Chief Executive 1998 Officer, IBP, Inc., Dakota City, Nebraska Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 353 Term expires Dec. 31 DISTRICT 10, OMAHA BRANCH—Continued Appointed by the Board of Governors LeRoy W. Thorn President, T-L Irrigation Company, 1996 Hastings, Nebraska Arthur L. Shoener Executive Vice President-Operations, 1997 Union Pacific Railroad, Omaha, Nebraska Gladys Styles Johnston Chancellor, University of Nebraska at Kearney, 1998 Kearney, Nebraska DISTRICT ll—DALLAS Class A Gayle M. Earls President and Chief Executive Officer, 1996 Texas Independent Bank, Dallas, Texas Kirk A. McLaughlin President and Chief Executive Officer, 1997 Security Bank, Rails, Texas Dudley K. Montgomery President and Chief Executive Officer, The 1998 Security State Bank of Pecos, Pecos, Texas Class B J. B. Cooper, Jr. Farmer, Roscoe, Texas 1996 Robert C. McNair Chairman and Chief Executive Officer, 1997 Cogen Technologies, Inc., Houston, Texas Milton Carroll Chairman and Chief Executive Officer, 1998 Instrument Products, Inc., Houston, Texas Class C 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 Roger R. Hemminghaus Chairman, President, and Chief Executive Officer, 1998 Diamond Shamrock, Inc., San Antonio, Texas EL PASO BRANCH Appointed by the Federal Reserve Bank Ben H. Haines, Jr. President and Chief Executive Officer, 1996 First National Bank of Dona Ana County, Las Cruces, New Mexico Veronica K. Callaghan Vice President and Principal, KASCO 1996 Ventures, Inc., El Paso, Texas Hugo Bustamante, Jr Owner and Chief Executive Officer, 1997 CarLube, Inc., ProntoLube, Inc., El Paso, Texas Lester L. Parker President and Chief Operating Officer, 1998 Bank of the West, El Paso, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

354 83rd Annual Report, 1996 Term expires Dec. 31 DISTRICT 11, EL PASO BRANCH—Continued Appointed by the Board of Governors 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 Beauregard Brite White Rancher, J. E. White, Jr. & Sons, Marfa, Texas 1998 HOUSTON BRANCH Appointed by the Federal Reserve Bank 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 J. Michael Solar Principal Attorney, Solar & Fernandes, LLP, 1998 Houston, Texas Appointed by the Board of Governors Peggy Pearce Caskey Chief Executive Officer, Laboratories for 1996 Genetic Services, Inc., Houston, Texas Isaac H. Kempner III Chairman, Imperial Holly Corporation, 1997 Sugar Land, Texas Edward O. Gaylord Chairman, EOTT Energy Corp., and General 1998 Partner, EOTT Energy Partners, LP, Houston, Texas SAN ANTONIO BRANCH Appointed by the Federal Reserve Bank Juliet V. Garcia President, The 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 Richard W. Evans, Jr Chairman and Chief Executive Officer, 1998 Frost National Bank, San Antonio, Texas Appointed by the Board of Governors Erich Wendl Vice President, Webro Investment Corporation, 1996 Corpus Christi, Texas H. B. Zachry, Jr. Chairman and Chief Executive Officer, 1997 H. B. Zachry Company, San Antonio, Texas Carol L, Thompson President, The Thompson Group, Austin, Texas 1998 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 355 Term expires Dec. 31 DISTRICT 12—SAN FRANCISCO Class A 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 Warren K. K. Luke Vice Chairman, President, and Chief Executive 1998 Officer, Hawaii National Bank, Honolulu, Hawaii Class B Gary G. Michael Chairman and Chief Executive Officer, 1996 Albertson's, Inc., Boise, Idaho Krestine Corbin President and Chief Executive Officer, 1997 Sierra Machinery, Inc., Sparks, Nevada Stanley T. Skinner Chairman and Chief Executive Officer, 1998 Pacific Gas and Electric Co., San Francisco, California Class C James A. Vohs Chairman (Retired), Kaiser Foundation Health 1996 Plan, Inc., and Kaiser Foundation Hospitals, Oakland, California Judith M. Runstad Partner, Foster Pepper & Shefelman, 1997 Seattle, Washington Cynthia A. Parker Executive Director, Anchorage Neighborhood 1998 Housing Services, Inc., Anchorage, Alaska Los ANGELES BRANCH Appointed by the Federal Reserve Bank Vacancy 1996 Liam E. McGee Group Executive Vice President, Bank of 1997 America, Los Angeles, California Antonia Hernandez President and General Counsel, Mexican 1997 American Legal Defense and Educational Fund, Los Angeles, California Stephen G. Carpenter Chairman and Chief Executive Officer, 1998 California United Bank, NA, Encino, California Appointed by the Board of Governors Anita Landecker Western Regional Vice President, Local 1996 Initiatives Support Corporation, Los Angeles, California David L. Moore President, Western Growers Association, 1997 Irvine, California Anne L. Evans Chair, Evans Hotels, San Diego, California 1998 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

356 83rd Annual Report, 1996 Term expires Dec. 31 DISTRICT 12, SAN FRANCISCO—Continued PORTLAND BRANCH Appointed by the Federal Reserve Bank Elizabeth K. Johnson President, Trans Western Aviation, Inc., 1996 Scappoose, Oregon Cecil W. Drinkward President and Chief Executive Officer, Hoffman 1996 Corporation, Portland, Oregon Thomas C. Young Chairman, President, and Chief Executive 1997 Officer, Northwest National Bank, Vancouver, Washington John D. Eskildsen President and Chief Executive Officer, U.S. 1998 National Bank of Oregon, Portland, Oregon Appointed by the Board of Governors Ross R. Runkel Professor of Law, Willamette University, 1996 Salem, Oregon Vacancy 1997 Carol A. Whipple Proprietor, Rocking C Ranch, Elkton, Oregon 1998 SALT LAKE CITY BRANCH Appointed by the Federal Reserve Bank J. Pat McMurray President, First Security Bank, N.A., Boise, Idaho 1996 Nancy Mortensen Vice President-Marketing Services, ZCMI, 1996 Salt Lake City, Utah R. D. Cash Chairman, President, and Chief Executive Officer, 1997 Questar Corporation, Salt Lake City, Utah Roy C. Nelson President, Bank of Utah, Ogden, Utah 1998 Appointed by the Board of Governors Constance G. Hogland Executive Director, Boise Neighborhood 1996 Housing Services, Inc., Boise, Idaho Gerald R. Sherratt President, Southern Utah University, 1997 Cedar City, Utah Richard E. Davis President and Chief Executive Officer, 1998 Salt Lake Convention & Visitors Bureau, Salt Lake City, Utah SEATTLE BRANCH Appointed by the Federal Reserve Bank Tomio Moriguchi Chairman and Chief Executive Officer, 1996 Uwajimaya, Inc., Seattle, Washington John V. Rindlaub Chairman, Seafirst Bank, Seattle, Washington 1996 Thomas E. Cleveland Chairman and Chief Executive Officer, Access 1997 Business Finance, Bellevue, Washington Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 357 Term expires Dec. 31 DISTRICT 12, SEATTLE BRANCH Appointed by the Federal Reserve Bank—Continued Constance L. Proctor Partner, Alston, Courtnage, MacAulay & 1998 Proctor, Seattle, Washington Appointed by the Board of Governors George F. Russell, Jr Chairman, Frank Russell Company, 1996 Tacoma, Washington Vacancy 1997 Helen M. Rockey President and Chief Executive Officer, 1998 Brooks Sports, Inc., Bothell, 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

360 83rd Annual Report, 1996 The Federal Reserve System - -•»,.»., 9 • ^ BOSTON MINNEAPOLIS 7 12 o • NEW YORK CHICAGO • CLEVELAND PSLADELPHIA • SAN FRANCISCO 10 4 ^ KANSAS CITY • g RICHMOND ST. LOUIS 8 5 6 • 11 • ATLANTA DALLAS "^ ' ALASKA ' \. • -* .,: HAWAII LEGEND Both pages Facing page • Federal Reserve Bank city • Federal Reserve Branch city D Board of Governors of the Federal — Branch boundary Reserve System, Washington, D.C. NOTE The Federal Reserve officially identifies Bank serves the Commonwealth of Districts by number and 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 1996. 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 361 1-A 2-B 3-C 4-D 5-E Pittsburgh Baltimore MD MY f I CT Buffalo Mk • Cincinnati •Charlotte * NY BOSTON NEW YORK PHILADELPHIA CLEVELAND RICHMOND 6-F 7-G 8-H •Nashville Birmingham Detroit* d •Memphis Little) Rock ( ATLANTA CHICAGO ST. LOUIS 9-1 • Helena MINNEAPOLIS 10-J 12-L Oklahoma City KANSAS CITY 11-K Salt Lake City •Los Angeles 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

365 Index Account Management Agent system, 267 Bank supervision and regulation— Appraisal subcommittee actions, 242 Continued ARMs, disclosure requirements, 221 International activities, 232 Assets and liabilities National Information Center, 238 Banks, by class, 307 Staff training, 238^0 Board of Governors, 276 Bankers acceptances, Federal Reserve Federal Reserve Banks, 286-89 Banks, holdings, 286-89 Assets and Liabilities of U.S. Branches and Banking offices, changes in number, 314 Agencies of Foreign Banks, revision, Banking on Partnerships: A Digest of 242 Community-Based Organizations in Association for Financial Counseling and Houston, 193 Planning Education, 208 Bankruptcy rate, 76 ATM services, 198, 210, 211 Banks {See Federal Reserve Banks and Audits, Paperwork reduction act, 220 Member banks) Auto leasing, 76, 91, 195, 201, 253 Basle Committee on Banking Regulation Auto loans, 76 and Supervision, 235, 237 Automated clearinghouse services, 261 Board of Governors {See also Federal Automated teller machines, 198, 210, 211 Reserve System) Decisions, public notice, 244 Balance sheet, Board of Governors, 276 Financial statements, 275-81 Bangkok Metropolitan Bank, PCL, 228 Legislation enacted, 217-24 Bank holding companies Litigation, 213-16 Applications, 203, 245 Members and officers, 330-32 Community development, 193 Mergers, acquisitions, and Economic growth act, 218 consolidations, list, 315-28 Examinations of, 229 Recommendations from other agencies, Number of, 227 210 Risk-based capital guidelines, 89, 235, Record of policy actions, 87-99 236 Regulatory simplification, 251-56 Securities purchases from supervised Testimony and legislative investment companies, 93 recommendations, 210 Stock repurchases, 246 Business spending and investment, 17-19, Supervision and regulation of, 227-34 44_46, 77 Well-capitalized, definition, 94, 255 Bank Holding Company Act of 1956, 218, 243 CAESAR, 207 Bank Merger Act Call Reports, revisions, 241 Applications and regulation, 243 Capital accounts Mergers, acquisitions, and Banks, by class, 307 consolidations, list, 315-28 Federal Reserve Banks, 285, 286-89 Bank Secrecy Act, 92, 246 Car leasing, 76, 91, 195, 201, 253 Bank Secrecy Act Advisory Council, 247 Cash flows, Board of Governors, statement, Bank service companies, Paperwork 278 reduction act, 222 Cash services, 262 Bank supervision and regulation {See also Chairs, presidents, and vice presidents of Supervision and regulation) Federal Reserve Banks Derivatives activities, 237 Conferences, 338 Enforcement actions, 228, 246 Salaries, 293 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

366 83rd Annual Report, 1996 Change in Bank Control Act, actions on Currency and Foreign Transactions applications, 244 Reporting Act of 1970, 246 Check clearing and collection, 259, 303 Civil money penalties assessed, 228 Debit cards, 198 Clearing House Interbank Payments Debt Collection Improvement Act of 1996, System, 260 96, 224 Collateralized transactions, proposed rule, Deposit Institution Management Interlocks 236 Act, 219 Commercial banks, banking offices, Depository institutions changes in number, 314 Credit, 23 Community Development Advisory Monetary aggregates, 23-27 Council, 194 Reserves and related items, 308-13 Community Development Investments: A Uniform cash access policy, 97 Guide for State Member Banks and Deposits Bank Holding Companies, 193 Banks, by class, 307 Community development lending, 192 Federal Reserve Banks, 286-89, 308-13 Community Lending Analysis System, 194 Derivatives, activities, 237 Community Reinvestment Act, 187, 192, Direct deposit use, 198 202, 208 Directors, Federal Reserve Banks and Complaint Analysis Evaluation System and Branches, list, 338-57 Repository, 207 Discount rate, 13-15, 97-99 Compliance examinations, 198 Discrimination practices by banks, 189 Compliance with Dividends, Federal Reserve Banks, 296, Community Reinvestment Act, 202 298, 299, 301 Consumer Leasing Act, 201 Doing the Undoable Deals: A Resource Electronic Fund Transfer Act, 200 Guide to Financing Housing and Equal Credit Opportunity Act, 200 Economic Development, 193 Expedited Funds Availability Act, 203, Domestic 255 Open market operations, FOMC, 101 Truth in Lending Act, 201 Policy directive, FOMC, 103 Unfair and Deceptive Acts or Practices, 203 Earnings of Federal Reserve Banks (See Computer-banking products, 198 also Federal Reserve Banks, income Condition statement of Federal Reserve and expenses), 267, 294 Banks, 284 Economic development in other countries, Conferences of chairs, presidents, and vice 29-35 presidents of Federal Reserve Banks, Economic Growth and Regulatory 338 Paperwork Reduction Act of 1996, 89, Consumer 217-23 Policies program, 208 Economy Price index, 9-11, 52-54, 73-75 Business, 17-19, 44-46, 67-69, 77 Spending, 42, 66 Foreign developments, 48, 70-72 Consumer Advisory Council, 208, 334 Government spending, 19-21, 46-48, 69, Consumer and community affairs, 187-214 75 Consumer leasing, 91, 195, 253 Household, 14-16, 42, 66 Consumer Leasing Act, 201, 221 Labor markets, 7, 50, 72 Consumer loans, delinquency rate, 76 Overview of 1996, 3-5, 7-11 Corporate profits, 18 Performance, 41-57, 65-81 Country transfer, risk-based capital Price developments, 9-11, 52, 73-75 standards, 235 Projections, 39-41, 63-65 Credit markets, 56-58, 75 Edge Act corporations and agreement Currency and coin, 262 corporations, 233 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 367 Electronic Federal agency securities—Continued Benefits transfer programs, 210, 211 Federal Reserve open market Data processing, examinations, 229 transactions, 290 Fund transfers, 252 Repurchase agreements, 284, 286-89, Payments, 224 290, 292 Stored-value cards, 198 Federal Financial Institutions Examination Electronic Federal Tax Payment System, Council, 190, 199, 240-42 266 Federal Financial Management Act of Electronic Freedom of Information Act 1994, 224 Amendments of 1996, 224 Federal government spending, 19 Electronic Funds Transfer Act Federal Open Market Committee Compliance with, 200 Meetings, minutes of, 106-85 Paperwork reduction act, 221 Members and officers, list, 332 Revisions, 195, 197, 198, 210, 211 Monetary policy and interest rate Employment in 1996, 7, 50, 72 developments, 54-56, 80-82 Enforcement actions, member banks, 228 Federal payments, electronic, 224 Equal Credit Opportunity Act, 194, 197, Federal Reserve Bank examiners, fair 200, 220 lending training, 189 Equity prices, 13, 80 Federal Reserve Banks Examinations, inspections, regulations, and Assessments for expenses of Board of audits Governors, 296-303 Federal banking agencies, 219 Bank premises, 284, 286-89, 302 Federal Reserve Banks, 267 Branches Member banks, 198, 227 Directors list, 338-57 Risk management, 236 Premises, 302 Specialized Vice presidents in charge, 336 Electronic data processing, 229 Capital accounts, 286-89 Fiduciary activities, 229 Chairs, deputy chairs, presidents, and Government securities, 230 vice presidents of Federal Reserve Municipal securities, 230 Banks, list, 336 Subsidiaries of bank holding Condition statement, 284 companies, 230 Conferences of chairs, presidents, and Surveillance and monitoring, 231 vice presidents, 338 Transfer agents, supervision, 231 Deposits, 285, 286-89 Examiner Workstation, 238 Directors, list, 338-57 Exchange rates, 80 District Banks Expedited Funds Availability Act, Atlanta, 192, 194 compliance with, 203, 255 Boston, 192, 194 Expenses, Board of Governors, 277 Chicago, 192 Export trading companies, 233 Cleveland, 192 Export Trading Company Act Amendments Dallas, 192, 193 of 1988, 233 Kansas City, 192, 193, 194 Minneapolis, 192, 193 Fair Credit Reporting Act, 221 New York, 192, 193 Fair lending practices, 188-90 Philadelphia, 192, 194 Fair Lending School, 189 Richmond, 192, 194 Farmers in drought areas, 223 San Francisco, 192, 193 FBO Desktop, 238 St. Louis, 192, 194 Federal Advisory Council, members, 333 Dividends paid, 296-304 Federal agency securities Educational programs, 193 Federal Reserve Banks, 286-89, Examinations, inspections, regulations, 308-13 and audits, 188, 267 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

368 83rd Annual Report, 1996 Federal Reserve Banks—Continued Federal spending, 46-48, 69, 75 Fees and services, 257-73 Federal tax payments services, 265 Income and expenses, 267 Fedwire Interest rates, 304 Foreign service providers, 96 International activities, 232 Funds transfer services, 260, 264 Liabilities and capital accounts, 285 Operation hours, announcement, 97 Loans and securities, 284, 286-89, Fees (See Federal Reserve System, Fees) 292-97, 308-13 Fiduciary activities, supervision, 229 Note, $100, 262 Financial Officers and employees, number and Disclosure, state member banks, 246 salaries, 293-96 Institutions, definition, 95 Operations, volume, 303 Statements, Board of Governors, 275-81 Payments to the U.S. Treasury, 299, 301 Financial Action Task Force, 247 Premises, 268 Financial Crimes Enforcement Network, 89 Presidents and first vice presidents, 336 Financial Management Service, U.S. Priced services, 308-13 Department of the Treasury, 266 Salaries, 293-96 Fiscal agency services, 264 Surveillance and monitoring, 231 Float, 262 Uniform cash access policy, 97 Flood insurance requirements, Federal Reserve notes, 262, 286-89, 299 Regulation H, 88 Federal Reserve System {See also Board of Food coupon services, 267, 303 Governors) Foreign Bank holding company applications, 203 Banks, 90, 222 Banking structure decisions, 244 Branches of member banks, 232 Fees, Federal Reserve services to Currencies, Federal Reserve income on, depository institutions 294 Automated clearinghouse, 261 Currency, directives and operations, 34, Book-entry securities, 261 35,36, 103, 105, 109, 111 Cash, 262 Currency, warehouse agreement, 112 Check clearing and collection, 259 Economies during 1996, 30, 48-50, Currency and coin, 262 70-72 Developments, 258 Exchange, 34, 48-50, 59-61, 70-72 Fedwire funds transfer, 97, 260, 264 Exchange rates, 80 Fiscal agency, 263 Investment regulation, 233 Float, 262 Stocks, list, 248 Food coupon, 267 Freedom of Information Act, 95, 224 Government depository, 263 Net settlement, 260 Glass-Steagall Act, 92 Noncash collection, 262 Gold certificate accounts of Reserve Banks Pricing of, 294 and gold stock, 286-89, 308-13 Treasury, U.S. Department of the, 266 Government depository services, 263 Loans to executive officers, 249 Government spending, 19-21 Map, 359 Membership, 249 Home Mortgage Disclosure Act Priced services, 270-73 Data and information from, 189, 191 Security and loan holdings, 268 Exemption threshold increase, 195 Staff training, 189, 199, 238 Lending patterns and data reported, 189 Staff, technical assistance to member Paperwork reduction act, 220 banks, 234 Home Ownership and Equity Protection Supervision and regulation, Act of 1994, 94, 196 responsibilities, 226-32 Household spending, 14-17 Supervisory policy, 234-37 Houses, sale of, 44, 68 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 369 Housing and Urban Development, U.S. Loan Guarantees for Defense Production, Department of, 195, 197, 205 regulation repealed, 93, 256 Loans Income and expenses Banks, by class, 307 Board of Governors, 277 Executive officers, 91, 95, 253 Federal Reserve Banks, 267, 294 Federal Reserve Banks Industrial production, 44 Depository institutions, 284, 286-89 Insider lending restrictions, 219 Holdings and income, 284, 286-89 Insured commercial banks (See also Interest rates, 304 Commercial banks), Assets, liabilities, Loans and securities, 308, 310, 312 and number, by class of bank, 307 Volume of operations, 303 Interest rates Federal Reserve Banks, depository During 1996, 13 institutions, 294 Federal Reserve Banks, 97-99, 304 Monetary policy, 54-56, 80-82 Maine Community Reinvestment Risk, policy statement, 96 Corporation, 192 Risk-based capital standards, 235 Management Official Interlocks, International banking activities and Regulation L, 91 operations Map, Federal Reserve System, 359 Developments, 29-35, 48-50, 70-72 Margin requirements, 306 Edge Act corporations and agreement Margin stocks, credit for purchasing, 88, corporations, 233 247, 306 Foreign banks, home state selection date, Market risk measurement, 235 90 Member banks Foreign-office operations of U.S. banking Assets, liabilities, and capital accounts, organizations, 232 307 Regulation K, 89-91, 252-54 Banking offices, changes in number, 314 Transactions, 32, 33 Membership with the Federal Reserve U.S. activities of foreign banks, 233 System, 249 Interpretations of regulations, 197 Number, 307 Investments Reserve requirements, 305 Business in 1995, 17-19 Minority loan programs, 191 Federal Reserve Banks, 284, 286-89 Model Agreement, 237 Products, retail sales of nondeposit, 237 Monetary aggregates, 4, 24, 26, 37-39, 41, State member banks, 307 61-63, 65 Monetary policy Joint Report: Streamlining of Regulatory Credit markets, 56-58, 75, 78 Requirements, 251 Developments during 1996, 53-56, Justice, U.S. Department of, 188, 189 75-78 Interest rate developments, 54-56, 80-82 Labor markets, 7, 50, 72 Reports to the Congress Leasing, automobile February 20, 1996, 37-61 Delinquency rates, 76 July 18, 1996, 61-81 Disclosure requirements, 91, 195, 201, Money laundering, protective measures 253 against, 247 Legislation enacted, 217-24 Mortgage Legislative recommendations, Board of Debt, 75 Governors, 210 Loans, lending practices, 189 Lender liability for disclosure errors, 94 Points and fees, adjustment in threshold Lending in Indian Country, video tape, 193 amount, 94 Limited liability company, 222 Reverse, 197 Litigation, 213-16 Servicing rights, 242 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

370 83rd Annual Report, 1996 Mortgage Insurance Companies of Policy actions and statements—Continued America, 191 Interest rate risk, 96 Payments system risk, 97 National Federation of Independent Safety and soundness standards, 96 Business, 19 Uniform cash access policy, 97 National Information Center (NIC), 238 Uniform Rules of Practice and Procedure National Securities Markets Improvement for Administrative Hearings, 96 Act of 1996, 223, 249, 254 Presidents and vice presidents, Federal Nationwide City Sort product, 259 Reserve Banks, 293, 338 Nationwide State/Federal Supervisory Price developments, 9-11, 52-54, 73-75 Agreement, 237 Priced services, Federal Reserve, 270-73, Net settlement services, 260 294, 308-13 Netting eligibility for financial institutions, Private mortgage insurance, 191 95 Profit and loss, Federal Reserve Banks, 296 New accounts at banks, 198 Public inspection of records, 224 Noncash collection services, 262 Publications Nonmember depository institutions Banking on Partnerships: A Digest of Assets and liabilities, 307 Community-Based Organizations in Banking offices, changes in number, 314 Houston, 193 Note, Federal Reserve $100 series, 262 Community Development Investments: A Guide for State Member Banks and Off-Site Risk Analysis, 231 Bank Holding Companies, 193 Officers of Federal Reserve Banks and Doing the Undoable Deals: A Resource Branches, 336 Guide to Financing Housing and Open-end lines of credit, 196 Economic Development, 193 Outstanding Educational Program Award Foreign Stocks, list, 248 for 1996, 208 Over-the-Counter Marginable Stocks, Over-the-Counter Marginable Stocks, list, list, 248 248 Securities Credit Transactions Handbook, Federal Reserve Regulatory Service, Paperwork Reduction Act of 1996, 194 248 Participants Trust Company, 260 Texas Colonias: A Thumbnail Sketch of Payments system risk, policy statement on the Conditions, Issues, Challenges Fedwire third-party access, 97 and Opportunities, 193 Performance Report Information and Surveillance Monitoring, 231 Qualified family partnerships (QFP), 219 Personal Responsibility and Work Opportunity Act of 1996, 210, 211 Rating systems for banks, disclosure, 241 Pine Ridge Reservation, 193 Real Estate Settlement Procedures Act, Policy actions and statements 197, 220 Board of Governors, 87-99 Recordkeeping requirements, 92 Federal Open Market Committee Regulation of the U.S. banking structure Domestic open market operations, Bank Holding Company Act, 243 authorization, 101, 108 Bank Merger Act, 243 Domestic policy directive, 103 Banking and nonbanking proposals, 245 Foreign currency directive, 105, 111 Change in Bank Control Act, 244 Foreign currency operations, Federal Reserve decisions, public notice, authorization, 103, 109 244 Foreign currency operations, Regulations procedural instructions, 106, 112 B, Equal Credit Opportunity, 194, 197, Fedwire foreign service providers, 96 200 Fedwire operation hours, 97 C, Home Mortgage Disclosure, 195 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 371 Regulations—Continued Relations with Dealers in Securities under D, Reserve Requirements of Depository Section 32, Banking Act of 1933, 92, Institutions, 87, 252 256 E, Electronic Fund Transfers, 88, 195, Reserve requirements of depository 197, 198,200,210,211,252 institutions, 87, 252, 305, 308-13 G, Securities Credit by Persons Other Residential investment, 15, 44 Than Banks, Brokers, or Dealers, Revenue, Board of Governors, 277 88, 247, 306 Reverse mortgages, 197 Riegle Community Development and H, Membership of State Banking Regulatory Improvement Act of 1994, Institutions in the Federal Reserve 89, 91, 93, 251 System, 88, 89, 252 Riegle-Neal Interstate Banking and K, International Banking Operations, Branching Efficiency Act of 1994, 257 89-91, 252-54 Risk-based capital standards L, Management Official Interlocks, 91 Guidelines, 89 M, Consumer Leasing, 76, 91, 195, 201, Market risk measurement policy, 235 253 Risk management guidance, 235 O, Loans to Executive Officers, Supervisory policy, 235-38 Directors, and Principal Rules Regarding Availability of Shareholders of Member Banks, 91, Information, 95 95, 253 R, Relations with Dealers in Securities Safety and soundness standards, 96 Under Section 32, Banking Act of SAIF, 217 1933, rescission, 92, 256 Salaries, Federal Reserve Bank staff, 293 Review of, 223 Savings Association Insurance Fund, 217 S, Reimbursement for Providing Savings bonds, 265 Financial Records; Recordkeeping Section 20 subsidiaries, 230, 245 Requirements for Certain Financial Securities {See also Treasury securities) Records, 92, 253 Book-entry transfer services, 261 T, Credit by Brokers and Dealers, 88, Credit, 88, 93, 254, 306 93, 247, 254, 306 Dealers interlocks, 92 U, Credit by Banks for the Purpose of Government, supervision of, 229 Purchasing or Carrying Margin Municipal, regulation of, 230 Stocks, 88, 247, 306 Regulations, 247 V, Loan Guarantees for Defense Subsidiaries of bank holding companies, Production, repealed, 93, 256 230 Y, Bank Holding Companies and Change Treasury, marketable, 264 in Bank Control, 89, 93, 94, 209, U.S. government, holdings by Federal 254 Reserve, 268 Z, Truth in Lending, 94, 196, 197, 201, Securities Exchange Act, 249 255 Small businesses, 193, 223 AA, Unfair or Deceptive Acts or Social security numbers, consumer Practices, 203 protection against unauthorized use, BB, Community Reinvestment, 187, 202 194 CC, Availability of Funds and Collection Special drawing rights certificates, 284, of Checks, 203, 255 286-89, 308-13 DD, Truth in Savings, 197 Spending and finance, 13-21 EE, Netting Eligibility for Financial State and local government spending, 20 Institutions, 95 State member banks Reimbursement to Financial Institutions for Applications, 245 Assembling or Providing Financial Back-office facilities, 88, 89 Records, 92, 253 Banking offices, changes in number, 314 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

372 83rd Annual Report, 1996 State member banks—Continued Treasury Offset Program, 265 Community development investment, Treasury securities 193 Bank holdings, by class of bank, 307 Compliance examinations, 199 Federal Reserve Banks, holdings, 284, Consumer complaints, 204-08 286-89, 292-95, 308-13 Economic Growth and Regulatory Federal Reserve Banks, income, 294 Paperwork Reduction Act of 1996, Open market transactions, 290 217 Repurchase agreements, 284, 286-89, Examinations by Federal Reserve Banks, 290, 292, 308-13 229 Treasury, U.S. Department of the, 265, 299, Financial disclosure, 246 301 Loans to executive officers, 249 Truth in Lending Act Number, 227, 307 Compliance with, 201 Risk-based capital guidelines, 89, 235, Expedited Funds Availability Act, 255 236 Mortgage points and fees, adjustment in Secured loans to executive officers, 91 thresh old amount, 94 Supervision and regulation of, 227-34 Open-end home equity lines of credit, 196 State-chartered savings banks, changes in Paperwork reduction act, 221 number, 314 Revision, 197 State/Federal Protocol, 237 Truth in Savings Act, 197, 220 Statement of Financial Accounting Standards 125, 242 Unfair and Deceptive Acts or Practices, Statistical analysis system for fair lending 203 examinations, 189 Uniform cash access policy, 97 Stored-value products, 210 Uniform Commercial Code, 4A, 92 Supervision and regulation (See also Bank Uniform Financial Institutions Rating supervision and regulation), 226-32 System, 240 Supervisory rating systems, disclosure to Uniform Interagency Rating System for banks, 241 Data Processing Operations, 241 Surplus stock, definition, 95 Uniform Interagency Trust Rating System, Suspicious Activity Report, 229 241 Sweep programs, retail customers, 82 Uniform Rules of Practice and Procedure System Open Market Account (SOMA), for Administrative Hearings, 96 portfolio, 168 Unregulated banking practices, consumer complaints, 205 Technical modifications, proposed rule, 236 Video tape, Lending in Indian Country, Testimony and legislative 193 recommendations, Board of Governors, 210 Texas Colonias: A Thumbnail Sketch of the Conditions, Issues, Challenges and Opportunities, report, 193 Thrift institutions, Economic growth act, 218 Thrift Institutions Advisory Council, 335 Training, Federal Reserve System staff, 189, 199, 238 Transfer agents, supervision, 231 Transfers of funds (See also Fees and Regulations: E), 303 Treasury Direct, 264, 265, 266 FRB1/1-12500-0597C Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis