Annual Report of the Federal Reserve Board, 1997

€/fnnual TZeport 1997 VJ 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 of Transmitted BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Washington, D.C., May 28, 1998 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-fourth annual report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1997. 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 1997 3 OVERVIEW: MONETARY POLICY AND THE ECONOMY IN 1997 7 U.S. ECONOMIC AND FINANCIAL DEVELOPMENTS IN 1997 7 The household sector 10 The business sector 12 The government sector 14 The labor market 16 Prices 18 Credit, money, interest rates, and equity prices 25 INTERNATIONAL DEVELOPMENTS IN 1997 26 Foreign economies 28 U.S. international transactions 30 Foreign exchange developments 31 Foreign exchange operations 33 MONETARY POLICY REPORTS TO THE CONGRESS 33 Report on February 26, 1997 53 Report on July 22, 1997 Part 2 Records, Operations, and Organization 81 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS 81 Regulation B (Equal Credit Opportunity) 81 Regulation C (Home Mortgage Disclosure) 82 Regulation D (Reserve Requirements of Depository Institutions) 83 Regulation D, Regulation I (Issue and Cancellation of Capital Stock of Federal Reserve Banks), and Rules Regarding Delegation of Authority 83 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 84 Regulation G (Securities Credit by Persons other than Banks, Brokers, or Dealers), Regulation T (Credit by Brokers and Dealers), Regulation U (Credit by Banks for the Purpose of Purchasing or Carrying Margin Stocks), and Regulation X (Borrowers of Securities Credit) 84 Regulation H (Membership of State Banking Institutions in the Federal Reserve System) 84 Regulation H and Regulation K (International Banking Operations) 85 Regulation H and Regulation Y (Bank Holding Companies and Change in Bank Control) 85 Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire) 86 Regulation M (Consumer Leasing) 86 Regulation O (Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks) 87 Regulation Q (Prohibition against Payment of Interest on Demand Deposits) 87 Regulation Y 88 Regulation Z (Truth in Lending) 88 Regulation CC (Availability of Funds and Collection of Checks) 88 Rules Regarding Delegation of Authority 88 Rules Regarding Availability of Information 89 Policy Statements and Other Actions 89 1997 Discount Rates 93 MINUTES OF FEDERAL OPEN MARKET COMMITTEE MEETINGS 93 Authorization for Domestic Open Market Operations 95 Domestic Policy Directive 95 Authorization for Foreign Currency Operations 97 Foreign Currency Directive 98 Procedural Instructions with Respect to Foreign Currency Operations 98 Meeting held on February 4-5, 1997 114 Meeting held on March 25, 1997 123 Meeting held on May 20, 1997 132 Meeting held on July 1-2, 1997 142 Meeting held on August 19, 1997 151 Meeting held on September 30, 1997 159 Meeting held on November 12, 1997 168 Meeting held on December 16, 1997 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

177 CONSUMER AND COMMUNITY AFFAIRS 178 Leasing education and regulatory changes 179 TILA and RESPA rules 180 Other regulatory matters 183 HMD A data and lending patterns 185 Fair lending 186 Community development 188 Economic effects of the Electronic Fund Transfer Act 189 Compliance examinations 191 Community Reinvestment Act 192 Agency reports on compliance with consumer regulations 195 Applications 197 Consumer complaints 200 Consumer policies 200 Consumer Advisory Council 203 Testimony and legislative recommendations 203 Recommendations of other agencies 205 LITIGATION 205 Bank Holding Company Act—Review of Board actions 206 Litigation under the Financial Institutions Supervisory Act 207 Other actions 211 LEGISLATION ENACTED 211 Riegle-Neal Amendments Act 211 Treasury appropriation for fiscal year 1998 211 Depository Institutions Disaster Relief Act 212 50 States Commemorative Coin Program Act 213 Sale of the Culpeper facility of the Federal Reserve Bank of Richmond 215 BANKING SUPERVISION AND REGULATION 216 Scope of responsibilities for supervision and regulation 222 International activities 224 Supervisory policy 229 Information technology 230 Staff training 232 Federal Financial Institutions Examination Council 234 Regulation of the U.S. banking structure 239 Enforcement of other laws and regulations Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

BANKING SUPERVISION AND REGULATION—Continued 240 Loans to executive officers 240 Federal Reserve membership 241 REGULATORY SIMPLIFICATION 241 Comprehensive reviews 246 Other regulatory proposals 247 FEDERAL RESERVE BANKS 247 Major initiatives 249 Developments in Federal Reserve priced services 254 Developments in currency and coin 254 Developments in fiscal agency and government depository services 258 Information technology 259 Financial examinations of Federal Reserve Banks 259 Income and expenses 260 Holdings of securities and loans 261 Volume of operations 261 Federal Reserve Bank premises 262 Pro forma financial statements for Federal Reserve priced services 267 BOARD OF GOVERNORS FINANCIAL STATEMENTS 275 STATISTICAL TABLES 276 1. Detailed statement of condition of all Federal Reserve Banks combined, December 31, 1997 and 1996 278 2. Statement of condition of each Federal Reserve Bank, December 31, 1997 and 1996 282 3. Federal Reserve open market transactions, 1997 284 4. Federal Reserve Bank holdings of U.S. Treasury and federal agency securities, December 31, 1995-97 285 5. Number and annual salaries of officers and employees of Federal Reserve Banks, December 31, 1997 286 6. Income and expenses of Federal Reserve Banks, 1997 290 7. Income and expenses of Federal Reserve Banks, 1914-97 294 8. Acquisition costs and net book value of premises of Federal Reserve Banks and Branches, December 31, 1997 295 9. Operations in principal departments of Federal Reserve Banks, 1994-97 296 10. Federal Reserve Bank interest rates on loans to depository institutions, December 31, 1997 297 11. Reserve requirements of depository institutions, December 31, 1997 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

STATISTICAL TABLES—Continued 298 12. Initial margin requirements under Regulations T, U, G, and X 299 13. Principal assets and liabilities and number of insured commercial banks in the United States, by class of bank, June 30, 1997 and 1996 300 14. Reserves of depository institutions, Federal Reserve Bank credit, and related items—year-end 1918-97 and month-end 1997 306 15. Banking offices, and banks affiliated with bank holding companies in the United States, December 31, 1996 and 1997 307 16. Mergers, consolidations, and acquisitions of assets or assumptions of liabilities approved by the Board of Governors, 1997 325 FEDERAL RESERVE DIRECTORIES AND MEETINGS 326 Board of Governors of the Federal Reserve System 328 Federal Open Market Committee 329 Federal Advisory Council 330 Consumer Advisory Council 331 Thrift Institutions Advisory Council 332 Officers of Federal Reserve Banks and Branches 334 Conferences of chairmen, presidents, and first vice presidents 334 Directors 355 MAPS OF THE FEDERAL RESERVE SYSTEM 359 INDEX Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Parti Monetary Policy and the U.S. Economy in 1997 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Overview: Monetary Policy and the Economy in 1997 The U.S. economy turned in another The circumstances that prevailed excellent performance in 1997. Growth through most of 1997 required that the was strong, the unemployment rate Federal Reserve remain especially attendeclined to its lowest level in nearly a tive to the risk of a pickup in inflation. quarter-century, and inflation slowed Labor markets were already tight when further. Impressive gains were also the year began, and nominal wages had made in other important respects: The started to rise faster than previously. federal budget moved toward balance Persistent strength in demand over the much more quickly than almost anyone year led to economic growth in excess had anticipated; capital investment, a of the expansion of the economy's critical ingredient for long-run growth, potential, intensifying the pressures on rose sharply further; and labor produc- labor supplies. In earlier business expantivity, the ultimate key to rising living sions, such developments had usually standards, displayed notable vigor. produced an adverse turn in the inflation Among the influences that brought trend that, more often than not, was about this favorable performance were accompanied by a worsening of ecothe sound fiscal and monetary policies nomic performance on a variety of that have been pursued in recent years. fronts, culminating in recession. Budgetary restraint at the federal level Robust growth of spending early in has raised national saving, easing the the year heightened concerns among competition for funds in capital markets members of the Federal Open Market and thereby encouraging greater private Committee (FOMC) that growing investment. Monetary policy, for its strains on productive resources might part, has sought to foster an environ- touch off a faster rate of cost and price ment of subdued inflation and sustain- rise that could eventually undermine able growth. The experience of recent the expansion. Financial market particiyears has provided additional evidence pants seemed to share these concerns: that the less households and businesses Intermediate- and long-term interest need to cope with a rising price level, or rates began moving up in December worry about the sharp fluctuations in 1996, effectively anticipating Federal employment and production that usually Reserve action. When the FOMC firmed accompany inflationary instability, the policy slightly at its March 1997 meetmore long-term investment, innovation, ing by raising the intended federal funds and enterprise are enhanced. rate from 5 XA percent to 5 Vi percent, the market response was small. The economy slowed a bit during the NOTE. The discussion here and in the next second and third quarters, and inflation chapter is adapted from Monetary Policy Report to moderated further. In addition, the the Congress pursuant to the Full Employment progress being made by the federal govand Balanced Growth Act of 1978 (Board of Governors, February 1998). ernment in reducing the size of the defi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84th Annual Report, 1997 cit was becoming more apparent. As a additional restraint against the possible consequence, by the end of September, emergence of greater inflation pressures. longer-term interest rates fell 3A percent- In the latter part of the year, developage point from their peaks in mid-April, ments in other parts of the world began leaving them about lA percentage point to alter the perceived risks attending the below their levels at the end of 1996. U.S. economic outlook. Foreign econo- The decline in interest rates, together mies generally had seemed to be on a with continued reports of brisk growth strengthening growth path at midyear. in corporate profits, sparked steep But over the remainder of the summer increases in equity prices between April and during the autumn, severe financial and September. strains surfaced in a number of econo- Even with a more moderate pace of mies in Asia, weakening somewhat the growth, labor markets continued to outlook for growth abroad and thus the tighten, generating concern among prospects for U.S. exports. The prob- FOMC members over this period that lems these economies encountered genrising costs might trigger a rise in infla- erally resulted in severe downward prestion. Consequently, at its meetings from sures on the foreign exchange values of May through November, the Committee their currencies; in some cases, steep adopted directives for the conduct of depreciations occurred despite substanpolicy that assigned greater likelihood tial upward movement of interest rates. to the possibility of a tightening of pol- Asset values in parts of Asia, notably icy than to the possibility of an easing equity and real estate prices, also of policy. Even though the Committee declined appreciably, leading to losses kept the nominal federal funds rate by financial institutions that had either unchanged, it saw the rise in the real invested in those assets or lent against funds rate resulting from declining infla- them; nonfinancial firms began to tion expectations, together with an encounter problems servicing their obliincrease in the exchange value of the gations. In many instances the debts of dollar, as providing some measure of nonfinancial and financial firms were denominated in dollars and unhedged. Concerted international efforts to bring Selected Interest Rates economic and financial stability to the Percent region were under way as the year drew Thirty-year to a close. Meanwhile, economic activ- Treasury ity in Japan stagnated, and the weaknesses in the Japanese financial system became more apparent. The difficulties in Asia contributed to additional declines of lA to V2 percentage point in the yields on intermediateand long-term Treasury securities in the United States between mid-autumn and the end of the year. The decreases 1996 1997 were due in part to an international NOTE. Small tick marks refer to dates in 1996 and flight to the safe haven of dollar assets, 1997 on which the Federal Open Market Committee held scheduled meetings. Dashed lines indicate dates of meet- but they also reflected expectations that ings at which the Committee announced a monetary pol- these difficulties would exert a moderaticy action: January 31, 1996, and March 25, 1997. The ing influence on the growth of aggredata are daily. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Overview gate demand and inflation in the United States. In light of the ongoing difficulties in Asia and the possible effects on the United States, the FOMC not only left interest rates unchanged in December but shifted its instructions to the Manager of the System Open Market Account to symmetry between ease and tightening in the near term. The inflation risk from a tight labor market and accelerating wages seemed to be roughly balanced over the near term by the effects of a number of other factors, including the economic weakness in Asia, a slump in the prices of oil and other commodities in the latter part of 1997, and the restraint on import prices from the substantial appreciation of the dollar against most other currencies over the preceding few quarters. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

U.S. Economic and Financial Developments in 1997 The year 1997 was an exceptionally Meanwhile, inflation slowed from the good one for the U.S. economy. Real already reduced rates of the previous GDP increased VA percent over the four few years. Although wages and total quarters of the year. Household and hourly compensation accelerated in the business expenditures continued to rise tight labor market, the inflationary rapidly, owing in part to supportive impulse from that source was more than financial conditions, including a strong offset by other factors, including rising stock market, ample availability of competition from imports, the price credit, and, from April onward, declin- restraint from increased manufacturing ing intermediate- and long-term interest capacity, and a sizable gain in labor rates. In the aggregate, private domestic productivity. spending on consumption and investment rose 5 percent on an inflationadjusted basis. The strength of spend- The Household Sector ing, along with a further sizable appreciation of the foreign exchange Consumption Spending, Income, value of the U.S. dollar, brought a surge and Saving of imports, the largest in many years. The growth of exports, while lagging Bolstered by increases in income and that of imports, also was substantial wealth, personal consumption expendidespite the appreciation of the dollar tures rose more than VA percent in and the emergence after midyear of 1997. Expenditures were strong for a severe financial difficulties in several wide variety of durable goods. Real outforeign economies, particularly among lays on home computers continued to the advanced developing countries in soar, rising even faster than they had Asia. over the previous few years. Strength was also reported in purchases of home Change in Real GDP goods, and consumer expenditures on Percent, Q4 to Q4 motor vehicles more than reversed the small declines of the previous two years. At the same time, real expenditures on services scored the largest gain of the past several years, rising 4 percent. Real disposable personal income— after-tax income adjusted for inflation— increased about VA percent over 1997, a rise that was exceeded on only one occasion in the previous decade. Income was boosted by sizable gains in wages and 1991 1993 1995 1997 salaries and by another year of large NOTE. The data are derived from chained (1992) dollars and come from the Department of Commerce. increases in dividends. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 84th Annual Report, 1997 Measured in terms of annual aver- and sales of existing homes increased ages, the personal saving rate fell further about 3 percent. House prices moved in 1997. The yearly average of 3.9 per- up more quickly than prices in general. cent was almost xh percentage point Responding to the strong demand, starts below the 1996 average and nearly a full of new single-family units remained at a percentage point below the 1995 aver- high level, only a touch below that of age. It also was the lowest annual read- 1996; the annual total for single-family ing in several decades. Various surveys units exceeded 1 million units for a sixth of households indicated that consumers consecutive year, putting the current had become more optimistic about pros- expansion in single-family housing conpects for the economy, and their opti- struction nearly on a par with that of mism may have led them to spend more the 1980s in terms of longevity and freely from current income. Support for strength. additional spending came from the Starts of multifamily units increased further rise in the stock market, as the in 1997 for the fourth year in a row and capital gains accruing to households were about double the record low of increased the chances of their meeting 1993. The increased construction of longer-run net worth objectives even as these units was supported by a firming they consumed a larger proportion of of rents, abundant supplies of credit, and current income. declines in vacancy rates in some markets. The national vacancy rate came down only slightly, however, and it has Residential Investment reversed only a portion of the sharp Real residential investment increased run-up that took place in the 1980s. about 5V2 percent during 1997. Outlays The home-ownership rate—the numfor the construction of new single- ber of households that own their dwellfamily structures rose moderately, and ings divided by the total number of spending on the construction of multi- households—moved up further in 1997, family units continued to recover from to about 653/4 percent, a historical high. the extreme lows that were reached ear- The rate fell in the 1980s but has risen lier in the decade. Real outlays for home almost 2 percentage points in this improvements and brokers' commis- decade. sions, categories that have a combined weight of more than 35 percent in total residential investment, moved up sub- Household Finance stantially from the final quarter of 1996 to the final quarter of 1997. Spending on Household net worth grew more than mobile homes, a small part of the total, $3V2 trillion during 1997, ending the also advanced. year at its highest multiple relative to The indicators of single-family hous- disposable personal income on record. ing activity were almost uniformly Most of the increase was the result of strong during the year. Sales of houses upward revaluations of household assets surged, driven by declines in mortgage rather than additional saving. In particuinterest rates and the increasingly favor- lar, capital gains on corporate equities able economic circumstances of house- accounted for about three-fourths of the holds. Annual sales of new single- increase. Flows of household assets into family houses were up 6 percent from mutual funds, pensions, and other vehithe number sold in the preceding year, cles for holding equities indirectly were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

U.S. Economic and Financial Developments exceeded by outflows from directly held than 20 percent, to some extent because equities. of households' rising debt burden; a Household borrowing not backed by change in the federal bankruptcy law real estate, including credit card bal- and a secular trend toward associating ances, auto loans, and other consumer less social stigma with bankruptcy also credit, increased 4J/2 percent in 1997. may have contributed. Over the same These obligations grew at double-digit period, delinquency and charge-off rates in 1994 and 1995 but slowed fairly rates on consumer loans increased steadily thereafter. Mortgage borrowing, significantly. which has experienced relatively muted In 1997, however, because the growth swings in growth during the current of household debt only moderately outexpansion, increased 1XA percent in paced that of income at the same time 1997, a gain that was only a bit less than that interest rates were drifting lower, the rise in 1996. Within the mortgage the household debt-service burden did category, however, home equity loans not change. Reflecting, in part, the staadvanced sharply, reflecting in part the bility of the aggregate household debt increased use of these loans in refinanc- burden, delinquency rates for many ing and consolidating credit card and segments of consumer credit plateaued, other consumer obligations. although charge-off rates generally con- An element in the slowing of con- tinued to rise somewhat. Personal banksumer credit growth may have been ruptcies advanced again in 1997 but assessments by some households that slowed considerably in the second half they were reaching the limits of their of the year. capacity for carrying debt and by some Some of the apparent flattening of lenders that they needed to selectively household debt-repayment problems tighten their standards for granting new may also have resulted from efforts by loans. In the mid-1990s, the percentage lenders to stem the growth of losses on of household income required to meet consumer loans. In both 1996 and 1997, debt obligations rose to the upper end of a large percentage of the respondents to its historical range, in large part because the Federal Reserve's quarterly Senior of a sharp rise in credit card debt. Loan Officer Opinion Survey on Bank Between 1994 and 1996 personal bank- Lending Practices reported tightened ruptcies grew at an annual rate of more standards on consumer loans. However, Household Net Worth Percent Household Debt-Service Burden Percent 17 1982 1985 1988 1991 1994 1997 1 1 1 1 _LL _LL _LL NOTE. AS a percentage of disposable personal income. 1965 1970 1975 1980 1985 1990 1997 Debt service is the sum of estimated required interest and NOTE. AS a percentage of disposable personal income; principal payments on consumer and household-sector four-quarter moving average. mortgage debt. The data are quarterly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 84th Annual Report, 1997 the percentages reporting tightening fell the expenditure data for other commera bit in the latter part of that period, cial buildings and industrial buildings. suggesting that many banks felt that they Other indicators of market conditions had altered their standards sufficiently. pointed to underlying firmness in non- Although banks pulled back a bit residential construction. Vacancy rates from consumer lending in 1997, most declined, for example, and rents seemed households had little trouble obtaining to be picking up. In some regions of the credit. Bank restraint most commonly country, more builders were putting up took the form of lower credit limits or new office buildings on "spec"—that higher finance charges on outstanding is, undertaking new construction before balances; credit card solicitations con- occupants had been lined up. The new tinued at a record pace. projects were apparently being spurred to some degree by the ready availability of financing. The Business Sector Business inventory investment picked up considerably in 1997. The level of Investment Expenditures inventories held by nonfarm businesses Adjusted for inflation, business outlays rose more than 5 percent in real terms for fixed investment rose 9 percent over over the course of the year after increas- 1997 after gaining about 12 percent over ing roughly 2 percent in 1996. Accumu- 1996. Spending continued to be spurred lation was especially rapid in the comby rapid growth of the economy, favor- mercial aircraft industry, in which able financial conditions, attractive pur- production was being ramped up in chase prices for new equipment, and response to a huge backlog of orders for optimism about the future. Business out- new jet aircraft. With the rate of invenlays for equipment, which account for tory growth outpacing the growth of more than three-fourths of total busi- final sales in 1997, the stock-to-sales ness fixed investment, moved up about ratio for the nonfarm sector ticked up 13 percent over 1997, making it the slightly after declining slightly in the fourth year of the last five in which the preceding year. Nonetheless, businesses annual gains have exceeded 10 percent. in general did not appear to be uncom- As in previous years of the expansion, fortable with the levels of stocks they the most striking gains were posted for were carrying at year-end. computers, the power of which continued to advance rapidly at the same time Corporate Profits and prices continued to decline. Spending Business Finance also moved up briskly for many other types of equipment, including communi- Despite a fourth-quarter downturn, the cations equipment, commercial aircraft, annual economic profits of corporate industrial machinery, and construction businesses—that is, book profits after machinery. inventory valuation and capital con- Real outlays for nonresidential con- sumption adjustments—increased about struction, the remaining portion of busi- 9!/2 in 1997 after gaining 13V4 percent ness fixed investment, declined slightly in 1996. Profits from the foreign operain 1997 after moving up in each of tions of these corporations rose only the four previous years. Construction of moderately in 1997, but the profits from office buildings continued to increase in domestic operations, by far the larger 1997, but sluggishness was reported in share of the total, posted further strong Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

U.S. Economic and Financial Developments 11 gains—about 16 percent for financial merger-related retirements. Given these corporations and more than 9 percent financing requirements, the growth of for nonfinancial corporations, in terms nonfinancial corporate debt picked up to of annual totals. For the year, the profits 8 percent in 1997. of nonfinancial corporations from With the debt of nonfinancial corporadomestic operations amounted to about tions advancing briskly, the ratio of their 13V2 percent of the nominal domestic interest payments to cash flow was about output of those corporations, up from unchanged in 1997 after several years of 73/4 percent in 1982 and the highest decline that had left the ratio at quite a annual share since the late 1960s. The low level. Consequently, measures of elevated profit share reflected both a debt-repayment difficulties also were high level of cash flow before interest very favorable: The default rate on corcosts, which was also at a multiyear porate bonds remained extremely low, peak relative to output, and the declines and the number of upgrades of debt in interest costs that have taken place in about equaled the number of downthe 1990s. In their profit announcements grades. Similarly, only small percentfor the fourth quarter, few corporations ages of business loans at banks were reported that they had experienced much delinquent or charged off. The rate of fallout from the events in Asia, but business bankruptcies increased a bit but many warned that profits in the first half was still fairly low. of 1998 could be significantly affected. Businesses continued to find credit Despite the rapid growth of profits, amply supplied at advantageous terms the financing gap for nonfinancial in 1997. The spreads between yields on corporations—capital expenditures less investment-grade bonds and yields on internal cash flow—widened over the Treasury securities of similar maturities year, reflecting the strong expansion remained narrow, varying only a little of spending on capital equipment and during the year. The spreads between inventories. Furthermore, on net, firms yields on below-investment-grade bonds continued to retire a large volume and those on Treasury securities fell durof equity, adding further to borrowing ing the year, touching new lows before needs, as substantial gross issuance was widening a bit in the fall; the widening swamped by stock repurchases and occurred in large part because these securities benefited less from the flight Corporate Profits before Taxes to U.S. assets in response to events in Asia than did securities of the Treasury. Percent Banks also appeared eager to lend to businesses. Large percentages of respon- 15 dents to the Federal Reserve surveys, citing stiff competition as the reason, 12 said they had eased terms on business 9 loans—particularly the spreads between loan rates and banks' cost of funds. Much smaller percentages reported hav- I I I I I I I I I 1 1 1 I 1 1 I I I I I ing eased standards on these loans. The 1977 1981 1985 1989 1993 1997 high ratios of stock prices to earnings NOTE. Profits of nonfinancial corporations from indicate that equity finance was also domestic operations, with inventory valuation and capital quite cheap in 1997. Nevertheless, the consumption adjustments, as a percentage of the gross market for initial public offerings of domestic product of the nonfinancial corporate sector. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 84th Annual Report, 1997 equity was cooler than in 1996: New the strength of the economy, which has issues were priced below the expected reduced outlays for income support. range more often than above it, and In nominal terms, small to moderate first-day trading returns were smaller on increases were recorded in most major average. expenditure categories in fiscal 1997. The pickup in business borrowing Net interest outlays, which have been was widespread across funding sources. accounting for about 15 percent of total Outstanding commercial paper, which unified outlays in recent years, rose only had declined a bit in 1996, posted strong a small amount in 1997, as did nominal growth in 1997, as did bank business outlays for defense and for income seculoans. Gross issuance of bonds was rity. Expenditures on Medicaid rose extremely high, particularly bonds rated moderately for a second year after havbelow investment grade. Such lower- ing grown very rapidly for many years; rated bonds made up nearly half of all spending in this category has been issuance, a new record. Although sales restrained of late by the strong economy, of new investment-grade bonds slowed the low rate of inflation in the medical a bit in the fall, corporations were appar- area, and policy changes in the Mediently waiting out the market volatility caid program. Policy shifts and the at that time. The financing of income strong economy also cut into outlays for properties—residential apartments and food stamps, which fell about 10 percent commercial buildings—expanded fur- in fiscal 1997. By contrast, spending on ther in 1997; banks, real estate invest- Medicare continued to rise at about three ment trusts, and commercial-mortgage- times the rate of total federal outlays. backed securities were the most Growth of outlays for social security significant sources of funds. also exceeded the rate of rise of total expenditures. Real federal outlays for consumption The Government Sector and gross investment, the part of federal spending that is counted in GDP, declined slightly, on net, from the fourth Federal Expenditures, quarter of 1996 to the fourth quarter of Receipts, and Finance 1997. Real outlays for defense, which Nominal outlays in the unified budget account for about two-thirds of the increased about 2Vi percent in fiscal spending for consumption and investyear 1997 after moving up 3 percent in fiscal 1996. Fiscal 1997 was the sixth Federal Receipts and Expenditures consecutive year in which the growth of Percent spending was less than the growth of nominal GDP. During that period, Total expenditures spending as a percentage of nominal GDP fell from about 22 Vi percent to just over 20 percent. The set of factors that combined to bring about this result includes implementation of fiscal poli- I I 1 I I 1 I I I I I I 1 I 1 I cies aimed at reducing the deficit, which has helped slow the growth of discre- 1981 1985 1989 1993 1997 tionary spending and spending on some NOTE. AS a percentage of nominal GDP. Data on receipts and expenditures are from the unified budget; social and health services programs, and years are fiscal years. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

US. Economic and Financial Developments 13 ment, edged lower, as did nonde- net redemption of bills, which at times fense outlays. Because of much larger pushed yields on short-term bills down declines in most other recent years, the relative to yields on other Treasury level of real defense outlays at the end securities and on short-term private of 1997 was down about 23 percent obligations. from its level at the end of the 1980s; The year saw the first issuance by the total real outlays for consumption and Treasury of inflation-indexed securities. investment dropped nearly 15 percent The Treasury sold indexed ten-year over that period. notes in January and April, and five-year Federal receipts rose faster than nomi- notes in July and October; a sale of nal GDP in fiscal 1997 for a fifth con- indexed thirty-year bonds was schedsecutive year; receipts were 193/4 per- uled for April 1998. At Treasury auccent of GDP, up from 173/4 percent in tions, investor interest in the securities fiscal 1992. The ratio tends to rise dur- was substantial, with the ratios of ing business expansions, mainly because received bids to accepted bids resemof cyclical increases in the share of prof- bling those for nominal securities. As its in nominal GDP. In recent years, the expected, most of the securities were ratio has also been boosted by the tax quickly acquired by final investors, and increases included in the Omnibus Rec- the trading volume as a share of the onciliation Act of 1993, by a rise in the outstanding amount was much smaller share of income going to high-income than for nominal securities. taxpayers, and by receipts from surging An important macroeconomic implicapital gains realizations, which raise cation of the reduced federal deficit was the numerator of the ratio but not the that the federal government ceased to denominator because capital gains real- be a negative influence on the level of izations are not part of GDP. In fiscal national saving. The improvement in the 1997, combined receipts from individual federal government's saving position in income taxes and social insurance taxes, recent years has more than accounted which account for about 80 percent of for a rise in the total gross saving of total receipts, moved up about 9Vi per- households, businesses, and governcent, even more than in fiscal 1996. ments, from about I4l/z percent of gross Receipts from taxes on corporate profits national product earlier in the decade, were up about 6 percent after increasing when federal government saving was at about 9Vi percent in fiscal 1996. The a cyclical low and highly negative, to total rise in receipts in fiscal 1997, more than 17 percent in 1997. This rise coupled with the subdued rate of in- in domestic saving, along with increased crease in nominal outlays, resulted in a borrowing from abroad, has financed the budget deficit of $22 billion, down from rise in domestic investment during this $107 billion in the preceding fiscal year. expansion. Still higher rates of saving With the budget moving close to bal- and investment were the norm two or ance, federal borrowing slowed sharply three decades ago, when the personal in 1997. The Treasury responded to the saving rate was a good bit above its smaller-than-expected borrowing need level in recent years. by selling fewer bills so as to keep its auctions of coupon securities predict- State and Local Governments able and of sufficient volume to maintain the liquidity of the secondary mar- The real outlays of state and local govkets. The result was an unusually large ernments for consumption and invest- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 84th Annual Report, 1997 ment moved up 2 percent over the four been larger than 3 percent of receipts in quarters of 1997, a rise similar to the each of the past three years. average rate of increase since the start State and local debt expanded about of the 1990s. Investment expenditures, 5Vi percent in 1997 after changing little which have grown about 2x/i percent in 1996 and declining in the two preceda year in this decade, rose at less than ing years. In those earlier years, municihalf that pace in 1997. However, real pal debt outstanding had been held down consumption expenditures increased by the retirement of bonds that were 2XA percent, a touch above the average "advance refunded" in the early 1990s. thus far in the decade. Compensation In such operations, funds that had earlier of government employees, which been raised and set aside were used to accounts for about three-fifths of real refund debt as it became callable. By the consumption and investment expendi- end of 1996, however, the stock of such tures, rose about VA percent in 1997 debt had apparently been largely worked and has increased at an annual rate of down. only about 1 lA percent since the end of the 1980s. The Labor Market The efforts of state and local governments to hold down their labor expenses Employment, Productivity, were also evident in other data. The and Labor Supply employment cost index for nominal hourly compensation of workers More than 3 million jobs were added employed by state and local govern- to nonfarm payrolls in 1997—a gain ments increased 2lA percent in 1997, a of nearly 23A percent, measured from little less than in 1996 and the smallest December to December. Patterns of hirannual increase in the seventeen-year ing mirrored the broadly based gains history of the series. The increase in in output and spending. Manufacturthe average hourly wage of state and ing, construction, trade, transportation, local government employees was about finance, and services all exhibited appre- 23/4 percent, roughly the same as the ciable strength. In manufacturing, the gain in 1996. The average hourly cost of 1997 rise in the job count followed two the benefit packages provided to state years of little change; in the other secand local government employees rose tors the 1997 gains came on top of subonly 1 lA percent, a percentage point less stantial increases in other recent years. than the 1996 increase. Especially rapid increases were posted With costs contained and receipts in some of the services industries, continuing to rise as the economy has including computer services, managegrown, financial pressures that were evi- ment services, education, and recreation. dent among state and local governments Employment at suppliers of personnel, a earlier in the expansion have dimin- category that includes the agencies that ished. The increased breathing room in supply help on a temporary basis, also the budgets of recent years is apparent increased appreciably in 1997, but the in the consolidated current account of gains in this category fell considerably these governments: Surpluses in that short of those seen in most previous account, excluding those that are ear- years of the expansion. Help-supply marked for social insurance funds, had firms reported that shortages of workdipped to a low of about 1 lA percent of ers were limiting the pace of their nominal receipts in 1991, but they have expansion. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

U.S. Economic and Financial Developments 15 Labor productivity has risen rapidly After moving up a step in 1996, the over the past two years. The 1996 gain labor force participation rate continued in output per hour in the nonfarm busi- to edge higher in 1997. Without the ness sector was about \3A percent, and increment to labor supply from the 1997 increase was larger still—a bit increased participation over these two more than 2 percent, according to the years, the unemployment rate would estimates as of March 1998. Although have fallen to an even lower level. the average rate of productivity increase Changes in the welfare system may have since the end of the 1980s has been only contributed to the small rise in participaa little above 1 percent a year, the data tion in 1997; however, the extent of the for the past two years provide indica- contribution is unclear because of the tions that sustained high levels of invest- difficulties of disentangling it from the ment in new technologies may finally be normal tendency of participation to rise translating into a stronger trend. when the labor market is tight. Even The civilian unemployment rate fell though one-third of the adult population more than Vi percentage point from remained outside the labor force in the fourth quarter of 1996 to the fourth 1997, the vast majority of those indiquarter of 1997, to an average of just viduals likely were in pursuits that under 43/4 percent. For most of the year, tended to preclude their workforce parthe rate was somewhat below the lowest ticipation, such as retirement, schooling, rate during the expansion of the 1980s. or housework. The percentage of the A variety of survey data indicated that working age population interested in firms were having increased difficulty work but not actively seeking it moved filling jobs. down further, to 2VA percent in the fourth quarter, a record low in the history of a series that began in 1970. Labor Market Conditions Millions of jobs, Dec. to Dec. Net change in payroll employment Wages and Hourly Compensation Total nonfarm The employment cost index for hourly compensation in private industry increased 3.4 percent from December 1996 to December 1997. This rise exceeded that of the preceding year by 1 1 1 1 1 I 0.3 percentage point and that of 1995 by Percent 0.8 percentage point. Although the Civilian unemployment rate patterns of change in hourly pay varied considerably by industry and occupation from 1995 to 1997, the overall step-up seems to have been prompted, in large part, by the tightening of labor markets. The implementation of a higher minimum wage also appears to have been a factor in some industries and occupa- 1991 1993 1995 1997 tions, although its impact is difficult to NOTE. The data are from the Department of Labor. The break in the unemployment rate data at January 1994 assess precisely. marks the introduction of a redesigned survey; data from The wage and salary component of that point on are not directly comparable with those of earlier periods. hourly compensation rose faster in 1997 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 84th Annual Report, 1997 than in any previous year of the expan- workers—stock options and signing sion. Annual increases in the employ- bonuses, for example. ment cost index for wages and salaries in private industry amounted to 2.8 per- Prices cent in both 1994 and 1995, but the increases in 1996 and 1997 were Indications of a slowing of inflation in 3.4 percent and 3.9 percent respectively. 1997 were widespread in the various Wages and salaries in the service- measures of aggregate price change. The producing industries accelerated nearly consumer price index, which rose more a full percentage point in 1997, pushed than 3 percent over the four quarters of up, especially, by sharp pay increases 1996, increased slightly less than 2 perin the finance, insurance, and real cent over the four quarters of 1997 as estate sector, in which commissions and energy prices turned down and increases bonuses were boosted by high levels of in food prices slowed. The CPI mortgage refinancing and trading activ- excluding food and energy—a widely ity. By contrast, hourly wages in the used gauge of the underlying trend of goods-producing industries slowed a inflation—rose only 2lA percent in 1997 couple of tenths of a percentage point in after increasing 3 percent in 1995 and 1997; the annual gains in these indus- 2Vi percent in 1996. The CPI for comtries have been around 3 percent, on modities other than food and energy rose average, in each of the past six years. about Vi percent over the four quarters Although the costs of the fringe bene- of 1997 after moving up slightly fits that companies provide to their more than 1 percent over 1996. Price employees also picked up in 1997, the increases for non-energy services, which 2.3 percent increase was not large by have a much larger weight than comhistorical standards. As in other recent modities in the CPI excluding food and years, benefit costs in 1997 were restrained by a variety of influences. Change in Prices Most notably, the price of health care Percent, Q4 to Q4 continued to rise at a subdued pace, and Consumer the ongoing strength of the economy limited the need for payments by firms to state unemployment trust funds. Even though some firms reported seeing in renewed sharp increases in health care costs during the year, the employment cost data suggest that most firms were still keeping those costs under fairly Consumer excluding food and energy tight control. With nominal hourly compensation in almost all industries moving ahead at a pace faster than inflation, workers' pay generally increased in real terms—and the real gains were substantial in many occupations. Indeed, the employment 11 111 J 11 11 MIL cost index does not capture some of the 1991 1993 1995 1997 forms of compensation that employers NOTE. Consumer price index for all urban consumers. have been using to attract and retain Based on data from the Department of Labor. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

U.S. Economic and Financial Developments 17 Change in Prices the goods and services purchased)— Percent increased 13A percent after rising 2lA percent in 1996. The smaller 1997 Price measure 1996 1997 rise in the price index for aggregate Fixed-weight purchases relative to that for aggregate Consumer price index 3.2 1.9 production was mainly a reflection of Excluding food and energy 2.6 2.2 declines in the prices of imports. Both Chain-type the price measure for production and the Personal consumption expenditures . 2.7 1.5 Excluding food and energy 2.3 1.5 price measure for purchases were influ- Gross domestic purchases 2.3 1.3 Gross domestic product 2.3 1.8 enced importantly by falling computer prices; the CPI was less influenced by NOTE. Changes are based on quarterly averages and are measured to the fourth quarter of the year indicated these prices, as it gave small weight to from the fourth quarter of the preceding year. computers through 1997. (It has started weighting them more heavily in 1998.) energy, also slowed a little in 1997; the 3 percent rise was about lA percentage In real terms, imports of goods and services account for approximately point less than the increase during 1996. 15 percent of the total purchases of Only small portions of the slowdowns households, businesses, and governfrom 1996 to 1997 in the total CPI and ments located in the United States. in the CPI excluding food and energy However, that figure probably underwere the result of technical changes states the degree of restraint that falling implemented by the Bureau of Labor Statistics.1 import prices have imposed on inflation in recent years, because the lower prices Other aggregate price measures also for imports also make domestic producdecelerated in 1997. The chain-type ers of competing products less likely to price index for gross domestic raise prices. Prices have also been purchases—the broadest measure of restrained by large additions to manuprices paid by U.S. households, busifacturing capacity in this country, nesses, and governments—increased slightly more than \lA percent in 1997 amounting to more than 5 percent a year after moving up 2lA percent in 1996. over the past three years; this capacity growth has helped to stave off the bottle- The chain-type price index for gross necks that have so often developed in domestic product—a measure of price the advanced stages of other postwar change for the goods and services business expansions. A gain in manuproduced in this country (rather than facturing production of more than 6 percent in 1997 was accompanied by only a 1. In recent years, the Bureau of Labor Statismoderate increase in the factory operattics has introduced a number of technical changes ing rate, which at year-end remained in its procedures for compiling the CPI, with the aim of obtaining a more accurate measure of price well below the highs reached in other change. Typically, the changes have had only recent expansions and the peak for this small effects on the results for any particular year, expansion, which was recorded at the but their cumulative effects are somewhat larger start of 1995. and have tended to hold down the reported increases relative to what would have been Reflecting the ample domestic supply reported with no changes in procedures. Apart and the effects of competition from from the procedural changes, the reported rate of goods produced abroad, the producer rise from 1998 forward will also be affected by price index for finished goods declined an updating of the CPI market basket, an action about 3A percent from the fourth quarter that the BLS undertakes approximately every ten years. of 1996 to the fourth quarter of 1997; Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 84th Annual Report, 1997 excluding food and energy, it rose only Credit, Money, Interest Rates, fractionally. Prices of domestically pro- and Equity Prices duced intermediate materials (other than food and energy) also rose only slightly, Credit and Depository on net. The prices of raw industrial com- Intermediation modities, many of which are traded The debt of the domestic nonfinancial in international markets, declined over sectors grew about 5 percent in 1997, in the year; the weakness of prices in these the middle of the range established by markets was especially pronounced in the FOMC and about the same as in late 1997, when the crises in Asia were 1996, when it grew 5]A percent. The worsening. slight deceleration was attributable to After moving up more than 4 percent the federal component, which, because in 1996, the consumer price index for of the reduced budget deficit, rose food increased only VA percent in 1997. less than 1 percent after having risen Impetus for the large increase in 1996 33/4 percent in 1996. Nonfederal debt had come from a surge in the price grew 6V2 percent, a bit more than in of grain, which peaked around the 1996, as the step-ups in borrowing by middle of that year; thereafter, grain businesses and by state and local govprices dropped back considerably. An ernments more than offset the deceleraecho of the up-and-down price pattern tion of household debt. for grain appeared at retail in the form Depository institutions increased their of sharp price increases for meats, poulshare of credit flows in 1997, with credit try, and dairy products in 1996 followed on their books expanding 63A percent, by small to moderate declines for most up appreciably from growth in 1996. of those products in 1997. Moderate The growth of bank credit, adjusted to price increases were posted at retail for remove the effects of mark-to-market most other food categories over the year. accounting rules, picked up to an The CPI for energy traced out an even 8V2 percent pace, the largest rise in ten larger swing than the price of food: A years; and banks' share of domestic nonjump of IV2 percent over the four quarfinancial debt outstanding climbed to ters of 1996 was followed by a decline its highest level since 1988. Holdings of about 1 percent over the four quarters of securities—which constitute about of 1997. As is usually the case in this one-fourth of bank credit—expanded at sector, the key to the changes in consumer energy prices was the price of crude oil, which in 1997 more than TotalDomestic Nonfinancial Debt reversed the run-up of the preceding Trillions of dollars year. A1ctual Surveys in which respondents are 7% 15.5 asked to state their expectations of future rates of price increase showed *** inflation expectations coming down a 15.0 T bit further in 1997. A lowering of infla- 3% tion expectations has long been viewed -—' 14.5 as an essential ingredient in the pursuit i 1 1 , , Range of price stability, and the data of recent 1 1 1 1 j I I t 1 1996 1997 years have pointed to ongoing progress NOTE. The range was adopted by the FOMC for the in that regard. period from 1996:Q4 to 1997:Q4. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

U.S. Economic and Financial Developments 19 a brisk pace in 1997 after declining high in 1997, and thrifts also were in 1995 and remaining flat in 1996. aggressive lenders. The outstanding Loans—which make up the remainder amount of credit extended by thrifts of bank credit—advanced a bit more grew about l/i percent, but the sluggishquickly in 1997 than in 1996, though ness was due entirely to the acquisitions more slowly than in 1995. of thrifts by commercial banks; among The increase in bank loans occurred thrifts not acquired during the year, asset despite a net decline in consumer loans growth was similar to that of banks. on banks' books resulting both from sharply slower growth in loans origi- The Monetary Aggregates nated by banks and from continued securitization of those loans. Real estate Boosted in part by the need of deposiloans at banks, by contrast, posted solid tory institutions to fund substantial growth, boosted by a pickup in home growth in their credit, M3 shot up mortgages, rapid growth in home equity in 1997, expanding S3A percent; this loans, which in part were substituting growth was well above the 2 percent to for consumer loans, an acceleration in 6 percent annual range established by commercial real estate lending, and the the FOMC and intended to suggest the acquisition of thrift institutions by rate of growth over the long run that banks. Commercial and industrial loans would be consistent with price stability. also expanded considerably in 1997, M3 was also boosted by a shift in reflecting both the general rise in the sources of funding—mostly at U.S. demand by businesses for funds and an branches and agencies of foreign increase in banks' share of the nonmort- banks—from borrowings from related gage business credit market as they offices abroad, which are not included in competed vigorously for business loans. M3, to large time deposits issued in the The rapid growth of banks' assets was United States, which are. Also contributfacilitated by their continued high profit- ing to the strength in M3 was the rapid ability and abundance of capital; at the growth of institution-only money funds, end of the fourth quarter, 98 percent a result of gains by such funds in providof bank assets were at well-capitalized ing corporate cash management serinstitutions. Problems with the repay- vices. Corporations that manage their ment performance of consumer loans— own cash often keep their funds in shortwhich, while not deteriorating further, term assets that are not included in M3. remained elevated by historical Although the growth of M2 did not standards—hurt some banks; however, match that of M3, it did increase at a overall loan delinquency and charge-off brisk 5Vi percent rate in 1997. As the rates stayed quite low, and measures of Committee had anticipated, the growth banks' profitability held at the elevated of this aggregate was somewhat above levels they have occupied for several the upper bound of its 1 percent to 5 peryears. Profits at a few large bank hold- cent annual range, which, like that of ing companies were reduced in the M3, had been chosen to be consistent fourth quarter by trading losses resulting with expected M2 growth under condifrom the events in Asia. Nonetheless, tions of price stability. Because shortthe profits of the industry as a whole term interest rates responded only remained robust. slightly to System tightening in March, The profits and capital levels of thrift the opportunity cost of holding M2—the institutions, like those of banks, were interest earnings forgone by owning M2 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 84th Annual Report, 1997 assets rather than money market instru- M2 Velocity and M2 Opportunity Cost ments such as Treasury bills—was about Ratio scale Percentage points, ratio scale unchanged over the year. As M2 grew at about the same rate as nominal GDP, its M2 velocity velocity was also essentially unchanged. The ups and downs of M2 growth in 1.9 - 1997 tended to mirror those of the growth of nominal output. M2 expanded 1.8 more slowly in the second quarter than in the first, consistent with the cooling 1.7 -. of nominal GDP growth and almost unchanged opportunity costs. In the sec- 1979 1985 1991 1997 ond half of the year, M2 growth picked up, roughly pacing the growth of nomi- NOTE. The velocity of M2 is the ratio of nominal gross domestic product to the stock of M2. The opportunity nal GDP. In the fall, M2 may also have cost of M2 is a two-quarter moving average of the threebeen boosted a little by volatility in month Treasury bill rate less the weighted average return on assets included in M2. equity markets, which may have led some households to seek the relative costs, along with some residual upward safety of M2 assets. drift. This drift suggests that some For several decades before 1990, M2 households may still have been in the velocity responded positively to changes process of shifting their portfolios in its opportunity costs and otherwise toward non-M2 assets. There was no showed little net movement over time. uptrend in velocity over the second half This pattern was disturbed in the early of 1997, perhaps because of the declin- 1990s in part by households' apparent ing yields on intermediate- and longdecision to shift funds out of lower- term debt and the greater volatility and yielding M2 deposits into higher- lower average returns of stock mutual yielding stock and bond mutual funds, funds. However, given the aberrant which raised M2 velocity even as oppor- behavior of velocity during the 1990s tunity costs were declining. The move- in general, considerable uncertainty ments in the velocity of M2 from 1994 remains about the relationship between into 1997 appear to have again been the velocity and opportunity cost of M2 explained by changes in opportunity in the future. Stock of M3 Stock of M2 Trillions of dollars Trillions of dollars Actual 5.4 Actual 4.0 5.2 3.8 5.0 i i i i i 1996 1997 1996 1997 NOTE. The range was adopted by the FOMC for the NOTE. The range was adopted by the FOMC for the period from 1996:Q4 to 1997:Q4. ' period from 1996:Q4 to 1997:Q4. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

U.S. Economic and Financial Developments 21 Annual Rate of Change in Reserves, Money Stock, and Debt Aggregates Percent 1997 Item 1994 1995 1996 Year Ql Q2 Q3 Q4 Depository institution reserves' Total -1.2 -4.9 -11.6 -6.3 -8.3 -14.3 -1.8 -1.3 Nonborrowed plus extended credit -1.4 -4.9 -11.6 -6.4 -7.2 -16.0 -3.4 .7 Required -1.1 -5.2 -11.9 -7.3 -8.4 -15.0 -2.4 -4.1 Monetary base2 8.4 4.0 3.8 6.0 5.3 3.7 6.3 8.1 Concepts of money3 Ml 2.5 -1.6 -4.5 -1.2 -1.4 ^.5 .3 .8 Currency 10.1 5.4 5.7 7.5 6.9 6.4 7.0 8.7 Demand deposits .6 1.4 2.9 -2.0 .6 -4.9 .0 -3.7 Other checkable deposits -1.8 -10.6 -22.8 -12.2 -16.0 -20.1 -10.1 -4.7 M2 .6 3.9 4.6 5.6 5.1 4.4 5.4 6.8 Non-Mi components -.2 6.6 8.7 8.2 7.7 7.9 7.3 9.0 Savings (including MMDAs) -4.2 -3.3 12.0 9.9 9.3 9.6 7.1 12.2 Small denomination time deposits 2.4 15.3 1.8 1.9 1.8 2.4 2.6 .7 Retail money market mutual funds ... 7.6 18.5 14.5 15.8 14.7 13.5 16.1 15.6 M3 1.7 6.1 6.9 8.8 8.0 7.7 8.1 10.2 Non-M2 components 6.7 15.4 15.7 20.0 18.0 18.9 16.8 20.8 Large-denomination time deposits 7.3 15.9 16.4 18.1 18.4 20.9 16.1 12.7 Institution-only money market mutual funds -4.1 24.7 20.9 21.0 18.4 18.1 19.6 22.0 Repurchase agreements 13.5 5.8 4.5 17.0 6.1 6.8 13.5 38.3 Eurodollars 21.5 11.4 21.7 30.4 35.8 32.2 18.6 23.4 Domestic nonfinancial sector debt 4.9 5.4 5.3 4.9 4.4 5.0 4.2 5.8 Federal 5.7 4.4 3.7 .6 1.8 .4 -.6 .9 Nonfederal 4.6 5.8 5.8 6.5 5.4 6.6 5.9 7.4 NOTE. Changes for quarters are calculated from the M2 is Ml plus savings deposits (including money average amounts outstanding in each quarter. Changes for market deposit accounts); small-denomination time years are measured from Q4 to Q4. Based on seasonally deposits (including retail repurchase agreements), from adjusted data. which have been subtracted all individual retirement 1. Data on reserves and the monetary base incorporate accounts (IRAs) and Keogh accounts at commercial adjustments for discontinuities associated with regulatory banks and thrift institutions; and balances in taxable and changes in reserve requirements. tax-exempt retail money market mutual funds (money 2. The monetary base consists of total reserves; plus funds with minimum initial investments of less than the currency component of the money stock; plus, for all $50,000), excluding IRAs and Keogh accounts. quarterly reporters, and for all weekly reporters without M3 is M2 plus large-denomination time deposits at all required reserve balances, the excess of current vault cash depository institutions other than those due to money over the amount applied to satisfy current reserve require- stock issuers; balances in institution-only money market ments. For further details, see the Federal Reserve's H.3 mutual funds (money funds with minimum initial invest- Statistical Release. ments of $50,000 or more); wholesale RP liabilities (over- 3. Ml consists of currency in circulation excluding night and term) issued by all depository institutions, net vault cash; travelers checks of nonbank issuers; demand of money fund holdings; and Eurodollars (overnight and deposits at all commercial banks other than those due to term) held by U.S. residents at all banking offices in depository institutions, the U.S. government, and foreign Canada and the United Kingdom and at foreign branches banks and official institutions, less cash items in the of U.S. banks worldwide, net of money fund holdings. process of collection and Federal Reserve float; and other For further details, see the Federal Reserve's H.6 Statisticheckable deposits, which consist of negotiable orders cal Release. of withdrawal and automatic transfer service accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 84th Annual Report, 1997 Ml fell VA percent in 1997. As has unavoidable daily mismatches between been true for the past four years, the reserves made available through open growth of this aggregate was depressed market operations and desired reserves by the adoption by banks of retail sweep typically have been fairly small, and programs, whereby balances in trans- their effect on the federal funds rate has actions accounts, which are subject to been muted. However, banks also hold reserve requirements, are "swept" into reserve balances at the Federal Reserve savings accounts, which are not. Sweep to avoid overdrafts after making payprograms benefit depositories by reduc- ments for themselves and their customing their required reserves, which earn ers. This component of the demand for no interest. At the same time, they do reserves is difficult to predict, varies not restrict depositors' access to their considerably from day to day, and must funds for transactions purposes, because be fully satisfied each day. As required the funds are swept back into transac- reserves have declined, the demand for tions accounts when needed. The initia- balances at the Federal Reserve has tion of programs that sweep funds out of become increasingly dominated by these NOW accounts—in 1997 the most com- more changeable daily payment-related mon form of retail sweep programs— needs. Nonetheless, federal funds volaappears to be slowing, but sweeps of tility did not increase noticeably in household demand deposits have picked 1997. In part this was because the Fedup, and the estimated total amount by eral Reserve intervened more frequently which sweep account balances increased than in the past with open market operain 1997 was similar to that in 1996. tions of overnight maturity in order to Adjusted for the initial reduction in better match the supply of and demand transactions accounts resulting from the for reserves each day. In addition, banks introduction of new sweep programs, made greater use of the discount win- Ml expanded 6 percent in 1997, a little dow, increasing the supply of reserves above its sweep-adjusted growth in when the market was excessively tight. 1996. Significant further declines in reserve The drop in transactions accounts balances, however, do risk increased caused required reserves to fall 1XA per- federal funds rate volatility, potentially cent in 1997. Despite this decline, the complicating the money market operamonetary base grew 6 percent, boosted tions of the Federal Reserve and of the by a hefty advance in currency. Cur- private sector. One possible solution to rency again benefited from foreign this problem is to pay banks interest on demand, as overseas shipments contin- their required reserve balances, reducing ued at the elevated levels seen in recent their incentive to avoid holding such years. Moreover, domestic demand for balances. currency expanded sharply in response to the strong domestic spending. The Federal Reserve has been con- Interest Rates and Equity Prices cerned that as the steady decline in required reserves of recent years is Interest rates on intermediate- and longextended, the federal funds rate may term Treasury securities moved lower, become significantly more volatile. on balance, in 1997. Yields rose early in Required reserves are fairly predictable the year as market participants became and must be maintained on only a two- concerned that strength in aggregate week average basis. As a result, the demand would further tighten resource Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

U.S. Economic and Financial Developments 23 utilization margins and increase infla- indexed securities is sufficiently small tion unless the Federal Reserve took that their yields can fluctuate tempocountervailing action. Over the late rarily as a result of moderate shifts in spring and summer, however, as growth supply or demand. Indeed, much of the moderated some and inflation remained rise in the indexed yield came late in subdued, these concerns abated signifi- the year, when, in an uncertain global cantly, and longer-term interest rates economic environment, investors' declined. Further reductions came in the heightened desire for liquidity may have latter part of the year as economic prob- made nominal securities relatively more lems mounted in Asia. On balance, attractive. between the end of 1996 and the end With real longer-term interest rates of 1997, the yields on ten-year and remaining low and corporate profits thirty-year Treasury bonds fell about growing strongly, equities had another 70 basis points. At year-end, rates were good year in 1997, and major stock approaching their levels of the late indexes rose 20 percent to 30 percent. 1960s and early 1970s, when the Although stocks rose early in the year, buildup of inflation expectations was in they fell with the upturn in interest rates its early stages. in February. As interest rates subse- Survey measures of expectations for quently declined and earnings reports longer-horizon inflation generally did remained quite upbeat, the markets move lower in 1997, but by less than the again advanced, with most broad drop in nominal yields. As a result, esti- indexes of stock prices reaching new mates of the real longer-term interest highs in the spring. Advances were rate calculated by subtracting these mea- much more modest, on balance, over sures of expected inflation from nominal the second half of the year. Valuations yields indicate a slight decline in real seemed already to have incorporated rates over the year. In contrast, yields on very robust earnings growth, and in the inflation-indexed ten-year Treasury October, deepening difficulties in Asia note rose about a quarter percentage evidently led investors to lower their point between mid-March (when market expectations for the earnings of some participants seem to have become more U.S. firms, particularly high-technology comfortable with the new security) and firms and money center banks. Through the end of the year. The market for the the remainder of the fourth quarter, Selected Treasury Rates Major Stock Price Indexes Percent Index, December 1996 = 100 120 100 NASDAQ 80 1965 1970 1975 1980 1985 1990 1995 i - t i t i i i t i f i l i i i t t t i i t ii NOTE. The twenty-year Treasury bond rate is shown 1996 1997 until the first issuance of the thirty-year Treasury bond, in February 1977. The data are quarterly. NOTE. The data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 84th Annual Report, 1997 stock prices remained volatile but displayed little trend. Despite the strong performance of earnings in 1997 and the slower rise of stock prices in the second half of the year, valuations seemed to reflect a combination of expectations of quite rapid future earnings growth and a historically small risk premium on equities. The gap between the market's forward-looking earnings-price ratio and the real interest rate, measured by the ten-year Treasury rate less a survey measure of inflation expectations, was at the smallest sustained level in 1997 in the eighteen-year period for which these data are available. Declines in this gap generally imply either that expected real earnings growth has increased or that the risk premium over the real rate investors use when valuing those earnings has fallen, or both. Survey estimates of stock analysts' expectations of long-term nominal earnings growth were, in fact, the highest observed in the fifteen years for which these data are available. Because inflation has trended down over the past fifteen years, the implicit forecast of the growth in real earnings departs even further from past forecasts. However, even with this forecast of real earnings growth, the level of equity valuation suggested that investors were also requiring a lower risk premium on equities than has generally been the case in the past, a hypothesis supported by the low risk premiums evident in corporate bond yields in 1997. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

25 International Developments in 1997 In 1997 economic growth accelerated in Union also showed signs of growth. The the major foreign industrial countries, countries of central and eastern Europe with the exception of Japan, where continued to experience generally modgrowth slowed sharply under fiscal erate growth. Economic activity in tightening imposed in an atmosphere Africa expanded, but more slowly than of already depressed confidence in the during the spurt of the previous year, economy and distress in the banking and activity in the Middle East, which system. Unemployment remained near had been snowing signs of acceleration, its record high level in Japan and stayed stagnated again in 1997. high or rose in continental Europe The U.S. trade deficit in goods and despite a pickup in economic growth. services in 1997, at $114 billion, was Budget deficits declined in several Euro- little different from that in the precedpean countries, partly under the influ- ing year. Both exports and imports ence of measures inspired by the Maas- expanded vigorously, especially during tricht Treaty objective for 1997,1 and the first half of the year. Exports slowed the budget moved into surplus in Can- later in the year, even before the effects ada. Improving budget balances and of deteriorating economic and financial steady or falling inflation—which in conditions in Asia began to be felt. 1997 was less than 2 percent on average The current account deficit widened in the foreign G-10 countries—helped in 1997, to $166 billion from $148 bilmove long-term interest rates signifi- lion in 1996, as a result of rising net cantly lower abroad.2 payments on the large, negative U.S. Economic growth in most Asian investment position. A record net accudeveloping countries slowed in 1997, mulation of assets in the United States with widespread financial turmoil in the by private foreigners exceeded the level area depressing activity in the latter part of net capital inflows needed to balance of the year. The pace of economic activ- the current account deficit in 1997. Fority also generally moderated in Latin eign official assets in the United States America, except in Mexico and Venezu- also increased, but only slightly, in sharp ela, where growth was more robust. Out- contrast to the massive inflows of the put expanded slightly in Russia after previous two years. declining for six straight years; most of The exchange value of the dollar rose the other republics of the former Soviet over 1997 in terms of all major foreign currencies except the U.K. pound. The dollar moved up sharply against the cur- 1. According to the Maastricht Treaty, only rencies of most continental European those countries that had a general government countries and Japan, where economic deficit of 3 percent of gross domestic product or less in 1997 may participate in the European activity was moderate or even slow rela- Monetary Union upon its scheduled commence- tive to that in the United States. The ment at the start of 1999. dollar also appreciated dramatically in 2. The G-10 (Group of Ten) countries are terms of the currencies of several major Belgium, Canada, France, Germany, Italy, Japan, Asian countries, particularly in the the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States. second half of the year, when these Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 84th Annual Report, 1997 economies were disrupted by financial Economic growth remained robust in turmoil. the United Kingdom through most of the year, largely because the service sector expanded at a rapid pace; growth in manufacturing was weak. By mid- Foreign Economies year, output likely exceeded the level In Germany and France, economic regarded as sustainable. The official growth was slow early in 1997 but unemployment rate fell sharply to 5 perpicked up as the year progressed. cent, its lowest point in nearly two Growth continued to be led by net decades. Some of the decline was exports, although domestic demand did related to changes in the system of accelerate in both countries from its unemployment benefits. An appreciasluggish pace in 1996. In Italy, by con- tion in sterling relative to other major trast, net exports were depressed by the currencies reduced import prices, lingering effects of the lira's appreciation relative to the dollar and other major currencies in 1996, somewhat Changes in GDP, Demand, and Prices dampening otherwise solid growth. The Percent, from previous year stronger lira had reflected, in part, Gross domestic product improved prospects for Italy's inclusion in the first round of European Monetary Union. The shortfall of actual output from estimated potential narrowed slightly j in the major countries of continental 1 1 1 1 1 Europe, but the improvement had little Total domestic demand effect on stubborn unemployment. Reductions in employment subsidies in the eastern states of Germany raised the unemployment rate there. In Italy, where a sizable output gap remained, the slack in the economy contributed to a significant decline in inflation for a second Consumer price index straight year; prices rose about 11/2 percent, the smallest increase since the late 1960s. Inflation in Germany and France was also below 2 percent. Efforts to curtail spending in order to reduce the general government budget deficit achieved notable success in Italy. 1991 1994 1997 Germany and France also undertook several measures to narrow their defi- NOTE. Data for the foreign G-10 countries are from national sources. The data are weighted by the countries' cits, including spending cuts and tempo- 1987-89 GDP as valued after adjusting for differences in rary tax increases. These moves were the purchasing power of their currencies; GDP and domestic demand are in constant prices. motivated by the desire of the major Data for the United States are from the Departments of countries to participate in European Commerce and Labor. GDP and domestic demand are Monetary Union from its commence- derived from chained (1992) dollars. For GDP and domestic demand, the data are quarterly; ment, scheduled for January 1999. for consumer prices, the data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 27 but underlying retail price inflation force on growth was exerted by exports, remained somewhat above the official spurred by the lagged effect of the target of 2!/2 percent, as retailers yen's depreciation over the past two appeared to increase their profit margins years. Japan's weak economy produced in the face of strong demand. In these a widening output gap, and unemploycircumstances, the Monetary Policy ment remained near its postwar high Committee of the newly independent of 31/2 percent. Inflation rose—from zero Bank of England began to tighten mone- in 1996 to 2 percent in 1997—but tary conditions. only because of the consumption tax In Canada, both consumption and increase. business investment moved significantly Economic growth elsewhere in Asia higher in 1997, spurred by the mone- slowed in 1997, largely because of tary easing of the previous year. These financial turmoil in the region in the expenditures overcame a sharp drop in second half of the year. Thailand was net exports to narrow the output gap the first to be affected, but severe disrupsubstantially and push the unemploy- tions in financial markets soon spread ment rate below 9 percent. With some to other countries, notably Indonesia slack left in the economy, however, and South Korea. These developments inflation fell from the midpoint of the appeared to be triggered by a crisis of Bank of Canada's target range of 1 per- confidence in the medium-term proscent to 3 percent to just below the bot- pects for these economies given a clustom of the range. Nonetheless, short- ter of factors: substantial external defiterm interest rates were raised sharply in cits in some of the economies, exchange the second half of the year, largely in rates that generally appeared to be overresponse to the depreciation of the Cana- valued, weak financial systems, and dian dollar. With Canada a major com- government policy responses to the inimodity exporter, the currency was hurt tial disruptions that were widely viewed by the expectation that global demand as inadequate. Pressures persisted defor commodities would be adversely spite the provision of financial assisaffected by developments in Asia. The tance to several countries under proachievement of a budget surplus in Can- grams supported by the International ada reflected sharp spending reductions Monetary Fund, and the need for strucover the past four years as well as a tural reforms became apparent. surge in tax receipts from a booming economy and a rising stock market. Exchange Value of Selected Asian Japan's economic activity picked up Currencies versus the Dollar early in the year in anticipation of the December 1996= 100 April 1 increase in the consumption tax but fell in the second quarter after the Hong Kong dollar tax came into effect. Economic and - 100 ••*— \ ^« financial performance later in the year Korean won \ was impeded by concerns that problems 80 in other Asian economies would spill Thai b a h t^ over, adversely affecting trade and bank \ 60 solvency. As a result of these difficulties, domestic demand declined during t t i t i t t i i ( t 1997, with consumption and investment 1997 NOTE. Dollars per unit of foreigncurrency.The data particularly weak. The only positive are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 84th Annual Report, 1997 South Korea and the major econo- remained relatively favorable: Growth, mies of Southeast Asia—Thailand, Ma- though easing from the very rapid pace laysia, Indonesia, and the Philippines— of the preceding year, continued to be all experienced abrupt and deep robust, inflation declined further, and the currency depreciation, a collapse in trade balance remained in surplus. equity prices, and a sharp increase in interest rates. As a result, activity sub- U.S. International Transactions sided throughout the region and actually declined in the fourth quarter in several The vigorous growth of the U.S. econof these countries. For 1997 as a whole, omy in 1997 spurred another year of only Thailand's economy contracted, strong expansion in real imports of but growth rates were down sharply in goods and services. A surge in imports the other countries. Weaker growth and early in the year subsided only slightly depreciated currencies in the affected in later months, resulting in an inflow countries caused their external balances about 14 percent greater than in 1996; to start swinging sharply toward sur- imports had also expanded briskly in the plus late in the year. The sharp currency earlier year, at a rate of about 12 perdepreciations also boosted inflation rates. U.S. International Trade The spread of financial turmoil also Billions of dollars, SAAR affected China and the economies of k Balances Hong Kong and Taiwan, although not as /\ n virulently as elsewhere. The peg of the J/\^\ Goods and services Hong Kong currency to the U.S. dollar V N^ 60 was maintained, and the Chinese fs/S^~ 120 authorities did not change the value Current account N/**"^ A, of the yuan. In Taiwan, the authorities \ 180 allowed the currency to depreciate 1 1 1 1 1 1 1 somewhat early in the crisis after briefly Ratio scale, billions of chained (1992) dollars attempting to defend the peg to the dol- Trade in goods and services y 1050 lar. Growth rates in these economies Imports ^ ^^/^ slowed only moderately on balance from i0 850 the rapid pace of the previous year. In Exports China, surging exports contributed to 650 the largest trade surplus in the country's history. _L J_ Growth generally moderated in Latin Ratio scale, 1992 = 100 America, except in Venezuela, where GDP price index (chain-type) a strong recovery from the downturn of the previous year began. Late in the ^ Total merchandise year, many Latin American economies exports experienced spillover effects from the financial crisis in Asia. Hardest hit was Brazil, where interest rates had to be raised sharply to defend the crawling currency peg, leading to an abrupt slow- 1991 1993 1995 1997 ing of activity in the final quarter of NOTE. The data are from the Department of Commerce; they are quarterly and seasonally adjusted. Data the year. Overall, conditions in Mexico for trade are at annual rates. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 29 U.S. International Transactions Billions of dollars, seasonally adjusted Quarter Year Transaction 1996 1997 1996 1997 P Q4 Ql Q2 Q3 Q4 Goods and services, net -in -114 -26 -29 -26 -30 -29 Exports 849 932 220 224 235 235 238 Merchandise 612 678 158 162 171 170 175 Services 237 253 62 62 63 64 64 Imports 960 1,045 246 253 260 265 267 Merchandise 803 877 206 212 218 222 224 Services 157 168 40 41 42 42 43 Investment income, net 3 -14 1 _2 -3 -4 -5 Direct investment, net 67 68 19 17 18 17 16 Portfolio investment, net -64 -82 -18 -19 -21 -21 -21 Unilateral transfers, private and government, net -40 -39 -12 -9 -9 -12 Current account balance -148 -166 -37 -40 -38 -43 -46 Private capital flows, net (outflows, -) 67 246 21 58 51 117 Bank-related capital, net (outflows, -) -88 -9 -28 -45 * -21 56 U.S. net purchases (-) of foreign securities -108 -79 -30 -15 -22 -39 -4 Foreign net purchases (+) of U.S. securities 289 352 100 87 97 97 72 Treasury securities 156 163 68 48 45 36 34 Corporate and other non-Treasury bonds 121 122 31 29 30 37 27 Corporate stocks 13 67 1 10 22 23 12 Direct investment flows, net (outflows, -) -11 -12 -13 4 -10 3 -8 U.S. direct investment abroad -88 -119 -31 -27 -37 -23 -33 Foreign direct investment in United States 77 108 18 31 27 26 25 Foreign holdings of U.S. currency 17 25 8 3 5 7 10 Other corporate capital flows, net -32 -32 -29 -14 -12 4 -10 Foreign official assets in United States (increase, +) 122 18 33 29 -5 22 • -27 U.S. official reserve assets, net (increase, -) 7 -1 -1 -5 U.S. government foreign credits and other claims, net -1 Total discrepancy -47 -97 -3 -14 -14 -29 -40 Seasonal adjustment discrepancy 0 0 3 7 -1 -8 3 Statistical discrepancy -47 _97 _6 -21 -13 -21 -43 NOTE. Components may not sum to totals because of p Preliminary. rounding. SOURCE. Department of Commerce, Bureau of Eco- *In absolute value, greater than zero and less than nomic Analysis. $500 million. cent. Also encouraging imports was economic activity in many U.S. trading another round of falling prices for goods partners. Growth of U.S. exports to Latin other than oil, importantly influenced by America and Canada was particularly the strong dollar. The most pronounced strong, and exports to western Europe increases in imports were in capital also increased at a healthy pace. goods, consumer goods, and automotive With imports expanding at a someproducts. what faster pace than exports, the Exports also exhibited strong growth already sizable U.S. trade deficit widin 1997, particularly during the first half ened a bit further in 1997, from of the year. Real exports of goods and $111 billion to $114 billion. Because services rose 10 percent after increasing payments of investment income by U.S. 9 percent the preceding year. Exports residents to foreigners exceeded the accelerated despite the appreciation of reverse flow, the current account deficit the dollar because of the pickup in increased by a larger amount. That Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 84th Annual Report, 1997 payments of investment income ex- in the United States amounted to a ceeded receipts—for the first time in record $108 billion, largely the consethis century—reflects the large deterio- quence of an ongoing trend of mergers ration in the country's net international and acquisitions between U.S. and forinvestment position that has accompa- eign companies. nied persistent current account deficits U.S. direct investment abroad reached over the past decade and a half. a record high of $119 billion in 1997. Both foreign ownership of assets in U.S. net purchases of foreign securities the United States and U.S. ownership were $76 billion in the first three quarof assets abroad increased substantially ters of 1997, a little below the pace for in 1997, as they have for several years. 1996, but net purchases in this category Worldwide, asset holders have become fell sharply in the fourth quarter, probincreasingly willing to expand their ably reflecting wider perception of portfolios across borders. The gathering increased risk as a result of the financial financial storm in Asia led, particularly market turmoil in Asia. Banks in the in the last quarter of the year, to sig- United States reported a large increase nificant and opposite net shifts in the in net claims on foreigners in the first holdings of assets in the United States quarter, but much of this outflow was by foreign authorities and private reversed later in the year. foreigners. Recorded net outflows of capital Foreign official assets in the United exceeded the current account deficit by States rose somewhat in the first nine a substantial margin in 1997 for the months of 1997 but declined sharply second year running. This negative stalate in the year; the net inflow for the tistical discrepancy indicates that net year was only $18 billion, compared payments in the current account or net with $122 billion the year before. The outflows in the capital account have net outflow in the fourth quarter was gone unrecorded. Although the U.S. concentrated among Asian countries and international accounts rarely sum to zero a few developing countries elsewhere in practice, the size of the discrepancy that were experiencing exchange-market and its shift from a positive to a negative pressures. number recently are puzzling. The increase in 1997 in the holdings of U.S. securities by private foreigners Foreign Exchange Developments surpassed previous annual increases. Net purchases of U.S. stocks by private The dollar gained I3l/z percent to foreigners were particularly strong, a 15 percent against the mark and other record $67 billion. Net purchases of U.S. continental European currencies tightly Treasury securities by private foreign linked to the mark (measured as the parties remained robust; more than change between the average for Decem- $30 billion net were purchased in Octo- ber 1996 and that for December 1997). ber alone, when developments in Asia This increase was consistent with strong increased the attractiveness of holdings U.S. economic growth and more moderin the United States. (Later in the year, ate growth in continental Europe. Unsome Asian investors liquidated their certainties related to the prospective forholdings to obtain needed funds.) Net mation of European Monetary Union purchases of U.S. corporate and other may also have played a role. The mark bonds also stayed high. In addition to appreciated somewhat in terms of the these inflows, foreign direct investment dollar during the late summer and fall as Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

International Developments 31 the Bundesbank raised interest rates. ciated briefly, but later evidence that When conditions in Germany subse- growth had stalled after the tax increase quently made it seem less likely that the undermined the currency again. Down- Bundesbank would tighten further, the ward pressure intensified when Japan's mark weakened again. weakened financial system and sluggish The dollar moved little in terms of the economy were exposed to further stress U.K. pound. Sterling was boosted rela- from economic and financial collapse in tive to other European currencies by several key Asian countries. a strong economy and the Bank of The dollar appreciated substantially England's moves to tighten monetary in terms of the currencies of most East policy. Versus the Canadian dollar, the Asian economies during the second half U.S. currency firmed nearly 5 percent, of 1997. Because a large portion of the chiefly toward the end of the year. The external debt of these countries was Asian financial crisis dampened pros- denominated in foreign currencies and pects for worldwide economic growth, had short maturities, the devaluations putting downward pressure on prices greatly hobbled the ability of borrowers for primary commodities, an important to roll over their liabilities. The Mexican part of Canada's economy. Its currency peso, which had firmed vis-a-vis the doldeclined even in the face of significant lar earlier in the year, also came under monetary policy tightening by the Bank pressure as investors feared that diffiof Canada. culties in Asia would spread to Latin Versus the yen, the dollar rose nearly America. On balance, the dollar appreci- 14 percent on balance. Early in the year, ated 3!/2 percent in terms of the peso in concerns about the resilience of Japan's 1997. banking system in the face of proposed financial deregulation weakened the yen. Foreign Exchange Operations The scheduled increase in taxes on consumption in April also undermined pros- U.S. authorities did not intervene in pects for sustained economic growth. foreign exchange markets in 1997. When domestic demand initially seemed Reported net sales of dollars by major to weather the tax increase and net foreign central banks were $10 billion exports also burgeoned, the yen appre- in 1997, in contrast to net purchases of $46 billion in 1996. Exchange Value of the Dollar At the end of the year, the Federal versus Selected G-10 Currencies Reserve held the equivalent of $17,046 December 1996= 100 million, valued at current exchange rates, in marks and yen. With the dollar' s appreciation versus both currencies German mark in 1997, the cumulative gains on Sys- 115 tem foreign currency holdings declined $2,593 million, to $358 million. In the absence of transactions in foreign cur- 105 rencies, the System did not realize any gains or losses. • Canadian dollar I l l l I l l l I I I 1997 NOTE. Foreign currency units per dollar. The data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

33 Monetary Policy Reports to the Congress In this chapter are reports submitted tively moderately, and further success in to the Congress on February 26 and controlling health care costs helped to July 22, 1991\ pursuant to the Full temper the rise in benefits. Moreover, Employment and Balanced Growth Act significant declines in the prices of U.S. of 1978. imports, owing to low inflation abroad and appreciation of the dollar on foreign exchange markets, tended to hold Report on February 26, 1997 down domestic prices. Damped inflation expectations probably contributed as well to the favorable price performance: Monetary Policy and the A lengthening run of years during which Economic Outlook inflation has been in a more moderate The economy performed impressively range, together with an understanding this past year, and the members of the of the Federal Reserve's commitment to Board of Governors and the Reserve maintaining progress toward price sta- Bank presidents anticipate that 1997 bility, may have discouraged aggressive will bring further appreciable economic pricing behavior. Business firms conexpansion with relatively low inflation. tinued to rely on cost control and gains In 1996, solid advances in the real expen- in productivity, rather than on price ditures of households and businesses led increases, as the primary channels for to sizable gains in output. Employment achieving profit growth. rose briskly, and the unemployment Still, the Federal Open Market Comrate edged down to its lowest level of mittee (FOMC) recognized the danger the current expansion. Consumer price that pressures emanating from the tight inflation increased owing to the likely labor market might trigger an acceltemporary effects of firmness in food eration of prices, which could eventuand energy markets, but some broader ally undermine the ongoing economic price measures showed inflation holding expansion. Consequently, although consteady or even declining. With the econ- ditions last year were not deemed to omy strengthening, intermediate- and warrant immediate policy action, the long-term interest rates rose on net, but Committee's policy directives starting credit continued to be amply available in mid-1996 reflected a perception that to businesses and most households, and the most likely direction of any policy equity prices soared. action would be toward greater restraint Several factors helped to restrain in the provision of reserves to the bankprice increases this past year in the face ing system. Forestalling a disruptive of high levels of resource utilization. buildup of inflationary pressures in the With workers still concerned to some near term and moving toward price degree about job security, acceleration stability over time remain central to the in hourly compensation was not so System's mission of promoting maxipronounced as in comparable periods in mum sustainable growth of employment the past; wage increases picked up rela- and production. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 84th Annual Report, 1997 Monetary Policy, Financial cated its view that near-term economic Markets, and the Economy in 1996 developments were more likely to lead to a tightening of policy than to an eas- The FOMC eased the stance of mone- ing. Labor markets continued to be taut tary policy twice around the beginning over the balance of the year, and this of last year—in December 1995 and bias toward restraint was included in in January—lowering the federal funds directives adopted at all of the Commitrate Vi percentage point in total, to tee's remaining meetings in 1996. 5XA percent. These actions were taken to After having peaked during midoffset the effect on the level of the real summer, interest rates moved down on federal funds rate of declines in inflation balance through the fall, as expansion of and inflation expectations in the second consumer spending and economic activhalf of 1995 and thereby to help ensure ity in general appeared to be moderating the resumption of moderate economic and markets saw less likelihood of a growth after the marked slowdown and need for Federal Reserve firming action. inventory correction in late 1995. By the Equity prices fell back for a time during spring, economic growth had become the summer, reversing some of the submore vigorous than either the Commit- stantial increase registered over the first tee or financial markets had foreseen. In half of the year, but by autumn they had response, intermediate-and longer-term reached new highs. Interest rates and interest rates as of mid-May were up dollar exchange rates turned back up around a full percentage point from the late in the year when signs of rapid two-year lows reached early in the year. growth and more intense use of the In combination with some softening of economy's resources re-emerged. Since economic activity abroad and declines year-end, interest rates have changed in interest rates in major foreign indus- little, on net. The foreign exchange trial countries, these developments con- value of the dollar has posted furtributed to a further appreciation of the ther gains, in part reflecting greaterdollar, building on the rise that had than-expected weakness in Europe and started in mid-1995. The Committee renewed pessimism about economic and anticipated that the increase in the financial prospects in Japan. Equity cost of credit, along with the higher prices have registered new highs exchange value of the dollar, would be since the start of the year. As of midsufficient to foster a downshift in eco- February, intermediate- and long-term nomic expansion to a more sustainable interest rates were up about Vi to 3A perpace and contain price pressures; thus, it centage point, on balance, since early left its policy stance unchanged at its 1996, and the value of the dollar was up spring meetings. around 9 percent against an average of By early summer, however, the con- other Group of Ten currencies. tinued momentum in demand and pres- For the nonfinancial business sector, sures on labor resources that were being the effect of the higher intermediatereflected in faster growth in wages were and long-term interest rates on the overseen as posing a threat of increased all cost of funds last year was offset to inflation. Core inflation remained mod- some degree by an easing of lending erate, but in light of the heightened risk terms at banks and a narrowing of yield that it would turn upward, the Commit- spreads on corporate bonds over Treatee in its early July directive to the Man- suries, as well as by declines in the cost ager of the Open Market Account indi- of capital in the equity market. Encour- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 35 aged, perhaps, by the prospects of sus- Economic Projections for 1997 tained economic expansion and low inflation, banks, market lenders, and With the economy free of serious imbalequity investors displayed a strong appe- ances, prospects appear favorable for tite for business obligations and seemed further growth of activity and expansion willing to require less compensation for of job opportunities in the coming year, the possible risks entailed. Some house- although resource constraints seem holds, by contrast, faced a tightening of likely to keep the pace of growth below standards and terms with respect to that of 1996. The central tendency of credit card debt and some other types the growth forecasts of gross domesof consumer debt last year, as banks tic product put forth by the members reacted to a rising volume of delinquen- of the Board of Governors and the cies and charge-offs on these instru- Reserve Bank presidents is from 2 perments. However, credit availability cent to 2lA percent, measured as the under home equity lines increased, par- change in real output between the final ticularly from finance companies but quarter of 1996 and the final quarter also from banks. Overall debt growth of 1997. Output growth of this magslowed slightly but remained near the nitude is expected to result in little midpoint of its 3 percent to 7 percent change in the civilian unemployment monitoring range. The growth rates of rate, which is projected to be between M2 and M3 edged up last year and, as 5lA percent and 51//2 percent in the was anticipated in the monetary policy fourth quarter of this year. These forereports to the Congress last February casts of GDP growth and unemployand July, both aggregates ended 1996 ment are similar to those of the Adminnear or above the upper end of their istration. The central tendency of the growth ranges. Again last year, the policymakers' forecasts of the congrowth of M2 relative to nominal sumer price index for 1997 spans the income and interest rates was generally relatively narrow interval of 23/4 perin line with historical relationships, in cent to 3 percent, with the lower bound contrast to its behavior during the early near the inflation forecast of the years of the decade. Administration. Economic Projections tor 1997 Percent Federal Reserve governors and Reserve Bank presidents Indicator Administration Central Range tendency Change, fourth quarter to fourth quarter1 C N R o e o a n m l s i u G n m a D l e P r G 2 p D ri P ce index3 4 2 1 3/ 2 4 4 - - - 2 5 3 1 ' » / 4 / 2 2 2 4 3 1 / / 2 4 2 - - - 2 3 4 3 '/ / 4 4 2 2 4 . . . 6 0 6 Average level, fourth quarter Civilian unemployment rate 5'/4-5'/2 5'/4-5'/2 5.4 1. Change from average for fourth quarter of preced- 3. All urban consumers. ing year to average for fourth quarter of year indicated. 2. Chain-weighted. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 84th Annual Report, 1997 Consumer spending, which accounts The major reason for expecting a for about two-thirds of total GDP, smaller CPI increase this year is a more should be supported in coming quarters favorable outlook for food and energy by further gains in income and the sub- prices. Prices of farm products have stantial increase in household net worth dropped back from the highs of last that has occurred over the past two summer, and, barring further weather years; debt problems, although rising of problems, this year's rise in food prices late, do not seem to be so widespread at retail should be considerably smaller as to threaten the ongoing expansion than that of 1996. Oil prices have of household expenditures in the aggre- recently declined and seem likely to ease gate. In the business sector, balance further in coming months as world sheets are strong, profits have been production and consumption come back rising, and efforts to bolster efficiency into better balance; this price relief is through the use of technologically important not only because of the direct advanced equipment are continuing at effects on the price of gasoline and other an intense pace. In the commercial real consumer energy items but also because estate market, the supply-demand bal- petroleum is a major element in the cost ance has shifted in many locales to a of producing and distributing many point at which interest in office building other goods. By contrast to the favorable projects has picked up noticeably. These outlook for food and energy prices, conditions, together with the ready some risk exists that core inflation could access to a wide variety of sources of turn up during the coming year. The finance that businesses currently are minimum wage will be moving up enjoying, should keep investment further in 1997, compounding whatever spending on an upward trajectory. For- cost pressures might be in train as a eign demand for U.S. products should result of labor market tightness, and the continue to rise with growth of the degree to which businesses can continue world economy, even in the wake of the to absorb stepped-up increases in labor significant appreciation of the dollar costs without raising prices more rapsince the first half of 1995; however, idly is not certain. imports also seem likely to remain on a As noted in the July 1996 monetary clear upward trend, given the prospects policy report, the CPI forecasts of the for continued expansion of the U.S. governors and Reserve Bank presidents economy. Government expenditures for incorporate allowances for the technical consumption and investment probably improvements to this index that have will follow recent trends, with further been made by the Bureau of Labor Stacutbacks in real outlays at the federal tistics. These technical changes are estilevel and moderate increases in the mated to have trimmed the reported rate combined purchases of state and local of CPI inflation slightly in each of the governments. past two years, and additional changes Although the risk of increased infla- will be affecting the rise in the index tion pressures is significant, especially in 1997. In view of the remaining diffiin view of the tightness of the labor culties of accurately measuring price market and the strength in activity that change in a highly complex and rapidly has been evident recently, Federal changing economy, alternative price Reserve policymakers expect this year's indexes will continue to be given subrise in the consumer price index to be stantial weight, along with the CPI, in somewhat smaller than that of 1996. monitoring progress toward the long- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 37 run goal of price stability. Some of the rates that heightened the attractiveness broad measures of inflation derived from of capital market instruments relative to the GDP accounts slowed in 1996; the bank deposits; and the expanding avail- Committee is concerned that, even if the ability and growing acceptance of stock CPI decelerates as expected in 1997, and bond mutual funds as household other indexes—with different scope and investments. weights—may pick up in reflection of With the waning of all but the last of the pressures on productive resources. these influences, movements in velocity have become more predictable over the past couple of years. This recent evi- Money and Debt Ranges for 1997 dence of stability, however, covers only Again in 1997, the Committee has set a relatively brief period, and its durabilranges for M2 and M3 that would ity remains uncertain. In these circumencompass monetary growth expected stances, the Committee has opted to to be consistent with approximate price continue treating the ranges as benchstability and a sustainable rate of real marks for the trends of money growth economic growth, assuming that the consistent with price stability rather than behavior of velocity is in line with as short-run targets for policy. Meanhistorical norms. These ranges are while, the actual behavior of the moneunchanged from those for 1996: 1 per- tary measures will be monitored for such cent to 5 percent for M2 and 2 percent to information as it may convey about 6 percent for M3. underlying economic developments. As has been the case for several years, The central tendency of the Committhe 1997 ranges for M2 and M3 were set tee 's expectations for nominal GDP against a backdrop of uncertainty about growth in 1997 is slightly below that the stability and predictability of their registered in 1996. Thus, if velocity velocities. A long-run pattern of rea- behaves as it did last year, M2 and M3 sonably stable velocity behavior broke might decelerate a bit but even so would down in the early 1990s when the pub- again expand around the upper ends lic's holdings of monetary assets were of their growth ranges. Debt of the depressed by several factors: the con- nonfinancial sectors is anticipated to traction of the thrift industry; a tight- increase this year at around the pace of ening of credit supplies and delev- last year, remaining near the midpoint of eraging by businesses and households; its unchanged 3 to 7 percent range. an extremely wide spread between short- and intermediate-term interest Economic and Financial Developments in 1996 and Early 1997 Ranges for Growth ofMonetary and Debt Aggregates The economy turned in a remarkably Percent favorable performance this past year. Preliminary estimates indicate that real Aggregate 1995 1996 1997 GDP rose more than 3 percent over M2 1-5 1-5 1-5 the four quarters of 1996, one of the M3 2-6 2-6 2-6 larger gains of the past several years Debt 3-7 3-7 3-7 and appreciably more than the FOMC NOTE. Change from average for fourth quarter of was expecting a year ago. Although preceding year to average for fourth quarter of year indicated. intermediate- and long-term interest Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 84th Annual Report, 1997 rates moved up, credit remained readily tronic equipment outpaced the growth available to most borrowers, and equity of other household outlays by a prices rose substantially. Expansion of wide margin in 1996. Sizable increases the debt of nonfinancial sectors contin- were also reported for most other types ued at about the 5 percent rate it has of consumer durables. However, real maintained over the past several years, expenditures on vehicles changed little and growth of the stock of money on net over the year, as gains achieved picked up a little to its most rapid pace during the first half were reversed after this decade. These financial devel- midyear. Late in 1996, sales of light opments provided support for strong vehicles may have been constrained to advances in the real expenditures of some degree by supply shortages that households and businesses, and the arose during strikes in the United States growth of exports held up well in the and Canada; early in 1997, vehicle sales face of an appreciating dollar. Tightness strengthened. Consumer purchases of of the labor market led to a moderate nondurables rose P/4 percent in 1996 pickup in wage increases in 1996. How- after having increased 1 percent durever, acceleration of prices was confined ing 1995. Spending for services rose largely to the food and energy sectors; 2Vi percent last year, about the same as prices for other consumer products the average gain in previous years of the decelerated, as did prices paid by expansion. businesses for capital goods and mate- After-tax personal income increased rials. Economic data for early 1997 5 percent in nominal terms over the four show the unemployment rate holding in quarters of last year. Wages and salaries a low range with the inflation trend still rose briskly, and the income of farm subdued. proprietors surged. Other types of income generally exhibited moderate gains. Given the low level of price infla- Economic Developments tion, the rise in nominal income translated into another significant advance in real disposable income—about 23/4 per- The Household Sector cent over the year. After having risen less than 2 percent in As in 1995, strong cross-currents con- 1995, real personal consumption expen- tinued to shape individual households' ditures moved up 23/4 percent in 1996. willingness—and ability—to spend Although debt problems arose with from current income. Huge increases greater frequency this past year, house- in stock market wealth provided some holds benefited from healthy increases households the wherewithal to boost in real income and another year of siz- spending at a pace considerably faster able gains in wealth. Consumers were than the growth of disposable income. relatively optimistic about prospects for But a number of households were likely the economy at the start of 1996, and held back by the need to divert income they became more so as the year to the servicing of debt, and according progressed. to some survey evidence, households Real outlays for consumer durables have become more concerned about savrose more than 5 percent in 1996 after a ing for retirement. Responding to these gain of only WA percent during 1995. influences, the annual average of the As has been true for many years, real personal saving rate was up slightly expenditures on computers and elec- from that of 1995; however, it remained Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 39 relatively low compared with its longer- Although market conditions for multirun average. family properties varied considerably Residential investment expenditures from city to city in 1996, the national posted a gain of 4 percent in real terms average vacancy rate for multifamily over the four quarters of 1996, more rental units remained relatively high, than reversing a small decline in the and demographic influences were probprevious year. Demand for single-family ably less supportive of multifamily housing was especially strong. Although housing than they were a decade or so interest rates on longer-term fixed-rate ago. Also, manufactured houses have mortgage loans moved up considerably provided an increased number of famiin 1996, a substantial number of home- lies with an alternative to rental apartbuyers sidestepped at least the initial ments in recent years. costs by using adjustable-rate loans that were available at lower rates. The effects The Business Sector of the rate increases on the single-family market were cushioned by other influ- Business fixed investment recorded a ences as well, most notably the growth fifth consecutive year of strong expanof employment and income. Even for sion in 1996, rising about 9 percent fixed-rate loans, mortgage financing according to the initial estimate. As in costs held at a level that, by historical other recent years, investment was standards, was low relative to household driven by rising profits, favorable trends incomes. All told, sales of new homes in the cost of capital, and the ongoing surged to the highest annual total of efforts of businesses to boost efficiency. the current expansion, and sales of Although much of the investment spendexisting homes established a historical ing was to replace depreciated equiphigh. New construction of single-family ment, the net addition to the aggregate dwellings also rose but not so dramati- capital stock appears to have been subcally as sales, as builders apparently stantial. The rate of rise in the stock has chose to work off some of their inven- picked up over the past two or three tories of unsold units, which had years after subpar growth through the climbed in 1995. Mild sluggishness in latter half of the 1980s and first few starts toward the end of 1996—which years of the 1990s; the resulting rise in was probably exacerbated by poor the level of capital per worker should weather in December—was followed by enhance labor productivity and potential more upbeat indicators of new construc- output. tion in January of this year. Equipment outlays moved up almost Construction of multifamily units 9V2 percent in real terms in 1996. Busimaintained a path of recovery from the ness purchases of office and computing extreme lows of the early 1990s, mov- equipment once again rose much faster ing up about 13 percent in terms of than the outlays for other types of equipannual totals. The number of multifam- ment. Computer purchases were proily units started—about 315,000—was pelled by many of the same forces that double the number started in 1993, when have been at work in other recent construction of these units was at a years—most particularly, the expansion low. However, compared with previ- of networks and the availability of new ous peaks, the 1996 total was less models of computers embodying subimpressive—starts were twice as high stantially improved computing power in some years of the 1970s and 1980s. at highly attractive prices. Outlays for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 84th Annual Report, 1997 communications equipment also rose moderate on average. Stocks at year-end quite rapidly in 1996. Gains for other generally appeared to be at comfortable types of equipment were generally more levels relative to recent trends in sales. modest. Business profits turned in another Investment in nonresidential struc- strong performance in 1996. Economic tures also rose substantially over the profits of all U.S. corporations rose at four quarters of 1996, posting the largest an annual rate of more than 10 percent advance in several years. Business from the final quarter of 1995 to the spending on structures went through an third quarter of 1996. Profits earned by extended contraction in the latter part foreign subsidiaries of U.S. corporations of the 1980s and early 1990s, and until fluctuated from quarter to quarter but recently the subsequent recovery has remained at high levels, and returns been relatively slow. That the 1996 gain from domestic operations rose substanin nonresidential investment would be tially, for both financial and nonfinancial so large was not evident until late in the firms. Domestic profits of nonfinancial year, when incoming data began to trace corporations amounted to 10.7 percent out sizable increases in new construc- of the nominal value of these firms' tion for many types of buildings. Invest- output in the third quarter, the highest ment in office buildings scored an espe- reading of the current expansion. cially large gain over the year, amid widespread reports of firming market The Government Sector conditions and reduced vacancy rates, and real outlays for other commercial Real federal expenditures on consumpstructures moved up for a fifth consecu- tion and gross investment—the part of tive year. Financing appears to be in federal spending that is included in ample supply for commercial construc- GDP—rose about 2Vi percent, on net, tion, and according to reports from the from the fourth quarter of 1995 to the District Reserve Banks, speculative fourth quarter of 1996, but the rise was office building projects—that is, those mostly an artifact of late-1995 real purwithout pre-committed tenants—are chases having been pushed to especially becoming more common. low levels by government shutdowns. Inventory investment was relatively The underlying trend of federal consubdued in 1996. The stock of nonfarm sumption and investment expenditures business inventories rose less than 2 per- probably is better represented by the cent over the four quarters of the year, IVi percent annual rate of decline from the smallest increase since 1992. Busi- the fourth quarter of 1994 to the final nesses had been moving toward a quarter of 1996. Reductions have been reduced rate of stockpiling over much of apparent over the past two years both 1995, and the rate of accumulation came in real defense purchases and in real almost to a halt in early 1996, when nondefense purchases. stocks of motor vehicles plummeted in Federal expenditures in the unified conjunction with a strike at two plants budget increased about 3 percent in that manufacture auto parts. Thereafter, nominal terms in fiscal 1996 after havinventory developments were relatively ing increased VA percent in fiscal 1995. uneventful. Stocks of vehicles changed Slower growth was recorded across little on net over the final three quarters many budgetary categories this past of the year, and accumulation of inven- year, and outright declines were reported tories by other nonfarm businesses was in some. Combined expenditures on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 41 health, social insurance, and income which make up the next biggest portion security—items that account for more of state and local purchases, rose about than half of all federal outlays—moved 4!/2 percent in real terms. In the aggreup 4^2 percent, the smallest increase this gate, the budget picture for state and decade. Defense spending was down local governments was relatively stable about 2VA percent in nominal terms, and in 1996, as the surplus of nominal net interest outlays rose much less rap- receipts over nominal current expendiidly than in fiscal 1995. Measured rela- tures changed little from the positive tive to the size of nominal GDP, total readings of other recent years. outlays in the most recent fiscal year were the smallest since 1979. Legisla- The External Sector tive restraint has led to cuts in a number of discretionary programs in recent The nominal trade deficit for goods and years, and the expanding economy has services widened to $115 billion in 1996 relieved pressure on those outlays that from $105 billion the previous year. For tend to vary inversely with the strength the first three quarters of the year, the of activity. current account deficit totaled $165 bil- Federal receipts increased about lion at an annual rate, somewhat greater IVi percent in fiscal 1996, the third year than the $150 billion deficit recorded in in which growth of receipts outpaced 1995. growth of nominal GDP by a significant The quantity of imports of goods and margin. Receipts from individual services rose strongly over the four income taxes climbed more than 11 per- quarters of 1996—about 8V2 percent cent in the most recent fiscal year, in according to the preliminary estimate— conjunction with healthy increases in after having expanded only AVA percent households' taxable earnings from capi- the previous year. The pickup in U.S. tal and labor. Taxes on corporate profits real output growth boosted the demand also continued to rise rapidly, more or for imported goods, as did the declines less in step with the growth of business in the prices of non-oil imports. Sizable earnings. The rapid growth of receipts, increases in import volume were widecoupled with the restrained growth of spread among most major merchandise expenditures, brought the unified budget trade categories, with the notable excepdeficit down to $107 billion in fiscal tions of oil and semiconductors. 1996 from almost $165 billion in fiscal Very strong export growth in the 1995. The deficit as a share of nominal fourth quarter of 1996 raised the yearly GDP was 1.4 percent, the smallest in gain in the quantity of exports of goods more than twenty years. and services to IV2 percent. Growth in The aggregate consumption and the economies of our major trading partinvestment expenditures of state and ners was only moderate on average but local governments rose 2XA percent in was somewhat faster than in 1995. As real terms over 1996. This gain was a consequence, growth of exports was about the same as those of the two previ- similar to the 1995 rate despite the ous years. Outlays for services, which appreciation of the dollar. Over the past consist mainly of employee compensa- year, most of the rise in the value of tion and account for more than two- merchandise exports went to Canada thirds of all state and local purchases, and Latin America. Exports to Western rose roughly VA percent in real terms Europe and Asia were only marginally last year. Investment expenditures, higher than they were a year earlier. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 84th Annual Report, 1997 In most of the major industrial coun- a strengthening of the price-adjusted tries abroad, real economic activity value of the peso contributed to a reducaccelerated last year from a relatively tion in the Mexican merchandise trade weak performance in 1995. In the surplus over 1996. Argentina and United Kingdom, real output growth Brazil also continued to recover from firmed through the year, as growth recessions. In Chile, real GDP growth in consumption spending rebounded moderated from the very high rate from its low 1995 rate. In Germany and recorded in 1995 to about 6 percent France, real GDP growth strengthened in 1996. In Venezuela, windfall oil but was still too low to prevent a further revenues softened the decline in real rise in the unemployment rate in both GDP in 1996 and improved the proscountries. In Italy, output growth slowed pects for 1997. as the rebound in the lira from its pre- In our major trading partners in Asia vious depreciation sharply reduced the other than Japan, real output growth growth of exports and depressed invest- generally slowed from its 1995 pace, ment spending. For most continen- despite a pickup in many countries tal European countries, further fiscal toward year-end in response to more restraint is planned this year as govern- accommodative monetary policies and ments hoping to participate in the third a partial recovery in export markets. In stage of European Monetary Union China, the slowdown of growth to about strive to meet the Maastricht Treaty's 10 percent last year from the 12 percent 1997 reference standard of a budget to 14 percent annual rates experienced deficit no larger than 3 percent of GDP. during 1992-94 reflected a substantial In Japan, fiscal stimulus spurred eco- deceleration in investment spending, nomic expansion early last year; sub- owing to China's efforts to reduce inflasequently, slower private consumption, tion by tightening central bank credit to reduced inventory accumulation, and state-owned enterprises and by restrictdecreased government investment ing investment. spending reduced output growth. In con- Consumer price inflation in Mexico trast, Canada's real output growth rose was about 28 percent in 1996, signifiover 1996 as inventory adjustment was cantly lower than the 1995 inflation rate completed during the first half of the of more than 50 percent. Venezuela's year and as exports strengthened. inflation rate in 1996 exceeded 100 per- Except in the United Kingdom, infla- cent, but inflation in most other Latin tion pressures in the foreign indus- American countries was at levels well trial countries continued to decline or under 10 percent. Inflation rates generremained subdued during 1996. Con- ally remained low in Asia. sumer prices in Japan were flat. Consumer price inflation fell sharply in Italy The Labor Market and remained below 2 percent in Germany and France. In the United King- The number of jobs on nonfarm payrolls dom, consumer prices excluding mort- rose more than 2V2 million from Decemgage interest payments accelerated to an ber 1995 to December 1996, an increase annual rate of more than 3 percent. of about 2lA percent. Employment gains The Mexican economy continued on were substantial in each quarter last a course of recovery that returned GDP year, and the labor market report for to its pre-crisis level in the fourth January of this year showed a further quarter of 1996. Increases in income and sizable expansion of payrolls. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 43 Employment in the private service- Growth of output per hour in the nonproducing sector, in which nearly two- farm business sector as a whole picked thirds of all nonfarm workers are up in 1996, rising about VA percent employed, increased about 3 percent over the year according to preliminary during 1996. Moderate employment data. However, coming after a threegains were posted in retail trade, trans- year period in which output per hour portation, and finance, and sizable gains changed little, this rise left the averin hiring continued in some other age rate of productivity growth in the service-producing industries, such as 1990s a bit below that of the 1980s and data processing, computer services, and well below the average gains achieved engineering and management. Job in the first three decades after World growth at suppliers of personnel—a War II. The sustained sluggishness category that includes temporary help in measured productivity growth this agencies—was about 6V2 percent, a decade is difficult to explain, as it has touch faster than in 1995 but much occurred during a period when high slower than it had been over 1992-94; levels of investment in new capital with the tightening of labor markets in and extensive restructuring of business the past couple of years, longer-lasting operations should have been boosting commitments in hiring may have come the efficiency of workers. Of course, back into greater favor among some measurement problems could be distortemployers. ing the data. As a summary measure that Employment changes among pro- relates aggregate output to aggregate ducers of goods were mixed in 1996. input of labor, the nonfarm productivity In construction, employment climbed index is affected by whatever deficienabout 51/2 percent, to a new high that cies might be present either in adding was almost 4 percent above the peak up the nominal expenditures for goods of the last business expansion. In manu- and services in the economy or adjustfacturing, increases in factory jobs ing those expenditures for price change. through the latter part of 1996 were not A considerable amount of recent sufficient to reverse declines that had research suggests that growth of output taken place earlier in the year. On net, and productivity is in fact understated, last year's loss of factory jobs amounted but whether the degree of understateto about Vi percent, a shade less than ment has been increasing over time is the average rate of decline since 1979, less clear. the year in which manufacturing In contrast to the experience of most employment peaked. Manufacturers other recent years, this past year's rise of durable goods boosted employment in employment was accompanied by a slightly last year, but many producers sustained pickup in the labor force parof nondurables implemented further ticipation rate. The rise in participation job cuts. As in many other recent boosted the labor supply and helped to years, reductions in factory employ- relieve pressures on the labor market. ment were accompanied by strong Nonetheless, hiring during 1996 was gains in worker productivity. Con- sufficient to reduce the civilian unemsequently, increases in output were ployment rate from a December 1995 sizable—the rise in the Federal rate of 5.6 percent to a December 1996 Reserve's index of manufacturing pro- rate of 5.3 percent. In January of duction cumulated to 4lA percent over this year, the rate remained low, at the year. 5.4 percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 84th Annual Report, 1997 Tightness of the labor market appears seemed likely to be of temporary durato have exerted some upward pressure tion. The CPI excluding food and on the cost of labor in 1996, even as energy—often called the "core" CPI— some workers continued to express rose just a touch more than 2l/i percent anxiety about job security. The employ- after having increased 3 percent during ment cost index (ECI) for the private 1995. Both the total CPI and the core nonfarm sector of the economy showed CPI have been affected in the past two compensation per hour moving up years by technical improvements imple- 3.1 percent over the year. The index had mented by the Bureau of Labor Statisrisen 2.6 percent in 1995. The step-up in tics that are aimed at obtaining more hourly pay increases was to some extent accurate readings of price change; the the result of a hike in the minimum rise in the CPI in 1996 would have been wage that took place at the start of somewhat greater if procedures used October. More generally, however, busi- through 1994 had not been altered. nesses probably had to boost hourly Other price indexes generally rose compensation either to attract workers less rapidly than the CPI. Like the or to retain them at a time when alterna- overall CPI, the chain-type price index tive employment opportunities were per- for personal consumption expenditures ceived to be more widely available. (PCE) accelerated somewhat in 1996, As in 1995, increases in hourly com- but its rate of rise, shown in the accompensation in 1996 came more as wage panying table, was significantly lower and salary increases than as increases than that of the CPI. The two measures in fringe benefits. According to the ECI, of consumer prices differ to some degree the rise in wage rates for workers in in their weights and methods of aggregathe nonfarm sector amounted to nearly tion. They also differ somewhat in their 3V2 percent this past year after a rise of selection of price data, with the PCE 23/4 percent in 1995. By contrast, the measure relying on alternative data in ECI measure of the hourly cost of bene- some areas in which the accuracy of fits rose only 2 percent, slightly less the CPI has been questioned. The chain than it did in 1995 and much less than it type price index for gross domestic rose on average over the past decade. purchases, which takes account of the Increases in the cost of benefits have been held down in recent years by Alternative Measures of Price Change reduced inflation for medical services and by the actions that many firms have Percent taken to shift employees into managed Price measure 1995 1996 care arrangements and to require them to assume a greater portion of the cost of Fixed-weight Consumer price index 2.7 3.2 health insurance and other medical Excluding food and energy ... 3.0 2.6 benefits. Chain-type Personal consumption expenditures 2.1 2.5 Prices Excluding food and energy ... 2.3 2.0 Gross domestic purchases 2.3 2.2 Gross domestic product 2.5 2 A The consumer price index rose more rapidly than in 1995, but the step-up Deflator Gross domestic product 2.5 1.8 was concentrated in the food and energy sectors—areas in which prices were NOTE. Changes are based on quarterly averages and are measured to the fourth quarter of the year indicated affected by supply limitations that from the fourth quarter of the previous year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 45 prices paid by businesses and govern- some retail foods. Consumer prices for ments as well as those paid by con- pork, poultry, and dairy products regissumers, moved up 2lA percent during tered their largest increases in several 1996, about the same as the percentage years. Retail beef prices also rose but rise during 1995. By contrast, price mea- only moderately: Expansion of the cattle sures associated with GDP decelerated herd in previous years had laid the in 1996 to thirty-year lows of around groundwork for a high flow of product 2 percent or less. Conceptually, the GDP to consumers, and herd reductions that measures are indicative of price changes occurred in 1996 augmented that flow. for goods and services that are produced Elsewhere in the food sector, acceleradomestically rather than price changes tion was reported in the price index for for goods and services purchased food away from home—a category that domestically—foreign trade accounting has a weight of almost 40 percent in the for the difference. CPI for food; the rise in the minimum The 1996 outcomes for all these mea- wage appears to have been an important sures reflected an economy in which factor in the acceleration. All told, the inflation pressures were muted. Sharp 1996 rise in CPI food prices amounted declines in non-oil import prices during to 4lA percent, the largest increase since the year lowered input costs for many 1990. domestic firms and likely caused other The energy sector was the other firms to restrain their product prices for major part of the economy in which fear of losing market share to foreign significant inflation pressures were evicompetitors. Also important, in all like- dent this past year. Crude oil prices, lihood, were the favorable imprints that which had started firming in the latter several years of moderate and rela- part of 1995, continued on an upward tively stable rates of inflation have left course through much of 1996, rising on inflation expectations. Despite the more than 30 percent in total. Stocks of uptick in hourly compensation and crude oil and petroleum products were adverse developments in the food and tight during the year, even after allowenergy sectors, survey data showed little ing for an apparent downward trend change in consumers' expectations of in firms' desired inventories. Inventory inflation, and private forecasters' views building was forestalled by production of the prospects for prices held steady. disruptions at refineries, a string of Businesses commonly described the weather problems here and abroad that situation as one in which competitive boosted fuel requirements for heating pressures were intense and the "lever- or cooling, and a reluctance of firms to age" for raising prices simply was not take on inventories that seemed likely to present. fall in value once renewed supplies from Food and energy prices were the Iraq became available. Natural gas, too, exceptions. In the food sector, steep was in tight supply at times, and its increases in grain prices in 1995 and the price surged. With retail prices of gasofirst few months of 1996 caused produc- line, fuel oil, and natural gas all moving tion adjustments among livestock farm- up substantially, the CPI for energy rose ers and substantial price increases for about IVi percent over the four quarters some livestock products. Later in the of 1996, the largest increase since the year, grain prices fell back, but livestock Gulf War. production could not recover in time to The CPI for goods other than food prevent significant price advances for and energy rose 1 percent during 1996, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 84th Annual Report, 1997 one of the smallest increases of recent Financial Developments decades. As in 1995, price increases for new vehicles were moderate last year, Debt and prices of used cars turned down Growth of the debt of nonfinancial after several years of sizable advances. sectors slowed slightly last year, to Prices of apparel and house furnishings 5lA percent. The growth of household also fell; these prices, as well as the sector debt dropped from SlA percent prices of vehicles, may have been to IV2 percent, a deceleration accounted heavily affected by the softness of for entirely by a sharp slowing of conimport prices. Moderate increases were sumer credit. The expansion of business the rule among most other categories of borrowing was held below its 1995 pace goods in the CPI. In the producer price by an increase in internally generated index, prices of capital equipment rose funds, but at 5VA percent, it was faster less than Vi percent over 1996; comthan in any other year since 1989. Its puter prices continued to plunge, and the strength reflected robust spending, prices of other types of equipment rose extremely favorable credit conditions, moderately, on balance. Materials prices and financing needs associated with a were weak: Prices of intermediate high level of mergers and acquisitions. materials excluding food and energy declined about 11A percent from the Federal government debt grew 33A percent, the lowest rate in more than two fourth quarter of 1995 to the final quardecades. The debt outstanding of the ter of 1996, and the producer price state and local sectors was unchanged. index for crude materials excluding food and energy dropped more than 6V2 percent over that period. Productive The Household Sector. Consumer capacity was adequate among domes- credit grew 8lA percent last year, just a tic producers of materials, and supplies bit over half the pace of the preceding of many materials were readily avail- two years. The sharp retrenchment able at competitive prices on the world likely reflected the burdens associated market. with a substantial accumulation of out- The CPI for non-energy services standing consumer debt over recent increased VA percent in 1996. The years as well as some tightening of lendrise was somewhat smaller than the ing terms and standards by commercial increases of most other recent years. banks, particularly with respect to credit Prices of medical services decelerated cards. for a sixth consecutive year, and The slowing in consumer credit increases in the cost of shelter were held growth also was associated with a shift down by another year of moderate toward increased use of home equity advances in residential rent and owners' loans. These loans were marketed equivalent rent. Large increases were vigorously, particularly by finance comevident only in scattered categories: panies, in part as a vehicle for con- Airfares posted a large increase, and solidating credit card and other outeducational costs, maintaining a long- standing consumer debt. Some of the established trend, continued to rise growth in home equity loans reflected quite rapidly relative to prices in moves by finance companies and general. banks into the "subprime" market— Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 47 lending either to higher-risk customers rates on residential mortgages remained or on terms entailing unusually high low. loan-to-value ratios, or both. The push In the segment of the finance comto expand home equity lending last year pany market that deals in subprime auto offset to some degree the effect of loans, some problems emerged last tighter lending standards and terms on month. A small firm in this market credit cards and other forms of con- defaulted on its commercial paper after sumer credit. it restated earlier earnings at lower The shift toward home equity loans, levels, and another firm filed for bankalong with a strong housing market, led ruptcy. Although the share prices of to a pickup in mortgage debt growth last these and other firms primarily engaged year to a rate of 7 x/i percent, the largest in sub-prime lending declined along advance since 1990. Mortgage borrow- with their earnings outlook, this sector ing for home purchases was restrained constitutes a very small part of the oversurprisingly little by the increase in all auto loan market, and the implicainterest rates over the first half of the tions for the availability of credit to the year. As noted previously, many borrow- household sector overall appear slight. ers were able to put off, at least for a Charge-off rates on consumer loans time, much of the impact of the increase rose at banks in 1996 to around the peak in rates by shifting to adjustable-rate levels of the last recession in 1990-91. mortgages, the rates on which rose much According to Federal Reserve surveys less last year than those on fixed-rate of senior loan officers, banks had anticimortgages. pated some deterioration in the quality Although the growth of household of their consumer loan portfolios last sector debt fell off a bit from the pace of year, but they were surprised by its recent years, it still exceeded that of extent. These surveys also showed disposable income. With loan rates up that banks considered the rate of on average for mortgages and down only charge-offs last year to be high relaa little on consumer loans, debt-service tive to the level of delinquencies and burdens continued to rise last year, and that the credit-scoring models most some households experienced diffi- banks use to evaluate consumer lendculties servicing certain kinds of debt. ing decisions have tended to be too Delinquency rates on banks' consumer optimistic. An important reason for the loans, particularly credit card loans, high level of charge-offs and the apparposted a second year of considerable ent shortcomings of the credit-scoring increase, although they remained below models was a 30 percent increase levels in the early 1990s. At finance in personal bankruptcies. This surge companies that are subsidiaries of auto- stemmed in part from changes in the makers, auto loan delinquency rates rose bankruptcy code that became effective to very high levels; but this rise appar- at the beginning of last year against a ently resulted in large part from a busi- backdrop of an apparently reduced ness strategy to compete in the vehicle stigma associated with this method of market by easing lending standards. dealing with financial problems. Banks Auto loan delinquency rates at commer- responded to the deterioration in their cial banks also rose but remained well consumer loan portfolios by tightenwithin historical ranges. Delinquency ing standards and terms, especially Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 84th Annual Report, 1997 on credit cards. In contrast, banks eased instruments over Treasuries narrowed, terms and conditions on home equity particularly in the case of high-yield loans. bonds. Surveys by the National Federa- Despite the rise in delinquencies tion of Independent Business revealed a on consumer debt, household balance rising tendency of small businesses to sheets appear healthy overall, as growth borrow over 1996, with credit availabilof household assets over the past two ity reported to be in a range more favoryears has more than kept pace with the able than at any time in the current growth of debt. Although year-end bal- economic expansion. ance sheet figures are not yet complete, On a gross basis, a pickup in bond the net worth of households appears to issuance by nonfinancial firms last have risen approximately $5 trillion year was accounted for mainly by from the end of 1994 to the end of 1996, speculative-grade offerings, likely in an amount that is equal to almost a full part a reaction to the improved pricyear's personal disposable income. ing. In the fourth quarter, however, Roughly two-thirds of that gain has been investment-grade issuance was subaccounted for by the surge in the prices stantial, responding to the decline in of corporate shares, which has lifted interest rates that began in late summer. the value of a wide range of household Commercial paper declined in the final investments, not only directly held months of the year, primarily because of stocks but also assets held in other forms paydowns from bond proceeds, but bank such as pension plans. The ratio of lending to businesses was strong, owing household net worth to personal dispos- in some part to robust merger activity. able income continued to climb this past Despite a marked increase in gross stock year, moving to its highest level in issuance—with strong gains both for recent decades. initial public offerings and for seasoned offerings—equity continued to be The Business Sector. Although many retired on net last year, as merger activinterest rates rose last year, businesses ity remained brisk and businesses used continued to find credit readily available ample cash resources to repurchase their and at favorable terms. This accommo- outstanding shares. dation likely resulted in part from the strong financial condition of this sector, The Government Sector. The growth reflected in minimal delinquency rates of federal debt was held down in 1996 on bank loans to businesses and very by legislative constraints on spending low default rates on corporate bonds, and by the boost to tax receipts from including those of low-rated issuers. both the stronger economy and a boom- With securitization of household debt ing stock market. Two years of coninstruments proceeding apace and with traction of state and local government high levels of capital, banks appeared debt ended last year. The declines to have ample room on their balance had occurred as issues that were presheets for business loans. This situation refunded earlier in the decade, when encouraged the development of a highly interest rates were unusually favorable, competitive lending environment in matured or became eligible to be called. which banks further eased a variety of Pre-refunded debt continued to be called credit terms, such as covenants and last year, albeit at a reduced pace, but markups over base rates. In capital mar- this decline was just offset by gross kets, interest rate spreads of private debt issuance, which picked up. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 49 Depository Intermediation. The ex- classified as "well capitalized." Underpansion of depository credit slowed lying thrift profits were also stronger last year, entirely reflecting a slower last year. However, profits at thrift instiadvance in bank credit. Growth at thrift tutions and at banks with deposits institutions picked up, benefiting from insured by the Savings Association strong demand for residential mortgages Insurance Fund (SAIF) were held down and improved capital positions. Growth temporarily by a special assessment on of commercial bank loans moderated, deposits to recapitalize SAIF. (Some as loans to businesses and, especially, bank deposits are SAIF-insured because consumers decelerated from elevated of mergers with thrift institutions or rates of growth in 1995. Bank portfolio acquisitions of them.) expansion also appears to have been damped somewhat by a faster pace of The Monetary Aggregates asset securitization, likely spurred by receptive capital markets. For example, Despite the slowing of depository real estate loan growth at banks was a credit, growth of the broader monetary subdued 4 percent last year, despite a aggregates strengthened last year: M3 robust housing market and a pickup in expanded 7 percent, up 1 percentage commercial real estate. At the same time, outstanding securities backed by mortgage pools expanded at a $179 bil- Growth of Money and Debt lion annual rate in the first three quarters Percent of last year, well above the pace of Domestic 1995. Commercial banks are a major non- Period Ml M2 M3 source of securitized mortgages. The financial debt outstanding amount of consumer credit that had been securitized by banks also Annual' 1980 7.5 8.7 9.6 9.5 rose at a brisk pace last year, although 1981 5.4 9.0 12.4 10.2 not so rapidly as in 1995. As a result of 2.52 1982 8.8 8.8 9.7 9.9 the slowing of bank credit, the share of 1983 10.3 11.8 9.5 11.9 1984 5.4 8.1 10.8 14.5 last year's advance in nonfederal debt that ended up on the books of deposi- 1985 12.0 8.6 7.7 14.2 1986 15.5 9.1 9.0 13.2 tories fell to about 38 percent, down 1987 6.3 4.2 5.8 10.0 from around 44 percent in the preceding 1988 4.3 5.7 6.3 9.0 1989 .5 5.2 4.0 7.9 two years. 1990 4.1 4.1 1.8 6.9 The balance sheets and operating 1991 7.9 3.1 1.2 4.6 results of depositories remained strong 1992 14.4 1.8 .6 4.7 1993 10.6 1.3 1.1 5.1 in 1996. Bank profits through the third 1994 2.5 .6 1.7 5.2 quarter were at historically high levels 1995 -1.6 4.0 6.2 5.5 1996 -4.6 4.6 6.9 5.3 for the fourth consecutive year, reflecting the maintenance of relatively wide Quarterly (annual rate) 3 interest rate margins, further loan 1996:Q1 -3.5 5.3 6.6 5.0 growth, and substantial fee income Q2 -1.4 4.5 6.3 5.7 Q3 -6.5 3.4 5.4 5.3 related to sales of mutual funds as well Q4 -7.4 5.0 8.5 4.9 as to securitization and other off- 1. From average for fourth quarter of preceding year to balance-sheet activities. As of the third average for fourth quarter of year indicated. quarter, almost 99 percent of commer- 2. Adjusted for shifts to NOW accounts in 1981. 3. From average for preceding quarter to average for cial bank assets were held at banks quarter indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 84th Annual Report, 1997 point from 1995 and also 1 percentage declining. However, these instruments point above the upper end of its 2 per- expanded briskly even in the third quarcent to 6 percent annual range. M2 ter, when short-term rates were rising, grew 4V2 percent, up Vi percentage point suggesting that part of the attractiveness and in the upper portion of its 1 per- of MMMFs is the convenience they cent to 5 percent range. As noted above, offer those investors engaged in moving the ranges for monetary growth last funds in and out of stock and bond year had been chosen to be consistent mutual funds, which expanded at a with approximate price stability and record pace last year. In addition, a sustainable rate of real economic institution-only funds seem to be having growth, rather than as indicators of considerable success in marketing cash the range of money growth rates likely management programs that capture to prevail under expected economic excess cash of corporations and municiconditions. palities. Likely reflecting the attrac- The acceleration of M3 was caused tiveness of money market and capital partly by a shift in the way banks market mutual funds last year, deposits financed their credit—specifically, sub- in M2 actually showed little growth stituting issuance of large time deposits in 1996. Retail deposit growth also for borrowings from offices abroad. may have been damped by a lack of Both foreign and domestically chartered aggressive pricing of deposits on the banks paid down net borrowing from part of banks, as demand for their loans foreign head offices and branches last slipped and they apparently found it year. For domestic banks, this paydown cheaper to finance a larger share of loan may have been related to the reduction originations through securitizations and to zero of insurance assessments on large time deposits. deposits, beginning with the last quarter The behavior of M2 relative to of 1995. In addition, the greater growth income last year, as summarized by its of M3 relative to that of M2 reflected income velocity, again bore a fairly systhe need to fund particularly strong loan tematic relationship to M2's opportunity growth at U.S. branches and agencies of cost—the return on M2 assets relative foreign banks, which do not offer the to yields available on alternative instruretail accounts that dominate deposits ments. The relationship of velocity to inM2. opportunity costs was reasonably stable Growth of both M2 and M3 was historically, but it broke down in the supported again last year by continu- early 1990s, a period characterized by ing robust advances in money market extensive restructuring of balance sheets mutual funds (MMMFs). Because the by households, businesses, and banks. yields on these funds are based on the In the process, M2 velocity rose subaverage return earned on their assets, stantially and, apparently, permanently. they lag changes in yields on new mar- Since 1993, velocity no longer appears ket instruments; thus, the funds tend to to be shifting higher, and M2 velocattract additional inflows when market ity and opportunity costs are moving rates are falling. Accordingly, MMMFs together about as they did before 1990. advanced most rapidly in the early part However, the recent period of relative of last year, when the monetary easings stability in this relationship has been too of December and January pulled down short for the Federal Reserve to place short-term rates, and also later in the increased reliance on M2 as a guide to year, when short-term rates were again policy at this time. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 51 Ml contracted AVi percent last year, offset by increases in their holdings of as the pace at which new arrangements required clearing balances—an arrangewere established to sweep reservable ment whereby depositories pay for retail transactions deposits to nonreserv- services provided by the Federal able nontransaction accounts acceler- Reserve through the holding of specified ated. The initial amounts removed amounts in reserve account balances. In from transaction accounts by sweep addition, advances in banks' techniques arrangements established last year of monitoring balances at the Federal amounted to $116 billion, compared Reserve and gauging their clearing with $45 billion in 1995. Ml continued needs have enabled them to operate effito be supported by currency growth ciently and smoothly at relatively low last year, when foreign demands, which levels of balances. Sweeps have had an were depressed earlier in the year effect on Federal Reserve earnings and partly in anticipation of the new the amounts it remits to the Treasury. $100 bill, picked up in the second The decline in reserve balances of about half. Adjusted for the initial amounts $12 billion owing to sweeps must be removed from transaction accounts by matched by an accompanying lower sweep arrangements, Ml grew 5lA per- level of Treasury securities on the books cent last year. The sweeping of trans- of Reserve Banks. The Federal Reserve action deposits contributed to a contrac- continues to monitor sweep activity tion of almost 12 percent in required closely. reserves—twice the rate of decline of the previous year. The monetary base Interest Rates, Equity Prices, decelerated only a little, however, as and Exchange Rates growth of its major component, currency, was little changed between 1995 Interest Rates. Declines in interest and 1996. rates during the second half of last year Continued declines in the levels of on evidence that economic growth had required reserves have the potential to moderated only partially reversed the impinge on the Federal Reserve's ability increases over the first half. Reflectto exert close day-to-day control over ing the surprising strength in economic the federal funds rate—the overnight activity last year, longer-term Treasury rate on reserves traded among deposi- rates rose on balance on the order of tory institutions. Depositories hold bal- xh percentage point over the year, and ances at Reserve Banks to meet daily intermediate rates were up somewhat clearing needs in addition to satisfying more. Spreads between most private statutory reserve requirements. At low rates and Treasuries narrowed markedly enough levels, reserve balances may last year, reflecting the high quality of provide inadequate protection against business balance sheets. Municipal rates adverse clearings, and banks' attempts moved up comparatively little over the to avoid overdrafts could generate first half of 1996, as earlier relative highly variable daily demands for bal- increases in these yields associated with ances at the Federal Reserve and a vola- discussions of fundamental tax reform tile federal funds rate. To date, however, were reversed when the likelihood of no serious problems have emerged, such changes to the tax code diminin part because the substantial drop in ished. Movements in interest rates over depositories' required reserve balances the year appeared to be basically in their attributable to sweeps has been partially real component, as inflation expecta- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 84th Annual Report, 1997 tions were little changed, according to economies in the first two quarters surveys. reinforced market expectations that U.S. monetary policy was less likely to be Equity Prices. The substantial rise eased than was policy in the other in equity prices last year was only a bit industrial countries. These expectations below that registered in 1995. However, boosted U.S. long-term interest rates in contrast to 1995, when bond rates relative to those abroad and contributed declined substantially, the equity gains to upward pressure on the dollar. The last year came despite the net rise in dollar fluctuated somewhat from June bond rates. Corporate earnings were through December but on balance robust last year, but their advance fell changed little. Over the course of 1996, short of share price increases, and price- the dollar appreciated 12 percent in earnings ratios rose to unusually high terms of the yen and 13A percent in levels; dividend-price ratios were even terms of the mark. During the first more out of line with historical expe- weeks of 1997, the dollar's average rience. Market participants appear to value against the G-10 currencies has be anticipating further robust earnings again moved up, appreciating about growth, and they also seem to be requir- 7 percent since the end of December, as ing much less compensation for the economic data have suggested addiextra risk of holding equities compared tional strength in the U.S. economy and to, say, Treasury bonds. Such evalua- have raised questions about the vigor of tions may be based on a perceived envi- economic expansions in several foreign ronment of persisting low inflation and industrial countries. balanced economic growth that would On average, yields on ten-year govlower the odds of disruptions to eco- ernment securities in the major foreign nomic activity. Other asset prices were industrial countries fell about 80 basis generally subdued. Commodity prices points last year, with most of the decline were flat to down. Commercial real coming in the second half. In Italy, estate prices, although no longer fall- long-term rates declined much more, ing, rose at little more than the rate of about 375 basis points, in response to inflation. Residential real estate prices low growth in real output, substantial increased moderately. progress in lowering inflation, and sizable, credible measures to reduce the Exchange Rates. The foreign ex- government deficit. In contrast, longchange value of the dollar in terms of term rates in the United Kingdom rose the currencies of the other G-10 coun- slightly as the economy strengthened. tries rose about 4 percent during 1996. Rates in Japan rose early in the year as When measured in terms of the curren- the economy spurted, but subsequent cies of a broader group of U.S. trading indicators of a weakening expansion partners and adjusted for differences caused rates to turn back down; over the in consumer price inflation, the appre- year, they declined about 40 basis points ciation of the dollar last year was also on net. Long-term rates abroad have about 4 percent. Much of the rise in the moved down slightly further so far this exchange value of the dollar occurred year. Short-term market rates in the during the first half of the year. Indica- foreign industrial countries on average tions of greater-than-expected under- declined about 120 basis points during lying strength in the U.S. economy and 1996. Except in Japan, official central signs of weakness in some European bank lending rates were lowered in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 53 foreign G-10 countries last year, contrib- by several European countries whose uting to the decline in market rates. currencies strengthened against the Equity prices in most industrial coun- mark. About half reflected increases tries rose strongly last year. The major in reserves of newly industrializing exception was Japan, where prices on countries. balance fell slightly. The general decline Private foreigners also added substanin long-term interest rates abroad and tially to their assets in the United States moves toward monetary ease were in the first three quarters of 1996. Net among the factors contributing to the purchases of U.S. Treasury securities by upward movement in stock prices. private foreigners amounted to $85 bil- The dollar appreciated in nominal lion through September, and net purterms about 2!/2 percent on balance chases of corporate and government against the Mexican peso during 1996, agency bonds were equally large. Forwith much of that appreciation coming eign direct investment in the United over a few weeks in October. After hav- States surged to a record $71 billion in ing fluctuated in a narrow range for most the first three quarters, reflecting numerof the year, the Mexican peso depreci- ous mergers and acquisitions of U.S. ated in terms of the dollar when mar- companies by foreigners. ket participants became concerned about U.S. private investors also added rapthe loss of competitiveness of Mexican idly to their holdings of foreign assets in exports during the year and about the first three quarters of 1996. In conthe partial nature of the government's trast to foreign investors in the United planned privatization of the petrochemi- States, U.S. portfolio investors favored cal industry. Peso interest rates rose in foreign stocks over bonds. Net pur- October and November, but have since chases in Japan were particularly large more than retraced that increase as the in the first half of the year. In addition, peso has stabilized. In January, Mexican U.S. direct investment abroad remained officials repaid all remaining outstand- strong, reflecting acquisitions and coning obligations to the Exchange Stabili- tinued privatizations of foreign firms. zation Fund of the U.S. Treasury, completing repayment to the United States of all borrowings that were made fol- Report on July 22, 1997 lowing the peso crisis in late 1994; a partial early repayment was made to the International Monetary Fund as well. Monetary Policy and the In the first three quarters of 1996, Economic Outlook large increases were reported in both foreign ownership of assets in the The economy continued to perform United States and U.S. ownership of exceptionally well in the first half of assets abroad. Over the same period, 1997. Real output grew briskly, while foreign official assets in the United inflation ebbed. Sizable further increases States increased almost $90 billion. Part in payrolls pushed the unemployment of this increase was associated with rate below 5 percent for the first time exchange market intervention by the in nearly twenty-five years. Although Japanese authorities to counter a brief growth in real gross domestic product strengthening of the exchange value of appears to have slowed in the spring, the yen early in the year, but a larger this slackening came on the heels of a part reflected the repurchase of reserves dramatic surge in the opening months Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 84th Annual Report, 1997 of the year; all indications are that resources under increasing strain. If the expansion remains well intact. The such unsustainable growth persisted, the members of the Board of Governors and resulting inflationary imbalances would the Reserve Bank presidents anticipate eventually undermine the health of the that the economy will grow at a mod- expansion—the all too frequent pattern erate pace in the second half of this of past business cycles. To protect year and in 1998 and that inflation will against the possibility of such an outremain low. Conditions in financial mar- come, the Committee tightened policy kets are supportive of continued growth: slightly. With the softening of demand Longer-term interest rates are in the in the spring, the Committee was able lower portion of the range observed in to maintain a steady posture in the this decade, the stock market has regis- money market while closely monitoring tered all-time highs, and credit remains economic developments. The ongoing readily available to private borrowers. objective of monetary policy is to help Since the February report on mone- the nation achieve maximum sustaintary policy, Federal Reserve policymak- able economic growth and the highest ers have revised upward their expecta- average living standards. The Federal tions for growth of real activity in 1997 Reserve recognizes that it can best and trimmed their forecasts of inflation. accomplish this objective by keeping This combination of revisions highlights inflation in check, because an environthe extraordinarily positive conditions ment of price stability is most conducive still prevailing more than six years into to sound, long-term planning by housethe current economic expansion. In part, holds and businesses. the recent confluence of higher-thanexpected output and lower inflation Monetary Policy, Financial has reflected the favorable influences Markets, and the Economy on prices of retreating oil prices and a over the First Half of 1997 strong dollar. But it may also be attributable to more durable changes in our The rapid economic growth observed in economy, notably a greater flexibility the closing months of 1996 continued and competitiveness in labor and prod- in the first quarter of this year, with uct markets and more rapid, technology- real gross domestic product advancing driven gains in efficiency. In essence, almost 6 percent at an annual rate. Conthe economy may be experiencing an sumer spending surged, fueled by a upward shift in its longer-range output significant increase in income, upbeat potential. consumer attitudes, and the effects of To the extent that aggregate supply the huge run-up in equity prices over the is expanding more rapidly, monetary past couple of years on household net policy can accommodate extra growth worth. Business fixed investment was in demand without fostering increased strong, and companies restocked inveninflationary pressures. In late March, tories that had become thin as sales however, the Federal Open Market soared. The advance in real output Committee (FOMC) concluded that provided support for considerable new there was a significant risk that aggre- hiring; rising pay and greater job availgate demand would grow faster in the ability drew additional people into the coming quarters than available supply, workforce, lifting the labor force particiwhich, with utilization already at a very pation rate to a new high during the first high level, would place the economy's quarter of the year. The underlying trend Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 55 in consumer price inflation was still market uncertainty about economic persubdued. Inflation pressures were held formance abroad. in check by smaller food price increases, As the second quarter progressed, it declining prices for non-oil imports, the became increasingly evident that ecomarked expansion of industrial capacity nomic activity had indeed decelerated. in recent years, and continuing efforts The expansion of consumer spending by businesses to boost efficiency. eased considerably, while business fixed At their meeting in late March, investment remained strong. Employ- FOMC members expected that the ment continued to climb rapidly, pushgrowth of economic activity would ease ing the unemployment rate down below in the coming months, but they were 5 percent on average in the second uncertain about the likely extent of that quarter—the lowest level since the early slowing. Although the first-quarter burst 1970s. Despite high levels of employin production had owed importantly to a ment and production through the first number of temporary factors, many of half of the year, there were few signs the fundamentals underlying consumer that inflation was deviating signifiand business demand remained quite cantly from recent trends. Although positive. The Committee was concerned overall consumer price inflation dipped about the risk that if outsized gains in in the second quarter as energy prices real output continued, pressures on costs declined, consumer prices excluding and prices would emerge that could food and energy increased at about the eventually undermine the expansion. same pace in the first half of the year as Therefore, to help foster more sustain- in 1996. able trends in output and guard against Continued favorable price movements potential inflationary imbalances, the and the slowing of economic growth Committee firmed policy slightly by suggested to financial market particiraising the expected federal funds rate pants that inflation might remain from around 5lA percent to around damped without a further tightening of 5 Vi percent. financial conditions, and this belief The unsustainably strong pace of prompted a substantial drop in interest economic growth in the first quarter rates from late April to mid-July, reversweighed on financial markets. Interest ing the earlier advance. With resource rates rose substantially, even before the utilization still at very high levels, and System's action, despite favorable news with economic and financial conditions on inflation. Because the policy tighten- conducive to robust increases in spending was widely anticipated, rates were ing, the FOMC at its May meeting little affected by the announcement, but continued to view the risks as skewed they moved up a little more in the toward the re-emergence of inflationary following weeks as incoming data sug- pressures. But the moderation in aggregested persistent strength in economic gate demand and uncertainty about the activity. Equity prices rose early in the relationship between utilization rates first quarter and then declined, chang- and inflation led the Committee to leave ing relatively little on net. The trade- reserve conditions unchanged in May weighted value of the dollar in terms and again in July. The drop in market of the other G-10 currencies increased interest rates in the second quarter may about 7 percent in the first quarter, also have been encouraged by favorable reflecting the unexpectedly strong eco- news about this year's federal budget nomic growth in the United States and deficit and by the agreement between Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 84th Annual Report, 1997 the President and the Congress to bal- of M2 in the first part of the year ance the budget in fiscal year 2002. was again reasonably well explained by Spurred by lower rates and greater opti- changes in nominal GDP and interest mism about the long-term outlook for rates. earnings, the stock market surged in the second quarter and into July. The value Economic Projections of the dollar rose somewhat further in for 1997 and 1998 foreign exchange markets, on balance, an increase more than accounted for After growing swiftly on balance over by an appreciation against continental the first half of the year, economic activ- European currencies. ity is expected to expand more moder- During the first half of the year, credit ately in the second half of 1997 and in remained available on favorable terms 1998. For this year, the central tendency to most households and businesses. of the GDP growth forecasts put forth High delinquency rates for consumer by members of the Board of Governors loans encouraged many banks to tighten and the Reserve Bank presidents is standards, but consumer loan rates 3 percent to 3V4 percent, measured as generally stayed fairly low relative to the change in real output between the benchmark Treasury rates, and con- final quarter of 1996 and the final quarsumer credit continued to grow faster than income and only a little below the pace of 1996. Home mortgage debt Economic Projections for 1997 and 1998 advanced at a moderate rate, with home Percent equity loans expanding especially rapidly in the spring. Businesses continued Federal Reserve governors and to have access to ample external fund- Reserve Bank presidents Indicator ing both directly in capital markets and Central through financial intermediaries. The Range tendency spreads between yields on corporate 1997 bonds and Treasury securities stayed low or fell further, and, relative to mar- Change, fourth quarter ket rates, bank business loan rates held to fourth quarter1 Nominal GDP 5-6 5-51/2 near the lower end of the range seen in Real GDP 3-31/2 3-31/4 the current expansion. Consumer price index 2 2-23/4 21/4-2V2 Total domestic nonfinancial debt Average level in the fourth quarter expanded more slowly in the first half Civilian unemployment of 1997 than in 1996, mainly because of rate 43/4-51/4 43/4-5 a reduced pace of federal borrowing. 1998 Trends in the monetary aggregates during the first half of 1997 were similar to Change, fourth quarter to fourth quarter1 those in 1996, with M2 near the upper Nominal GDP 4'/4-53/4 41/2-5 end of the range set by the FOMC and R C e o a n l s u G m D e P r price index 2 21 2 /2 - - 3 3 21 2 /2 - - 2 3 V2 M3 somewhat above its range. This out- Average level come was in line with FOMC expecta- in the fourth quarter tions, because the ranges had been set to Civilian unemployment be consistent with conditions of price rate 41/2-51/4 43/4-5 stability, and inflation, while damped, 1. Change from average for fourth quarter of preceding year to average for fourth quarter of year indicated. remained above this level. The behavior 2. All urban consumers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 57 ter of 1997. For 1998, most of the fore- markets since last year could damp casts anticipate growth of real GDP export sales and encourage U.S. firms within a range of 2 percent to 2Vi per- and households to purchase foreigncent. With this pace of continued eco- produced goods and services. nomic expansion over the next six quar- Federal Reserve policymakers believe ters, the central tendency of forecasts for that this year's rise in the CPI will the civilian unemployment rate remains be smaller than that of 1996, mostly a little under 5 percent through 1998, because of favorable developments in about the average for the second quarter the food and, especially, energy sectors. of this year. After last year's run-up, crude oil prices Economic activity appears to have have dropped back significantly, pulling entered the second half with consid- down the prices of petroleum products. erable positive momentum. Households Food price increases also have been have experienced hefty gains in employ- subdued this year, as the decline in grain ment, income, and wealth, and their prices that began in the middle of last optimism about the future is quite high. year has been working its way through These factors seem likely to outweigh to the retail level. Looking ahead to any drag on consumer demand that next year, the governors and Reserve might be associated with the debt- Bank presidents expect larger increases servicing problems that some house- in the CPI, with a central tendency holds have experienced. Lower mort- from 2!/2 percent to 3 percent. Food and gage rates are buttressing demand for energy prices are not expected to repeat homes. In the business sector, healthy this year's salutary performance, and balance sheets and profits and a moder- non-oil import prices may be less of ate cost of external funds, along with a a restraining influence than in 1997, continuing desire to install new tech- absent a continued uptrend in the dollar. nology, are providing support and impe- Moreover, there is a risk that high tus for investment in equipment. Mean- levels of resource utilization could begin while, investment in structures should putting upward pressure on business follow last year's strong performance costs. with further increases, because of As noted in past monetary policy declining vacancy rates in some sectors reports, the CPI forecasts of Federal and ready access to financing. Reserve policymakers incorporate the Notwithstanding the economy's posi- technical improvements that the Bureau tive momentum, growth is expected to of Labor Statistics is making to the CPI be more moderate in the next year and in 1997 and 1998. A series of technical a half than in the first half of 1997. In changes is estimated to have trimmed part, this deceleration is likely to reflect reported rates of CPI inflation slightly in the influence on demand of the substan- recent years, and the additional changes tial buildup of stocks of household dura- will affect the index this year and next. bles and business plant and equipment In light of the challenges of accurately thus far in the expansion. As well, the measuring price changes in a complex pace of inventory investment will need and dynamic economy, the governors to slacken considerably relative to that and Reserve Bank presidents will conobserved in the first part of this year, lest tinue placing substantial weight on other stock-to-sales ratios become uncom- price indexes, along with the CPI, in fortably high. In the external sector, the gauging progress toward the long-run strength of the dollar on exchange goal of price stability. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 84th Annual Report, 1997 The Administration has not yet behavior of the velocities of the two released an update of the economic aggregates. For several decades until the projections contained in the February 1990s, these aggregates exhibited fairly Economic Report of the President. The stable trends relative to nominal spendearlier Administration forecasts were ing, and variations in M2 growth around broadly similar to those in the Federal its trend were reasonably closely related Reserve's February report, with Admin- to changes in the spread between market istration forecasts for growth and infla- rates and yields on the assets in M2. tion within or near the range anticipated These relationships were disrupted in by Federal Reserve policymakers in the first part of this decade. Between February. Because of developments in 1991 and early 1994, the velocities of the economy since that time, the central M2 and M3 climbed well above the tendency of forecasts for real GDP levels that were predicted by past expegrowth put forth by the members of rience, as households shifted substantial the Board of Governors and the Reserve amounts out of lower-yielding deposits Bank presidents has moved higher, into higher-yielding stock and bond while their forecasts for the CPI have mutual funds, and as banks and thrift moved down. institutions sharply curtailed their lending to focus on rebuilding capital. Since mid-1994, the velocities have been Money and Debt Ranges moving more nearly in line with their for 1997 and 1998 historical patterns with respect to At its meeting earlier this month, the changes in opportunity costs—albeit at Committee reaffirmed the ranges for higher levels. This recent period of 1997 growth of money and debt that it renewed stability is still brief, however, had established in February: 1 percent to and has occurred at a time of relatively 5 percent for M2, 2 percent to 6 percent stable financial and economic condifor M3, and 3 percent to 7 percent for tions, leaving open the important questhe debt of the domestic nonfinancial tion of whether the stability would be sectors. The Committee also set provi- sustained in the future under a wider sional ranges for 1998 at the same levels variety of circumstances. as for 1997. In light of this uncertainty, the Com- In choosing the ranges for M2 and mittee again decided to view the ranges M3, the Committee recognized the as benchmarks for monetary growth continuing uncertainty about the future rates that would be consistent with approximate price stability and historical velocity relationships. If velocities Ranges for Growth of Monetary change little over the next year and a and Debt Aggregates half, Committee members' expectations Percent of nominal GDP growth in 1997 and 1998 imply that M2 and M3 will likely Provisional Aggregate 1996 1997 for finish around the upper boundaries of 1998 their respective ranges each year. The debt of the domestic nonfinancial sec- M2 1-5 1-5 1-5 M3 2-6 2-6 2-6 tors is expected to remain near the Debt 3-7 3-7 3-7 middle of its range this year and next. NOTE. Change from average for fourth quarter of The Committee will continue to monitor preceding year to average for fourth quarter of year the behavior of the monetary aggregates indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 59 and domestic nonfinancial debt—as advance in spending slowed thereafter— well as a wide range of other data—for partly because of unusually cool weather information about economic and finan- in late spring—underlying fundamentals cial developments. for the household sector remain favorable to further solid gains; notably, real incomes have continued to rise, and Economic and Financial many consumers have benefited from Developments in 1997 sizable gains in wealth. With this good The economy has continued to perform news in hand, consumers have become exceptionally well this year. Real gross extraordinarily upbeat about the econodomestic product surged almost 6 per- my's prospects. Indexes of consumer cent at an annual rate in the first quarter sentiment—such as those compiled by of 1997, and available data point to the Survey Research Center at the Unia healthy, though smaller, increase in versity of Michigan and the Conferthe second quarter. Financial condi- ence Board—have soared to some of tions remained supportive of spending. the highest readings since the 1960s. Despite a modest tightening of money Despite this generally healthy picture, market conditions by the System, most some households still face difficulties interest rates were little changed or meeting debt obligations, and delindeclined a bit on net during the first half quency rates for consumer loans have of the year, and equity prices surged remained at high levels. ahead. With relatively few exceptions, Real outlays for consumer durables credit remained readily available from surged 18% percent (annual rate) in the both intermediaries and financial mar- first quarter of this year but apparently kets on generally favorable terms. The slowed considerably in the second quarrapid increases in output led to a further ter. After changing little, on net, last tightening of labor markets in the first year, consumer purchases of motor vehisix months of 1997, and labor costs cles increased rapidly early in the year, a accelerated a little from the pace of a result of sound fundamentals, a bounceyear earlier. Price inflation has been sub- back from the strike-depressed fourth dued, held down in part by declines quarter, and enlarged incentives offered in energy prices, smaller increases in by automakers. In the second quarter, food prices, and lower prices for non-oil sales were once again held down noticeimports that have followed in the wake ably by strike-related supply constraints, of the appreciation of the dollar. In addi- as well as by some payback from the tion, intense competition, adequate plant elevated first-quarter pace. Smoothing capacity, and ongoing efficiency gains through the ups and downs, the underhave helped to restrain inflation pres- lying pace of demand in the first half sures in the face of rising wages. of the year likely remained reasonably close to the 15 million unit rate that has prevailed since the second half of 1995. The Household Sector Purchases of durable goods other than motor vehicles also took off in the first Spending, Income, and Saving quarter; computers and other electronic After posting a sizable increase in 1996, equipment were an area of notable real personal consumption expenditures strength, as households took advantage jumped 5Vi percent at an annual rate of rapidly falling prices to acquire the in the first quarter of 1997. Although the latest technology. According to avail- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 84th Annual Report, 1997 able monthly data, purchases of dura- net worth. One such factor could be bles other than motor vehicles and elec- a greater focus on retirement savings, tronic equipment moderated in the particularly among the large cohort second quarter. Although a pause in the of the population reaching middle age. growth of spending is not surprising Concerns about the adequacy of saving after the strong first quarter, unusually for retirement have likely been heightcool spring weather, leading to the post- ened by increased public discussion of ponement of purchases of some sea- the financial problems of social security sonal items, may also have contributed and federal health programs. In addito the moderation. tion, debt problems may be restraining Growth of real spending for nondu- the spending of some households. rables also appears to have slowed considerably from a strong first-quarter Residential Investment pace. Within services, weather conditions held down growth of real outlays The underlying pace of housing activity for energy services in the first quarter has remained at a high level this year, and boosted them in the second. Growth even though some indicators suggest of real outlays for other services— that activity has edged off a bit from last typically the steadiest component of year's pace. In the single-family sector, consumption—picked up at the end of housing starts through June averaged 1996 and appears to have stayed ahead 1.14 million units at an annual rate, a of last year's 2V2 percent pace in the shade below the pace of starts in 1996. first half of 1997. Although starts dipped in the second Consumer spending continued to quarter, the decline was from a firstdraw support from healthy advances in quarter level that, doubtless, was income this year, as gains in wages and boosted by mild weather. Mortgage rates salaries boosted personal disposable have zigzagged moderately this year; income. These gains translated into a the average level has differed little from 4 percent annual rate advance in real that in 1996. With mortgage rates low disposable income in the first quarter, and income growth strong, a relatively after a significant 23A percent advance large proportion of families has been last year. Although month-to-month able to afford the monthly cost of movements were affected by uneven- purchasing a home. Home sales have ness in the timing of tax payments, the remained strong, helping to keep invenunderlying trend in real disposable tories of unsold new units relatively income remained strong into the second lean—a favorable factor for prospective quarter. building activity. Other indicators of On top of rising incomes, further demand remain quite positive. Accordincreases in net worth—primarily ing to the latest survey by the National related to the soaring stock market— Association of Homebuilders, builders' have given many households the finan- ratings of new home sales strengthened cial wherewithal to spend. In light of the in recent months to the highest level very large gains in wealth, the impetus since last August. Moreover, consumto consumption appears to have been ers' assessments of conditions for homesmaller than might have been antici- buying, as reported by the Survey pated on the basis of historical rela- Research Center at the University of tionships, suggesting that other factors Michigan, remained very favorable may be offsetting the effect of higher into July. In addition, the volume of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 61 applications for mortgages to purchase able indicators, probably stayed at homes has moved up recently to a high roughly the same rate during the seclevel. ond quarter. The pace of multifamily starts has The estimated ratio of required paybeen well maintained. These starts aver- ments of loan principal and interest to aged close to 320,000 units at an annual disposable personal income remained rate from January to June, a little above high in the first quarter, after climbing last year's figure for starts. Even so, rapidly between early 1994 and early the pace of multifamily construction 1996 and rising more slowly in the secremains well below peaks in the 1970s ond half of last year. This measure of and 1980s, partly because of changes in the debt-service burden of households the nation's demographic composition has nearly returned to the peak reached as the bulge of renters in the 1980s has toward the end of the last business cycle moved on to home ownership. Another expansion. Adding estimated payments factor that has restrained multifamily on auto leases to households' scheduled construction is the growing popularity monthly debt payments boosts the ratio of manufactured housing ("mobile a little more than 1 percentage point and homes"), which provides an alternative places it just above its previous peak. to rental housing for some households. Indicators of households' ability to In particular, the price of a typical man- service their debt have been mixed. The ufactured unit is considerably less delinquency rate for mortgage loans past than that of a new single-family house, due sixty days or more is at its lowest making manufactured homes especially level in two decades, but delinquency attractive to first-time buyers and to rates for consumer loans are relatively people purchasing second houses or high. According to data from the Report retirement homes. Shipments of these of Condition and Income filed by banks homes trended up through last fall and (the Call Report), the delinquency rate then flattened out at a relatively high for credit card loans was roughly level. unchanged in the first quarter of 1997, remaining at its highest value since late 1992, when the economy was in Household Finance the midst of a sluggish recovery and Household balance sheets strengthened the unemployment rate was more than in the aggregate during the first half of 2 percentage points higher than today. 1997, but debt-payment problems con- For auto loans at the finance companies tinued at a high level in several market affiliated with the major manufactursegments. Indebtedness grew less rap- ers, the delinquency rate rose again in idly than it had in 1996, and further the first quarter, continuing the steady gains in equity markets pushed up the run-up in this measure over the past ratio of household net worth to dis- three years. posable personal income to its highest Anecdotal evidence suggests that the mark in recent decades. Consumer credit recent increases in consumer credit increased at a 6V4 percent annual rate delinquency rates had been partly anticibetween December 1996 and May 1997, pated by lenders, reflecting the normal compared with %lA percent in 1996. seasoning of loans as well as banks' The growth of mortgage debt was efforts to stimulate borrowing by maksomewhat slower in the first quarter ing credit more broadly available and than in 1996 and, according to avail- automakers' attempts to stimulate sales Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

62 84th Annual Report, 1997 using the same approach. During the The Business Sector past several years, lenders have aggressively sought business from people Investment Expenditures who might not have been granted credit previously, in part because of Following a fifth year of sizable lenders' confidence in new "credit increases in 1996, real business fixed scoring" models that statistically eval- investment rose at an annual rate of uate an individual's creditworthiness. 11 percent in the first quarter. The Despite these new tools, banks evi- underlying determinants of investment dently have been surprised by the spending remain solid: strong business extent of the deterioration of their con- sales, sizable increases in cash flow, and sumer loans and have tightened lend- a favorable cost of capital, especially for ing standards as a result. Nearly half high-tech equipment. To be sure, a sigthe banks responding to the Federal nificant portion of this investment has Reserve's May survey on bank lend- been required to update and replace ing practices had imposed more strin- depreciated plant and equipment; nevergent standards for new credit card theless, the current pace of investment accounts over the preceding three implies an appreciable expansion of the months, with a smaller fraction rein- capital stock. ing in other consumer loans. About Real outlays for producers' durable one-third more of the responding banks equipment jumped at an annual rate of expected charge-off rates on con- 123A percent in the first quarter of this sumer loans to increase further over the year after rising 93A percent last year. As remainder of the year than expected in recent years, purchases of computers charge-off rates to decrease; many of and other information processing equipthose expecting an increase cited con- ment contributed importantly to this sumers' growing willingness to declare gain. The computer sector has been probankruptcy. Rising delinquency rates pelled by declining prices of new and have also put pressure on firms special- more powerful products and by a drive izing in subprime auto loans, with some in the business sector to improve effireporting reduced profits and acute ciency with these latest technological liquidity problems. developments. Real purchases of com- According to the most recently avail- munications equipment also have been able data, personal bankruptcies surged robust, boosted by rapidly growing again in the first quarter of the year after demand for wireless phone services and rising 30 percent in 1996. The rapid Internet connections as well as by increases of late are partly related to the upgrades to telephone switching and same increase in financial stress evident transmission equipment in anticipation in the delinquency statistics, but they of eventual deregulation of local phone may also be tied to more widespread markets. In addition, purchases of airuse of bankruptcy as a means of deal- craft by domestic airlines moved higher ing with such stress. Changes in federal on net in 1995 and 1996 and—on the bankruptcy law effective at the start of basis of orders and production plans of 1995 increased the value of assets that aircraft makers—are expected to rise may be protected from liquidation, and considerably further this year. For the there may also be a secular trend toward second quarter, data on orders and less stigma being associated with declar- shipments of nondefense capital goods ing bankruptcy. in April and May imply that healthy Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 63 increases in equipment investment have cles, stocks rose in the first quarter, with continued. particularly sizable increases coming Real business spending for nonresi- from a continued ramp-up in producdential structures posted another sizable tion of aircraft and from a restocking increase in the first quarter after advanc- of petroleum products during a period ing a hefty 9 percent in 1996. Although when prices eased. Nevertheless, with the latest data suggest a slowing of the extraordinarily strong sales, inventorypace of advance in the second quarter, sales ratios still moved down further the economic factors underlying this in the major sectors. Available monthly sector point to continued increases. data suggest that vigorous inventory Vacancy rates have been falling and investment outside of motor vehicles rents have been improving. Financing continued through mid-spring, as firms for commercial construction report- responded to strength in current and edly is in abundant supply, especially prospective sales. For motor vehicles, with substantial amounts of capital inventories moved up some in the first flowing to real estate investment trusts quarter of this year, after strike-related (REITs). reductions in the fourth quarter. In the Trends in construction continue to second quarter, the monthly pattern of differ among sectors. Increases in office motor vehicles stocks was bounced construction were especially robust in around somewhat by strikes; cutting recent quarters, as vacancy rates fell through the noise, inventories of light for both downtown and suburban prop- vehicles still appear to be in balance. erties. With office-based employment expanding, this sector has continued to Corporate Profits and recover from the severe slump of the Business Finance late 1980s and early 1990s; even so, the level of con struction activity is barely The continued rapid advance of busimore than half that of the mid-1980s. ness investment this year has been Construction of other commercial build- financed through both strong cash flow ings has increased steadily during the and substantial borrowing at relatively past five years, and the gain in the first favorable terms. Economic profits (book quarter of this year was sizable. Since profits after inventory valuation and the current expansion began, the non- capital consumption adjustments) in the office commercial sector has provided first quarter were 13A percent higher a large contribution to overall construc- than a year earlier. For the nonfinancial tion spending. Industrial construction sector, domestic profits were more than dropped back in the first quarter after 9 percent higher, reaching their highest jumping at the end of last year; the trend share of those firms' domestic output for this sector has been relatively flat on in the current expansion. Despite abunbalance in recent years. dant profits, the financing gap for these During 1996, investment in real non- companies—the excess of capital expenfarm business inventories was modest ditures (including inventory investment) compared with the growth of sales, and over internally generated funds—has the year ended with lean inventories widened somewhat since the middle of in many sectors. In the first quarter of 1996. To fund that gap, and the ongoing this year, businesses moved to rebuild net retirement of equity shares, nonstocks, and inventory investment picked financial corporations increased their up substantially. Outside of motor vehi- debt 6V2 percent at an annual rate in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

64 84th Annual Report, 1997 first quarter, compared with 5lA percent their borrowing from banks. The outduring 1996. standing commercial paper of these cor- External funding has remained read- porations also increased on net from ily available to businesses on favorable December through June, after declining terms. The spreads between yields on a little in 1996. Meanwhile, these busiinvestment-grade bonds and yields on nesses' net issuance of long-term bonds Treasury securities have stayed low in the first half of the year exceeded since the beginning of the year, while last year's pace, with speculative-grade the spreads on high-yield bonds have offerings accounting for the highest declined further to historically narrow share of gross issuance on record. levels. Price-earnings ratios are high, At the same time, the pace of gross implying a low cost of equity financing. equity issuance by nonfinancial corpo- Further, banks remain accommodative rations dropped considerably in the lenders to businesses. According to the first half of this year. In particular, the Federal Reserve's most recent survey of market for initial public offerings has business lending, the spreads between been cooler than in 1996, despite some loan rates and market rates have held pickup of late; new issues have been about steady for borrowers of all sizes, priced below the intended range more with rate spreads for large loans near the often than above it, and first-day tradlower end of the range seen over the ing returns have been relatively low. past decade. Moreover, surveys by the Net equity issuance has been deeply National Federation of Independent negative again this year, as gross issu- Business indicate that small businesses ance has been more than offset by retirehave not had difficulty obtaining credit. ments through share repurchases and The plentiful supply of credit prob- mergers. The bulk of merger activity ably stems from several factors. Most in the 1980s involved share retirebanks are well positioned to lend: Their ments financed by borrowing, but the profits are strong, rates of return on recent surge—which largely involves equity and on assets are high, and capi- friendly intra-industry mergers—has tal is ample. In addition, continued sub- been financed about equally through stantial inflows into stock and high- borrowing and stock swaps. Structuring yield bond mutual funds suggest that deals as stock swaps can reduce shareinvestors may now perceive less risk holders' tax liabilities and enable the in these areas or may be more willing combined firm to use a more advantato accept risk. In fact, businesses gen- geous method of financial accounting. erally are in very good financial con- The dollar value of nonfinancial mergdition, with the estimated ratio of oper- ers in which the target firm was worth ating cash flow to interest expense for more than a billion dollars set a record the median nonfinancial corporation in 1996, and merger activity appears to remaining quite high in the first part of be on a very strong track this year as the year. Moreover, delinquency rates well. for business loans at banks have stayed extremely low, as has the default rate on The Government Sector speculative-grade debt. The increase in the pace of business Federal borrowing in the first half of 1997 was widespread across sources of finance. The federal budget deficit has come Nonfinancial corporations stepped up down considerably in recent years and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 65 should register another substantial recent years. Although still restrained, decline this fiscal year. Over the first outlays for defense have ticked up this eight months of fiscal year 1997—the fiscal year after trending down for sevperiod October through May—the defi- eral years. cit in the unified budget was $65 billion, As for the part of federal spending down $43 billion from the comparable that is included directly in GDP, real period of fiscal 1996. The recent reduc- federal expenditures on consumption tion in the deficit primarily reflected and gross investment declined 3lA perextremely rapid growth of receipts for cent in the first quarter of 1997, a shade the second year in a row, although a more than the average rate of decline continuation of subdued growth in out- in recent years. An increase in real nonlays also contributed to the improve- defense spending was more than offset ment. Given recent developments, the by a decline in real defense outlays. budget deficit as a share of nominal The substantial drop in the unified GDP this fiscal year is likely to be at its budget deficit reduced federal borrowlowest level since 1974. ing in the first half of 1997 compared Federal receipts were almost 8V2 per- with the first half of 1996. The Treasury cent higher in the first eight months of responded to the smaller-than-expected fiscal year 1997 than in the year-earlier borrowing need by reducing sales of period and apparently are on track bills; this traditional strategy of allowto outpace the growth of nominal GDP ing borrowing swings to be absorbed for the fifth year in a row. Individual primarily by variation in bill issuance income tax payments have risen sharply enables the Treasury to have predictable this fiscal year—on top of a hefty coupon auctions and to issue sufficient increase last year—reflecting strong quantities of coupon securities to mainincreases in households' taxable labor tain their liquidity. The result this past and capital income; preliminary data spring was an unusually large net from the Daily Treasury Statement indi- redemption of bills, which pushed yields cate that individual income tax revenues on short-term bills down relative to remained strong in June. Moreover, yields on other Treasury securities and corporate tax payments posted another on short-term private paper. sizable advance through May of this The issuance of inflation-indexed fiscal year. securities at several maturities has been Federal outlays during the first eight a major innovation in federal debt manmonths of the fiscal year rose 3Vi per- agement this year. The Treasury sold cent in nominal terms from the com- indexed ten-year notes in January and parable period last year. Although this April and added five-year notes earlier increase is up from the restrained rate of this month. A small number of agency growth in fiscal 1996—which was held and other borrowers issued their own down by the government shutdown— inflation-indexed debt immediately after spending growth remained subdued the first Treasury auction, and the Chiacross most categories. Outlays for cago Board of Trade recently introduced income security programs rose modestly futures and options contracts based in the first eight months of the fiscal on inflation-indexed securities. As one year, partly as a result of the continued would expect at this stage, however, the strong economy, and spending on the market for indexed debt has not yet fully major health programs grew somewhat matured: Trading volume as a share of more slowly than their average pace in the outstanding amount is much smaller Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 84th Annual Report, 1997 than for nominal debt, and a market for been pre-refunded in the early 1990s stripped securities has yet to emerge. waned. State and Local The External Sector The fiscal condition of state and local Trade and the Current Account governments has remained positive over the past year, as the surplus of receipts The nominal deficit on trade in goods over current expenditures has been and services was $116 billion at an stable at a relatively high level. Strong annual rate in the first quarter, somewhat growth in sales and incomes has led larger than the $105 billion in the fourth to robust growth in revenues, despite quarter of last year. The current account numerous small tax cuts, and many deficit of $164 billion (annual rate) in states have held the line on spending the first quarter exceeded the $148 bilin the past several years. Additionally, lion deficit for 1996 as a whole because the welfare reform legislation passed of the widening of the trade deficit in August 1996, while presenting long- and further declines in net investment term challenges to state and local gov- income. In April and May, the trade ernments, actually has eased fiscal pres- deficit was slightly narrower than in the sures in recent quarters: Block grants first quarter. to states are based largely on 1992-94 The quantity of U.S. imports of goods grant levels, but caseloads more recently and services surged in the first quarter at have been falling. Overall, at the state an annual rate of about 20 percent. Conlevel, accumulated surpluses—current tinued strength in the pace of U.S. ecosurpluses plus those from past years— nomic activity largely accounted for the were on track to end fiscal year 1997 at rapid growth, but a rebound in autoa healthy level, according to a survey by motive imports from Canada from their the National Association of State Bud- strike-depressed fourth-quarter level get Officers taken shortly before the end boosted imports as well. Preliminary of most states' fiscal years. data for April and May suggest that Real expenditures for consumption strong real import growth continued. and gross investment by state and local Non-oil import prices fell through the governments increased moderately in second quarter, extending the generally the first quarter of this year, about the downward trend that began in mid-1995. same as the pace of advance in the past The quantity of U.S. exports of goods two years. For construction, the average and services expanded at an annual rate level of real outlays during the first five a bit above 10 percent in the first quarmonths of the year was a little higher ter, about the same rapid pace as during than in the fourth quarter. Hiring by the second half of last year. Growth of state and local governments over the output in our major trading partners, parfirst half of the year was somewhat ticularly the industrial countries, helped above last year's pace, with most of the to sustain the growth of exports, as did increase at the local level. increased deliveries of civilian aircraft. The pace of gross issuance of state Exports to western Europe and to Canada and local debt was roughly the same grew strongly, while those to the Asian in the first half of the year as in 1996. developing countries declined some- Net issuance turned up noticeably, how- what. Preliminary data for April and May ever, as retirements of debt that had suggest that real exports rose moderately. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 67 Capital Flows In Japan, real GDP accelerated to a 6V2 percent annual growth rate in the Large gross capital inflows and outflows first quarter, boosted by extremely continued during the first quarter of strong growth of consumer spending 1997, reflecting the continued trend ahead of an increase in the consumption toward globalization of financial and tax on April 1. Activity appears to have product markets. Both foreign direct fallen in the second quarter, but contininvestment in the United States and ued improvement in business sentiment U.S. direct investment abroad were suggests that the current weakness is very strong, swelled by mergers and only temporary. In Canada, growth of acquisitions. real output increased to 3lA percent at Private foreign net purchases of U.S. an annual rate in the first quarter. Final securities amounted to $85 billion in the domestic demand more than accounted first quarter, down somewhat from the for this expansion, as business investvery high figure in the previous quarter ment, consumption, and residential conbut still above the record pace for 1996 struction all provided significant contrias a whole. Net purchases of U.S. Treabutions. Indicators suggest that output sury securities were particularly robust. growth remained healthy in the second Private foreigners also showed increased quarter. interest in the U.S. stock market in Economic activity has remained vigthe first quarter of 1997. U.S. net purorous so far this year in the United chases of foreign securities amounted Kingdom and appears to have strengthto $15 billion in the first quarter, down ened in Germany and France. In the from the strong pace of 1996. Private first quarter, U.K. real GDP grew at an foreigners continued to add to their annual rate of 3!/2 percent as domestic holdings of U.S. paper currency in the demand, particularly investment, accelfirst quarter, but at a rate substantially erated from its already strong pace below earlier peaks. in the fourth quarter. Strong house- Foreign official assets in the United hold consumption spending supported States, which rose a record $122 billion demand in the second quarter. Weak in 1996, increased another $28 billion demand for exports, associated with the in the first quarter of 1997. Apart from appreciation of the pound since midthe oil-producing countries, which bene- 1996, and some tightening of monetary fited from high oil prices, significant conditions should moderate growth increases in holdings were associated in the current quarter. In Germany, ecowith efforts by some emerging-market nomic expansion revived in the first countries to temper the impact of large quarter and appears to have firmed in private capital inflows on their econothe second quarter. After growing very mies. Information for April and May little in the fourth quarter of last year, suggests that official inflows have German real GDP rose at an annual rate abated. of P/4 percent in the first quarter, led by government consumption, equipment investment, and exports. Manufacturing Foreign Economies orders and indicators of business senti- Economic activity in the major for- ment suggest additional gains in the eign industrial countries has generally second quarter. French real GDP grew strengthened so far this year from the only three-quarters percent at an annual pace in the second half of last year. rate in the first quarter, as declines in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 84th Annual Report, 1997 investment offset strong export growth, the Japanese consumption tax lifted the but data on manufacturing output and twelve-month change in the consumer consumption suggest a pickup in activ- price index to about IV2 percent, but ity during the second quarter. elevation of the inflation rate should In most major Latin American coun- be temporary. CPI inflation remains less tries, real output growth remained vigor- than 2 percent in Germany, France, ous. In Mexico, real economic expan- Canada, and Italy. Only in the United sion slowed some in the first quarter Kingdom, where output growth has from its very rapid pace in the second resulted in tight labor markets and conhalf of last year but remained robust. sumer prices are rising at an annual rate The industrial sector continued to be the of more than 2lA percent, are inflation source of strength, while the service sec- pressures currently a concern. tor lagged. A pickup in import growth In most major countries in Latin has resulted in a narrowing of the trade America, inflation either is falling or surplus; through May, the trade balance is already low. Mexican inflation conof $l3/4 billion was about half the size tinues to improve: The monthly inflait was in the same period last year. In tion rate was below 1 percent in May Argentina, continued healthy economic and June, the lowest monthly rates since growth in the first quarter has brought the 1994 devaluation. In Argentina, real GDP back to its level before the consumer prices were essentially flat recession induced by the Mexican crisis through the second quarter after almost of 1995. In Brazil, real output declined no increase last year. Brazilian inflation in the first quarter after three quarters of has declined to historically low rates. In strong expansion. contrast, Venezuelan inflation, though it Economic growth in our major Asian has come down from its 1996 rate of trading partners other than Japan slowed more than 100 percent per year, remains a bit on average in the first quarter but near 50 percent. Consumer price inflaappears to have rebounded in the second tion remains generally low in Asia, quarter. Nationwide labor strikes in including in China, where it fell to less Korea affected many of the country's than 3 percent in the twelve months key export industries and were partly through May. responsible for weakness in first-quarter output and a ballooning of the current account deficit. Data for April and May The Labor Market show recovery in industrial production, and the trade balance improved in the Payroll employment continued to second quarter. Real output growth in expand solidly during the first half of Taiwan remains strong so far this year, 1997. The growth in nonfarm payrolls though not quite so vigorous as during averaged about 230,000 per month; this the second half of 1996. In China, real figure may overstate slightly the under- GDP continues to expand at an annual lying rate of employment growth in rate of nearly 10 percent, about the same the first half because technical factors brisk pace as last year. boosted payroll figures in April. The Despite the pickup in growth, consid- strength in labor demand drew addierable excess capacity remains in the tional people into the job market, raising major foreign industrial countries. As the labor force participation rate to hisa consequence, inflation has generally torical highs during the first half. Neverremained quiescent. The increase in theless, the civilian unemployment rate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 69 moved down to 4.9 percent, on average, is even further below the average gains in the second quarter. realized in the twenty-five years after Employment gains in the private World War II. The slower reported proservice-producing sector, in which ductivity growth during this expansion nearly two-thirds of all nonfarm work- could partly reflect measurement probers are employed, accounted for much lems. Productivity is the ratio of real of the expansion in payrolls through output to hours worked, and official June of this year. Within this sector, productivity indexes rely on a measure higher employment in services, trans- of real output based on expenditures. In portation, and retail trade contributed theory, a matching measure of real outimportantly to the gain. After advancing put should be derivable by summing substantially for several years, payrolls labor and capital inputs on the "income in the personnel supply industry—a side" of the national accounts. Howcategory that includes temporary help ever, the income-side measure of real agencies—actually turned down in the output has increased considerably faster second quarter; anecdotal reports sug- than the expenditure-side measure in gest that some temporary help firms are recent years, raising the possibility that having difficulty finding workers, espe- productivity growth has been somecially for highly skilled and technical hat better than reported in the official positions. indexes. Employment gains were also posted Measurement difficulties may also in the goods-producing sector. In the affect estimates of the longer-term traconstruction industry, payrolls increased jectory of productivity growth. In parsubstantially between December and ticular, if inflation were overstated by June. Factory employment moved some- official measures—as a considerable what higher in the first part of the year amount of recent research suggests it after declining a little during 1996, and is—then real output growth would be manufacturing overtime hours remained understated. This understatement would at a high level. Producers of durable arise because too much inflation would goods increased employment further be removed from nominal output growth between December and June, while in the calculation of real output growth. makers of nondurable goods continued Indeed, productivity growth for nonto reduce payrolls. Since the end of financial corporations—a sector for 1994, factory employment and total which output growth arguably is meahours worked in manufacturing have sured more accurately than in broader changed little. Even so, manufacturers sectors—has been more rapid than for have boosted output considerably over nonfarm business overall. In particular, this period, primarily through ongoing productivity for nonfinancial corpoimprovements in worker productivity. rations increased at an average annual Although productivity for the broader pace of about 1 Vi percent between 1990 nonfarm business sector rose substan- and 1996, while productivity in the tially in the first quarter, it was just nonfarm business sector rose a little 1 percent above its value a year earlier. less than 1 percent per year over Moreover, output per hour changed little the same period. This difference—which from the end of 1992 to the last quarter implies very weak measured producof 1995. The average rate of measured tivity growth outside of the nonproductivity growth in the 1990s is still finanial corporate sector—raises the somewhat below that of the 1980s and possibility that overall productivity Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 84th Annual Report, 1997 growth is stronger than indicated by sufficiently brisk during the first half official indexes for nonfarm busi- of this year to pull the unemployness.1 Of course, a critical—and still ment rate down about one-quarter perunanswered—question is the extent to centage point between December and which any understatement of productiv- June. ity growth has become larger over time. Just as the low unemployment rate If productivity growth were more rapid points to tightness in labor markets, than indicated by official statistics, then anecdotal reports from many regions the economy's capacity to produce and industries mention the difficulties goods and services would be increasing firms are having hiring workers, espefaster than indicated by current official cially workers with specialized skills. statistics. But if the amount of mismea- With this tightness, labor compensation surement has not increased over time, costs have accelerated slightly. Although then the economy's productive capacity hourly labor costs, as measured by the also increased more rapidly in earlier employment cost index (ECI), increased years than shown by published mea- only 2.5 percent at an annual rate during sures. In this case, the official statistics the first three months of this year, they on productivity growth—though per- were up 3.0 percent over the twelve haps understated—would not give a months ending in March, compared with misleading impression about changes in 2.7 percent over the preceding twelve productivity trends. months. These increases are smaller After changing little, on net, since the than might have been expected on the late 1980s, the labor force participation basis of historical relationships, perrate turned up early last year; it reached haps partly reflecting persistent worker a record high 67.3 percent in March concerns about job security. In addiof this year and remained at an ele- tion, modest increases in employervated 67.1 percent in the second quarter. paid benefits have partly offset faster Better employment opportunities have increases in wages and salaries in the drawn additional people into the work- past couple of years. With smaller force. Although the recent welfare increases in health care costs than earreform legislation probably has not lier in the decade, shifts of employees yet had a large effect on aggregate labor into managed care plans, and requireforce dynamics, it may generate an addi- ments that employees assume a greater tional, albeit small, boost to labor share of health care costs, employer force participation rates over the next costs for health-related benefits have few years. Since the beginning of 1996, been well contained. However, growth the increases in the labor force asso- in employer health care costs may be in ciated with a higher participation rate the process of bottoming out, as reports have eased pressures on labor mar- of rising premiums for health insurance kets, as additional workers have stepped have become more common. Moreover, in to satisfy continuing strong demand the wages and salaries component of the for labor. Nevertheless, hiring was ECI has continued to accelerate, rising 3.4 percent during the twelve months ending in March 1997, about one- 1. More detail is provided in a paper by quarter percentage point faster than Lawrence Slifman and Carol Corrado, "Decompo- during the previous twelve months and sition of Productivity and Unit Costs," Board of roughly half a percentage point faster Governors of the Federal Reserve System, than in 1994 and 1995. November 18, 1996. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 71 Prices high levels of resource utilization. Several factors have contributed to the The underlying trend of price inflation recent favorable performance of price has remained favorable this year. In parinflation. Energy prices have declined ticular, the CPI excluding food and this year. Non-oil import prices also energy—often referred to as the "core" have fallen significantly, reducing input CPI—increased at an annual rate of costs for some domestic companies and 2Vi percent over the first two quarters of likely restraining the prices charged the year, about the same pace as in 1996. by domestic businesses that compete The overall CPI registered a smaller with foreign producers. Besides being increase than the core CPI during the restrained by some price competition first half of this year. Both the overall from imported materials and supplies, CPI and the core CPI have been affected prices of manufactured goods at earlier by a series of technical changes implestages of processing have been held in mented by the Bureau of Labor Statischeck by an expansion of industrial tics over the past two and one-half years capacity that has been rapid enough to to obtain a more accurate measure of restrain increases in utilization rates price changes. If not for these changes, over the past year. Also, to the extent increases in the CPI since 1994 would that firms have succeeded in their efforts be marginally larger. to realize large efficiency gains and Other measures of prices also suggest reduce unit costs, upward pressure on that favorable inflation trends continued prices may be reduced. Finally, an into 1997. Measured from the first quarextended period of relatively low and ter of last year to the first quarter of this steady inflation has reinforced a belief year, the chain price index for personal among households and businesses that consumption expenditures excluding the trend of inflation should remain food and energy rose 2 percent, the same muted, and consequently helped to hold as in the four-quarter period a year down inflation expectations. earlier.2 Similarly, the chain price index Developments in the food and energy for overall GDP—which covers prices sectors were favorable to consumers in of all goods and services produced in the first half of 1997. Consumer energy the United States—and the chain measure for gross domestic purchases— which covers prices of all goods pur- Alternative Measures of Price Change chased in the United States—increased Percent the same amount over the year ending in the first quarter of 1997 as during the 1995:Q1 1996:Q1 Price measure to to previous four quarters. 1996:Q1 1997:Q1 All of these price measures indicate Fixed-weight that inflation remains muted, despite Consumer price index 2.7 2.9 Excluding food and energy ... 2.9 2.5 Chain-type 2. The price measure for personal consumption Personal consumption expenditures (PCE) is closely related to the CPI expenditures 2.0 2.5 Excluding food and energy ... 2.0 2.0 because components of the CPI are key inputs in Gross domestic purchases 2.2 2.2 the construction of the PCE price measure. Never- Gross domestic product 2.2 2.2 theless, the PCE price measure has the advantage that by using chain weighting rather than fixed Deflator Gross domestic product 2.1 1.8 weights it avoids some of the substitution bias that affects the CPI. NOTE. Changes are based on quarterly averages. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

72 84th Annual Report, 1997 prices declined in the first half of the prices of new and used passenger cars year as the price of crude oil dropped declined in the first six months of the back following last year's run-up. In year, and prices of light trucks were 1996, the price of crude oil was boosted essentially flat. Also, prices of house by refinery disruptions, uncertainty furnishings were about unchanged, on about the timing of Iraqi oil sales, and balance, in the first half of the year, unusual weather patterns that increased although apparel prices moved up after energy demand for heating and cooling. declining in recent years. As these factors receded this year, crude The CPI for non-energy services rose oil prices fell. Although the downward about 3 percent at an annual rate trend was interrupted by some transitory between December and June, a touch spikes in prices—as in May when ten- below last year's pace. After rising sions in the Middle East flared up— markedly last year, airfares declined, on the price of crude is now roughly back net, in the first half of this year. Fares to the range that prevailed before last fell substantially early in the year when year's run-up. Since December, gasoline the excise tax on tickets expired, and prices have tumbled more than 16 per- even with the reimposition of the tax in cent at an annual rate, and heating oil March, ticket prices were still lower prices have fallen significantly. Natural in June than in December. Increases in gas prices also fell as stocks, which had prices of medical services also contindwindled over the winter, were replen- ued to slow somewhat this year.3 In ished. Reflecting the declines in fuel addition, the CPI for auto finance fell in prices, the CPI for energy fell about May and June as automakers sweetened 9 percent at an annual rate between incentives. In contrast, price increases in December 1996 and June 1997. the first half of the year picked up in Consumer food prices increased at an some other areas; shelter prices rose a annual rate of only about 1 percent in bit more rapidly than last year, as did the first half of the year. Although coffee tuition and prices for personal care prices jumped, the prices of many other services. food items were flat or edged lower. Most notably, declines in grain prices Credit and the that began in mid-1996 have been work- Monetary Aggregates ing their way to the retail level and have held down prices for a variety of grain- Credit and Depository Intermediation dependent foods, such as beef, poultry, and dairy products. Prices of foods that The total debt of domestic nonfinancial depend more heavily on labor costs have sectors increased at an annual rate of been rising modestly this year. about 43/4 percent from the fourth quar- Consumer prices for goods other than ter of 1996 through May of this year, food and energy rose a restrained three- placing the aggregate near the middle of quarters percent at an annual rate the range for 1997 established by the between December and June of this year, a touch below last year's pace. Declining prices for non-oil imports 3. In January 1997, the Bureau of Labor Statishelped contain prices of goods in the tics introduced a new measure of the prices of hospital services—which account for roughly one- CPI in the first half of the year, in part third of the CPI for medical services—and this by constraining U.S. businesses in comnew measure should, over time, provide a more petition with importers. For example, accurate gauge of price movements in this area. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 73 FOMC. This pace is more than half a Real estate lending at banks rose about percentage point below that for 1996, 9 percent at an annual rate between the reflecting significantly slower growth of fourth quarter of 1996 and June of this borrowing by the federal government. year, compared with 4 percent in 1996. The total debt of the other sectors has In contrast, outstanding home mortgages risen at a roughly constant pace over at thrift institutions grew little in the first the past few years, even though the part of the year after a large run-up in growth rate of nominal output has been 1996. Home equity credit lines from increasing. banks expanded especially rapidly in the Credit on the books of depository spring, as some banks promoted these institutions rose more rapidly than total loans as a substitute for consumer loans. debt in the first half of 1997, indicating The growth of consumer loans at banks that their share of total debt outstanding (including loans that were securitized increased. Credit growth at thrift institu- as well as loans still on banks' books) tions eased late last year and early this fell from about 11 percent in 1996 to year after increasing moderately in the 3lA percent at an annual rate between first three quarters of 1996. However, the fourth quarter of 1996 and June of commercial bank credit grew at a brisk this year. pace in the first half of the year, with both securities and loans increasing The Monetary Aggregates more rapidly than they did last year. Growth of the monetary aggregates during the first half of 1997 was similar Growth of Money and Debt to growth in 1996. Between the fourth Percent quarter of last year and June, M2 expanded at an annual rate of almost Domestic non- 5 percent; as the Committee had antici- Period Ml M2 M3 financial pated, the aggregate was running close debt to the upper bound of its growth cone, Annual* which had been chosen to be consistent 1987 6.3 4.2 5.8 10.0 1988 4.3 5.7 6.3 9.0 with price stability. The behavior of M2 1989 .5 5.2 4.0 7.9 over this period can be reasonably well 1990 4.1 4.1 1.8 6.9 explained by changes in nominal GDP 1991 ... 7.9 3.1 1.2 4.6 1992 14.4 1.8 .6 4.7 and interest rates, using historical veloc- 1993 ... 10.6 1.3 1.1 5.2 ity relationships. In the first quarter, the 1994 2.5 .6 1.7 5.2 velocity of M2 (defined as the ratio of 1995 -1.6 4.0 6.2 5.5 nominal GDP to M2) increased a little 1996 -4.6 4.7 6.8 5.4 more than might have been anticipated Quarterly 'annual rate)2 from its recent relationship to the 1997:Q1 -.7 6.1 8.2 4.5 opportunity cost of holding M2—the Q2 -5.4 4.3 6.8 n.a. interest earnings forgone by owning M2 Year-to-date3 assets rather than market instruments 1997 -2.6 4.9 7.1 4.8 such as Treasury bills. M2 may have 1. From average for fourth quarter of preceding year to been held down a bit by savers' prefaverage for fourth quarter of year indicated. erences for equity market funds, for 2. From average for preceding quarter to average for quarter indicated. which inflows were quite strong. 3. From average for fourth quarter of 1996 to average Growth of M2 was much slower in the for June (May in the case of domestic nonfinancial debt). n.a. Not available. second quarter than in the first quarter Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 84th Annual Report, 1997 percent compared with 6 percent at of renewed stability in the behavior of an annual rate), consistent with the M2—three years—is still fairly short, slowing of the economy and almost and whether the stability will persist unchanged M2 opportunity cost. The is unclear. Variations in opportunity monthly pattern of M2 growth in the cost and income growth during this second quarter was heavily influenced period have been rather small, leaving by unusually high individual non- considerable doubt about how M2 withheld tax payments. M2 surged in would respond to more significant April, as households apparently accu- changes in the financial and economic mulated additional liquid balances in environment. order to make the larger tax pay- M3 rose about 7 percent at an annual ments, and was about unchanged on a rate between the fourth quarter of 1996 seasonally adjusted basis in May as pay- and June of this year. This pace is a ments cleared and balances returned to little faster than last year's and again normal. left M3 above the upper end of its The correspondence between changes growth cone, which, like the growth in M2 velocity and in opportunity cost cone for M2, was set to be consistent during recent years may represent a with price stability. Large time deposits, return to the roughly stable relationship which are not included in M2, conobserved for several decades until tinued to increase much more rapidly 1990—albeit at a higher level of veloc- than other deposits. Banks have been ity. The relationship was disturbed in funding their asset growth disproporthe early 1990s by households' apparent tionately through wholesale deposits, decisions to shift funds out of lower- leaving interest rates on retail deposits yielding deposits into higher-yielding further below market rates than they stock and bond mutual funds. On one have been historically. Growth of hand, the "credit crunch" at banks and institution-only money market funds the resolution of troubled thrifts curbed eased just a little from last year's torrid the eagerness of these institutions to pace, as the role of these funds in corattract retail deposits, holding down the porate cash management continued to rates of return offered on brokered increase. deposits and similar accounts relative Ml contracted at a 2Vi percent annual to the average deposit rates used in rate between the fourth quarter of constructing measures of opportunity 1996 and June of this year. Growth of cost. At the same time, the appeal of this aggregate was again depressed by longer-term assets was enhanced tempo- the spread of so-called sweep programs, rarily by the steeply sloped yield curve whereby balances in transactions and more permanently by the greater accounts, which are subject to reserve variety and lower cost of mutual fund requirements, are "swept" into savings products available to investors. More accounts, which are not. Sweep prorecently, robust inflows into stock funds grams benefit depositories by reducing apparently have substituted to only a their required holdings of reserves, limited extent for holdings of M2 which earn no interest. At the same assets, and M2 velocity and oppor- time, they do not restrict depositors' tunity cost have again been moving access to their funds for transactions roughly together since mid-1994, purposes, because the funds are swept although velocity has continued to back into transactions accounts when drift up slightly. However, the period needed. Until late last year, most retail Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 75 sweep programs were limited to NOW required reserves were to fall quite accounts, but demand-deposit sweeps low, the demand for balances would have expanded markedly since then. become more linked to banks' desire Adjusted for the estimated total of bal- to avoid overnight overdrafts when ances swept owing to the introduction of conducting transactions through their new sweep programs, Ml expanded at accounts at Reserve Banks. Demand a 43A percent annual rate between the from this source is more variable than is fourth quarter of 1996 and June 1997, a requirement-related demand, and it also little below its sweep-adjusted growth cannot be substituted across days; both rate in 1996. factors would tend, all else equal, to The drop in the amount of deposits increase the volatility of the federal held in transactions accounts in the first funds rate. half of 1997 caused required reserves to The decline in required reserves over fall about 10 percent at an annual rate, the past several years has not created close to the rate of decline last year. serious problems in the federal funds Nonetheless, the monetary base has market, but funds-rate volatility has expanded at a moderate pace so far in risen a little, and the risk of much 1997, because the runoff in required greater volatility would increase if reserves has been more than offset—as required reserves were to fall substanit was also last year—by an increase in tially further. One factor mitigating an the demand for currency. Currency increase in funds-rate volatility has been growth has been a little higher this year an increase in required clearing balthan last, as the effects of strong domes- ances. These balances, which banks can tic spending more than offset a slight precommit to hold on a two-week averdrop in net shipments of U.S. currency age basis, earn credits that banks use to abroad in the first four months of the pay for Federal Reserve priced services. year. Like required reserve balances, required Further reductions in required re- clearing balances are predictable by serves have the potential to diminish the Federal Reserve and can be subthe Federal Reserve's ability to control stituted across days within the twothe federal funds rate closely on a day- week maintenance period. Funds-rate to-day basis. Traditionally, the daily volatility has also been damped by demand for balances at the Federal banks' improved management of their Reserve largely reflected banks' needs balances at Reserve Banks, which in for required reserves, which are fairly part reflects the improved real-time predictable. As a result, the Federal access to account information now Reserve has generally been able to provided by the Federal Reserve. supply the quantity of balances that Whether these factors could continue to satisfies this demand at the intended restrain funds-rate volatility if required funds rate. Moreover, reserve require- reserve balances were to become much ments are specified in terms of an smaller is as yet unclear. Also unclear is average level of balances over a whether a moderate increase in fundstwo-week period, so if the funds rate rate volatility would have any serious on a particular day moves above the adverse consequences for interest rates level expected to prevail on ensuing farther out on the yield curve or for the days, banks can trim their balances macroeconomy. The Federal Reserve and thereby relieve some of the continues to monitor the situation upward pressure on the funds rate. If closely. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 84th Annual Report, 1997 Interest Rates, Equity Prices, and The interest rate on the three-month Exchange Rates Treasury bill was held down in recent months by the reduced supply of bills associated with the smaller federal defi- Interest Rates cit. Between mid-March and mid-July, Interest rates on Treasury securities the spread between the federal funds were little changed or declined a bit, on rate and the three-month yield averaged balance, between the end of 1996 and about 15 basis points above the average mid-July. Yields rose substantially in the spread in 1996. Interest rates on private first quarter as evidence mounted that short-term instruments increased a little the robust economic activity observed in in the second quarter after the small the closing months of 1996 had contin- System tightening in March. ued into 1997. By the time of the March FOMC meeting, most participants in Equity Prices financial markets were anticipating some tightening of monetary policy, and Equity markets have advanced dramatirates moved little when the increase cally again this year. Through mid-July, in the intended federal funds rate was most broad measures of U.S. stock announced. Beginning in late April, key prices had climbed between 20 percent data pointed to continued low inflation and 25 percent since year-end. Stocks and a slowing of economic growth in began the year strongly, with the major the second quarter, and interest rates indexes reaching then-record levels in retraced their earlier advance. late January or February. Significant The yield on the inflation-indexed selloffs ensued, partly occasioned by the ten-year Treasury note was little backup in interest rates, and by early changed between mid-April and mid- April the NASDAQ index was well July, suggesting that at least part of the below its year-end mark and the roughly 60-basis-point drop in the nomi- S&P 500 composite index was barely nal ten-year yield over that period above its. Equity prices began reboundreflected a reduction in expected infla- ing in late April, however, soon pushing tion or in uncertainty about future infla- these indexes to new highs. Stock prices tion, or both. Yet, relative movements in have been somewhat more volatile this these two yields should be interpreted year than last. carefully, as the market's experience in The run-up in stock prices in the trading indexed debt is relatively brief, spring was bolstered by unexpectedly making its prices potentially vulnerable strong corporate profits for the first to small shifts in market sentiment. quarter. Still, the ratio of prices in the Moreover, the Treasury announced this S&P 500 to consensus estimates of earnspring a reduction in the frequency of ings over the coming twelve months nominal ten-year note auctions, perhaps has risen further from levels that were putting downward pressure on their already unusually high. Changes in this nominal yields, and some investors may ratio have often been inversely related have paid renewed attention to upcom- to changes in long-term Treasury yields, ing technical adjustments to the CPI, but this year's stock price gains were which will reduce measured inflation. not matched by a significant net decline Survey-based measures of expected in interest rates. As a result, the yield on inflation showed little change in the sec- ten-year Treasury notes now exceeds the ond quarter. ratio of twelve-month-ahead earnings to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 11 prices by the largest amount since 1991, pressure for dollar appreciation abated. when earnings were depressed by the While robust economic activity in the economic slowdown. One important United States generated a rise in U.S. factor behind the increase in stock prices long-term interest rates through April, this year appears to be a further rise in market uncertainty about the strength of analysts' reported expectations of earn- output growth in several foreign indusings growth over the next three to five trial countries led to little change, on years. The average of these expectations balance, in average long-term (ten-year) has risen fairly steadily since early 1995 rates in other G-10 countries. Since then, and currently stands at a level not seen US. rates have returned to near year-end since the steep recession of the early levels, while rates abroad have moved 1980s, when earnings were expected to down. Accordingly, the long-term interbounce back from levels that were quite est differential, on balance, has shifted low. further in favor of dollar assets since December, consistent with the net appreciation of the dollar this year. Exchange Rates Despite indications of further recov- The weighted average foreign exchange ery of output in Japan, the dollar rose value of the dollar in terms of the other against the yen early in the year as G-10 currencies rose sharply in the first planned fiscal policy in Japan appeared quarter from its level in December and to be more restrictive than had been has moved up somewhat further since expected, and Japanese long-term interthen. On balance, the nominal dollar is est rates declined in response. Statemore than 10 percent above its level at ments by G-7 officials at their meeting the end of December. A broader mea- in Berlin in February and on subsequent sure of the dollar that includes curren- occasions suggested some concern that cies from additional U.S. trading part- the dollar's strength and the yen's weakners and adjusts for changes in relative ness not become excessive. The dollar consumer prices shows appreciation moved back down in terms of the yen in of about 7 percent. After rising nearly May and has since fluctuated narrowly. 10 percent in terms of the Japanese The yen has been supported by data yen to a recent peak in late April, the showing a widening of Japanese exterdollar retreated; it is currently about nal surpluses and by a partial retracing unchanged from its value in terms of by Japanese long-term rates of their earyen at the end of December. In contrast, lier decline, as indicators have suggested the dollar has risen about 17 percent in that the fiscal measures may not be as terms of the German mark since the end contractionary as previously expected. of last year. The dollar also rose sharply early in Early in the year, data showing con- the year in terms of the German mark tinued strengthening of U.S. economic and other continental European curactivity surprised market participants, rencies. Market participants have been raised their expectations of some tight- disappointed that the pace of economic ening of U.S. monetary policy, and con- activity has not strengthened further in tributed to upward pressure on the dol- continental European countries. In addilar. In light of the FOMC action in late tion, uncertainties about the prospects March and the tendency for subsequent for European Monetary Union, includeconomic indicators to suggest a slow- ing the possibility of delay and the quesing of the growth of U.S. real output, tion of which countries will be in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 84th Annual Report, 1997 first group proceeding to Stage Three, have resulted in fluctuations in the mark and, on balance, appear to have strengthened the dollar. German long-term interest rates have declined somewhat on balance this year. Short-term market interest rates in most of the major foreign industrial countries have changed little on average since the end of last year. Rates in the United Kingdom have risen somewhat as the new government increased the official lending rate one-quarter percentage point in May and the Bank of England raised it by the same amount in June and again in July. Short-term rates in Italy and Switzerland have eased. Stock prices have risen sharply so far this year in the major foreign industrial countries, particularly in continental Europe. The dollar has changed little on balance in terms of the Mexican peso since December, as improved investor sentiment toward Mexico, reflected in narrowing yield spreads between Mexican and U.S. dollar-denominated bonds, has supported the peso. The trend in Mexican inflation has declined this year; nevertheless, the excess of Mexican inflation over U.S. inflation implies about a 7 percent real appreciation of the peso since December. Since mid-May, financial pressures in Thailand, which caused authorities there to raise interest rates and have led to depreciation of the currency, have spilled over to influence financial markets in some of our Asian trading partners, particularly the Philippines and Malaysia. Interest rates in both of these countries rose sharply. Philippine officials relaxed their informal peg of the peso in terms of the dollar, and the currency declined significantly; the Malaysian ringgit and Indonesian rupiah have also depreciated. • 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

81 Record of Policy Actions of the Board of Governors Regulation B Regulation C Equal Credit Opportunity Home Mortgage Disclosure September 9, 1997—Amendments January 16, 1997—Amendment The Board amended Regulation B to The Board approved an interim amendcreate a legal privilege for self-tests con- ment to Regulation C to increase the ducted voluntarily by creditors, effective exemption threshold for depository January 30, 1998. institutions, effective January 1, 1997. Votes for this action: Messrs. Greenspan Votes for this action: Mr. Greenspan, and Kelley, Ms. Phillips, and Mr. Meyer. Ms. Rivlin, Messrs. Kelley and Lindsey, Absent and not voting: Ms. Rivlin.1'2 Mses. Phillips and Yellen, and Mr. Meyer. The Board revised Regulation B to The Economic Growth and Regulaimplement amendments to the Equal tory Paperwork Reduction Act of 1996 Credit Opportunity Act as part of the amended the Home Mortgage Dis- Economic Growth and Regulatory closure Act to increase the asset- Paperwork Reduction Act of 1996. That exemption threshold that determines act created a legal privilege for informa- which depository institutions are exempt tion produced by creditors through vol- from the act. The new asset-exemption untary self-tests they conduct to deter- threshold is based on the percentage by mine the level or effectiveness of their which the Consumer Price Index for compliance with the Equal Credit Urban Wage Earners and Clerical Work- Opportunity Act, provided that appropri- ers (CPIW) for 1996 exceeded the index ate corrective action is taken to address for 1975. On the basis of the CPIW for any possible violations they discover. December 1996, the Board approved a The Department of Housing and Urban threshold of $28 million. The Board also Development issued a substantially requested comment on the interim similar regulation under the Fair Hous- amendment. ing Act. The Board announced its revised regulation on December 11, May 19, 1997—Amendments 1997. The Board amended Regulation C to increase the asset-exemption threshold for depository institutions, ease disclosure requirements, and extend data col- 1. Throughout this chapter, note 1 indicates that two vacancies existed on the Board when the lection authority, effective July 1, 1997. action was taken. 2. In voting records throughout this chapter, Votes for this action: Mr. Greenspan, Board members, except the Chairman and Vice Ms. Rivlin, Mr. Kelley, Ms. Phillips, and Chair, are listed by seniority. Mr. Meyer.1 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 84th Annual Report, 1997 The revisions implement amendments reserve balances nationally or locally. to the Home Mortgage Disclosure Act The revisions also update and clarify the included in the Economic Growth and pass-through rules in Regulation D for Regulatory Paperwork Reduction Act of all institutions. 1996. The action makes final an interim amendment adopted in January 1997 that set the asset-exemption threshold November 7, 1997—Amendments for depository institutions at $28 million. The amendments also establish an The Board amended Regulation D to alternative method by which institutions decrease the amount of transaction may provide disclosure statements in balances to which the lower reserve metropolitan areas in which they have requirement applies. branch offices and extend data collec- Votes for this action: Mr. Greenspan, tion authority under the Paperwork Ms. Rivlin, Mr. Kelley, and Ms. Phillips. Reduction Act for another three years. Absent and not voting: Mr. Meyer.1 Under the Monetary Control Act of Regulation D 1980, depository institutions, Edge Act Reserve Requirements corporations, agreement corporations, of Depository Institutions and U.S. agencies and branches of foreign banks are subject to reserve October 26, 1997—Amendments requirements set by the Board. The act directs the Board to adjust annually the The Board amended Regulation D to amount subject to the lower reserve allow U.S. branches and agencies of for- requirement to reflect changes in transeign banks and Edge Act and agreement action balances nationwide. Recent corporations to choose whether to aggre- declines in transaction balances wargate reserve balances on a nationwide ranted a decrease to $47.3 million, basis with a single pass-through corre- and the Board amended Regulation D spondent or to continue to maintain accordingly. reserve balances on a same-state/same- The Garn-St Germain Depository District basis, effective January 1, 1998. Institutions Act of 1982 establishes a zero percent reserve requirement on the Votes for this action: Mr. Greenspan, first $2 million of an institution's reserv- Ms. Rivlin, Mr. Kelley, Ms. Phillips, and Mr. Meyer.1 able liabilities. The act also provides for annual adjustments to that exemption To make interstate banking and amount based on deposit growth nationbranching easier, the Federal Reserve wide. Recent growth in deposits war- Banks began in January 1998 to imple- ranted an increase to $4.7 million, ment a new account structure that pro- and the Board amended Regulation D vides a single Federal Reserve account accordingly. for each domestic depository institution For institutions reporting weekly, and enables the Federal Reserve Banks the amendments are effective with the to establish a single debtor-creditor rela- reserve computation period beginning tionship with each chartered entity. The December 30,1997, and the correspondamendments allow foreign banks and ing reserve maintenance period begin- Edge Act and agreement corporations to ning January 1, 1998. For institutions choose whether to aggregate required reporting quarterly, the amendments are Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 83 effective with the reserve computation banking, and the number of depository period beginning December 16, 1997, institutions with branches in more that and the corresponding reserve main- one Federal Reserve District is expected tenance period beginning January 15, to increase. The amendments clarify the 1998. Federal Reserve District in which a To reduce the reporting burden on depository institution is eligible for Fedsmall institutions, depository institutions eral Reserve membership and the locawith total deposits below specified lev- tion of a depository institution's reserve els are required to report their deposits account. The Board also delegated to the and reservable liabilities quarterly or Secretary of the Board the authority to less frequently. To reflect increases make a determination of location under in the growth rate of total deposits at Regulation D or Regulation I if (1) the all depository institutions, the Board relevant Federal Reserve Banks and the increased the deposit cutoff levels used institution agree on the specific Reserve in determining the frequency and detail Bank in which the institution should of deposit reporting to $78.9 million for hold stock or with which the institution nonexempt depository institutions and should maintain a reserve account and to $50.7 million for exempt depository (2) the location agreed upon does not institutions, beginning in September raise any significant policy issues. 1998. Regulation E Regulation D Electronic Fund Transfers Reserve Requirements of Depository Institutions August 8, 1997—Amendments The Board amended Regulation E to Regulation I exempt certain needs-tested electronic Issue and Cancellation of Capital benefit transfer programs established or Stock of Federal Reserve Banks administered by state or local govern- Rules Regarding Delegation ment agencies from requirements of the of Authority Electronic Fund Transfer Act and Regulation E, effective September 15, 1997. June 3, 1997—Amendments Votes for this action: Messrs. Greenspan and Kelley, Ms. Phillips, and Mr. Meyer. The Board amended Regulations D and Absent and not voting: Ms. Rivlin.1 I to define the location of a depository institution for purposes of Federal Electronic benefit transfer programs Reserve membership and reserve generally involve the issuance of access account maintenance, effective Octo- cards and personal identification number 1, 1997. bers to recipients of government benefits so that they can obtain their benefits Votes for this action: Ms. Rivlin, Mr. through automated teller machines and Kelley, Ms. Phillips, and Mr. Meyer. Absent and not voting: Mr. Greenspan.1 point-of-sale terminals. The amendments implement a provision of the The Riegle-Neal Interstate Banking Electronic Fund Transfer Act contained and Branching Efficiency Act of 1994 in the Personal Responsibility and Work eliminated many barriers to interstate Opportunity Reconciliation Act of 1996 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 84th Annual Report, 1997 that exempted certain electronic benefit 1998. Compliance with the amendments transfer programs from coverage under to Regulation T is optional until July 1, the Electronic Fund Transfer Act. 1998. Regulation H Regulation G Membership of State Banking Securities Credit by Persons other Institutions in the Federal Reserve than Banks, Brokers, or Dealers System Regulation T Credit by Brokers and Dealers February 24, 1997—Amendments Regulation U The Board adopted amendments to pro- Credit by Banks for the Purpose visions of Regulation H related to recof Purchasing or Carrying Margin ordkeeping and confirmation of certain Stocks securities transactions effected by state member banks, effective April 1, 1997. Regulation X Borrowers of Securities Credit Votes for this action: Mr. Greenspan, Ms. Rivlin, Mr. Kelley, Ms. Phillips, and December 18, 1997—Amendments Mr. Meyer.1 The Board amended Regulations G, T, The amendments update recordkeep- U, and X to reduce regulatory distinc- ing and confirmation requirements to tions between broker-dealers, banks, conform them with rules of the Securiand other lenders and to implement ties Exchange Commission and the changes to the Board's securities credit Department of the Treasury and with regulations, effective April 1, 1998. principles of safe and sound banking. Votes for this action: Mr. Greenspan, Ms. Rivlin, Mr. Kelley, Ms. Phillips, and Regulation H Messrs. Ferguson and Gramlich. Absent Membership of State Banking and not voting: Mr. Meyer. Institutions in the Federal Reserve System The Board adopted the amendments to simplify the regulations and reduce Regulation K burden as part of its periodic regulatory International Banking Operations review and to implement changes to the Board's statutory authority contained March 11, 1997—Amendments in the National Securities Markets Improvement Act of 1996, which The Board amended Regulations H and deregulated lending to certain broker- K to establish rules concerning govdealers. The amendments also provide ernment securities sales practices by for merging Regulation G into Regula- depository institutions, effective July 1, tion U, thereby eliminating Regula- 1997. tion G. The Board also will discontinue Votes for this action: Mr. Greenspan, publication of its quarterly list of over- Ms. Rivlin, Mr. Kelley, Ms. Phillips, and the-counter market stocks that are sub- Mr. Meyer.1 ject to its margin regulations for brokerdealers, effective January 1, 1999, and The rules, which were also adopted for other lenders, effective April 1, by the other federal banking agencies, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 85 minimize regulatory burden to the extent ment to Regulations H and Y to reduce feasible while providing consistent treat- regulatory burden in risk-based capital ment for customers of bank and non- guidelines that apply to banking organibank dealers and brokers in government zations with significant trading activisecurities. ties, effective December 31, 1997. Votes for this action: Mr. Greenspan, August 22, 1997—Amendments Ms. Rivlin, Mr. Kelley, Ms. Phillips, and Messrs. Meyer, Ferguson, and Gramlich. The Board amended Regulations H and K to implement the prohibition in sec- The Board, along with the other fedtion 109 of the Riegle-Neal Interstate eral banking agencies, amended the risk- Banking and Branching Efficiency Act based capital standards for market risk of 1994 against establishing interstate applicable to certain banks and bank branches primarily for the purpose holding companies with significant tradof deposit production, effective Octo- ing activities. The amendment elimiber 10, 1997. nates the requirement that the total capital charge for specific risk must equal at Votes for this action: Mr. Greenspan, least 50 percent of the standard capital Ms. Rivlin, Mr. Kelley, Ms. Phillips, and Mr. Meyer.1 charge for specific risk when an institution measures specific market risk using As required by section 109 of the act, its internal model. The rule implements the Board, along with the Office of the a revision to the Basle Accord and Comptroller of the Currency and the reduces regulatory burden for institu- Federal Deposit Insurance Corporation, tions with qualifying internal models adopted uniform amendments to their because they will no longer be required regulations that prohibit any bank from to calculate a standard specific-risk capiestablishing or acquiring, under the tal charge. authority of the act, a branch or branches outside of its home state primarily for the purpose of deposit production. The Regulation J amendments also provide guidelines for Collection of Checks and Other determining whether such a bank is rea- Items by Federal Reserve Banks sonably helping to meet the credit needs and Funds Transfers through of the communities served by its inter- Fedwire state branches. August 26, 1997—Amendment Regulation H The Board amended Regulation J to Membership of State Banking establish a policy under which each Institutions in the Federal Reserve depository institution will have a single System Federal Reserve account relationship, effective January 2, 1998. Regulation Y Bank Holding Companies and Votes for this action: Mr. Greenspan, Change in Bank Control Ms. Rivlin, Mr. Kelley, and Ms. Phillips. Absent and not voting: Mr. Meyer.1 December 17, 1997—Interim Rule The Riegle-Neal Interstate Banking The Board approved an interim amend- and Branching Efficiency Act of 1994 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86 84th Annual Report, 1997 eliminated many barriers to interstate lation M that apply to automobile leasbanking, and the number of depository ing from October 1, 1997, to January 1, institutions operating branches in more 1998. than one Federal Reserve District is expected to increase. The amendment Votes for this action: Messrs. Greenspan and Kelley, Ms. Phillips, and Mr. Meyer. allows a depository institution to send Absent and not voting: Ms. Rivlin.1 checks to any Reserve Bank for collection, but all of its check-collection trans- On October 7, 1996, the Board had actions through the Federal Reserve published revisions to Regulation M to System will be reflected in a single take effect on October 1, 1997. Those account held at its Administrative revisions established a new disclosure Reserve Bank, regardless of where the scheme to improve consumer underinstitution has its branches. This account standing of automobile-leasing transacstructure will establish a single debtortions. The new scheme required the creditor relationship between each instipreparation of new forms and the reprotution and a Federal Reserve Bank and gramming of computer software. The will make account management more Board had been asked by representaefficient for banks having interstate tives of the automobile leasing industry branches. to delay the effective date of the new rules, to allow more time for installation of the software programs necessary to Regulation M produce computer-generated disclosure Consumer Leasing statements. March 26, 1997—Amendments Regulation O The Board amended Regulation M to Loans to Executive Officers, implement legislation, revise certain dis- Directors, and Principal closures, and make technical correc- Shareholders of Member Banks tions, effective April 1, 1997, with compliance optional until October 1, 1997. March 11,1997—Amendment Votes for this action: Mr. Greenspan, The Board amended Regulation O to Ms. Rivlin, Mr. Kelley, Ms. Phillips, and Mr. Meyer.1 exclude from coverage certain extensions of credit by a bank to an executive The amendments incorporate statu- officer or a director of an affiliate, effectory changes that streamline lease adver- tive April 1, 1997. tising disclosures, revise the requirement to disclose certain costs due at the Votes for this action: Mr. Greenspan, Ms. Rivlin, Mr. Kelley, Ms. Phillips, and signing of the lease to parallel the statu- Mr. Meyer.1 tory change to a similar advertising provision, and make several technical The amendment excludes from the corrections. requirements of Regulation O extensions of credit by a bank to an executive officer or a director of an affiliate, pro- September 25, 1997—Amendments vided that the executive officer or direc- The Board delayed the date for manda- tor is not engaged in major policymaktory compliance with revisions to Regu- ing functions of the lending bank and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 87 that the affiliate does not account for The amendments include a streammore than 10 percent of the consoli- lined and expedited review process for dated assets of the bank's parent holding bank and nonbanking proposals by wellcompany. The amendment also simpli- run bank holding companies, a reorgafies the procedure for a bank to imple- nized and expanded list of permissible ment this exclusion by resolution or nonbanking activities, elimination of bylaw. outmoded or superseded restrictions on nonbanking activities, revisions to tying restrictions, revisions to provisions Regulation Q implementing the Change in Bank Con- Prohibition against Payment trol Act, and other changes to improve of Interest on Demand Deposits the competitiveness of bank holding companies by eliminating unnecessary May 6, 1997—Interpretation regulatory burden and modernizing the regulation. The Board also adopted a The Board revised an interpretation of number of measures intended to broaden Regulation Q to provide an exception to and improve public notice of bank the current limitations on premiums acquisition proposals and to ensure that given on demand deposit accounts, applications and notices are quickly effective May 15, 1997. available to the public. Votes for this action: Mr. Greenspan, Ms. Rivlin, Mr. Kelley, Ms. Phillips, and Mr. Meyer.1 August 21, 1997—Amendments The Board revised an interpretation to provide an additional exception to the The Board amended the prudential limilimitations on premiums that may be tations applicable to bank holding compaid on demand deposit accounts. The panies engaged in securities underwritrevised interpretation permits the pay- ing and dealing activities through ment of premiums to depositors without section 20 subsidiaries, effective Octoany limit, provided the premiums are ber 31, 1997. not related to or dependent on the balance in a demand deposit account and Votes for this action: Mr. Greenspan, the duration of the account balance. Ms. Rivlin, Mr. Kelley, Ms. Phillips, and Mr. Meyer.1 Regulation Y The Board, in its decisions under the Bank Holding Companies and Bank Holding Company Act and section Change in Bank Control 20 of the Glass-Steagall Act, had established prudential limitations (firewalls) February 19, 1997—Amendments that permit a nonbank subsidiary of a bank holding company to underwrite The Board amended Regulation Y to and deal in securities. The amendeliminate unnecessary regulatory burden ments eliminate limitations that have and paperwork and to improve effiproved to be unduly burdensome or unciency, effective April 21, 1997. necessary in light of other laws or regulations and consolidate the remaining Votes for this action: Mr. Greenspan, Ms. Rivlin, Mr. Kelley, Ms. Phillips, and limitations in a series of eight operating Mr. Meyer.l standards. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

88 84th Annual Report, 1997 Regulation Z Votes for this action: Ms. Rivlin, Mr. Truth in Lending Kelley, Ms. Phillips, and Mr. Meyer. Absent and not voting: Mr. Greenspan.1 November 19, 1997—Amendment Many of the amendments clarify the requirements of the regulation. Others The Board amended the disclosure reduce the compliance burden for requirements for variable-rate loans in depository institutions by, for example, Regulation Z, which implements the allowing more flexibility in the way Truth in Lending Act, to give creditors institutions must provide certain notices flexibility in providing disclosures about and disclosures to their customers. variable-rate loans, effective November 21, 1997. Votes for this action: Mr. Greenspan, Rules Regarding Delegation Ms. Rivlin, Mr. Kelley, Ms. Phillips, and of Authority Messrs. Meyer, Ferguson, and Gramlich. March 11, 1997—Amendment The revision implements an amendment to the Truth in Lending Act con- The Board amended its Rules Regarding tained in the Economic Growth and Delegation of Authority to delegate to Regulatory Paperwork Reduction Act of an individual Board member the author- 1996 and applies to variable-rate loans ity to extend the time period for Board that have terms of more than one year action on certain applications, effective and are secured by the borrower's prin- March 22, 1997. cipal dwelling. Under the amendment, for any variable-rate mortgage transac- Votes for this action: Mr. Greenspan, tion, instead of a fifteen-year historical Ms. Rivlin, Mr. Kelley, Ms. Phillips, and Mr. Meyer.1 table, creditors may give borrowers a statement that their periodic payments The Board delegated to the chairman may increase or decrease substantially of its Committee on Supervisory and and a maximum interest rate and corre- Regulatory Affairs its authority, under sponding payment based on a $10,000 the Economic Growth and Regulatory loan. Paperwork Reduction Act of 1996, to Compliance with the amendment iniextend the 180-day period for final tially was optional until December 22, Board action on applications by foreign 1997. On December 2, 1997, the Board banks to establish a branch or agency extended the date for optional complior to acquire ownership or control of a ance until October 1, 1998. commercial lending company. Regulation CC Rules Regarding Availability Availability of Funds and of Information Collection of Checks October 1, 1997—Amendments February 26, 1997—Amendments The Board approved amendments to The Board adopted clarifying and tech- subparts A and B of its Rules Regarding nical amendments to Regulation CC, Availability of Information to provide effective April 28, 1997. for expedited processing of requests for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 89 records and multitrack processing of also approved volume-based fees for the requests, effective November 19, 1997. origination of automated clearinghouse transactions and a reduction in the fee Votes for this action: Mr. Greenspan, for the receipt of transactions. Ms. Rivlin, Mr. Kelley, Ms. Phillips, and Mr. Meyer.1 November 6, 1997—Policy Statement on Payments System The Board's Rules Regarding Avail- Risk ability of Information implement the Freedom of Information Act and set The Board modified its procedures for forth the procedures for providing measuring daylight overdrafts to accomaccess to Board information under the modate an earlier afternoon presentment act and in other circumstances. The deadline for checks drawn on local Fed- Board adopted the amendments to com- eral Reserve Banks, effective Novemply with the Electronic Freedom of ber 14, 1997. Information Act Amendments of 1996, which require agencies to provide for Votes for this action: Mr. Greenspan, expedited processing of requests for Ms. Rivlin, Mr. Kelley, Ms. Phillips, and Mr. Meyer.1 records and permit agencies to provide for fast-track processing of certain The Board revised its procedures to requests. The Board also updated its establish a uniform Systemwide presentrules to comply with statutes that have ment deadline for federal funds checks been enacted since the latest revisions in of 3:00 p.m. local time. Federal funds 1988. Revisions to subpart C of the rules checks presented after that deadline will are still under consideration. be credited to depository institutions' accounts on the next business day at 8:30 a.m. eastern time. Policy Statements and Other Actions 1997 Discount Rates March 13, 1997—Volume-Based During 1997 the basic discount rate was Fee Structures left unchanged at 5 percent. Over the The Board approved guidelines for the course of the year, however, there were use of volume-based fee structures for numerous changes in the rates charged Reserve Bank payment services, effec- by the Federal Reserve Banks for seative March 25, 1997, and reduced auto- sonal and extended credit. The rates for mated clearinghouse fees, effective both types of credit are set on the basis May 1, 1997. of market-related formulas, and these rates exceeded the basic discount rate by Votes for this action: Mr. Greenspan, varying amounts during the year. Ms. Rivlin, Mr. Kelley, Ms. Phillips, and Mr. Meyer.' Basic Discount Rate The Board adopted guidelines for the Reserve Banks' use of volume-based fee The Board's decisions about the basic structures for their electronic payment discount rate are made against the backservices and products and for continua- ground of the policy actions of the Fedtion of volume-based fees for certain eral Open Market Committee (FOMC) electronic check products. The Board and related economic and financial Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 84th Annual Report, 1997 developments. These developments are their requests for an increase in the basic covered more fully in part 1 of this discount rate, and by early July no REPORT and in the minutes of the Reserve Banks were proposing a higher FOMC meetings during 1997 that also rate. appear in this REPORT. Over the summer and fall, the growth Economic activity continued to ex- of economic activity remained relatively pand at a rapid pace during the early brisk, although it was well below its months of 1997 after strengthening pace during the opening months of the markedly in the latter part of 1996. The year. Price inflation continued to be subsharp uptrend in economic activity was dued during this period despite indicaassociated with substantial growth in tions of some pickup in the rise of labor employment and slightly faster increases compensation. No requests were made in average hourly earnings. At the same by any of the Banks to raise the basic time, however, the underlying trend in rate during the summer months, but consumer price inflation remained sub- in early October one Bank proposed a dued. In view of these developments, lA percentage point increase, and late in most of the Reserve Banks continued the year a second Bank requested an to favor leaving the basic discount rate increase of the same amount. The two unchanged at 5 percent, its level since it Banks expressed concern about what was lowered lA percentage point in they regarded as an overly accommoda- January 1996. By mid-March, however, tive monetary policy at a time when the four Reserve Banks were proposing a persisting strength of domestic demand lA percentage point increase in view of seemed to be increasing pressures on their growing concerns about the pros- resources and augmenting the risks of pects for inflation. The Board took no higher inflation. The Board decided, action on these pending requests but however, that the discount rate should agreed on the need to monitor the econ- not be changed. Price inflation had omy for signs of developing inflationary remained quite limited and, indeed, pressures. appeared by some measures to be On March 25, the FOMC unani- declining. Moreover, the financial turmously approved a small increase in the moil in Southeast Asia, which intensifederal funds rate to an average of about fied during the closing months of the 5l/z percent. This action took into year, could be expected to have a dampaccount the persistence of rapid growth ing effect on the economic expansion in economic activity, which, in the con- and inflation in the year ahead. Accordtext of already high levels of resource ingly, although higher price inflation use, was seen as progressively increas- clearly remained a risk, the Board ing the risk of rising inflation. In the agreed with most of the Reserve Banks circumstances, the slight firming of that near-term uncertainties warranted a monetary policy was viewed as a pru- cautious, wait-and-see policy posture. dent step that, by fostering an environment conducive to lower inflation, Structure of Discount Rates afforded greater assurance of prolonging the current economic expansion. In light The basic rate is the rate normally of this preemptive action and subse- charged on loans to depository instituquent signs that the economic expansion tions for short-term adjustment credit, might be slowing to a more sustainable while flexible, market-related rates pace, some Reserve Banks withdrew generally are charged on seasonal and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 91 extended credit. These flexible rates are Board Votes calculated periodically in accordance Under the Federal Reserve Act, the with formulas that are approved by the boards of directors of the Federal Board. Reserve Banks must establish rates on The seasonal program helps smaller loans to depository institutions at least institutions meet needs arising from a every fourteen days and must submit regular pattern of intra-yearly movethe rates to the Board of Governors for ments in their deposits and loans. Funds review and determination. The Reserve may be provided for periods longer than Banks are also required to submit those permitted under adjustment credit. requests to renew the formulas for calcu- Since its introduction in 1992, the flexlating the flexible rates on seasonal and ible rate charged for seasonal credit has extended credit. All votes on discount been closely aligned with short-term rates by the Board of Governors during market rates; it may never be less than 1997 were unanimous. • the basic discount rate applicable to adjustment credit. The purpose of extended credit is to assist depository institutions that are under sustained liquidity pressure and are not able to obtain funds from other sources. The usual rate for extended credit is 50 basis points higher than the rate for seasonal credit and is at least 50 basis points above the basic rate. In appropriate circumstances, the basic discount rate may be applied to extendedcredit loans for up to thirty days, but any further borrowings are charged the market-related rate. Exceptionally large adjustment-credit loans that arise from computer breakdowns or other operating problems not clearly beyond the reasonable control of the borrowing institution are assessed the highest rate applicable to any credit extended to depository institutions; under the current structure, that rate is the rate for extended credit. At the end of 1997 the structure of discount rates was as follows: a basic rate of 5 percent for short-term adjustment credit, a rate of 5.65 percent for seasonal credit, and a rate of 6.15 percent for extended credit. During 1997 the rate for seasonal credit ranged from 5.25 percent to 5.70 percent, and the rate for extended credit ranged from 5.75 percent to 6.20 percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

93 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 curmarket operations, that it shall record rency area, the Committee operates therein the votes taken in connection under an Authorization for Foreign Curwith the determination of open market rency Operations, a Foreign Currency policies and the reasons underlying each Directive, and Procedural Instructions such action, and that it shall include in with Respect to Foreign Currency its annual report to the Congress a full Operations. These policy instruments account of such actions. are shown below in the form in which The minutes of the meetings contain they were in effect at the beginning of the votes on the policy decisions made 1997. Changes in the instruments during at those meetings as well as a resume of the year are reported in the minutes 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 Market Operations Committee at the time of the meetings rather than on data as they may have In Effect January 1, 1997 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

94 84th Annual Report, 1997 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 of business on the day following such meeting open market operations, the Federal Open and ending with the close of business on the Market Committee authorizes and directs the day of the next such meeting; Federal Reserve Banks to lend U.S. Government securities held in the System Open (b) When appropriate, to buy or sell in Market Account to Government securities the open market, from or to acceptance deal- dealers and to banks participating in Governers and foreign accounts maintained at the ment securities clearing arrangements con- Federal Reserve Bank of New York, on a ducted through a Federal Reserve Bank, cash, regular, or deferred delivery basis, for under such instructions as the Committee the account of the Federal Reserve Bank of may specify from time to time. New York at market discount rates, prime bankers acceptances with maturities of up to 3. In order to ensure the effective conduct nine months at the time of acceptance that of open market operations, while assisting in (1) arise out of the current shipment of goods the provision of short-term investments for between countries or within the United foreign and international accounts main- States, or (2) arise out of the storage within tained at the Federal Reserve Bank of the United States of goods under contract of New York, the Federal Open Market Comsale or expected to move into the channels of mittee authorizes and directs the Federal trade within a reasonable time and that are Reserve Bank of New York (a) for System secured throughout their life by a warehouse Open Market Account, to sell U.S. Governreceipt or similar document conveying title ment securities to such foreign and interto the underlying goods; provided that the national accounts on the bases set forth in aggregate amount of bankers acceptances paragraph l(a) under agreements providing held at any one time shall not exceed for the resale by such accounts of those $100 million; securities within 15 calendar days on terms comparable to those available on such trans- (c) To buy U.S. Government securities, actions in the market; and (b) for New York obligations that are direct obligations of, or Bank account, when appropriate, to underfully guaranteed as to principal and interest take with dealers, subject to the conditions by, any agency of the United States, and imposed on purchases and sales of securities prime bankers acceptances of the types in paragraph l(c), repurchase agreements in authorized for purchase under l(b) above, U.S. Government and agency securities, and from dealers for the account of the Federal to arrange corresponding sale and repurchase Reserve Bank of New York under agree- agreements between its own account and ments for repurchase of such securities, obli- foreign and international accounts maingations, or acceptances in 15 calendar days tained at the Bank. Transactions undertaken or less, at rates that, unless otherwise with such accounts under the provisions of expressly authorized by the Committee, shall this paragraph may provide for a service fee be determined by competitive bidding, after when appropriate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings 95 Domestic Policy Directive of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter In Effect January 1, 19971 of 1995 to the fourth quarter of 1996. The monitoring range for growth of total domes- The information reviewed at this meeting tic nonfinancial debt was maintained at 3 to suggests that economic activity has contin- 7 percent for the year. For 1997, the Commitued to expand at a moderate pace. Private tee agreed on a tentative basis to set the same nonfarm payroll employment increased ranges as in 1996 for growth of the monetary appreciably further in November, although aggregates and debt, measured from the the civilian unemployment rate edged up fourth quarter of 1996 to the fourth quarter to 5.4 percent. Industrial production rose of 1997. The behavior of the monetary aggresharply in November, in part because of a gates will continue to be evaluated in the rebound in motor vehicle assemblies that had light of progress toward price level stability, been depressed earlier by work stoppages. movements in their velocities, and develop- Consumer spending has posted appreciable ments in the economy and financial markets. gains over recent months after a summer lull. In the implementation of policy for the Housing starts rebounded in November after immediate future, the Committee seeks to declining in September and October. Busi- maintain the existing degree of pressure on ness fixed investment appears to be growing reserve positions. In the context of the Commoderately after a sharp rise in the third mittee's long-run objectives for price stabilquarter. The nominal deficit on U.S. trade in ity and sustainable economic growth, and goods and services widened substantially in giving careful consideration to economic, the third quarter from its rate in the second financial, and monetary developments, quarter. Increases in labor compensation somewhat greater reserve restraint would have trended up this year, and consumer or slightly lesser reserve restraint might price inflation also has picked up owing to be acceptable in the intermeeting period. larger increases in food and energy prices. The contemplated reserve conditions are expected to be consistent with relatively Short-term market interest rates have regstrong expansion in M2 and M3 over coming istered mixed changes since the Committee months. meeting on November 13, 1996, while longterm yields have risen slightly. In foreign exchange markets, the trade-weighted value of the dollar in terms of the other G-10 currencies has risen slightly over the inter- Authorization for Foreign meeting period. Currency Operations Growth of M2 picked up in November, while expansion of M3 moderated somewhat In Effect January 1, 1997 from its brisk pace in October. For the year through November, M2 is estimated to have grown at a rate in the upper half of the 1. The Federal Open Market Committee Committee's annual range, and M3 at a rate authorizes and directs the Federal Reserve a little above the top of its range. Total Bank of New York, for System Open Market domestic nonfinancial debt has expanded Account, to the extent necessary to carry out moderately on balance over recent months the Committee's foreign currency directive and has remained in the middle portion of its and express authorizations by the Committee range. pursuant thereto, and in conformity with The Federal Open Market Committee such procedural instructions as the Commitseeks monetary and financial conditions that tee may issue from time to time: will foster price stability and promote sus- A. To purchase and sell the following tainable growth in output. In furtherance of foreign currencies in the form of cable transthese objectives, the Committee at its meet- fers through spot or forward transactions on ing in July reaffirmed the ranges it had estab- the open market at home and abroad, includlished in January for growth of M2 and M3 ing transactions with the U.S. Treasury, with the U.S. Exchange Stabilization Fund established by Section 10 of the Gold Reserve 1. Adopted by the Committee at its meeting on Act of 1934, with foreign monetary authori- December 17, 1996. ties, with the Bank for International Settle- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 84th Annual Report, 1997 ments, and with other international financial Amount institutions: Foreign bank (millions of dollars equivalent) Austrian schillings Italian lire Austrian National Bank 250 Belgian francs Japanese yen National Bank of Belgium 1,000 Canadian dollars Mexican pesos Bank of Canada 2,000 Danish kroner Netherlands guilders National Bank of Denmark 250 Pounds sterling Norwegian kroner Bank of England 3,000 French francs Swedish kronor Bank of France 2,000 German marks Swiss francs German Federal Bank 6,000 Bank of Italy 3,000 Bank of Japan 5,000 B. To hold balances of, and to have Bank of Mexico 3,000 Netherlands Bank 500 outstanding forward contracts to receive or Bank of Norway 250 to deliver, the foreign currencies listed in Bank of Sweden 300 paragraph A above. Swiss National Bank 4,000 Bank for International Settlements Dollars against Swiss francs 600 C. To draw foreign currencies and to Dollars against authorized European permit foreign banks to draw dollars under currencies other than Swiss francs 1,250 the reciprocal currency arrangements listed in paragraph 2 below, provided that drawings by either party to any such arrangement Any changes in the terms of existing swap shall be fully liquidated within 12 months arrangements, and the proposed terms of any after any amount outstanding at that time new arrangements that may be authorized, was first drawn, unless the Committee, shall be referred for review and approval to the Committee. because of exceptional circumstances, specifically authorizes a delay. 3. All transactions in foreign currencies D. To maintain an overall open posi- undertaken under paragraph 1(A) above tion in all foreign currencies not exceeding shall, unless otherwise expressly authorized $25.0 billion. For this purpose, the overall by the Committee, be at prevailing market open position in all foreign currencies is rates. For the purpose of providing an investdefined as the sum (disregarding signs) of ment return on System holdings of foreign net positions in individual currencies. The currencies, or for the purpose of adjusting net position in a single foreign currency is interest rates paid or received in connection defined as holdings of balances in that cur- with swap drawings, transactions with forrency, plus outstanding contracts for future eign central banks may be undertaken at receipt, minus outstanding contracts for non-market exchange rates. future delivery of that currency, i.e., as the sum of these elements with due regard to 4. It shall be the normal practice to arrange sign. with foreign central banks for the coordination of foreign currency transactions. In mak- 2. The Federal Open Market Committee ing operating arrangements with foreign directs the Federal Reserve Bank of New central banks on System holdings of foreign York to maintain reciprocal currency currencies, the Federal Reserve Bank of arrangements ("swap" arrangements) for the New York shall not commit itself to maintain System Open Market Account for periods up any specific balance, unless authorized by to a maximum of 12 months with the follow- the Federal Open Market Committee. Any ing foreign banks, which are among those agreements or understandings concerning the designated by the Board of Governors of the administration of the accounts maintained by Federal Reserve System under Section 214.5 the Federal Reserve Bank of New York with of Regulation N, Relations with Foreign the foreign banks designated by the Board Banks and Bankers, and with the approval of of Governors under Section 214.5 of Reguthe Committee to renew such arrangements lation N shall be referred for review and on maturity: approval to the Committee. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings 97 5. Foreign currency holdings shall be C. From time to time, to transmit invested to ensure that adequate liquidity is appropriate reports and information to the maintained to meet anticipated needs and so National Advisory Council on International that each currency portfolio shall generally Monetary and Financial Policies. have an average duration of no more than 18 months (calculated as Macaulay dura- 8. Staff officers of the Committee are authotion). When appropriate in connection with rized to transmit pertinent information on arrangements to provide investment facilities System foreign currency operations to approfor foreign currency holdings, U.S. Govern- priate officials of the Treasury Department. ment securities may be purchased from foreign central banks under agreements for 9. All Federal Reserve Banks shall particirepurchase of such securities within 30 calpate in the foreign currency operations for endar days. System Account in accordance with paragraph 3 G(l) of the Board of Governors' 6. All operations undertaken pursuant to Statement of Procedure with Respect to Forthe preceding paragraphs shall be reported eign Relationships of Federal Reserve Banks promptly to the Foreign Currency Subdated January 1, 1944. committee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Foreign Currency Directive Governors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving In Effect January 1, 1997 on the Subcommittee, other Board Members designated by the Chairman as alternates, 1. System operations in foreign currencies and in the absence of the Vice Chairman of shall generally be directed at countering disthe Committee, his alternate). Meetings of orderly market conditions, provided that the Subcommittee shall be called at the market exchange rates for the U.S. dollar request of any member, or at the request of reflect actions and behavior consistent with the Manager, System Open Market Account the IMF Article IV, Section 1. ("Manager"), for the purposes of reviewing recent or contemplated operations and of 2. To achieve this end the System shall: 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, questions arising from such reviews and con- B. Maintain reciprocal currency sultations shall be referred for determination ("swap") arrangements with selected forto the Federal Open Market Committee. eign central banks and with the Bank for International Settlements. 7. The Chairman is authorized: C. Cooperate in other respects with A. With the approval of the Commit- central banks of other countries and with tee, to enter into any needed agreement or international monetary institutions. understanding with the Secretary of the Treasury about the division of responsibility for 3. Transactions may also be undertaken: foreign currency operations between the System and the Treasury; A. To adjust System balances in light of probable future needs for currencies. B. To keep the Secretary of the Treasury fully advised concerning System for- B. To provide means for meeting Syseign currency operations, and to consult with tem and Treasury commitments in particular the Secretary on policy matters relating to currencies, and to facilitate operations of the foreign currency operations; Exchange Stabilization Fund. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 84th Annual Report, 1997 C. For such other purposes as may be tion in a single foreign currency exceeding expressly authorized by the Committee. $150 million, or $300 million when the operation is associated with repayment of 4. System foreign currency operations shall swap drawings. be conducted: C. Any operation that might generate a A. In close and continuous consulta- substantial volume of trading in a particular tion and cooperation with the United States currency by the System, even though the Treasury; change in the System's net position in that currency might be less than the limits speci- B. In cooperation, as appropriate, with fied in l.B. foreign monetary authorities; and D. Any swap drawing proposed by a C. In a manner consistent with the obliforeign bank not exceeding the larger of gations of the United States in the Interna- (i) $200 million or (ii) 15 percent of the size tional Monetary Fund regarding exchange of the swap arrangement. arrangements under the IMF Article IV. 2. The Manager shall clear with the Committee (or with the Subcommittee, if the Procedural Instructions with Subcommittee believes that consultation Respect to Foreign Currency with the full Committee is not feasible in the Operations time available, or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time In Effect January 1, 1997 available): In conducting operations pursuant to the A. Any operation that would result in a authorization and direction of the Federal change in the System's overall open position Open Market Committee as set forth in the in foreign currencies exceeding $1.5 billion Authorization for Foreign Currency Opera- since the most recent regular meeting of the tions and the Foreign Currency Directive, Committee. the Federal Reserve Bank of New York, through the Manager, System Open Market B. Any swap drawing proposed by a Account ("Manager"), shall be guided by foreign bank exceeding the larger of (i) $200 the following procedural understandings million or (ii) 15 percent of the size of the with respect to consultations and clearance swap arrangement. with the Committee, the Foreign Currency Subcommittee, and the Chairman of the 3. The Manager shall also consult with the Committee. All operations undertaken pursu- Subcommittee or the Chairman about proant to such clearances shall be reported posed swap drawings by the System, and promptly to the Committee. about any operations that are not of a routine character. 1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman believes that consultation with the Meeting Held on Subcommittee is not feasible in the time February 4-5, 1997 available): A meeting of the Federal Open Market A. Any operation that would result in a change in the System's overall open position Committee was held in the offices of the in foreign currencies exceeding $300 million Board of Governors of the Federal on any day or $600 million since the most Reserve System in Washington, D.C., recent regular meeting of the Committee. on Tuesday, February 4, 1997, at 2:30 B. Any operation that would result in a p.m. and continued on Wednesday, Febchange on any day in the System's net posi- ruary 5, 1997, at 9:00 a.m. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 99 Present: Ms. Johnson,3 Assistant Director, Mr. Greenspan, Chairman Division of International Finance, Mr. McDonough, Vice Chairman Board of Governors Mr. Broaddus Messrs. Brady3 and ReifSchneider,3 Mr. Guynn Section Chiefs, Divisions of Mr. Kelley Monetary Affairs and Research Mr. Meyer and Statistics respectively, Board Mr. Moskow of Governors Mr. Parry Messrs. Brayton3 and Rosine,3 Senior Ms. Phillips Economists, Division of Research Ms. Rivlin and Statistics, Board of Governors Ms. Garrett, Economist, Division of Messrs. Hoenig, Jordan, Melzer, and Monetary Affairs, Board of Ms. Minehan, Alternate Members Governors of the Federal Open Market Ms. Low, Open Market Secretariat Committee Assistant, Division of Monetary Affairs, Board of Governors Messrs. Boehne, McTeer, and Stern, Ms. Browne, Messrs. Dewald, Hakkio, Presidents of the Federal Reserve Lang, Rosenblum, and Sniderman, Banks of Philadelphia, Dallas, Senior Vice Presidents, Federal and Minneapolis respectively Reserve Banks of Boston, St. Louis, Kansas City, Mr. Kohn, Secretary and Economist Philadelphia, Dallas, and Mr. Bernard, Deputy Secretary Cleveland respectively Mr. Coyne, Assistant Secretary Mr. Miller and Ms. Perelmuter, Mr. Gillum, Assistant Secretary Vice Presidents, Federal Reserve Mr. Mattingly, General Counsel Banks of Minneapolis and Mr. Baxter, Deputy General Counsel2 New York respectively Mr. Prell, Economist Mr. Truman, Economist In the agenda for this meeting, it was reported that advices of the election of Messrs. Beebe, Eisenbeis, Goodfriend, the following members and alternate Hunter, Lindsey, Mishkin, members of the Federal Open Market Promisel, Siegman, Slifman, and Committee for the period commencing Stockton, Associate Economists January 1, 1997, and ending Decem- Mr. Fisher, Manager, System Open ber 31, 1997, had been received and that Market Account the named individuals had executed their oaths of office. Mr. Ettin, Deputy Director, Division of The elected members and alternate Research and Statistics, Board of Governors members were as follows: Mr. Winn, Assistant to the Board, Office of Board Members, Board William J. McDonough, President of the of Governors Federal Reserve Bank of New York, Messrs. Madigan and Simpson, with Ernest T. Patrikis, First Vice Presi- Associate Directors, Divisions of dent of the Federal Reserve Bank of Monetary Affairs and Research New York, as alternate; and Statistics respectively, Board of Governors 3. Attended portions of meeting relating to the Committee's review of the economic outlook and establishment of its monetary and debt ranges for 2. Attended Tuesday session only. 1997. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 84th Annual Report, 1997 J. Alfred Broaddus, Jr., President of the Fed- David J. Stockton, Associate eral Reserve Bank of Richmond, with Economists Cathy E. Minehan, President of the Federal Reserve Bank of Boston, as By unanimous vote, the Federal alternate; Reserve Bank of New York was selected Michael H. Moskow, President of the Federal Reserve Bank of Chicago, with to execute transactions for the System Jerry L. Jordan, President of the Fed- Open Market Account until the adjourneral Reserve Bank of Cleveland, as ment of the first meeting of the Commitalternate; tee after December 31, 1997. Jack Guynn, President of the Federal By unanimous vote, Peter R. Fisher Reserve Bank of Atlanta, with Thomas was selected to serve at the pleasure C. Melzer, President of the Federal Reserve Bank of St. Louis, as alternate; of the Committee as Manager,. System Robert T. Parry, President of the Federal Open Market Account, on the under- Reserve Bank of San Francisco, with standing that his selection was subject to Thomas M. Hoenig, President of the being satisfactory to the Federal Reserve Federal Reserve Bank of Kansas City, Bank of New York. as alternate. Secretary's note: Advice subsequently By unanimous vote, the following was received that the selection of Mr. Fisher officers of the Federal Open Market as Manager was satisfactory to the board Committee were elected to serve until of directors of the Federal Reserve Bank of the election of their successors at the New York. first meeting of the Committee after December 31, 1997, with the under- By unanimous vote, the Authorizastanding that in the event of the discon- tion for Domestic Open Market Operatinuance of their official connection with tions shown below was reaffirmed. the Board of Governors or with a Federal Reserve Bank, they would cease to have any official connection with the Authorization for Domestic Federal Open Market Committee: Open Market Operations Alan Greenspan Chairman 1. The Federal Open Market Committee William J. McDonough Vice Chairman authorizes and directs the Federal Reserve Bank of New York, to the extent necessary Donald L. Kohn Secretary and to carry out the most recent domestic policy Economist directive adopted at a meeting of the Normand R.V. Bernard Deputy Secretary Committee: Joseph R. Coyne Assistant (a) To buy or sell U.S. Government Secretary securities, including securities of the Federal Gary P. Gillum Assistant Financing Bank, and securities that are direct Secretary obligations of, or fully guaranteed as to J. Virgil Mattingly, Jr. General Counsel principal and interest by, any agency of the Thomas C. Baxter, Jr. Deputy General United States in the open market, from or to Counsel securities dealers and foreign and interna- Michael J. Prell Economist tional accounts maintained at the Federal Edwin M. Truman Economist Reserve Bank of New York, on a cash, regular, or deferred delivery basis, for the System Jack H. Beebe, Robert A. Eisenbeis, Open Market Account at market prices, and, Marvin S. Goodfriend, William C. for such Account, to exchange maturing U.S. Hunter, David E. Lindsey, Frederic S. Government and Federal agency securities Mishkin, Larry J. Promisel, Charles J. with the Treasury or the individual agencies Siegman, Lawrence Slifman, and or to allow them to mature without replace- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 101 ment; provided that the aggregate amount of such agreement are not repurchased by the U.S. Government and Federal agency securi- seller, they shall continue to be held by the ties held in such Account (including forward Federal Reserve Bank or shall be sold in the commitments) at the close of business on the open market. day of a meeting of the Committee at which 2. In order to ensure the effective conduct action is taken with respect to a domestic of open market operations, the Federal Open policy directive shall not be increased or Market Committee authorizes and directs the decreased by more than $8.0 billion during Federal Reserve Banks to lend U.S. Govthe period commencing with the opening of ernment securities held in the System Open business on the day following such meeting Market Account to Government securities and ending with the close of business on the dealers and to banks participating in Govday of the next such meeting; ernment securities clearing arrangements (b) When appropriate, to buy or sell conducted through a Federal Reserve Bank, in the open market, from or to acceptance under such instructions as the Committee dealers and foreign accounts maintained at may specify from time to time. the Federal Reserve Bank of New York, on a 3. In order to ensure the effective conduct cash, regular, or deferred delivery basis, for of open market operations, while assisting the account of the Federal Reserve Bank of in the provision of short-term investments New York at market discount rates, prime for foreign and international accounts mainbankers acceptances with maturities of up to tained at the Federal Reserve Bank of nine months at the time of acceptance that New York, the Federal Open Market Com- (1) arise out of the current shipment of goods mittee authorizes and directs the Federal between countries or within the United Reserve Bank of New York (a) for System States, or (2) arise out of the storage within Open Market Account, to sell U.S. Governthe United States of goods under contract of ment securities to such foreign and internasale or expected to move into the channels of tional accounts on the bases set forth in trade within a reasonable time and that are paragraph l(a) under agreements providing secured throughout their life by a warehouse for the resale by such accounts of those receipt or similar document conveying title securities within 15 calendar days on terms to the underlying goods; provided that the comparable to those available on such transaggregate amount of bankers acceptances actions in the market; and (b) for New York held at any one time shall not exceed Bank account, when appropriate, to under- $100 million; take with dealers, subject to the conditions (c) To buy U.S. Government securities, imposed on purchases and sales of securities obligations that are direct obligations of, or in paragraph l(c), repurchase agreements in fully guaranteed as to principal and interest U.S. Government and agency securities, and by, any agency of the United States, and to arrange corresponding sale and repurchase prime bankers acceptances of the types agreements between its own account and authorized for purchase under l(b) above, foreign and international accounts mainfrom dealers for the account of the Federal tained at the Bank. Transactions undertaken Reserve Bank of New York under agree- with such accounts under the provisions of ments for repurchase of such securities, obli- this paragraph may provide for a service fee gations, or acceptances in 15 calendar days when appropriate. or less, at rates that, unless otherwise expressly authorized by the Committee, shall With Mr. Broaddus dissenting, the be determined by competitive bidding, after Authorization for Foreign Currency applying reasonable limitations on the vol- Operations shown below was reaffirmed. ume of agreements with individual dealers; provided that in the event Government securities or agency issues covered by any such agreement are not repurchased by the dealer Authorization for Foreign pursuant to the agreement or a renewal Currency Operations thereof, they shall be sold in the market or transferred to the System Open Market 1. The Federal Open Market Committee Account; and provided further that in the authorizes and directs the Federal Reserve event bankers acceptances covered by any Bank of New York, for System Open Market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 84th Annual Report, 1997 Account, to the extent necessary to carry out to a maximum of 12 months with the followthe Committee's foreign currency directive ing foreign banks, which are among those and express authorizations by the Committee designated by the Board of Governors of the pursuant thereto, and in conformity with Federal Reserve System under Section 214.5 such procedural instructions as the Commit- of Regulation N, Relations with Foreign tee may issue from time to time: Banks and Bankers, and with the approval of A. To purchase and sell the following the Committee to renew such arrangements foreign currencies in the form of cable trans- on maturity: fers through spot or forward transactions on the open market at home and abroad, includ- Amount ing transactions with the U.S. Treasury, with Foreign bank (millions of the U.S. Exchange Stabilization Fund estab- dollars equivalent) lished by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authori- Austrian National Bank 250 National Bank of Belgium 1,000 ties, with the Bank for International Settle- Bank of Canada 2,000 ments, and with other international financial National Bank of Denmark 250 Bank of England 3,000 institutions: Bank of France 2,000 German Federal Bank 6,000 Austrian schillings Italian lire Bank of Italy 3,000 Belgian francs Japanese yen Bank of Japan 5,000 Canadian dollars Mexican pesos Bank of Mexico 3,000 Danish kroner Netherlands guilders Netherlands Bank 500 Pounds sterling Norwegian kroner Bank of Norway 250 French francs Swedish kronor Bank of Sweden 300 German marks Swiss francs Swiss National Bank 4,000 Bank for International Settlements Dollars against Swiss francs 600 B. To hold balances of, and to have Dollars against authorized European outstanding forward contracts to receive or currencies other than Swiss francs 1,250 to deliver, the foreign currencies listed in paragraph A above. Any changes in the terms of existing swap C. To draw foreign currencies and to arrangements, and the proposed terms of any permit foreign banks to draw dollars under new arrangements that may be authorized, the reciprocal currency arrangements listed shall be referred for review and approval to in paragraph 2 below, provided that draw- the Committee. ings by either party to any such arrangement 3. All transactions in foreign currencies shall be fully liquidated within 12 months undertaken under paragraph LA. above after any amount outstanding at that time shall, unless otherwise expressly authorized was first drawn, unless the Committee, by the Committee, be at prevailing market because of exceptional circumstances, spe- rates. For the purpose of providing an investcifically authorizes a delay. ment return on System holdings of foreign D. To maintain an overall open posi- currencies, or for the purpose of adjusting tion in all foreign currencies not exceeding interest rates paid or received in connection $25.0 billion. For this purpose, the overall with swap drawings, transactions with foropen position in all foreign currencies is eign central banks may be undertaken at defined as the sum (disregarding signs) of non-market exchange rates. net positions in individual currencies. The 4. It shall be the normal practice to net position in a single foreign currency is arrange with foreign central banks for the defined as holdings of balances in that cur- coordination of foreign currency transacrency, plus outstanding contracts for future tions. In making operating arrangements receipt, minus outstanding contracts for with foreign central banks on System holdfuture delivery of that currency, i.e., as the ings of foreign currencies, the Federal sum of these elements with due regard to Reserve Bank of New York shall not commit sign. itself to maintain any specific balance, unless 2. The Federal Open Market Commit- authorized by the Federal Open Market tee directs the Federal Reserve Bank of Committee. Any agreements or understand- New York to maintain reciprocal currency ings concerning the administration of the arrangements ("swap" arrangements) for the accounts maintained by the Federal Reserve System Open Market Account for periods up Bank of New York with the foreign banks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 103 designated by the Board of Governors under National Advisory Council on International Section 214.5 of Regulation N shall be Monetary and Financial Policies. referred for review and approval to the 8. Staff officers of the Committee are Committee. authorized to transmit pertinent information 5. Foreign currency holdings shall be on System foreign currency operations to invested to ensure that adequate liquidity is appropriate officials of the U.S. Treasury maintained to meet anticipated needs and so Department. that each currency portfolio shall generally 9. All Federal Reserve Banks shall parhave an average duration of no more than ticipate in the foreign currency operations 18 months (calculated as Macaulay dura- for System Account in accordance with paration). When appropriate in connection with graph 3 G(l) of the Board of Governors' arrangements to provide investment facilities Statement of Procedure with Respect to Forfor foreign currency holdings, U.S. Govern- eign Relationships of Federal Reserve Banks ment securities may be purchased from for- dated January 1, 1944. eign central banks under agreements for repurchase of such securities within 30 cal- With Mr. Broaddus dissenting, the endar days. Foreign Currency Directive shown 6. All operations undertaken pursuant to below was reaffirmed. the preceding paragraphs shall be reported promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman of the Committee, Foreign Currency Directive the Vice Chairman of the Board of Governors, and such other member of the Board 1. System operations in foreign currenas the Chairman may designate (or in the cies shall generally be directed at countering absence of members of the Board serving on disorderly market conditions, provided that the Subcommittee, other Board members market exchange rates for the U.S. dollar designated by the Chairman as alternates, reflect actions and behavior consistent with and in the absence of the Vice Chairman of the IMF Article IV, Section 1. the Committee, his alternate). Meetings of 2. To achieve this end the System shall: the Subcommittee shall be called at the A. Undertake spot and forward purrequest of any member, or at the request of chases and sales of foreign exchange. the Manager, System Open Market Account B. Maintain reciprocal currency ("Manager"), for the purposes of review- ("swap") arrangements with selected foring recent or contemplated operations and eign central banks and with the Bank for of consulting with the Manager on other International Settlements. matters relating to his responsibilities. At C. Cooperate in other respects with the request of any member of the Subcom- central banks of other countries and with mittee, questions arising from such reviews international monetary institutions. and consultations shall be referred for 3. Transactions may also be undertaken: determination to the Federal Open Market A. To adjust System balances in light Committee. of probable future needs for currencies. 7. The Chairman is authorized: B. To provide means for meeting Sys- A. With the approval of the Commit- tem and U.S. Treasury commitments in partee, to enter into any needed agreement or ticular currencies, and to facilitate operations understanding with the Secretary of the Trea- of the Exchange Stabilization Fund. sury about the division of responsibility for C. For such other purposes as may be foreign currency operations between the Sys- expressly authorized by the Committee. tem and the U.S. Treasury; 4. System foreign currency operations B. To keep the Secretary of the Trea- shall be conducted: sury fully advised concerning System for- A. In close and continuous consultaeign currency operations, and to consult with tion and cooperation with the U.S. Treasury; the Secretary on policy matters relating to B. In cooperation, as appropriate, with foreign currency operations; foreign monetary authorities; and C. From time to time, to transmit C. In a manner consistent with the obliappropriate reports and information to the gations of the United States in the Inter- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 84th Annual Report, 1997 national Monetary Fund regarding exchange Committee. All operations undertaken pursuarrangements under the IMF Article IV. ant to such clearances shall be reported promptly to the Committee. Mr. Broaddus dissented in the votes 1. The Manager shall clear with the Subcommittee (or with the Chairman, if the on the Authorization and the Directive Chairman believes that consultation with the because they provide the foundation for Subcommittee is not feasible in the time foreign exchange market intervention. available): He believed that the Federal Reserve's A. Any operation that would result in a participation in foreign exchange mar- change in the System's overall open position in foreign currencies exceeding $300 million ket intervention compromises its ability on any day or $600 million since the most to conduct monetary policy effectively. recent regular meeting of the Committee. Because sterilized intervention cannot B. Any operation that would result in a have sustained effects in the absence change on any day in the System's net posiof conforming monetary policy actions, tion in a single foreign currency exceeding Federal Reserve participation in foreign $150 million, or $300 million when the operation is associated with repayment of exchange operations in his view risks swap drawings. one of two undesirable outcomes. First, C. Any operation that might generate a the independence of monetary policy is substantial volume of trading in a particular jeopardized if the System adjusts its pol- currency by the System, even though the icy actions to support short-term foreign change in the System's net position in that currency might be less than the limits speciexchange objectives set by the U.S. fied in I.B. Treasury. Alternatively, the credibility D. Any swap drawing proposed by a of monetary policy is damaged if the foreign bank not exceeding the larger of System does not follow interventions (i) $200 million or (ii) 15 percent of the size with compatible policy actions, the in- of the swap arrangement. terventions consequently fail to achieve 2. The Manager shall clear with the Committee (or with the Subcommittee, if the their objectives, and the System is asso- Subcommittee believes that consultation ciated in the mind of the public with the with the full Committee is not feasible in the failed operations. time available, or with the Chairman, if the By unanimous vote, the Procedural Chairman believes that consultation with the Subcommittee is not feasible in the time Instructions with Respect to Foreign available): Currency Operations shown below were A. Any operation that would result in a reaffirmed. change in the System's overall open position in foreign currencies exceeding $1.5 billion since the most recent regular meeting of the Procedural Instructions with Committee. Respect to Foreign Currency B. Any swap drawing proposed by a Operations foreign bank exceeding the larger of (i) $200 million or (ii) 15 percent of the size of the In conducting operations pursuant to the swap arrangement. authorization and direction of the Federal 3. The Manager shall also consult with Open Market Committee as set forth in the the Subcommittee or the Chairman about Authorization for Foreign Currency Opera- proposed swap drawings by the System and tions and the Foreign Currency Directive, about any operations that are not of a routine the Federal Reserve Bank of New York, character. through the Manager, System Open Market Account ("Manager"), shall be guided by By unanimous vote, the Committee the following procedural understandings with respect to consultations and clearances reduced from $20 billion to $5 billion with the Committee, the Foreign Currency the amount of eligible foreign curren- Subcommittee, and the Chairman of the cies that the System was prepared to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 105 "warehouse" for the U.S. Treasury and were asked to indicate if they wished to the Exchange Stabilization Fund (ESF). have any of the documents in question Warehousing involves spot purchases of placed on the agenda for consideration foreign currencies from the U.S. Trea- at this meeting, and no requests for consury or the ESF and simultaneous for- sideration were received. ward sales of the same currencies to the By unanimous vote, the minutes of U.S. Treasury or the ESF at the then- the meeting of the Federal Open Market current forward market rates. The effect Committee held on December 17, 1996, of warehousing is to supplement the were approved. The Committee also dis- U.S. dollar resources of the U.S. Trea- cussed its long-standing practice of resury and the ESF for financing the pur- leasing the minutes a few days after the chase of foreign currencies and related meeting at which they were approved, international operations. The agreement usually on the following Friday. The had been enlarged from $5 billion to members agreed with a proposal to $20 billion in early 1995 to facilitate advance the normal release to Thursday U.S. participation in the Multilateral to facilitate the dissemination and public Program to Restore Financial Stability understanding of these decisions. in Mexico. No use of the warehousing The Manager of the System Open facility had been made by the U.S. Trea- Market Account reported on developsury or the ESF during this period, and ments in foreign exchange markets since in light of Mexico's repayment to the the meeting on December 17, 1996. U.S. Treasury of all the financing pro- There were no transactions in foreign vided under the Program and the termi- currencies for System account during nation of that Program, the Committee this period, and thus no vote was agreed that the size of the warehousing required of the Committee. arrangement should revert to $5 billion. The Manager also reported on devel- The Report of Examination of the opments in domestic financial markets System Open Market Account, con- and on System open market transactions ducted by the Board's Division of in government securities and federal Reserve Bank Operations and Payment agency obligations during the period Systems as of the close of business on December 18, 1996, through Febru- October 31, 1996, was accepted. ary 4, 1997. By unanimous vote, the By unanimous vote, the Program for Committee ratified these transactions. Security of FOMC Information was The Manager advised the Committee amended to update the document with that the anticipated pattern of reserve regard to certain security classifications, needs was such that he might want to access to FOMC information, and atten- add considerably to the System's outdance at FOMC meetings. right holdings of U.S. government secu- On January 23, 1997, the continuing rities over the coming intermeeting rules and other standing instructions of period. By unanimous vote, the Comthe Committee were distributed with the mittee amended paragraph l(a) of the advice that, in accordance with proce- Authorization for Domestic Open Mardures approved by the Committee, they ket Operations to raise the limit on interwere being called to the Committee's meeting changes in such holdings from attention before the February 4-5 orga- $8 billion to $12 billion for the period nization meeting to give members an ending with the close of business on the opportunity to raise any questions they date of the next meeting, March 25, might have concerning them. Members 1997. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 84th Annual Report, 1997 The Committee then turned to a dis- cent, its average level for the second cussion of the economic and financial half of the year. outlook, the ranges for the growth of Industrial production increased money and debt in 1997, and the imple- sharply in November and December. mentation of monetary policy over the The gains in December were widely disintermeeting period ahead. A summary tributed across manufacturing industries of the economic and financial informa- but were held down by a steep decline tion available at the time of the meeting in the output of utilities after a surge and of the Committee's discussion is in November. The production of aircraft provided below, followed by the domes- and parts extended a strong uptrend. The tic policy directive that was approved by utilization of total manufacturing capacthe Committee and issued to the Federal ity rose considerably further in Decem- Reserve Bank of New York. ber, to a level slightly above its long- The information reviewed at this term average. meeting suggested that the growth of the Consumer spending registered a sizeconomy had strengthened markedly in able increase over the fourth quarter the fourth quarter of 1996. To a large after having grown little during the sumextent the gain in final demand during mer. In December total nominal retail the quarter reflected a surge in exports, sales rose considerably following a but consumer spending also increased small decline in November. The Decemsubstantially after having risen at a ber increases were spread across all much reduced pace in the third quarter. major categories except for some further Despite some slowing in the growth of decline in sales of building materials business fixed investment and some eas- and supplies. The most recent data on ing in housing activity, the overall econ- services expenditures pointed to moderomy had expanded briskly as reflected ate advances in October and November. in data on production and employment. Surveys indicated that consumer confi- The tightness in labor markets had per- dence had remained elevated in late sisted and was evidenced by some con- 1996 and early 1997. tinued acceleration in labor compensa- Housing starts fell appreciably in tion in the fourth quarter. There was no December, evidently reflecting unusudiscernible change in the underlying ally adverse weather conditions in sevtrend in price inflation, although a spurt eral parts of the country, and were down in energy prices had resulted in faster somewhat for the fourth quarter as a increases in overall consumer and pro- whole. The declines were concentrated ducer prices than in the third quarter. in single-family units. Permits for new Private payroll employment rose home construction were little changed appreciably further in December after in December but edged lower for the having recorded sizable increases over fourth quarter as a whole. Available data October and November. The gains indicated a somewhat slower pace of remained widespread among employ- sales of new and existing homes in the ment categories and continued to be led fourth quarter. by large advances in the services and Growth of business fixed investment trade industries. Aggregate hours of pri- moderated considerably in the fourth vate production workers and the average quarter after having advanced sharply workweek edged higher in the fourth in the previous quarter. The slowdown quarter. The civilian unemployment rate reflected a small decline in spending on was unchanged in December at 5.3 per- producer durable equipment that was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 107 more than offset by an apparent surge in energy prices. Excluding food and in outlays for nonresidential structures. energy items, consumer prices rose Growth in spending on office, comput- modestly over the two months and ing, and communications equipment increased less over the twelve months slowed somewhat from the third-quarter ending in December than over the prepace but remained on a steep uptrend. vious twelve months. At the producer Business investment in transportation level, a similar pattern prevailed in equipment was weak in the fourth quar- prices of finished goods, and there was ter, as sales of heavy trucks fell further no evidence of increased price pressures and work stoppages at a major manufac- at earlier stages of production. Worker turer prompted cuts in fleet auto sales in compensation as measured by the October and November. employment cost index (ECI) and aver- Business inventory investment picked age hourly earnings of production and up somewhat on average in October and nonsupervisory workers rose consider- November, with most of the increase ably further during the closing months occurring in manufacturing. Trade inven- of 1996. For the year, both measures tories increased moderately on balance were up appreciably more than in 1995, over the two-month period. Reflecting though much of the acceleration in the considerable strength in shipments and ECI occurred in the first half of the year. sales, however, inventory-sales ratios At its meeting on December 17, 1996, for most industries and trade groupings the Committee issued a directive that edged lower from their third-quarter called for maintaining the existing levels. degree of pressure on reserve positions. The nominal deficit on U.S. trade in The directive included a bias toward the goods and services narrowed consider- possible firming of reserve conditions to ably in October and November from its reflect a consensus among the members rate in the third quarter. Nearly all the that the risks remained biased toward improvement was accounted for by a higher inflation and that the next policy very large increase in exports of goods move was more likely to be toward and services. The rise was spread among some tightening than toward easing. In all major trade categories except auto- this regard, the directive stated that in motive products. Economic activity in the context of the Committee's longthe major foreign industrial countries run objectives for price stability and appeared to have continued to expand at sustainable economic growth, and giva moderate rate on average in the fourth ing careful consideration to economic, quarter. Available indicators suggested financial, and monetary developments, relatively strong economic perfor- somewhat greater reserve restraint mances in Japan, Canada, and the would be acceptable and slightly lesser United Kingdom and slower growth in reserve restraint might be acceptable the major continental European coun- during the intermeeting period. The tries. Further expansion was reported for reserve conditions associated with this several large Latin American and some directive were expected to be consistent Asian economies. with some slowing of the growth of M2 Recent data pointed to little change and M3 over coming months. in underlying inflation trends. Overall Open market operations during the consumer prices had continued under intermeeting period continued to be upward pressure in November and directed toward maintaining the existing December, boosted by large advances degree of pressure on reserve positions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 84th Annual Report, 1997 The federal funds rate rose briefly in loan growth. From the fourth quarter of response to year-end pressures, but it 1995 to the fourth quarter of 1996, M2 otherwise tended to remain close to was estimated to have grown at a rate the 5lA percent level expected with near the upper end of the Committee's an unchanged policy stance. Other annual range and M3 at a rate appreshort-term interest rates generally were ciably above the top of its range. Total unchanged to slightly higher over domestic nonfinancial debt had exthe intermeeting period. Rates on panded moderately on balance over intermediate- and long-term securities recent months and was estimated to have edged higher on balance in reaction to grown last year at a rate near the midincoming data on economic activity that point of its range. were on the firm side of market expec- The staff forecast prepared for this tations; the increases in such rates meeting suggested that the expansion appeared to be tempered, however, by would be sustained at a rate a bit above favorable market reactions to new data the economy's estimated growth potenon wages and prices. The generally posi- tial. The increase in consumer spending tive news on economic growth and infla- was projected to moderate somewhat tion along with favorable reports on from its pace in the fourth quarter to a earnings appeared to reinforce the opti- rate generally in line with the expected mism of equity market investors, and rise in disposable income. Homebuildmajor indexes of stock prices increased ing was forecast to decline somewhat markedly further over the intermeeting but to stabilize at a relatively high level period. in the context of continued income In foreign exchange markets, the growth and the generally favorable cash trade-weighted value of the dollar in flow affordability of home ownership. terms of the other G-10 currencies rose Business spending on equipment and substantially over the intermeeting structures was projected to expand less period. The rise, which was most rapidly in light of some anticipated pronounced against the Japanese yen slowing in the growth of sales and profand continental European currencies, its. Fiscal policy and the external sector appeared to reflect market perceptions were expected to exert small restraining of unexpectedly strong economic influences on economic activity over growth in the United States and a risk of the year ahead. With resource utilization faltering growth in the other countries. high and rising, consumer price infla- The dollar appreciated less against ster- tion, as measured by the CPI excluding ling and declined somewhat against the the relatively volatile food and energy Canadian dollar in apparent response to components of the index, was forecast expectations of relative strength in the to increase slightly this year in the economies of those countries. context of some further pickup in the After having grown at a considerably growth of labor compensation that faster rate in the fourth quarter, M2 and would include another legislated rise in M3 apparently increased at a more mod- the federal minimum wage. erate but still brisk pace in January. The In the Committee's discussion of curexpansion of both aggregates likely was rent and prospective economic developboosted by strong income growth, and ments, members commented that the the relatively rapid expansion of M3 robust performance of the economy in reflected heavy bank reliance on the the fourth quarter partly reflected some managed liabilities in M3 to fund robust sources of strength, notably a surge in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 109 exports, that were evidently temporary, range of 5lA to 5x/2 percent for the fourth and they anticipated substantial modera- quarter of the year. With regard to nomition in the pace of the expansion over nal GDP growth in 1997, the forecasts the period ahead. The outlook was sub- were mainly in a range of 4*A to 43A perject to considerable uncertainty, but as cent, with an overall range of 4lA to they assessed the numerous factors bear- 5lA percent. Nearly all the members ing on prospective developments, the anticipated a small decline in the rate members generally concluded as they of inflation in 1997, as measured by had at previous meetings that further the consumer price index, from that growth in aggregate demand at a rate recorded in 1996. Specifically, the proaveraging near or a bit above the econo- jections converged on rates of 23A to my's potential remained a reasonable 3 percent and a full range of 23A to expectation. Many observed, however, 3x/2 percent in 1997. These forecasts that the risks to such an outlook took account of expected developments appeared to be tilted to the upside. The in the food and energy sectors and furstrength of the expansion in the fourth ther technical improvements in the index quarter, and in fact over 1996 as a by the Bureau of Labor Statistics, both whole, had heightened concerns that the of which were expected to trim the economy had considerable forward mo- reported rate. The projections were mentum at a time when it was already based on individual views concerning operating at a level, especially with what would be an appropriate policy regard to labor resources, that could tend over the projection horizon to further to generate rising inflationary pressures. progress toward the Committee's goals. Indeed, in the view of at least some In their review of developments in members, growth of aggregate demand key sectors of the economy, members in line with increases in potential output observed that the available data and posed a risk of rising price inflation anecdotal information indicated considbecause the recent relatively favorable erable strength in consumer spending in price performance was seen in this view recent months, and they referred to a as reflecting at least in part the behavior number of underlying factors that should of special factors that could dissipate help to sustain at least moderate further over the projection horizon. growth in such spending. The latter In keeping with the practice at meet- included the solid expansion in employings when the Committee establishes its ment and incomes, the increased finanlong-run ranges for the growth of money cial wealth of many consumers, and the and debt aggregates, the members of high level of consumer confidence as the Committee and the Federal Reserve indicated by recent surveys. However, Bank presidents not currently serving as members also cited some factors that members had provided individual pro- would tend to restrain the growth in jections of the growth in real and nomi- consumer spending. Among these facnal GDP, the rate of unemployment, and tors were the effects of the high level the rate of inflation for the year 1997. of consumer debt and rising repayment The forecasts of the rate of expansion in problems on both the willingness of real GDP had a central tendency of 2 to households to borrow and of finan- 2lA percent and a full range of 2 to cial intermediaries to lend, the likely 2Vi percent. The projections of the civil- absence of pent-up demands after an ian unemployment rate associated with extended period of expansion, and the these growth expectations were all in a possibility of a setback in the stock Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 84th Annual Report, 1997 market. It was difficult to evaluate how forecasts, as in 1996, could not be ruled these differing factors would on bal- out. ance affect consumer spending, but the Fiscal policy and foreign trade also members concluded that the consumer were seen as likely to exert some modsector was likely to provide impor- est restraint on overall economic activtant support for sustained economic ity. Federal purchases of goods and serexpansion. vices still appeared to be on a declining The growth in business capital spend- trend. Although fiscal policy negotiaing was expected to moderate somewhat tions were likely to be difficult and their in 1997 in association with slower outcome was uncertain, members felt growth in sales, profits, and cash flows. that there was some basis for anticipat- It also seemed likely after several years ing the enactment of further legislation of robust investment expenditures that this year to help bring the federal budget many business firms now had high lev- into eventual balance. The large increase els of up-to-date capital stock relative to in exports in the fourth quarter clearly planned production. Members referred, was associated with temporary develophowever, to a number of favorable fac- ments, and net exports were expected tors that should continue to support at to weaken this year, reflecting both least moderate further growth in busi- some reversal of recent developments ness investment, including the attractive and the earlier appreciation of the dollar. pricing of and ongoing rapid technologi- Some members reported that business cal improvements in computer and com- contacts had already communicated munications equipment and the wide concerns about increased competitive availability of equity and debt financing pressures from imports because of the on favorable terms to business firms. rise in the foreign exchange value of the Members also reported that commercial dollar. building activity had improved in many Members commented that inflation areas. Some noted a tendency to under- had remained remarkably subdued, but estimate the strength of overall business they expressed considerable concern investment in recent years, including the about the risks of rising inflation in the stimulus provided by efforts to improve context of high levels of resource use. productivity in highly competitive They referred in particular to statistical markets. indications, supported by anecdotal While indicators of housing activity reports from around the nation, of very had been somewhat erratic over the tight conditions in labor markets and past several months, members sensed a some upward pressures on wages. Thus somewhat softer tone on balance in this far, the rise in compensation had been sector of the economy. This assessment held down by diminishing increases was supported by anecdotal observa- in worker benefit costs, and productivity tions in several regions across the coun- gains also appeared to have had a favortry. Against the background of the able effect on unit labor costs. In addiincrease that had occurred earlier in tion, the increases in wages themselves mortgage financing costs and forecasts had continued to be restrained by apparof some slowing in the growth of jobs ent worker concerns about job security. and incomes, the housing sector was To date, there was no evidence that preslikely to weaken slightly over the com- sures stemming from tight labor markets ing year, but some members commented had been passed through to a measurthat surprises on the upside of current able extent to higher prices. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 111 While the absence of increasing price In reviewing the tentative ranges, the inflation was a welcome development, members took note of a staff projection members were concerned that the break indicating that M2 and M3 likely would with historical patterns might not per- grow in 1997 at rates close to the upper sist. If labor markets remained under limit of those ranges, given the Commitpressure, nominal compensation costs tee's expectations for the performance were likely to pick up at some point as of the economy and prices and assuming one-time savings in worker benefit costs no major changes in interest rates. The ran out and as workers became less staff analysis anticipated that the velociwilling to trade off lower wages for ties of the broad monetary aggregates increased security; such a development would continue to behave in the relawould foster increases in labor costs that tively stable and predictable manner that ultimately would feed through to higher had re-emerged in the last few years and prices. The members did not anticipate that was closer to historical norms than a sudden surge in inflation, but many had been the case in the early 1990s. expressed concern about the possibility The greater measure of predictability of a gradual upcreep in coming quarters in velocity recently was an encouraging that might become more considerable development, but in view of the substanlater. They generally expected a small tial changes in financial markets and decline in overall price inflation this the increased availability of investment year, reflecting favorable developments alternatives it would be premature to in food and energy and, for the CPI, assume that the pattern would necessarfurther technical improvements by the ily continue going forward. Given the Bureau of Labor Statistics; however, substantial uncertainty still attached to they believed that the risks to their fore- projections of money growth consistent casts were in the direction of greater with the Committee's basic objectives inflation, and several noted in particular for monetary policy, the members that projected declines in energy prices agreed that there was no firm basis for might not materialize as soon or to the changing the tentative ranges set in July extent assumed in many forecasts. 1996. Adopting higher ranges, which In keeping with the requirements of would be more closely centered on the Full Employment and Balanced money growth thought likely to be con- Growth Act of 1978 (the Humphrey- sistent with the Committee's expecta- Hawkins Act), the Committee reviewed tions for economic activity and prices, the ranges for growth of the monetary could be misinterpreted as indicating and debt aggregates in 1997 that it that the Committee had become much had established on a tentative basis at more confident of the predictability of its meeting in July 1996. Those ranges velocity and was placing greater emphaincluded expansion of 1 to 5 percent for sis on M2 and M3 as gauges of the M2 and 2 to 6 percent for M3, measured thrust of monetary policy. One member, from the fourth quarter of 1996 to the while agreeing with this assessment, fourth quarter of 1997. The monitoring emphasized that a continuation of a range for growth of total domestic nonfi- stable and predictable pattern of velocnancial debt was provisionally set at 3 to ity behavior would raise the question as 7 percent for 1997. The tentative ranges to whether the Committee should return for 1997 were unchanged from the to setting ranges consistent with its actual ranges adopted for 1995 (in July expectations for economic developof that year for M3) and 1996. ments. Nonetheless, from a longer-run Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 84th Annual Report, 1997 perspective, the tentative ranges readily In the Committee's discussion of polencompass rates of growth of M2 and icy for the intermeeting period ahead, all M3 that, if velocity were to behave in the members favored or could support a line with historical experience, could be proposal to maintain an unchanged polexpected to be associated with approxi- icy stance; the members also strongly mate price stability and a sustainable supported the retention of a bias toward rate of real economic growth. In that restraint. An unchanged policy seemed regard, they continue to serve the useful appropriate with inflation still quiescent, purpose of benchmarking money growth with few signs of emerging price presconsistent with the Committee's long- sures, with growth in economic activity run goal of price stability. seen as likely to moderate appreciably At the conclusion of its discussion, from the unexpectedly strong and unsusthe Committee voted to approve without tainable pace of the fourth quarter, and change the tentative ranges for 1997 that with considerable uncertainty about it had established in July of last year. In future inflationary developments. Howkeeping with its usual procedures under ever, the members emphasized that the the Humphrey-Hawkins Act, the Com- extent of the slowdown in economic mittee would review its ranges at mid- expansion was unclear and that the peryear, or sooner if interim conditions sisting, or even greater, tightness of warranted, in light of the growth and labor markets, coupled with potentially velocity behavior of the aggregates and faster growth in worker benefits and ongoing economic and financial devel- diminishing worker insecurity, could put opments. Accordingly, the following added upward pressure on labor costs statement of longer-run policy for 1997 and induce some increase in price inflawas approved for inclusion in the tion over time. Even so, most members domestic policy directive: thought that inflation likely would remain contained for some period ahead and that any strengthening in inflation The Federal Open Market Committee seeks monetary and financial conditions that pressures probably would be gradual, will foster price stability and promote sus- allowing the Committee to respond in a tainable growth in output. In furtherance of timely manner. Several also commented these objectives, the Committee at this meetthat a tightening policy action was not ing established ranges for growth of M2 and generally anticipated in financial mar- M3 of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quar- kets, and a move at this time could have ter of 1996 to the fourth quarter of 1997. The exaggerated repercussions. A few memmonitoring range for growth of total domes- bers emphasized, however, that the tic nonfinancial debt was set at 3 to 7 percent recent surge in economic activity had for the year. The behavior of the monetary raised the probability that the level of aggregates will continue to be evaluated in the light of progress toward price level sta- economic output was now above the bility, movements in their velocities, and economy's long-run potential, and withdevelopments in the economy and financial out a significant slowing in economic markets. growth, inflationary pressures were more likely to increase over the forecast Votes for this action: Messrs. Greenspan, horizon. While an immediate tightening McDonough, Broaddus, Guynn, Kelley, of policy would help to forestall such Meyer, Moskow, Parry, Mses. Phillips and a buildup of pressures, the members Rivlin. Votes against this action: None. agreed that current uncertainties about Absent and not voting: Mr. Lindsey and Ms. Yellen. the outlook for both the rate of expan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 113 sion and inflation warranted a continu- The Federal Reserve Bank of New ing "wait and see" policy stance, or at York was authorized and directed, until least made such a policy acceptable at instructed otherwise by the Committee, this juncture. to execute transactions in the System In their discussion of possible adjust- Account in accordance with the followments to policy during the intermeeting ing domestic policy directive: period, the members recognized that an asymmetric directive tilted toward tight- The information reviewed at this meetening was consistent with their general ing suggests that the economic expansion view that the risks were now more strengthened markedly in the fourth quarter. clearly in the direction of an upward Private nonfarm payroll employment trend in inflation. They agreed that the increased appreciably further in December after sizable gains over October and current environment called for careful November. The civilian unemployment rate monitoring of new developments and remained at 5.3 percent in December. Indusfor prompt action by the Committee to trial production rose sharply in November counter any tendency for price inflation and December. Consumer spending posted to rise and for higher inflation expecta- a large increase in the fourth quarter after a tions to become embedded in financial summer lull. Housing activity moderated somewhat over the closing months of the markets and economic decisionmaking year. Growth in business fixed investment more generally. Indeed, in the interest of slowed substantially in the fourth quarter fostering a continuation of sustainable after a sharp rise in the third quarter. The growth of the economy, it would be nominal deficit on U.S. trade in goods and desirable to tighten before any sign of services narrowed considerably in October and November from its rate in the third actual higher inflation were to become quarter. Advances in labor compensation evident. trended up in 1996, but price inflation gen- At the conclusion of the Committee's erally diminished apart from enlarged discussion, all the members indicated increases in food and energy prices. that they supported a directive that Most market interest rates have changed little or risen slightly since the Committee called for maintaining the existing meeting on December 17, 1996. In foreign degree of pressure on reserve positions exchange markets, the trade-weighted value and that retained a bias toward the pos- of the dollar in terms of the other G-10 sible firming of reserve conditions dur- currencies has increased substantially over ing the intermeeting period. Accord- the intermeeting period. Growth of M2 and M3 strengthened coningly, in the context of the Committee's siderably in the fourth quarter and appeared long-run objectives for price stability to have continued at a fairly brisk, though and sustainable economic growth, and diminished, pace in January. From the fourth giving careful consideration to eco- quarter of 1995 to the fourth quarter of 1996, nomic, financial, and monetary devel- M2 is estimated to have grown near the opments, the Committee decided that upper end of the Committee's annual range and M3 well above the top of its range. Total somewhat greater reserve restraint domestic nonfinancial debt has expanded would be acceptable and slightly lesser moderately on balance over recent months reserve restraint might be acceptable and is estimated to have grown last year near during the intermeeting period. The the midpoint of its range. reserve conditions contemplated at this The Federal Open Market Committee seeks monetary and financial conditions that meeting were expected to be consiswill foster price stability and promote sustent with some moderation in the expantainable growth in output. In furtherance of sion of M2 and M3 over coming these objectives, the Committee at this meetmonths. ing established ranges for growth of M2 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 84th Annual Report, 1997 and M3 of 1 to 5 percent and 2 to 6 percent Present: respectively, measured from the fourth quar- Mr. Greenspan, Chairman ter of 1996 to the fourth quarter of 1997. The Mr. McDonough, Vice Chairman monitoring range for growth of total domes- Mr. Broaddus tic nonfinancial debt was set at 3 to 7 percent Mr. Guynn for the year. The behavior of the monetary Mr. Kelley aggregates will continue to be evaluated in Mr. Moskow the light of progress toward price level sta- Mr. Meyer bility, movements in their velocities, and Mr. Parry developments in the economy and financial Ms. Phillips markets. Ms. Rivlin In the implementation of policy for the immediate future, the Committee seeks to Messrs. Hoenig, Jordan, Melzer, and maintain the existing degree of pressure on Ms. Minehan, Alternate Members reserve positions. In the context of the Com- of the Federal Open Market mittee's long-run objectives for price sta- Committee bility and sustainable economic growth, and giving careful consideration to economic, Messrs. Boehne, McTeer, and Stern, financial, and monetary developments, some- Presidents of the Federal Reserve what greater reserve restraint would or Banks of Philadelphia, Dallas, and slightly lesser reserve restraint might be Minneapolis respectively acceptable in the intermeeting period. The contemplated reserve conditions are ex- Mr. Kohn, Secretary and Economist pected to be consistent with some modera- Mr. Bernard, Deputy Secretary tion in the expansion of M2 and M3 over Mr. Coyne, Assistant Secretary coming months. Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel Votes for this action: Messrs. Greenspan, Mr. Baxter, Deputy General Counsel McDonough, Broaddus, Guynn, Kelley, Mr. Prell, Economist Meyer, Moskow, Parry, Mses. Phillips and Mr. Truman, Economist Rivlin. Votes against this action: None. Absent and not voting: Mr. Lindsey and Messrs. Eisenbeis, Goodfriend, Hunter, Ms. Yellen. Lindsey, Mishkin, Siegman, and Stockton, Associate Economists It was agreed that the next meeting of the Committee would be held on Tues- Mr. Fisher, Manager, System Open day, March 25, 1997. Market Account The meeting adjourned at 11:35 a.m. Mr. Winn, Assistant to the Board, Donald L. Kohn Office of Board Members, Board of Governors Secretary Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors Messrs. Madigan and Simpson, Meeting Held on Associate Directors, Divisions of March 25, 1997 Monetary Affairs and Research and Statistics respectively, Board A meeting of the Federal Open Market of Governors Committee was held in the offices of Mr. Hooper, Assistant Director, Division of International Finance, the Board of Governors of the Federal Board of Governors Reserve System in Washington, D.C., Ms. Low, Open Market Secretariat on Tuesday, March 25, 1997, at Assistant, Division of Monetary 9:00 a.m. Affairs, Board of Governors Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 115 Messrs. Dewald, Hakkio, Lang, ket Operations to raise the limit on inter- Rolnick, and Rosenblum, Senior meeting changes in such holdings from Vice Presidents, Federal Reserve $8 billion to $12 billion for the period Banks of St. Louis, Kansas City, ending with the close of business on the Philadelphia, Minneapolis, and Dallas respectively date of the next meeting, May 20, 1997. Messrs. Altig, Bentley, Judd, and The Committee then turned to a dis- Kopcke, Vice Presidents, Federal cussion of the economic outlook and the Reserve Banks of Cleveland, implementation of monetary policy over New York, San Francisco, and the intermeeting period ahead. A sum- Boston respectively mary of the economic and financial information available at the time of the By unanimous vote, the minutes of meeting and of the Committee's discusthe meeting of the Federal Open Market sion is provided below, followed by Committee held on February 4-5, 1997, the domestic policy directive that was were approved. approved by the Committee and issued The Manager of the System Open to the Federal Reserve Bank of Market Account reported on recent New York. developments in foreign exchange mar- The information reviewed at this kets. There were no System open market meeting suggested that the economy had transactions in foreign currencies during continued to expand at a relatively the period since the meeting on Feb- robust pace in early 1997 after having ruary 4-5, 1997, and thus no vote was strengthened markedly in the fourth required of the Committee. quarter of 1996. Much of the more The Manager also reported on devel- recent growth reflected further acceleraopments in domestic financial markets tion in consumer spending, but business and on System open market transac- capital expenditures, housing activity, tions in U.S. government securities and an upturn in inventory investand federal agency obligations dur- ment also had contributed to the recent ing the period February 5, 1997, through increase in total expenditures. By con- March 24, 1997. By unanimous trast, available data pointed to a sharp vote, the Committee ratified these drop in net exports after a surge in the transactions. fourth quarter. To meet the strong aggre- The Manager advised the Committee gate demand, employment had recorded that he continued to anticipate a pattern another large advance in early 1997 and of reserve needs that might require industrial production had risen someanother unusually large addition to the what further. The underlying trend in System's outright holdings of U.S. gov- consumer price inflation had remained ernment securities during the relatively subdued, but the increase in average long intermeeting period ahead. The hourly earnings had continued to edge limit on increases in outright holdings higher early this year. between meetings had been raised to Private nonfarm payroll employment $12 billion at the February meeting, and rose substantially further in January and the Manager requested that the higher February. The gains continued to be led limit be retained for the upcoming by sizable advances in the services and period. By unanimous vote, the Com- trade industries. Employment in conmittee amended paragraph l(a) of the struction increased considerably over Authorization for Domestic Open Mar- the two months, largely because of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 84th Annual Report, 1997 unseasonably warm weather across Recent trends in orders and shipments much of the country in February that led pointed to a sizable further rise in outto an earlier-than-usual pickup in build- lays for producers' durable equipment ing activity. Aggregate hours of private in early 1997, largely reflecting conproduction workers, which were also tinued rapid growth in purchases of affected by changing weather condi- computers and some further increase tions, were up appreciably on balance in spending for communications equipover the two months, and the aver- ment. Expenditures for other types of age workweek increased considerably, equipment remained little changed. In reaching a new recent high in Febru- the nonresidential construction sector, ary. The civilian unemployment rate, at trends in contracts suggested some fur- 5.3 percent in February, was unchanged ther spending gains in most market from its average level in the second half segments after strong advances in the of 1996. fourth quarter. Manufacturing and trade Industrial production rose appreciably inventories rose somewhat in January, in February after having declined roughly offsetting small declines over slightly in January. The February the previous two months. With sales advance resulted from a surge in the and shipments rising rapidly in January, manufacturing of durable goods that was inventory-sales ratios for a wide range only partly offset by a plunge in the of industries dropped further from output of utilities associated with unsea- already low levels. sonably mild weather in that month. The The nominal deficit on U.S. trade utilization of total manufacturing capac- in goods and services widened substanity was unchanged on balance over the tially in January from its temporarily two months at a level slightly above its depressed rate in the fourth quarter. long-term average. Nearly all the deterioration in the trade Consumer spending strengthened balance reflected a sharp rise in imports; considerably further in early 1997 after that increase was largely the result of a having registered a sizable increase over rebound in automotive shipments from the fourth quarter. Nominal retail sales Canada, which had been temporarily rose sharply in January and February. reduced by a strike. Recent information The gains over the two months were on economic activity in the G-7 counconcentrated in sales of durable goods, tries suggested continued expansion at a including motor vehicles and building moderate rate on average in early 1997, materials. Spending on services rose but rates of expansion had continued strongly in January (latest data) but to diverge among those economies. may have moderated in February when Growth in output still appeared to be milder-than-normal weather held down relatively strong in Japan, Canada, heating costs. Recent surveys indicated and the United Kingdom, while much that consumer confidence had risen to weaker economic performances were the highest levels in many years. indicated for the major continental Housing construction rose sharply in European countries. The economies of February after two months of relatively the major developing countries in Latin depressed activity. On balance, various America and eastern Asia apparently indicators of housing activity had been continued to expand in late 1996. mixed over the past several months and Data for January and February were did not suggest any clear trend in spend- consistent with the continuation of a ing for new housing. subdued trend in underlying price infla- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 111 tion. Overall consumer price inflation and that the next policy move was more moderated somewhat over the two likely to be toward some tightening than months from its pace in the fourth quar- toward easing. In this regard, the directer; smaller increases in energy prices tive stated that in the context of the were an important factor in the slow- Committee's long-run objectives for down, but prices of consumer items price stability and sustainable economic other than food and energy also growth, and giving careful consideration advanced at a slower rate over the first to economic, financial, and monetary two months of the year. For the twelve developments, somewhat greater reserve months ending in February, consumer restraint would be acceptable and prices excluding food and energy rose slightly lesser reserve restraint might somewhat less than they had over the be acceptable during the intermeeting preceding twelve months; a develop- period. The reserve conditions associment contributing importantly to the ated with this directive were expected to deceleration was a smaller rise in non- be consistent with some slowing of the oil import prices associated with the growth of M2 and M3 over coming appreciation of the dollar. At the pro- months. ducer level, overall prices of finished Over the period since the February goods declined somewhat in January meeting, open market operations were and February, reflecting an appreciable directed toward maintaining the existing drop in the food and energy compo- degree of pressure on reserve positions. nents. For the twelve months ending in Federal funds continued to trade mainly February, the increase in the overall at rates close to the 5lA percent level index of finished goods prices was little expected with an unchanged policy changed from that over the preceding stance, though the rate did at times fall twelve months, but excluding food and below that level in conjunction with energy prices, which had registered unanticipated shortfalls in demands sizable advances in 1996, the rise was for excess reserves. Most other market considerably smaller over the latest interest rates rose somewhat over the twelve-month period. At early stages of intermeeting period in apparent response processing, however, some producer to indications of stronger-than-expected prices had moved up in recent months. economic activity, perceptions that the Average hourly earnings of production Federal Reserve had become more conand nonsupervisory workers posted cerned about a possible buildup in inflasmall further increases in January and tion pressures, and perhaps disappoint- February but were up appreciably more ment over the prospects for legislation over the twelve months ending in Feb- to reduce the federal budget deficit. In ruary than over the preceding twelve these circumstances, expectations built months. that monetary policy would be tight- At its meeting on February 4-5, 1997, ened. The rise in most market interest the Committee issued a directive that rates was accompanied by slight called for maintaining the existing declines in a number of major indexes degree of pressure on reserve positions. of stock market prices, although stock The directive included a bias toward the prices in some industries posted more possible firming of reserve conditions, pronounced declines. reflecting a consensus among the mem- In foreign exchange markets, the bers that the risks were clearly in the trade-weighted value of the dollar in direction of an upward trend in inflation terms of the other G-10 currencies rose Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 84th Annual Report, 1997 further over the intermeeting period. quarters, partly reflecting the rise that The dollar's appreciation appeared to already had occurred in mortgage interreflect spreading perceptions of a rela- est rates. The staff continued to anticitively strong U.S. expansion and associ- pate that fiscal policy and the external ated increases in U.S. interest rates com- sector would exert mildly restraining pared with those abroad. The dollar's effects on economic activity over the rise was most pronounced against the year ahead. With resource utilization continental European currencies. high and labor compensation rising, core Growth of M2 moderated somewhat consumer price inflation was forecast to in January and February from a brisk increase slightly over the year ahead. pace in late 1996, while expansion of In the Committee's discussion of cur- M3 remained rapid in both months. Data rent and prospective economic developfor the first part of March suggested ments, members referred to the widediminished growth of both aggregates. spread statistical and anecdotal evidence The appreciable further expansion of that the surprising strength in economic these broad aggregates thus far this year activity over the closing months of 1996 probably continued to reflect elevated was persisting in 1997. Some observed income growth, and the relative strength that it was difficult to detect signs of of M3 was associated to an important weakness or imbalances in domestic extent with heavy bank reliance on sectors of the economy. While the memlarge-denomination time deposits to bers believed that some slowing in the fund robust asset growth. M3 also con- expansion was inevitable, they felt that tinued to be boosted by the rapid growth substantial uncertainty surrounded the of money market mutual funds. The timing and extent of such slowing in the expansion of total domestic nonfinancial quarters ahead. Continued growth near, debt appeared to have slowed in the or even somewhat below, the recent early part of the year in conjunction pace would raise resource utilization with reduced borrowing by both federal rates further from their already high and state governments, which were levels. Although labor markets already drawing down cash balances. were tight, inflation had remained rela- The staff forecast prepared for this tively subdued, and there were no signs meeting suggested that the expansion in in price data that it was picking up. economic activity would slow in com- However, the risks of a rise in inflation ing quarters to a pace somewhat above down the road had increased appreciathat of the economy's estimated poten- bly as a result of the strength of aggretial and would moderate a bit further in gate demand and the increase in pres- 1998. Growth in consumer spending sures on resources that likely would was expected to decline appreciably accompany it absent a firming in finanfrom its recent pace but to remain fairly cial conditions. brisk over the quarters ahead, supported In their discussion of the outlook for by further projected gains in employ- spending in key sectors of the economy, ment and incomes. Expansion in busi- members emphasized the strength of ness spending on equipment and struc- consumer spending in recent months. tures also was projected to moderate, They noted that anecdotal reports from but to a still relatively high rate, in asso- numerous parts of the country and ciation with smaller increases in sales surveys indicating very high levels of and profits. Housing construction was consumer confidence tended to confirm forecast to drift lower over coming statistical evidence of an ebullient con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 119 sumer sector. While the recent surge in indicated the emergence of speculative consumer demand probably was sup- building activity. On the other hand, in ported mainly by rapid growth in em- some regions, signs of slowing nonresiployment and labor income, it seemed dential construction were reported. possible that consumers also were re- Housing construction activity had sponding increasingly to the run-up in fluctuated in recent months, largely in household net worth stemming from the response to changing weather condiearlier buoyant performance of the stock tions, but such construction appeared to market. The effects of rising financial be little changed on balance. Recent wealth on consumer spending were diffi- anecdotal reports pointed to improving cult to isolate, and they were undoubt- housing markets in several regions and edly restrained by efforts to accumulate to some easing in a few. Looking ahead, savings for future expenditures such the members generally anticipated that as college expenses and retirement. housing activity would be maintained at Moreover, the constraints on spending a relatively high level, perhaps slightly imposed by the high debt burdens of below that prevailing on average in many households tended to exert at least recent quarters, barring unanticipated a partly offsetting influence on overall developments in the broader economy consumer spending. On balance, how- or in financial markets. Although the ever, the members believed that the con- rise that had occurred in mortgage intersumer sector was likely to provide est rates was a somewhat inhibiting major ongoing support to the expansion, influence on the prospects for housing, though the increases in consumer spend- favorable factors noted during the meeting probably would diminish in the ing included the ongoing effects of context of more restrained growth in the large gains in stock market wealth, jobs and incomes. A number of mem- sizable increases in employment and bers expressed the view, however, that incomes, and a still relatively favorthe risks to such a forecast were in the able cash-flow affordability of home direction of more robust consumer ownership. spending. The persisting efforts by business Business fixed investment, which had firms to economize on their inventories remained on a steep uptrend for an had reduced the latter to quite low levels extended period, also was expected to in relation to sales. In the circumstances, provide continuing though moderating current inventory levels were viewed stimulus to the overall economic expan- as an upside risk to the expansion that sion. Growth in expenditures for busi- could be triggered by unexpected ness equipment was forecast to decline strength in final demand. Absent an from the extraordinary pace of recent upside surprise in demand, inventories years, despite continuing brisk demand might be expected to remain a slightly for computers and communications positive factor in the economic outlook; equipment. With regard to the outlook and if growth in final demand were to for nonresidential building activity, moderate more than anticipated, the curanecdotal reports from several regions rently lean inventories could be viewed pointed to a further pickup in commer- as minimizing the risks of accumulating cial construction associated with declin- weakness in the near term. ing vacancy rates, rising property values The outlook for fiscal policy remained and rents, and readily available financ- one of modest restraint; on the basis ing. Indeed, reports from a few areas of existing legislation, reductions were Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 84th Annual Report, 1997 anticipated in constant-dollar purchases a substantial period of economic expanof goods and services by the federal sion at a rate that exceeded the estigovernment in fiscal years 1997 and mated growth of potential had generated 1998. A key element in the potential increasing concerns of rising inflaimpact of fiscal policy was the uncertain tionary pressures in an economy that outcome of the current effort to elimi- already was operating at high levels of nate the federal deficit over time. resource utilization. Members observed Although success in that effort probably in this regard that while there was little would have little effect on the govern- evidence of growing demand pressures ment's budget position over the next on capital resources, the tightness in few years, it likely would have some labor markets appeared to be intensifybeneficial repercussions on business and ing. Indications of such a development consumer confidence and possibly also included not only widespread anecdotal on financial markets. Financial markets reports but a variety of data such as would be especially positively affected initial claims, insured unemployment, by an agreement to reduce significantly and help-wanted advertising. The rise in the growth of entitlements, which would labor force participation to a high perdamp government spending and deficits centage of the working age population over the longer run. had helped to keep the unemployment The unwinding in the early months of rate from falling, but the unexpected 1997 of special factors that had boosted increase in participation was itself net exports in the fourth quarter of 1996 suggesting tight conditions that were was offsetting some of the effects on inducing marginal workers into the job production of the persisting strength in market. domestic demand. Beyond the near The data on worker compensation term, the appreciated value of the dollar were somewhat mixed, but they sugwas expected to hold down net exports, gested some acceleration on balance. restraining overall demand and growth. Members noted that the damping effects Some members observed in this regard of some temporary factors on labor costs that the deterioration in net exports could well begin to wane soon, if they might be substantial. While such an out- had not already begun to do so. These come would help to moderate inflation- included the possibility that job security ary pressures on domestic resources in concerns might be diminishing after an coming quarters, it also would exacer- extended period of rapid job growth bate the longer-term problem of very and low unemployment. The downward large foreign trade and current account trend in medical cost increases might be deficits. in the process of shifting to a flat, if not In their review of developments bear- a rising, gradient according to informed ing on the outlook for inflation, mem- observers. Moreover, as the rise in labor bers commented that the risks now force participation depleted the pool of seemed to be tilted more clearly toward available workers, less productive workhigher inflation. They acknowledged ers would tend to be hired, with adverse that it was difficult to find indications effects on productivity and costs. The of rising inflation in broad measures of members recognized that even though consumer or GDP-related prices; indeed, aggregate demand pressures seemed to such measures still could be viewed as be pressing increasingly on available consistent with a slightly declining trend producer resources, it was not possible in price inflation. Even so, prospects for to forecast with confidence when the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 111 period of favorable price behavior sifying inflationary pressures. In their would end. Even so, it was clear that view, a more vigorous action would inflationary developments in the econ- lessen the need for tightening in the omy had become a matter of more future and also would foster a financial urgent concern for monetary policy. setting that would be more conducive In light of this concern, in the Com- to sustained expansion. Other members mittee's discussion of policy for the acknowledged that a smaller policy intermeeting period ahead, the members move would have less effect in curbsupported or could accept a proposal ing inflationary pressures, but they felt to adjust policy toward a slightly less that a cautious approach to policy was accommodative stance and to move to desirable at a time when the outlook symmetry in the directive. They noted for economic activity and inflation that continued relatively rapid growth remained subject to substantial uncerof economic activity in the first quarter tainties. Some noted that a shift in polsuggested greater persisting strength in icy direction, as the Committee was demand than they had anticipated. With about to undertake, often can have exagresource use already at high levels, fur- gerated effects in financial markets, ther rapid growth risked greater pres- making it difficult to judge how much sures on resources and rising inflation. additional restraint, if any, might be Although inflation remained remarkably needed. subdued and any increase in inflationary In their discussion of possible adjustpressures likely would tend to emerge ments to policy during the intermeetonly slowly, the strength in demand had ing period, a majority of the members developed against the backdrop of finan- favored a symmetric directive. While cial conditions that, broadly considered, additional policy tightening might be were not substantially different from needed at some point, it did not appear those now prevailing. In this situation, very likely that developments during the they saw a clear need for a preemptive intermeeting period would require a furpolicy action that would head off any ther policy move. Some added that inflapickup of inflation, and it was noted that tion remained quiescent and the neara shift to a tighter policy stance would term onset of an appreciable slowing of seem to pose little risk to the expansion. the expansion to a rate more in line with Indeed, by countering any tendency the economy's potential could not be for inflation to rise and for higher infla- ruled out. Accordingly, they felt that the tion expectations to become embedded directive should not establish a prein financial markets and economic sumption about further near-term policy decisionmaking more generally, such tightening. Other members believed action would help head off a more that growth of the economy was not abrupt economic slowing, or even a likely to slow enough to alleviate excess downturn, and thereby would help sus- demands for resources and that additain the expansion and preserve the tional tightening would be needed firm labor markets and their associated sooner rather than later to moderate benefits. inflationary pressures and prolong the A few members argued that a more expansion. In their view, the outlook substantial tightening was needed at this called for vigilance and the maintenance juncture to provide a better calibrated of an asymmetric directive with a bias response to the persisting strength of the toward tightening, but they could accept economy and the related risk of inten- a symmetric directive with careful moni- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 84th Annual Report, 1997 toring of new developments for any services widened substantially in January signs of the need for prompt action. from its temporarily depressed rate in the fourth quarter. Underlying price inflation has At the conclusion of the Committee's remained subdued. discussion, all the members indicated Most market interest rates have risen that they supported or could accept a somewhat since the Committee meeting on directive that called for a slight increase February 4-5, 1997. In foreign exchange in the degree of pressure on reserve markets, the trade-weighted value of the dolpositions and that did not include a pre- lar in terms of the other G-10 currencies increased further over the intermeeting sumption about adjustments to policy period. during the intermeeting period. Accord- Growth of M2 moderated somewhat in ingly, in the context of the Committee's January and February from a brisk pace over long-run objectives for price stability the fourth quarter while the expansion of M3 and sustainable economic growth, and remained relatively robust; data for the first giving careful consideration to eco- part of March pointed to diminished growth in both aggregates. Total domestic nonfinannomic, financial, and monetary develcial debt has expanded moderately on balopments, the Committee decided that ance over recent months. slightly greater reserve restraint or The Federal Open Market Committee slightly lesser reserve restraint might seeks monetary and financial conditions that be acceptable during the intermeeting will foster price stability and promote susperiod. The reserve conditions contem- tainable growth in output. In furtherance of these objectives, the Committee at its plated at this meeting were expected to meeting in February established ranges for be consistent with some moderation in growth of M2 and M3 of 1 to 5 percent and the expansion of M2 and M3 over com- 2 to 6 percent respectively, measured from ing months. the fourth quarter of 1996 to the fourth quarter of 1997. The monitoring range for growth The Federal Reserve Bank of of total domestic nonfinancial debt was set at New York was authorized and directed, 3 to 7 percent for the year. The behavior of until instructed otherwise by the Com- the monetary aggregates will continue to be mittee, to execute transactions in the evaluated in the light of progress toward System Account in accordance with the price level stability, movements in their following domestic policy directive: velocities, and developments in the economy and financial markets. In the implementation of policy for the The information reviewed at this meeting immediate future, the Committee seeks to suggests that relatively strong economic increase slightly the existing degree of presgrowth has continued in the first quarter. sure on reserve positions. In the context of Private nonfarm payroll employment the Committee's long-run objectives for increased substantially further in January price stability and sustainable economic and February, and the civilian unemploygrowth, and giving careful consideration to ment rate, at 5.3 percent in February, was economic, financial, and monetary develunchanged from its level in the second half opments, slightly greater reserve restraint of 1996. Industrial production rose moderor slightly lesser reserve restraint might ately on balance in January and February. be acceptable in the intermeeting period. Nominal retail sales increased sharply fur- The contemplated reserve conditions are ther over January and February after a expected to be consistent with some moderaconsiderable advance in the fourth quarter. tion in the expansion of M2 and M3 over Housing activity strengthened markedly over coming months. January and February, though much of the rise probably related to unusually favorable weather. Recent data on orders and contracts Votes for this action: Messrs. Greenspan, point to a further sizable gain in business McDonough, Broaddus, Guynn, Kelley, fixed investment in the first quarter. The Meyer, Moskow, Parry, Mses. Phillips and nominal deficit on U.S. trade in goods and Rivlin. Votes against this action: None. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 123 It was agreed that the next meeting of Mr. Parry the Committee would be held on Tues- Ms. Phillips Ms. Rivlin day, May 20, 1997. The meeting adjourned at 12:20 p.m. Messrs. Hoenig, Jordan, Melzer, and Ms. Minehan, Alternate Members Donald L. Kohn of the Federal Open Market Secretary Committee Messrs. Boehne, McTeer, and Stern, After the meeting, the following press Presidents of the Federal Reserve release was issued: Banks of Philadelphia, Dallas, and Minneapolis respectively The Federal Open Market Committee decided today to tighten money market con- Mr. Kohn, Secretary and Economist ditions slightly, expecting the federal funds Mr. Bernard, Deputy Secretary rate to rise VA percentage point to around Mr. Coyne, Assistant Secretary 5Vi percent. Mr. Gillum, Assistant Secretary This action was taken in light of persisting Mr. Mattingly, General Counsel strength in demand, which is progressively Mr. Baxter, Deputy General Counsel increasing the risk of inflationary imbalances Mr. Prell, Economist developing in the economy that would even- Mr. Truman, Economist tually undermine the long expansion. In these circumstances, the slight firming Messrs. Beebe, Eisenbeis, Goodfriend, of monetary conditions is viewed as a pru- Hunter, Lindsey, Mishkin, dent step that affords greater assurance of Promisel, Siegman, Slifman, and prolonging the current economic expansion Stockton, Associate Economists by sustaining the existing low inflation environment through the rest of this year and Mr. Fisher, Manager, System Open next. The experience of the last several years Market Account has reinforced the conviction that low inflation is essential to realizing the economy's fullest growth potential. Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of No change was made in the Federal Governors Reserve discount rate, which remains at Messrs. Madigan and Simpson, 5 percent. Associate Directors, Divisions of Monetary Affairs and Research and Statistics respectively, Board Meeting Held on of Governors May 20, 1997 Ms. Low, Open Market Secretariat Assistant, Division of Monetary A meeting of the Federal Open Market Affairs, Board of Governors Committee was held in the offices of Mr. Conrad, First Vice President, the Board of Governors of the Federal Federal Reserve Bank of Chicago Reserve System in Washington, D.C., Messrs. Dewald, Hakkio, Ms. Krieger, on Tuesday, May 20, 1997, at 9:00 a.m. Messrs. Lang, Rosenblum, and Sniderman, Senior Vice Present: Presidents, Federal Reserve Mr. Greenspan, Chairman Banks of St. Louis, Kansas City, Mr. McDonough, Vice Chairman New York, Philadelphia, Dallas, Mr. Broaddus and Cleveland respectively Mr. Guynn Messrs. Cox, Rosengren, and Weber, Mr. Kelley Vice Presidents, Federal Reserve Mr. Moskow Banks of Dallas, Boston, and Mr. Meyer Minneapolis respectively Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 84th Annual Report, 1997 By unanimous vote, the Federal Open costs, underlying price inflation was still Market Committee approved the min- subdued. utes of its meeting on March 25, 1997. Private nonfarm payroll employment The Manager of the System Open rose at a considerably reduced pace over Market Account reported on recent March and April, and the average workdevelopments in foreign exchange mar- week dropped from an unusually high kets. The Desk did not conduct any rate in February and March to a more transactions in foreign currencies for normal level in April. The services System Account during the period since industries recorded further large gains the latest meeting on March 25, 1997, in employment in March and April, but and thus no vote was required of the the number of jobs in manufacturing Committee. contracted in April and construction The Manager also reported on devel- employment declined in both March and opments in domestic financial markets April. The civilian unemployment rate and on System open market transactions fell appreciably in April to 4.9 percent, in government securities and federal and the labor force participation rate agency obligations during the period edged down from the record high March 25, 1997, through May 19, 1997. reached in March. By unanimous vote, the Committee rati- Industrial production was unchanged fied these transactions. in April after having recorded sizable The Committee then turned to a dis- increases in March and other recent cussion of the economic outlook and the months; declines in mining and manuimplementation of monetary policy over facturing were offset by a large rise in the intermeeting period ahead. A sum- utility output. The drop in manufacturmary of the economic and financial ing production reflected a sharp decline information available at the time of the in the output of motor vehicles and parts meeting and of the Committee's dis- that was largely related to the lagged cussion is provided below, followed effects of strike activity in recent months. by the domestic policy directive that The output of manufactured goods other was approved by the Committee and than motor vehicles and parts rose issued to the Federal Reserve Bank of moderately in April: the production New York. of business equipment posted another The information reviewed at this solid gain while the output of consumer meeting suggested that the expansion of goods and construction supplies was economic activity had slowed after hav- unchanged. The rate of utilization of ing surged in late 1996 and earlier this manufacturing capacity fell in April, year. Consumer spending appeared to be reflecting the decline in motor vehicle increasing at a considerably slower pace output, but it remained relatively high. after the spurt in the first quarter, while Nominal retail sales were unchanged business fixed investment remained on in March and declined in April after a strong uptrend, and the demand for having increased rapidly in earlier housing seemed to be well maintained. months. Weaker sales of motor vehicles Growth of labor demand had moderated contributed to the overall sluggishness somewhat from the rapid pace at the of retail activity in March and April, beginning of the year, but labor markets but spending on many other categories remained tight and worker compensa- of goods, both durable and nondurable, tion appeared to be accelerating gradu- also was down over the two-month ally. Despite the upward drift in labor period after having previously grown Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 125 strongly. Expenditures on services computers, and an upturn in imports advanced further through March (latest of semiconductors after four quarters of available data) even though unseason- declines. By contrast, exports of goods ably mild weather held down outlays for and services rose only slightly in the heating. While retail sales had slowed January-February period; exports of recently, the latest surveys indicated that automotive products were up sharply, consumer sentiment had risen further but sizable increases in exports of from an already markedly high level. chemicals, computers, and semiconduc- Housing activity in March and April tors were largely offset by declines in was in line with that in other recent other nonautomotive trade categories. months. Single-family housing starts Recent economic information on the were unchanged in April after having foreign G-7 countries, including some declined in March. Starts for the two- preliminary indicators for the second month period were only a little below quarter, suggested that the growth of the average for 1996, and sales of output had strengthened somewhat on new homes remained at a very high average in these countries. Activity in level in March (latest data). Multifamily continental Europe, though still weak, starts rose considerably in April and on was improving, while the economies of average over March and April were a Canada, Japan, and the United Kingdom little above the elevated level in the remained strong. Economic activity confourth quarter. tinued to expand rapidly on average in Business fixed investment expanded the major developing countries in the briskly in the first quarter. Outlays first quarter. for producers' durable equipment Recent data indicated that price inflarebounded after fourth-quarter weak- tion remained moderate despite a ness, and spending for nonresidential gradual acceleration of labor costs. structures posted another substantial Increases in consumer prices were held advance. Available indicators pointed down in March and April by sizable to further sizable gains in spending declines in energy prices and a small on both equipment and structures. Busi- net reduction in food prices. Consumer ness inventory investment was up prices for items other than food and considerably in the first quarter after energy advanced at a moderate rate over having increased a relatively small the two months, and over the twelve amount in the fourth quarter; however, months ended in April they increased inventory-sales ratios for most industry the same amount as in the previous and trade groupings remained at very twelve months. Producer prices fell in low levels. both March and April, reflecting large The nominal deficit on U.S. trade in declines in energy prices. Excluding goods and services widened substan- food and energy, producer prices edged tially on balance over January and Feb- lower in April after having risen a sizruary from the temporarily depressed able amount in March. Core producer rate in the fourth quarter of last year prices increased considerably less over and was about the same as the rate in the twelve months ended in April than the third quarter. A surge in imports over the previous twelve months. At reflected a rebound in the importation earlier stages of production, producer of automotive products from the strike- prices registered declines both in recent reduced level of the fourth quarter, fur- months and for the twelve months ended ther expansion in purchases of imported in April. An upward creep in the growth Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 84th Annual Report, 1997 of labor costs was apparent in data needed to offset the reserve drains assoon the hourly compensation of private ciated with those tax payments. industry workers; although the rise in Market interest rates generally posted the first three months of 1997 was small mixed changes over the intersmaller than the increase in the fourth meeting period. Most private short-term quarter, the advance over the twelve rates increased only a little in response months ended in March was larger than to the March policy action, which had that over the previous twelve months. A been largely anticipated by market similar but more pronounced pattern participants. Intermediate- and longwas evident in data on average hourly term yields rose over the early part earnings for production or nonsuper- of the intermeeting period, responding visory workers. mostly to incoming data suggesting that At its meeting on March 25, 1997, the growth in aggregate demand and output Committee issued a directive that called remained strong; these increases were for a slight increase in the degree of subsequently more than reversed, howpressure on reserve positions; the firm- ever, as later information indicated that ing of policy was taken in light of economic growth was moderating and continued rapid growth of aggregate price inflation remained subdued and on demand in the first quarter and the atten- news of an agreement to balance the dant greater risk of heightened pressures federal budget. Major indexes of stock on resources and an upturn in inflation. market prices fluctuated substantially Although further policy tightening over the period but they rose considermight be needed at some point, the ably on balance. Committee did not believe that devel- In foreign exchange markets, the opments during the intermeeting period trade-weighted value of the dollar in were likely to require an adjustment, terms of the other G-10 currencies and thus the directive did not include declined on balance over the intermeeta presumption about adjustments to ing period. The movements of the dollar policy during the intermeeting period. during the period roughly corresponded The reserve conditions associated with to the fluctuations in intermediate- and this directive were expected to be con- long-term U.S. interest rates; the dollar sistent with some moderation in the advanced strongly in April on growing expansion of M2 and M3 over coming expectations of a further firming of U.S. months. monetary policy but more than retraced Open market operations immediately that gain in May as the likelihood of after the meeting on March 25 were further tightening waned. The dollar's directed toward implementing the weakness in May also seemed to reflect slightly firmer reserve conditions growing attention to the prospects for desired by the Committee and then official intervention to restrain the dolmaintaining those conditions over the lar's rise, notably against the Japanese remainder of the intermeeting period. yen and the German mark. The federal funds rate averaged close to The growth of M2 and M3 remained the higher intended level of 5V2 percent. brisk over March and April. Much of Open market operations were compli- M2's strength during this period resulted cated during the period by extraor- from a temporary buildup by housedinarily large federal tax payments in holds of balances in savings accounts April, which substantially increased and money market mutual funds to the volume of open market purchases cover unusually large tax payments. The Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 127 rapid growth of M3 was associated not recent months pointed on balance to a only with the bulge in M2 but also with marked slowing in the expansion of ecostepped-up issuance of large time depos- nomic activity from a very rapid pace its to fund the expansion of bank credit. in late 1996 and earlier this year. The For the year through April, both aggre- extent of the reduced growth in the curgates expanded at rates appreciably rent quarter and the prospects for subabove the upper bounds of their respec- sequent quarters were subject to subtive ranges for the year. The growth stantial uncertainty, but the members of total domestic nonfinancial debt had generally felt that the economy retained moderated over recent months as a result considerable underlying strength. In the of reductions in federal government circumstances and assuming no changes borrowing. from current financial conditions, the The staff forecast prepared for this individual members saw likely prospects meeting suggested that the economy for expansion over the forecast horizon would expand in the second half of the at a pace close to, or a little above, the year at a rate a little above that of its estimated growth of the economy's estimated potential and then would long-run potential. Many noted, howincrease at a slower and more sustain- ever, that high levels of consumer and able rate in 1998. Growth of consumer business confidence and supportive spending, supported by high levels of financial conditions among other factors household wealth and further projected suggested the possibility that growth gains in employment and income, was could turn out to be even faster. With expected to remain fairly brisk over the the utilization of productive resources, forecast horizon. Business spending on notably labor, already at particularly equipment and structures was antici- high levels in relation to the economy's pated to continue to outpace the overall potential, an outcome no stronger expansion of the economy, though the than current forecasts could well have differential would tend to narrow over adverse implications for inflation. Nonetime in conjunction with the gradual theless, the members also noted that the diminution of increases in sales and rise in compensation increases had been profits that was expected to be associ- damped and that there continued to be ated with moderating economic growth. few indications of accelerating price Housing construction was projected to inflation in the statistical and anecdotal drift lower over coming quarters, partly information available at this time; such in conjunction with the rise in mortgage developments underlined persisting interest rates that already had occurred uncertainties about behavior in labor but also in response to the smaller in- markets and the level and growth of the creases expected in household income. economy's sustainable potential. The staff continued to anticipate that In their review of developments in fiscal policy and the external sector key sectors of the economy, members would exert mild restraint on the expan- referred to favorable underlying factors sion of economic activity. With resource in the outlook for consumer spending. utilization high and labor compensation These included solid growth in congradually accelerating, core consumer sumer incomes, large increases in finanprice inflation was forecast to drift cial wealth, and currently high levels slightly higher. of consumer confidence. While more In the Committee's discussion, the moderate growth in consumer spending members agreed that the information for for durable goods seemed likely after Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 84th Annual Report, 1997 an extended period of robust expansion, boom reminiscent of the 1980s did not these favorable factors suggested that appear to be under way. the risks of a different outcome were Concerning the outlook for housing, tilted in the direction of faster-than- members referred to forecasts of a mild projected expansion. On the negative downtrend in residential construction side, large consumer debts were still associated with the increases that had viewed as likely to constitute an inhibit- occurred in mortgage interest rates. To ing influence on consumer expenditures, date, however, there were few indicaand many banking institutions had tions of any weakening. Indeed, housing tightened lending terms and conditions construction had been relatively robust at least for their more marginal con- in the early months of the year, though sumer borrowers. On balance, growth the strength probably was largely in consumer expenditures at a somewhat accounted for by unusually favorable reduced pace approximating that of weather conditions and may have borthe expected expansion of disposable rowed from building activity later in the incomes appeared to be a reasonable year. On balance, as evidenced by anecprospect, though one that was subject to dotal reports from some areas, various considerable uncertainty. factors including ongoing growth in Spending for business fixed invest- employment and incomes, the availabilment seemed to have retained a good ity of financing on still generally favordeal of momentum even after the large able terms, and the associated affordincreases in such expenditures in recent ability of housing for many homeowners years. Clearly, businesses regarded seemed likely to provide continued such investments as highly profitable, support for this sector of the economy and they appeared to be leading to gains for some period of time. in productivity that in turn were helping A surge in nonfarm business invento offset rising compensation and to tory investment accounted for a submaintain profit margins in highly com- stantial portion of the acceleration in petitive markets. In the circumstances, it output in the first quarter, and an anticiappeared unlikely that growth in capital pated moderation in the accumulation of outlays would moderate appreciably for inventories was an important element in some time. A number of members also forecasts of greatly reduced economic referred to the increasing strength in growth in the current quarter. In keeping nonresidential construction, notably that with business practices aimed at achievof commercial structures, in several ing or maintaining lean inventory-sales parts of the nation. Some referred in ratios, inventory investment was proparticular to planned or actual construc- jected to continue at a relatively subtion of new office buildings in various dued pace in coming quarters. A number locales; such activity was being stimu- of members expressed the view, howlated by declining vacancy rates, rising ever, that stockbuilding represented an rents, and a ready availability of financ- upside risk in the economic outlook, ing. Likewise, a surge in tourism in at least in the nearer term. While there a number of areas had resulted in a were some indications of efforts to pare scarcity of hotel rooms and was spurring inventories in recent months, generhotel construction in some major cities. ally optimistic business sentiment and Anecdotal reports of nonresidential currently trim inventories in most indusbuilding activity undertaken on a specu- tries might well foster efforts to acculative basis had increased, but a building mulate stocks at a relatively rapid Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 129 pace, especially if more-buoyant-than- pointed to relatively limited increases anticipated sales were to stimulate a in productivity seemed inconsistent precautionary demand for inventories as with strong profits as well as with anechad occurred in 1994. dotal reports of sizable gains associated With regard to the outlook for infla- with widespread business restructuring tion, members observed that increases in activities and large additions of highprices had remained subdued despite the technology equipment to an increasingly rapid expansion in economic activity efficient capital stock. The ongoing in recent quarters and the associated development and spreading adoption of increase in pressures on already highly automated equipment along with the utilized resources. The appreciation of increasing skills and other infrastructure the dollar undoubtedly had helped to needed to use it effectively appeared to damp domestic inflation this year, and be creating growing efficiencies or synreported increases in consumer prices ergies that were markedly enhancing also had been held down to a marginal productivity and enabling firms to hold extent by an ongoing series of techni- the line on prices and maintain high cal adjustments to the consumer price profit margins. index. These were only partial explana- While these were welcome developtions, however, and the members found ments, members continued to express it very difficult to account for the sur- concern that, perhaps sooner rather than prisingly benign behavior of inflation in later, growing pressures on productive an economy that had been operating at a resources would be reflected in some level approximating full employment— upturn in overall inflation. Although indeed, possibly somewhat above sus- most measures of labor compensation tainable full employment in labor had been relatively favorable recently, markets in the view of a number of such measures had been displaying a members, especially taking into consid- clear uptrend over a somewhat longer eration the recent further decline in the period, and it seemed likely that, if unemployment rate. On the basis of this trend continued, labor cost develophistorical patterns, any overshooting of ments would at some point be reflected full employment would be expected more fully in core measures of prices. to generate rising inflation over time. Members commented that the timing Although increases in labor compen- and extent of any upturn in price inflasation had been trending higher, these tion would depend on growth of overall pressures were muted and had not demand in the economy, but they also shown through to prices. believed that expansion of demand in Members focused on the possible role line with their current expectations of faster-than-reported increases in pro- could induce a somewhat less favorable ductivity as a key explanation for the inflation experience during coming benign behavior of inflation in current quarters. However, recent developments circumstances. Business firms had con- had underscored the fact that historitinued to report robust profit margins in cal experience was not a fully relia period when competitive pressures able guide to the prospective behavior generally prevented them from raising of prices; accordingly, the inflation outtheir prices, or raising them sufficiently, look remained subject to considerable to pass on the increases that they were uncertainty. experiencing in worker compensation. In the Committee's discussion of pol- Standard statistical measures that icy for the intermeeting period ahead, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 84th Annual Report, 1997 all but one of the members indicated apparently solid momentum of the ecothat they could support a proposal to nomic expansion. Indeed, the strength maintain an unchanged policy stance, of investment demand, the ready availalthough some also expressed a prefer- ability of financing, and possible favorence for some tightening at this meeting. able productivity gains argued that real Those who endorsed a steady policy at rates of interest would need to be higher this time agreed that some tightening than historical norms to balance aggremight well be needed later to contain gate demand and supply. The risk of potentially rising inflation. For now, slightly lower economic growth needed however, economic growth seemed to to be compared with what they viewed be slowing to a more sustainable pace, as the greater risk of losing ground and the uncertainties surrounding the to inflation and thereby inhibiting the extent of the slowing and the outlook for Committee's ability to reach its ultimate inflation pointed to the desirability of a goal of price stability, a goal that all the cautious approach to any policy tight- members viewed as necessary to achieve ening, especially given the persisting maximum sustainable economic growth absence of a rising inflation trend in over time. Given the quiescence of inflacurrent measures of prices. A number of tion and the uncertainties surrounding members also observed that real interest its outlook, however, all but one of these rates were not unusually low. Thus, the members could accept a wait-and-see present stance of monetary policy prob- policy stance for now. ably was not very far out of alignment With regard to possible adjustments with what likely would prove to be a to policy during the intermeeting period, desirable degree of restraint, thereby all the members supported a shift from lessening any risk of large and persist- the symmetric directive that had been ing imbalances that a delay in imple- adopted in conjunction with the policy menting further restraint might incur. tightening action at the March meeting Members who preferred some tight- to an asymmetric directive tilted toward ening, at least in the near term if not tightening. While such a bias did not necessarily at this meeting, noted that necessarily imply an intention to tighten the Committee needed to weigh the risks policy during the weeks immediately of having to implement a small degree ahead, it was consistent with the memof restraint now versus considerably bers' view that the risks were in the more later if inflation were allowed direction of a potential need for some to build momentum. Monetary policy tightening in monetary policy to counter exerts its effects with a considerable lag, rising inflationary pressures, and that and a small but relatively prompt tight- they might be required to make such a ening action would provide some fur- decision in the not-too-distant future. ther insurance against an intensification At the conclusion of the Committee's of inflation. Such an outcome could discussion, all but one member indibe seen as more likely now, given the cated that they supported a directive that increased tightness in labor markets and called for maintaining the existing the possibility that relatively strong degree of pressure on reserve positions growth would put added pressures on and that included a bias toward the posresources. Some of these members com- sible firming of reserve conditions durmented that the risk of a retarding effect ing the intermeeting period. Accordon the economy from a small move at ingly, in the context of the Committee's this time was quite limited in light of the long-run objectives for price stability Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 131 and sustainable economic growth, and both aggregates expanded at rates appreciagiving careful consideration to eco- bly above the upper bounds of their respective ranges for the year. Growth in total nomic, financial, and monetary develdomestic nonfinancial debt has moderated opments, the Committee decided that over recent months, reflecting reductions in somewhat greater reserve restraint federal government borrowing. 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 sustainable 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 February established ranges for with moderate growth of M2 and M3 growth of M2 and M3 of 1 to 5 percent and over coming months. 2 to 6 percent respectively, measured from The Federal Reserve Bank of New the fourth quarter of 1996 to the fourth quar- York was authorized and directed, until ter of 1997. The monitoring range for growth of total domestic nonfinancial debt was set at instructed otherwise by the Committee, 3 to 7 percent for the year. The behavior of to execute transactions in the System the monetary aggregates will continue to be Account in accordance with the follow- evaluated in the light of progress toward ing domestic policy directive: price level stability, movements in their velocities, and developments in the economy and financial markets. The information reviewed at this meeting In the implementation of policy for the suggests that growth in economic activity immediate future, the Committee seeks to has slowed after surging in late 1996 and maintain the existing degree of pressure on earlier this year. Private nonfarm payroll reserve positions. In the context of the Comemployment increased at a considerably mittee's long-run objectives for price stareduced pace over March and April, but the bility and sustainable economic growth, and civilian unemployment rate fell appreciably giving careful consideration to economic, to 4.9 percent in April. Industrial production financial, and monetary developments, somewas flat in April following sizable gains what greater reserve restraint would or over previous months. Nominal retail sales slightly lesser reserve restraint might be were unchanged in March and declined in acceptable in the intermeeting period. The April after a considerable advance in earlier contemplated reserve conditions are exmonths. Housing activity in March and April pected to be consistent with some moderawas little changed from other recent months. tion in the expansion of M2 and M3 over Available indicators point to further sizable coming months. gains in business fixed investment. The nominal deficit on U.S. trade in goods and Votes for this action: Messrs. Greenspan, services widened substantially in January- McDonough, Guynn, Kelley, Meyer, February from its temporarily depressed rate Moskow, Parry, Mses. Phillips and Rivlin. in the fourth quarter. Underlying price infla- Vote against this action: Mr. Broaddus. tion has remained subdued. Market interest rates generally have posted Mr. Broaddus dissented because he small mixed changes since the Committee believed that the strength of investment meeting on March 25, 1997; share prices in equity markets have risen considerably. demand, due possibly to an increase in In foreign exchange markets, the trade- the trend growth rate of productivity, weighted value of the dollar in terms of the required somewhat higher real interest other G-10 currencies declined on balance rates to prevent' inflationary pressures over the intermeeting period. from developing. He was concerned Growth of M2 and M3 was brisk over that, with the economy already operat- March and April, boosted by a buildup in household balances to cover unusually large ing at a high level and labor markets tax payments. For the year through April, apparently very tight, any increase in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 84th Annual Report, 1997 such pressures might be costly to reverse Mr. Bernard, Deputy Secretary and might reduce the credibility of the Mr. Coyne, Assistant Secretary Mr. Gillum, Assistant Secretary Committee's longer-run strategy of pro- Mr. Mattingly, General Counsel moting maximum sustainable growth by Mr. Baxter, Deputy General Counsel fostering price level stability. He also Mr. Prell, Economist believed that the risk to the economy of Mr. Truman, Economist a moderate further tightening was small given the apparent momentum of aggre- Messrs. Beebe, Goodfriend, Hunter, Lindsey, Mishkin, Promisel, gate economic activity. Siegman, Slifman, and Stockton, It was agreed that the next meeting Associate Economists of the Committee would be held on Tuesday-Wednesday, July 1-2, 1997. Mr. Fisher, Manager, System Open The meeting adjourned at 12:45 p.m. Market Account Mr. Ettin, Deputy Director, Division of Donald L. Kohn Research and Statistics, Board of Secretary Governors Messrs. Madigan and Simpson, Associate Directors, Divisions of Meeting Held on Monetary Affairs and Research July 1-2, 1997 and Statistics respectively, Board of Governors A meeting of the Federal Open Market Ms. Johnson, Assistant Director, Committee was held in the offices of Division of International Finance, Board of Governors the Board of Governors of the Federal Reserve System in Washington, D.C., Messrs. Reifschneider4 and Small,4 on Tuesday, July 1, 1997, at 2:30 p.m. Section Chiefs, Divisions of and continued on Wednesday, July 2, Research and Statistics and 1997, at 9:00 a.m. Monetary Affairs respectively, Board of Governors Present: Mr. Greenspan, Chairman Mr. Sichel, Senior Economist, Division Mr. McDonough, Vice Chairman of Research and Statistics, Board Mr. Broaddus of Governors Mr. Guynn Mr. Kelley Mr. Elmendorf,4 and Ms. Garrett, Mr. Moskow Economists, Division of Monetary Mr. Meyer Affairs, Board of Governors Mr. Parry Ms. Phillips Mr. Lebow,5 and Ms. Lindner,5 Ms. Rivlin Economists, Division of Research and Statistics, Board of Governors Messrs. Hoenig, Jordan, Melzer, and Ms. Minehan, Alternate Members Ms. Low, Open Market Secretariat of the Federal Open Market Assistant, Division of Monetary Committee Affairs, Board of Governors Messrs. Boehne, McTeer, and Stern, 4. Attended portions of meeting relating to the Presidents of the Federal Reserve Committee's review of the economic outlook and Banks of Philadelphia, Dallas, establishment of its monetary and debt ranges for and Minneapolis respectively 1998. 5. Attended portion of meeting relating to price Mr. Kohn, Secretary and Economist measurement issues for monetary policy. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 133 Ms. Holcomb, First Vice President, expansion slowed substantially in the Federal Reserve Bank of Dallas second quarter after having surged in late 1996 and earlier this year. Con- Ms. Browne, Messrs. Dewald, Hakkio, sumer spending decelerated consider- Kos, Lang, Rolnick, Rosenblum, ably, but business spending on durable and Sniderman, Senior Vice Presidents, Federal Reserve Banks equipment increased substantially furof Boston, St. Louis, Kansas City, ther and housing demand appeared to New York, Philadelphia, have been well maintained. Employ- Minneapolis, Dallas, and ment growth moderated recently, while Cleveland respectively industrial production continued to rise appreciably. Price inflation remained Ms. Rosenbaum, Vice President, Federal Reserve Bank of Atlanta subdued despite high rates of resource utilization, notably that of labor. By unanimous vote, the minutes of Private nonfarm payroll employment the meeting of the Federal Open Market rose at a reduced pace in May after Committee held on May 20, 1997, were having registered sizable advances over approved. the first four months of the year. Job The Manager of the System Open growth remained brisk in the services Market Account reported on develop- sector despite a further drop in employments in foreign exchange markets since ment at temporary help agencies that the meeting on May 20, 1997. There might have reflected constraints on were no System open market transac- the availability of workers for hire. tions in foreign currencies during this Although employment in construction period, and thus no vote was required of recovered in May from the weatherthe Committee. depressed level in April, the underlying The Manager also reported on devel- growth in such jobs seemed to have opments in domestic financial markets slowed. Employment in manufacturing and on System open market transactions changed little over April and May after in government securities and federal having increased moderately in the first agency obligations during the period quarter. The average workweek for pro- May 20, 1997, through June 30, 1997. duction or nonsupervisory workers was By unanimous vote, the Committee rati- unchanged in May but was slightly fied these transactions. below the average for the first quarter. The Committee then turned to a dis- The civilian unemployment rate fell cussion of the economic outlook, the slightly further to 4.8 percent in May. ranges for the growth of money and debt Industrial production continued to in 1997 and 1998, and the implemen- grow briskly in May. Manufacturing tation of monetary policy over the inter- output recorded a substantial gain and meeting period ahead. A summary of mining production rose considerably; the economic and financial information however, cooler-than-average weather available at the time of the meeting and led to a drop in utility output. Much of the Committee's discussion is pro- of the rise in manufacturing reflected a vided below, followed by the domestic rebound in the production of motor vehipolicy directive that was approved by cles and parts from strike-depressed the Committee and issued to the Federal levels in April and strength in the out- Reserve Bank of New York. put of business equipment, construction The information reviewed at this supplies, and materials. With output meeting suggested that the economic generally keeping pace with the rapid Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 84th Annual Report, 1997 expansion of factory capacity, the rate of capital goods also had been robust on of utilization of manufacturing capacity balance. Recent data on orders pointed remained at a relatively high level. to further brisk growth in coming Personal consumption expenditures, months. Nonresidential construction in real terms, rose substantially in May activity appeared to have eased recently, after having changed little on balance with construction-put-in-place slipping over the preceding three months. Spend- in March and April from the elevated ing on services remained on a solid pace of the first two months of the year. uptrend in May, while aggregate pur- However, other information suggested chases of goods turned up after three that the downturn might be shortlived: months of lackluster spending on Vacancy rates for office space had been nondurable goods and motor vehicles. declining, prices for commercial real The unusual weather patterns of late estate had been edging up, and recent winter and early spring apparently had data on contracts suggested that builda depressing effect on consumer expen- ing activity would improve in coming ditures, especially for seasonal items; months. however, the combination of strong job Business inventory investment picked gains, buoyant sentiment, and increased up sharply in April from the slow pace household net worth pointed to a pos- in March but, overall, stocks remained sible resumption of more robust spend- at a low level in relation to sales. In ing by consumers. manufacturing, much of the increase in Housing activity appeared to have stocks occurred in capital goods indusbeen generally well maintained in recent tries in which production was expanding months. Although housing starts were briskly. In the wholesale sector, a subdown somewhat in May from the rela- stantial decline in stocks in April more tively elevated average rate for the first than offset a sizable increase in March, four months of the year, this slowing and the aggregate stock-sales ratio for might have been, at least in part, the the sector fell further over the Marchresult of unusually mild winter weather April period. Retail inventories rose that enabled an early start on spring considerably in April, with notable building activity. The latest information increases in stocks of apparel and genon home sales suggested continued firm eral merchandise. In a departure from demand for single-family housing: Sales the general downtrend of recent months, of existing homes rose in May and were inventory-sales ratios for most types of among the highest monthly totals on retail establishments were up appreciarecord, and sales of new homes in April bly in April. (latest data available) were down only The nominal deficit on U.S. trade in a little from the brisk pace of earlier goods and services narrowed somewhat months in the year. in April from a downward-revised aver- Available information suggested fur- age rate in the first quarter. The value of ther sizable gains in business fixed exports in April rose substantially from investment. Shipments of nondefense the first-quarter level, led by increases in capital goods edged higher in May after exports of machinery and aircraft. The having posted large increases in earlier value of imports also rose but less than months of the year. Shipments of com- that of exports; imports were up in most puters had been particularly strong this trade categories except petroleum prodyear in conjunction with rapidly falling ucts. Recent information suggested that, prices, but shipments of other categories on average, economic activity in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 135 major foreign industrial countries con- period. The reserve conditions associtinued to grow at a moderate rate in the ated with this directive were expected to second quarter. Growth remained robust be consistent with moderate growth of in Canada and the United Kingdom and M2 and M3 over coming months. was improving in Germany, France, and Open market operations were directed Italy. Economic activity appeared to throughout the intermeeting period have flattened temporarily in Japan after toward maintaining the existing degree an increase in the consumption tax in of pressure on reserve positions, and the April. federal funds rate averaged close to the Price inflation remained subdued. For intended level of 5XA percent. Most other a third straight month, consumer prices market interest rates declined somewhat recorded only a slight increase in May. on balance during the period. Market Favorable developments in food and participants apparently concluded that energy continued to hold down the over- the likelihood of further policy tightenall rise and accounted for a much ing had decreased substantially in light smaller advance in the index of prices of incoming data that suggested slowing of all consumer items over the twelve growth of final demand and continued months ended in May than over the subdued inflation. Share prices in equity previous twelve months. The decline in markets rose considerably further. core CPI inflation over the same time In foreign exchange markets, the period was much less, though this mea- trade-weighted value of the dollar in sure of inflation also remained relatively terms of the other G-10 currencies was restrained. At the producer level, prices up on balance over the intermeeting of finished goods other than food and period; the advance occurred despite a energy fell further in May and were smaller decline on average in long-term little changed over the year ended that interest rates abroad than in the United month. At earlier stages of processing, States. The dollar rose appreciably producer prices for intermediate materi- against the German mark and most other als other than food and energy changed continental European currencies amid little over the year ended in May, and growing market concerns that there producer prices at the crude level would be broad participation in the advanced only slightly. The tight condi- European Monetary Union despite the tions prevailing in labor markets were fact that the major European countries associated with a somewhat larger would not be able to comply strictly increase in average hourly earnings in with the Maastricht fiscal standards and the twelve months ended in May than in related expectations that the euro would the year-earlier period. be a weak currency. In contrast, the dol- At its meeting on May 20, 1997, the lar fell against the Japanese yen and the Committee adopted a directive that British pound; the yen moved up as called for maintaining the existing markets focused more closely on recent degree of pressure on reserve positions. and prospective increases in Japan's cur- Because the members saw the potential rent account surplus, and the pound need for some tightening in monetary strengthened in anticipation of further policy to counter rising inflationary policy tightening by the Bank of pressures, perhaps in the relatively England. near term, the directive included a bias Expansion of M2 and M3 slowed toward the possible firming of reserve sharply in May in association with a conditions during the intermeeting swing in household balances related Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 84th Annual Report, 1997 to large tax payments; growth of M2 economy, including widespread indicarebounded in June, but M3 accelerated tions of strength in business activity and less. For the year through June, M2 subdued inflation. After a surge in late increased at a rate near the upper bound 1996 and earlier this year, the rate of of its range for the year. Rapid growth expansion had moderated considerably of M3 over the first half of the year, in recent months, and the members genpartly in conjunction with robust expan- erally expected economic activity to sion of bank credit, placed growth settle into a pattern of growth over the of this aggregate somewhat above the next six quarters that would approxiupper bound of its range. The rate of mate the economy's estimated output increase in total domestic nonfinancial potential. A major factor in that outlook debt had been a little higher in recent was their expectation of some deceleramonths; for the year to date, this aggre- tion in demands for consumer durables gate had grown at a rate near the middle and business plant and equipment in of its range. light of the substantial buildup of such The staff forecast prepared for this assets that already had taken place in meeting suggested that the economy recent years. However, given the underwould expand at a pace somewhat above lying strength of the expansion, favorthat of its estimated potential in the sec- able financial conditions, and the ond half of the year but would slow to a absence of major imbalances in the rate of increase more in line with that of economy, the risks of a different outpotential in 1998. Growth of consumer come were judged to be in the direction spending, supported by high levels of of somewhat faster growth than curhousehold wealth and further projected rently projected. The outlook for inflagains in employment and income, was tion was subject to particular uncerexpected to be relatively brisk for some tainty. Despite an economy that had time. Business spending on equipment been operating for a considerable period and structures was anticipated to con- at rates of resource utilization that were tinue outpacing the overall expansion very close to, and by some estimates of the economy, though the differential somewhat above, sustainable levels, would tend to narrow in association with inflation had remained relatively low the gradual diminution of increases and indeed had declined on the basis of in sales and profits that was expected some broad measures of prices. Such an to occur in the context of moderating outcome was very much welcome, but economic growth. Housing construction the reasons for it were not completely was projected to drift lower over the understood and appeared to include forecast period. The staff anticipated some factors that might exert only that fiscal policy and the external sector temporary restraint on price increases. would exert mild restraint on the expan- Consequently, continuing pressures on sion of economic activity. With labor resources associated with economic compensation gradually accelerating in growth in line with the members' curthe context of high resource utilization, rent forecasts could well be reflected in core consumer price inflation was fore- rising inflation over time. cast to drift slightly higher. In keeping with the practice at meet- In the Committee's discussion of cur- ings when the Committee sets its longrent and prospective economic develop- run ranges for the money and debt ments, members commented on the con- aggregates, the members of the Committinuing exceptional performance of the tee and the Federal Reserve Bank presi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 137 dents not currently serving as members new highs. On the other hand, the accuprovided individual projections of the mulation of consumer durables that had growth in real and nominal GDP, the occurred over the course of the current rate of unemployment, and the rate of cyclical advance was likely to exert inflation for the years 1997 and 1998. a retarding influence on the rise in The forecasts of the rate of expansion consumer spending. Other somewhat in real GDP for 1997 as a whole had a restraining factors included the prospect central tendency of 3 to 3lA percent and of some softening in housing demand for 1998 were centered on a range of and related purchases of household 2 to 2!/2 percent. With regard to the goods and the already heavy debt repaygrowth of nominal GDP, most of the ment burdens of many consumers. Some forecasts were in ranges of 5 to 5l/i per- members also noted that a possible corcent for 1997 and 4Vi to 5 percent for rection from the currently elevated lev- 1998. The civilian rate of unemploy- els of stock market prices could have ment associated with these forecasts had adverse effects on consumer sentiment a central tendency of 43A to 5 percent in and purchasing power. On balance, the fourth quarters of both years. Projec- growth in personal consumer expenditions of the rate of inflation, as mea- tures was seen as likely to approximate sured by the consumer price index, the moderate rate of increase projected pointed to a sizable moderation this year in overall domestic demand. from the rate in 1996 and a partially The members viewed the prospects offsetting rise in 1998, with prices of for further growth in business fixed food and energy accounting for much of investment as another important supthe swing. Specifically, the projections portive factor in the outlook for converged on CPI inflation rates of sustained economic expansion. Current 2lA to 2Vi percent in 1997 and 2Vi to indicators pointed to the continuation of 3 percent in 1998. very rapid growth in such spending over In their review of the outlook for eco- the near term, but some moderation was nomic activity in major sectors of the likely over the course of coming quareconomy, members referred to the gen- ters in conjunction with the projected erally sluggish pace of retail sales in slowing in the increase of overall recent months. It was noted, however, demand and the very large buildup in that the slowdown was perhaps in part the stock of capital that already had an adjustment to very strong growth of occurred in recent years. Even so, sales in previous months, and some investment spending was likely to be members commented on anecdotal indi- relatively robust over the projection cations of some pickup in recent weeks. horizon in the context of continuing More importantly, underlying trends and incentives to hold down production fundamentals pointed to prospective costs in highly competitive markets and growth in consumer expenditures at a to take advantage of falling prices and pace that was likely to continue to pro- wider applications for certain types of vide key support for further moderate new equipment, notably computerexpansion in overall economic activity. related equipment. The ready availabil- In particular, jobs and incomes had con- ity of both debt and equity finance tinued to post sizable gains; further large on favorable terms, an upbeat outlook increases in stock market prices had for sales in many industries, and generraised wealth-to-income ratios sharply; ally high profit levels were other posiand consumer optimism had risen to tive factors. The outlook for nonresi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 84th Annual Report, 1997 dential construction activity also seemed The members agreed that the risks to to be relatively favorable. Members their price forecasts were in the direcreferred to declining vacancy rates and tion of higher inflation, given already rising rents for commercial structures high levels of capacity use and their in many parts of the country and noted expectations of appreciable further ecothat construction contracts for new nomic growth. Nonetheless, the relaoffice buildings and hotels recently had tively low inflation experienced despite turned up on a nationwide basis after a lengthy period of fully employed a pause earlier this year. In sum, the resources suggested that the timing of growth in business fixed investment a potential upturn in inflation—indeed seemed likely to continue to outpace whether inflation would in fact pick that of overall demand in coming up—could not be predicted with any quarters. degree of confidence on the basis of past Some restraint on aggregate demand historical patterns. The reasons for the would come from other sectors of the persistence of a relatively benign inflaeconomy—notably government spend- tion performance in the current expaning, net exports, housing, and perhaps sion were not fully understood. They business inventories. None of these fac- included some temporary factors such tors seemed likely to exert a substan- as the effect of the rise in the dollar on tially negative effect, but in total they import prices and the restraint on health were expected to help keep the pace of care costs. More fundamentally, they the expansion close to the estimated rate presumably also involved the favorable of increase in the economy's potential effects on production costs of wideover coming quarters. spread business restructurings and the During the course of the Committee's large volume of investment in more prodiscussion, many of the members com- ductive technology in recent years, the mented on the persistence of an impres- impact of both factors on the job secusively benign inflation performance rity concerns of workers and their willdespite widespread indications of very ingness to accept reduced increases high, and by some measures increasing, in compensation, and the effects of an levels of capacity use. Indeed, most intense degree of competition among broad measures of prices pointed to sub- domestic and foreign producers in U.S. dued or even declining inflation, and it markets. With regard to the possibility was difficult to find evidence of rising that more robust productivity increases inflation pressures in "pipeline" price would be holding down production data or the wage structure. The members costs, it was noted that a surge in ecoanticipated that inflation as measured nomic activity, such as had occurred in by the consumer price index would late 1996 and early 1997, tended to be decrease appreciably over 1997 as a accompanied by above-trend gains in result of favorable developments in the productivity. A slower pace of economic food and especially the energy sectors growth in the second quarter and beyond of the economy and declining import might provide an opportunity to assess prices associated with the previous whether productivity increases were on appreciation of the dollar. These posi- a clear uptrend and could help to explain tive influences would wane over time, the favorable behavior of prices over an however, and consumer prices were extended period. In any event, it was too likely to rise at a somewhat faster pace early to reach any firm conclusion on in 1998. this issue or the broader question of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 139 whether or when a rise in inflation might ditions in the period ahead, but instead materialize under anticipated economic could be viewed as anchors or benchconditions. marks for money growth that would be The members also discussed a staff associated with approximate price stastudy of the relative performance of bility and sustained economic growth, various price indexes as measures of assuming behavior of velocity in line inflation. Members noted that most with historical experience. Accordingly, broad measures of inflation moved a reaffirmation of those ranges would together over extended periods of time, underscore the Committee's commitbut they did not always do so over short ment to a policy of achieving price staintervals. Differences in construction, bility over time, and in the view of at coverage, and other factors meant that least some members, higher ranges none of the individual measures was could raise questions in this regard. clearly superior in assessing general Over the past few years, in contrast to inflation trends, and several members earlier in the 1990s, the behavior of the commented that all measures needed to broad aggregates, especially that of M2, be monitored. in relation to nominal GDP and short- In keeping with the requirements of term interest rates had displayed a patthe Full Employment and Balanced tern that was in line with historical Growth Act of 1978 (the Humphrey- norms before the 1990s. The members Hawkins Act), the Committee at this viewed this as an encouraging developmeeting reviewed the ranges for growth ment in that it raised the possibility of of the monetary and debt aggregates that giving more weight at some point to the it had established in February for 1997, performance of these aggregates as useand it decided on tentative ranges for ful indicators in formulating monetary those aggregates for 1998. The current policy. However, the period of more preranges set in February for the period dictable M2 and M3 behavior was still from the fourth quarter of 1996 to the relatively brief, and such behavior had fourth quarter of 1997 were unchanged occurred at a time of generally settled from the ranges for 1996 and included conditions in financial markets and the expansion of 1 to 5 percent for M2 and overall economy. The prospective per- 2 to 6 percent for M3. An unchanged formance of these aggregates in periods range of 3 to 7 percent also was set in of rapid changes in financial and eco- January for growth of total domestic nomic conditions was still an open quesnonfinancial debt in 1997. tion, and in light of the uncertainties that All the members favored retaining the were involved the members concluded current ranges for this year and extend- that it would be premature to place ing them on a provisional basis to 1998. increased reliance on them in the con- They anticipated that growth of M2 duct of policy. Accordingly, the Comprobably would continue at rates in the mittee decided that despite projected upper part of its current range in both growth of M2 and M3 at rates in the years and that of M3 at rates approxi- vicinity of the upper limits of the current mating or even slightly above the upper ranges, prevailing uncertainties made bound of its range, given the Commit- it desirable to retain those ranges as tee's expectations for the performance benchmarks for the achievement of price of the economy and prices. The current stability rather than to establish higher ranges were not expected to be guides ranges that seemed more likely to capto money growth under anticipated con- ture expected outcomes. In the circum- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 84th Annual Report, 1997 stances, any tendency for growth of the tainable growth in output. In furtherance of monetary aggregates to move outside these objectives, the Committee reaffirmed at this meeting the ranges it had established the Committee's ranges would not in in February for growth of M2 and M3 of 1 to itself call for a policy adjustment but 5 percent and 2 to 6 percent respectively, would continue to be interpreted in the measured from the fourth quarter of 1996 context of a broad range of business and to the fourth quarter of 1997. The range for financial developments bearing on the growth of total domestic nonfinancial debt prospective performance of the overall was maintained at 3 to 7 percent for the year. For 1998, the Committee agreed on tentative economy. ranges for monetary growth, measured from The Committee members were unani- the fourth quarter of 1997 to the fourth quarmously in favor of retaining the current ter of 1998, of 1 to 5 percent for M2 and 2 to range of 3 to 7 percent for growth of 6 percent for M3. The Committee provisiontotal domestic nonfinancial debt in 1997 ally set the associated range for growth of total domestic nonfinancial debt at 3 to 7 perand extending that range on a provicent for 1998. The behavior of the monetary sional basis to 1998. They took account aggregates will continue to be evaluated of a staff projection indicating that in the light of progress toward price level growth of the debt aggregate was likely stability, movements in their velocities, and to slow somewhat from its pace in 1995 developments in the economy and financial and 1996, reflecting a small reduction in markets. the expansion of federal government Votes for this action: Messrs. Greenspan, debt. According to the staff projection, McDonough, Broaddus, Guynn, Kelley, growth in the debt measure would be Meyer, Moskow, Parry, Mses. Phillips and near the midpoint of the existing range Rivlin. Votes against this action: None. over the period through 1998. At the conclusion of this discussion, In the Committee's discussion of polthe Committee voted to reaffirm the icy for the intermeeting period ahead, all ranges for growth of M2, M3, and total the members favored or could support a domestic nonfinancial debt that it had proposal to maintain an unchanged polestablished in February for 1997. For icy stance, and they strongly supported the year 1998, the Committee approved the retention of a bias toward restraint. provisional ranges for the three aggre- An unchanged policy seemed approgates that were unchanged from the priate with inflation still quiescent and 1997 ranges. In keeping with its usual business activity projected to settle into procedure under the Humphrey- a pattern of moderate growth broadly Hawkins Act, the Committee would consistent with the economy's long-run review its preliminary ranges for 1998 output potential. While the members early next year, or sooner if interim assessed risks surrounding such a foreconditions warranted, in light of their cast as decidedly tilted to the upside, the growth and velocity behavior and ongo- slowing of the expansion should keep ing economic and financial develop- resource utilization from rising substanments. Accordingly, the Committee tially further, and this outlook together voted to incorporate the following state- with the absence of significant early ment regarding the 1997 and 1998 signs of rising inflationary pressures ranges in its domestic policy directive: suggested the desirability of a cautious "wait and see" policy stance at this point. In the current uncertain environ- The Federal Open Market Committee ment, this would afford the Committee seeks monetary and financial conditions that will foster price stability and promote sus- an opportunity to gauge the momentum Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, July 141 of the expansion and the related degree fostering a continuation of sustainable of pressure on resources and prices. The growth of the economy, it would be risks of waiting appeared to be limited, desirable to tighten on the basis of early given that the evidence at hand did not signs of potentially intensifying inflapoint to a step-up in inflation despite tion and before higher inflation actually low unemployment and that the current materialized. stance of monetary policy did not seem At the conclusion of the Committee's to be overly accommodative, at least on discussion, all the members indicated the basis of some measures such as the that they could support a directive level of real short-term interest rates. In that called for maintaining the existing these circumstances, any tendency for degree of pressure on reserve positions price pressures to mount was likely to and that retained a bias toward the posemerge only gradually and to be revers- sible finning of reserve conditions durible through a relatively limited policy ing the intermeeting period. Accordadjustment. Some members commented, ingly, in the context of the Committee's however, that in the absence of unantici- long-run objectives for price stability pated weakness in the economy, some and sustainable economic growth, and tightening of policy was likely to be giving careful consideration to econeeded in the relatively near future, and nomic, financial, and monetary develone expressed the view that a tightening opments, the Committee decided that action at this meeting seemed desirable somewhat greater reserve restraint to forestall or limit the risks of intensi- would be acceptable and slightly lesser fying inflationary pressures. However, reserve restraint might be acceptable waiting was an acceptable alternative during the intermeeting period. The given the favorable economic news and reserve conditions contemplated at this the persisting uncertainties surrounding meeting were expected to be consistent the relationship of output to prices. with moderate expansion in M2 and M3 In their discussion of possible adjust- over coming months. ments to policy during the intermeeting The Federal Reserve Bank of New period, all the members indicated that York was authorized and directed, until they wanted to retain the existing asym- instructed otherwise by the Committee, metry toward restraint adopted at the to execute transactions in the System May meeting. An asymmetric directive Account in accordance with the followwas consistent with their view that the ing domestic policy directive: risks clearly were in the direction of excessive demand pressures in the econ- The information reviewed at this meeting omy and an associated upward trend suggests that the economic expansion slowed substantially in the second quarter after surgin inflation. Such a bias in the directive ing in late 1996 and earlier this year. Private also would serve the purpose of signalnonfarm payroll employment increased at a ing the Committee's ongoing commit- reduced pace in May, but the civilian unemment to curb inflation in the interest ployment rate fell slightly further to 4.8 perof fostering maximum sustainable eco- cent. Industrial production registered another nomic growth and employment. The sizable gain in May. Personal consumption expenditures, in real terms, rose substantially members agreed that the current enviin May after having changed little over ronment called for careful monitoring the preceding three months. Housing activity of developments and for prompt action appears to have been well maintained in by the Committee if needed to counter recent months. Available indicators point to rising inflation. Indeed, in the interest of further sizable gains in business fixed invest- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 84th Annual Report, 1997 ment. The nominal deficit on U.S. trade reserve positions. In the context of the in goods and services narrowed somewhat Committee's long-run objectives for price in April from its downward-revised average stability and sustainable economic growth, rate in the first quarter. Price inflation has and giving careful consideration to ecoremained subdued. nomic, financial, and monetary develop- Market interest rates generally have ments, somewhat greater reserve restraint declined somewhat since the day before the would or slightly lesser reserve restraint Committee meeting on May 20, 1997; share might be acceptable in the intermeeting prices in equity markets have risen consid- period. The contemplated reserve conditions erably further. In foreign exchange markets, are 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 was up slightly on balance over the intermeeting Votes for this action: Messrs. Greenspan, period. McDonough, Broaddus, Guynn, Kelley, Growth of M2 and M3 fluctuated sharply Meyer, Moskow, Parry, Mses. Phillips and from April to May in association with a Rivlin. Votes against this action: None. swing in household balances related to large tax payments; on balance, both aggre- It was agreed that the next meeting of gates expanded at a moderate pace over the Committee would be held on Tuesthe two months, and available data pointed to further moderate growth in June. For the day, August 19, 1997. year through June, M2 expanded at a rate The meeting adjourned at 11:55 a.m. near the upper bound of its range for the on July 2. year and M3 at a rate somewhat above the upper bound of its range. Total domestic Donald L. Kohn nonfinancial debt has continued to expand in recent months and is near the middle of Secretary its range. The Federal Open Market Committee seeks monetary and financial conditions that Meeting Held on will foster price stability and promote sus- August 19, 1997 tainable growth in output. In furtherance of these objectives, the Committee reaffirmed A meeting of the Federal Open Market at this meeting the ranges it had established Committee was held in the offices of in February for growth of M2 and M3 of 1 to the Board of Governors of the Federal 5 percent and 2 to 6 percent respectively, Reserve System in Washington, D.C., measured from the fourth quarter of 1996 to on Tuesday, August 19, 1997, at the fourth quarter of 1997. The range for growth of total domestic nonfinancial debt 9:00 a.m. was maintained at 3 to 7 percent for the year. For 1998, the Committee agreed on tentative Present: ranges for monetary growth, measured from Mr. Greenspan, Chairman the fourth quarter of 1997 to the fourth quar- Mr. McDonough, Vice Chairman ter of 1998, of 1 to 5 percent for M2 and 2 to Mr. Broaddus 6 percent for M3. The Committee provision- Mr. Guynn ally set the associated range for growth of Mr. Kelley total domestic nonfinancial debt at 3 to 7 per- Mr. Moskow cent for 1998. The behavior of the monetary Mr. Meyer aggregates will continue to be evaluated Mr. Parry in the light of progress toward price level Ms. Phillips stability, movements in their velocities, and Ms. Rivlin developments in the economy and financial markets. Messrs. Hoenig, Jordan, Melzer, and In the implementation of policy for the Ms. Minehan, Alternate Members immediate future, the Committee seeks to of the Federal Open Market maintain the existing degree of pressure on Committee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 143 Messrs. Boehne, McTeer, and Stern, By unanimous vote, the minutes of Presidents of the Federal Reserve the meeting of the Federal Open Market Banks of Philadelphia, Dallas, and Committee held on July 1-2, 1997, were Minneapolis respectively approved. By unanimous vote, the Committee Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary elected Mr. Stephen G. Cecchetti of the Mr. Coyne, Assistant Secretary Federal Reserve Bank of New York as Mr. Gillum, Assistant Secretary Associate Economist to serve until the Mr. Mattingly, General Counsel election of his successor at the first Mr. Prell, Economist meeting of the Committee after Decem- Mr. Truman, Economist ber 31, 1997. It was understood that in the event of the discontinuance of Messrs. Beebe, Cecchetti, Goodfriend, Eisenbeis, Lindsey, Promisel, his official connection with the Fed- Siegman, Slifman, and Stockton, eral Reserve Bank of New York, he Associate Economists would cease to have any official connection with the Federal Open Market Mr. Fisher, Manager, System Open Committee. Market Account The Manager of the System Open Market Account reported on develop- Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of ments in foreign exchange markets since Governors the meeting in early July. There were no System open market transactions in Messrs. Madigan and Simpson, foreign currencies during this period, Associate Directors, Divisions of and thus no vote was required of the Monetary Affairs and Research Committee. and Statistics respectively, Board of Governors The Manager also reported on developments in domestic financial markets Ms. Low, Open Market Secretariat and on System open market transactions Assistant, Division of Monetary in government securities and federal Affairs, Board of Governors agency obligations during the period July 2, 1997, through August 18, 1997. Ms. Strand, First Vice President, By unanimous vote, the Committee rati- Federal Reserve Bank of Minneapolis fied these transactions. The Committee then turned to a dis- Messrs. Lang, Rolnick, Rosenblum, cussion of the economic outlook and the and Sniderman, Senior Vice implementation of monetary policy over Presidents, Federal Reserve Banks the intermeeting period ahead. A sumof Philadelphia, Minneapolis, mary of the economic and financial Dallas, and Cleveland respectively information available at the time of the meeting and of the Committee's dis- Messrs. Gavin, Kahn, and Ms. Perelmuter, Vice Presidents, cussion is provided below, followed by Federal Reserve Banks of the domestic policy directive that was St. Louis, Kansas City, and approved by the Committee and issued New York respectively to the Federal Reserve Bank of New York. Ms. Little and Mr. Sullivan, Assistant The information reviewed at this Vice Presidents, Federal Reserve Banks of Boston and Chicago meeting suggested that economic activrespectively ity was expanding moderately. Growth Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 84th Annual Report, 1997 in consumer spending had picked up preceding three months. Sales at autoafter having slowed sharply in early motive dealers rebounded in June and spring, business purchases of durable July following substantial weakness in equipment were still on a strong upward earlier months, and expenditures at nontrend, and housing demand seemed to durable goods stores also strengthened. have been well maintained. The overall By contrast, sales at non-automotive rise in production had been held down durable goods outlets were unchanged recently by supply disruptions in the over June and July. The pickup in motor vehicles industry, but employ- consumer spending occurred against a ment had continued to expand at a backdrop of further strong gains in strong pace and the unemployment rate incomes and household net worth. In was at a low level. Increases in labor addition, credit was readily available to compensation had remained moderate most consumers, although lenders coneven though labor markets were tight, tinued to tighten terms for marginal and price inflation was still subdued. borrowers. Total private housing starts Private nonfarm payroll employment were unchanged in July after having rose sharply in July after a June increase rebounded in June from a May decline. that was below the average for earlier Data on home sales in recent months months of the year. The step-up in job continued to suggest that demand for growth in July reflected substantially single-family housing was still relatively larger job gains in business services, buoyant. retail trade, and the finance, insurance, Real business fixed investment and real estate industries. A small increased substantially further in the decline in manufacturing jobs roughly second quarter, reflecting a broad-based offset slightly higher employment in surge in spending on producers' durable construction. The civilian unemploy- equipment. Real outlays for office and ment rate, at 4.8 percent in July, computing equipment continued to grow matched its low for the current eco- rapidly as prices of personal computers nomic expansion. and networking equipment remained on Industrial production increased rela- a steep downtrend. Spending for comtively slowly in July after having munications equipment grew at a slower advanced at a fairly brisk pace over the pace in the second quarter, but recent first half of the year. The July slowdown orders for such equipment pointed to reflected a temporary drop in motor larger increases in the current quarter. vehicle assemblies partly associated Nonresidential construction activity was with work stoppages at a major automo- sluggish in the second quarter. While tive manufacturer. Outside the motor available information on construction vehicles sector, the output of business contracts suggested little improvement equipment and consumer durable goods in building activity in coming months, rose strongly while the production of prices for commercial real estate had consumer nondurables weakened fur- risen slightly and vacancy rates had ther. Factory capacity increased a little declined. more than production in July, and the Nonfarm business inventories inutilization of total manufacturing capac- creased rapidly in the second quarter, ity slipped to its lowest level since last but there were few signs of inventory autumn. imbalances. In June, the pace of Retail sales rose briskly in June and inventory investment in manufacturing July after having changed little over the slowed from the rapid average rate for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 145 April and May, and the inventory- ther drop in food prices. Prices of finshipments ratio for the sector was at ished goods other than food and energy a very low level. In wholesale trade, were unchanged over the twelve months stocks rose sharply in June after little ended in July. At earlier stages of pronet change over the two previous duction, producer prices for core intermonths. Despite the June increase, the mediate materials rose slightly over the stock-sales ratio was at the middle of its year ended in July and prices of core relatively narrow range of the past year. crude materials increased by a larger At the retail level, the rise in inventories amount over the same period. Growth in June retraced only part of the May in hourly compensation of private indusdecline; the inventory-sales ratio for the try workers picked up somewhat in sector also was near the middle of its the second quarter, but the rise in comrange for the last year. pensation over the year ended in June The nominal deficit on U.S. trade in matched the advance over the comgoods and services was slightly smaller parable year-earlier period. Average on balance over April and May than the hourly earnings of production and nondownward-revised average rate in the supervisory workers were unchanged first quarter. Measured against their in July, and the rise in such earnings first-quarter levels, the value of exported over the twelve months ended in July goods and services grew more than the also was the same as in the year-earlier value of imports over the April-May period. period. The largest increases in exports At its meeting on July 1-2, 1997, the were in machinery and aircraft and Committee adopted a directive that parts, while the biggest gains in imports called for maintaining the existing were in consumer goods, computers, and degree of pressure on reserve positions. capital goods other than computers. The Because the Committee continued to see available information suggested that in a potential need for some tightening of recent months economic activity had monetary policy to counter rising inflaexpanded further in all the major for- tionary pressures, the directive included eign industrial countries except Japan. a bias toward a possible firming of Growth continued to be robust in Can- reserve conditions during the intermeetada and the United Kingdom and appar- ing period. The reserve market condiently remained moderate in France and tions associated with this directive were Germany. Economic activity in Japan expected to be consistent with moderate had slowed after a rise in that country's growth of M2 and M3 over coming consumption tax in April. months. Consumer price inflation picked up Open market operations were directed slightly in July from the slow pace throughout the intermeeting period in each of the previous four months; a toward maintaining the existing degree small decline in energy prices offset a of pressure on reserve positions, and the further increase in food prices. The average federal funds rate for the period index for items other than food and was at the Committee's intended level energy rose in July at the same low rate of 5V2 percent. Most other market recorded for both the first six months of interest rates declined further on balance 1997 and the twelve months ended in over the period in an atmosphere of July. At the producer level, prices of greater volatility in financial markets. finished goods edged down for a sev- The net decline in market rates seemed enth consecutive month, reflecting a fur- to have reflected a judgment by market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 84th Annual Report, 1997 participants that the outlook for inflation June. M3 surged in July, however, as had improved slightly on balance and heavy volumes of large time deposits that the likelihood of any tightening of were issued by U.S. branches of foreign monetary policy in coming months had banks to pay down borrowings from receded a little further. Share prices their overseas offices and by domestic in equity markets increased on balance banks to counter the runoff of govover the period. ernment deposit accounts; the latter two In foreign exchange markets, the sources of funds are not included in M3. trade-weighted value of the dollar in For the year through July, M3 expanded terms of the other G-10 currencies rose at a rate appreciably above the upper significantly on balance over the inter- bound of its range. Total domestic nonmeeting period. The appreciation of the financial debt had continued to expand dollar was uneven against the currencies in recent months at a rate near the of the major foreign industrial countries. middle of its range. The dollar's substantial increase against The staff forecast prepared for this the German mark and other continental meeting suggested that the expansion of European countries reflected both the the economy would be damped in the continuing favorable developments in second half of the year by a slowing of the U.S. economy and persisting market inventory accumulation from the unsusconcerns that difficulties faced by the tainably brisk pace in the first half of major European countries would lead to the year. In 1998, the economy would policies that might detract from strength expand at a pace in line with the growth in the euro. The dollar rose only slightly of its estimated potential. Growth of against the yen. That currency came consumer spending, supported by high under downward pressure in reaction to levels of household wealth and projected incoming data suggesting a somewhat- further gains in employment and ingreater-than-expected falloff in demand come, was expected to be relatively following the recent increase in the con- brisk over the forecast horizon. Business sumption tax, but the release of the June spending on equipment and structures current account surplus late in the inter- was anticipated to continue to outpace meeting period rekindled market con- the overall expansion of the economy, cerns about Japanese external balances though the differential would tend to and led to some appreciation of the yen. narrow over time in association with the M2 expanded at a moderate pace over gradual diminution of increases in sales June and July after having fluctuated and profits that was expected in conjuncsharply in April and May as a result of tion with moderating economic growth. tax-related flows. Data for early August Housing construction was projected to suggested a somewhat faster rate of M2 drift lower over the forecast horizon. growth in association with heavier The staff anticipated that the external inflows to retail money funds; the latter sector would exert some mild restraint might have been related to heightened on the expansion of economic activdemand for liquidity as a result of ity. With labor compensation gradually recently higher volatility in bond and accelerating in the context of higher equity markets. For the year through resource utilization, core consumer price July, M2 expanded at a rate near the inflation was forecast to drift slightly upper bound of its range. M3 also fluc- higher. tuated sharply over April and May and The Committee's discussion of curgrew at a relatively moderate rate in rent and prospective economic develop- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 147 ments highlighted statistical and anec- rate of inventory investment would have dotal evidence of a solid economic to be reined in if an overhang were to be performance, including indications of a averted. A concern in this regard was rebound in final demand after a lull dur- that the apparent upturn in final demand, ing the spring and the persistence of particularly if it proved to be somewhat relatively subdued, and by some mea- stronger than currently expected, and sures declining, inflation. Growth in related business optimism about sales consumer spending had slowed sharply, prospects might well result in a further and a surge in inventory accumulation buildup of inventories at a relatively had accounted for much of the expan- rapid rate. While such a development sion of economic activity in the second was not viewed as the most likely outquarter. Looking ahead, the members come and, indeed, less-than-projected did not believe that recent develop- strength in the inventory sector could ments had altered the prospect that the not be ruled out, relatively rapid inveneconomy would settle into a pattern tory accumulation in the context of of moderate growth approximating its persisting above-trend growth in final potential. Such a forecast was subject demand would generate additional presto considerable uncertainty, and sev- sure on resources and heighten the risks eral members observed that the risks of accelerating inflation. appeared to be mostly in the direction of With regard to the prospects for final stronger growth in demand. With regard demand in key sectors of the economy, to the outlook for inflation, widespread members noted that the appreciable evidence of very tight labor markets was rebound in consumer spending followed associated with scattered indications that a weak second quarter, and some modthe rise in labor compensation might be eration in the growth of such spendaccelerating, but overall labor costs had ing was likely later this year and in remained relatively damped and price 1998. Even so, favorable prospects for inflation restrained. Gains in produc- employment and incomes and the large tivity and muted increases in nonlabor gains that had occurred in financial costs probably also were contributing wealth suggested that consumer expento holding producer costs under good ditures were likely to be well maincontrol. Nonetheless, the members tained over the projection horizon. The remained concerned about the risks of high level of consumer confidence rising inflation, especially if somewhat- reported by consumer surveys was faster-than-projected growth in eco- another supporting factor in this favornomic activity were to occur and add to able outlook, pressures on resources in an economy In the area of business fixed investthat already seemed to be operating ment, a strong upward trend in outlays close to, or perhaps even above, its sus- for new equipment was thought likely to tainable potential. persist, notably in the computer-related The uncertain prospects for inventory and the telecommunications industries. investment were a dominant factor in Anecdotal reports also pointed to apprethe outlook for economic activity over ciable strength in commercial constructhe nearer term. The accumulation of tion activity, including office structures, inventories had been unusually high hotels, and warehouses in various parts in the second quarter according to the of the country. Indeed, in some areas available evidence. There was no broad construction activity was said to be limsense of an undesired buildup, but the ited only by shortages of qualified labor. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 84th Annual Report, 1997 Positive factors in the outlook for busi- ing appreciably less than would have ness investment included the persistence been expected on the basis of past expeof a high level of profits, an accommo- rience under similarly tight labor market dative financial climate, and the rapid conditions. Explanations tended to focus obsolescence of high-tech equipment. on the concerns about job security felt There were, nonetheless, indications of by many workers, the muted rise in the some moderation in commercial con- costs of worker benefits, notably for struction activity in a number of areas, health care, and the increased use of including reports of developing over- innovative and highly targeted methods capacity of retail space in shopping of compensation. With regard to the centers. Spending for basic industrial market pricing of goods, businesses equipment also was likely to soften, tended to cite highly competitive condigiven moderating growth in overall final tions across the nation that made it very demand in line with current forecasts. difficult to raise prices and gave impe- Housing activity continued to display tus to efforts to improve productivity. considerable vigor in many parts of the Indeed, the available evidence suggested nation as evidenced by available statis- that the profits of business concerns gentics and anecdotal reports. The afford- erally had continued to increase in the ability of housing and the very large second quarter, implying that producincreases that had occurred in stock mar- tivity had been rising at a pace that ket wealth clearly were supportive fac- exceeded published estimates by a sigtors. Concurrently, however, there were nificant margin. indications of slowing in residential Even though inflation had not accelerbuilding activity in several areas. On ated, some signs were beginning to balance, some moderation in housing emerge that wages and other labor costs construction appeared likely over the might be experiencing increasing presprojection horizon in keeping with sure. These included some limited evilonger-term population and other trends dence that job security concerns might affecting such construction. be diminishing and multiplying anec- In the Committee's discussion of the dotal reports of a less benign outlook for prospects for inflation, members com- health care costs. Some members commented that a number of factors could mented that the outcome of the recent be cited to explain the persistence of labor negotiations involving a very large relatively subdued inflation this year package delivery firm might well be a despite high levels of resource use. harbinger of more militant labor negoti- Among those factors were the apprecia- ating attitudes. Against this background, tion of the dollar and its effects on prices members expressed concern that a furof imports and competing domestic ther increase in labor utilization rates products, a significant decline in world could put substantial upward pressures oil prices, the relatively sluggish perfor- on wages that eventually would work mance of many foreign economies that their way through to prices. had tended to moderate prices of prod- In the Committee's discussion of polucts traded in world markets, and rela- icy for the intermeeting period ahead, tively large grain harvests in the United all the members endorsed a proposal to States that had curbed pressures on food maintain an unchanged policy stance. prices. However, the underlying reasons Underlying economic conditions and the for the favorable price trends were not outlook for economic activity and inflaentirely clear. Labor costs were still ris- tion had changed little in recent months. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 149 The most likely outcome of the current intermeeting period, they continued to policy stance was growth near potential view the next policy move as more and some pickup in inflation as the likely to be in the direction of some effects of special factors holding it down firming than toward easing. abated. For the present, monetary policy The members reviewed proposals for appeared to be appropriately positioned rewording the operational paragraph to foster the Committee's objectives of of the directive for the purpose of updatresisting an intensification of inflation- ing and clarifying the description of ary pressures while supporting a fully the Committee's instructions to the employed economy. The level of real Manager of the System Open Market short-term interest rates was relatively Account and to conform the directive high by historical standards and pro- wording with current public announcevided some assurance that the current ment practices regarding the Commitstance of policy would not accommo- tee's policy decisions. In particular, the date a significant increase in underlying directive would in the future include inflationary pressures. Nonetheless, the specific reference to the federal funds members remained concerned about the rate that the Committee judged to be outlook for inflation. Although some consistent with the stance of monetary decline in inflation could not be ruled policy. The Committee also modified the out, persistence of the current degree of present sentence relating to the intertightness in labor markets, consistent meeting bias in the directive to recogwith the economy growing at a pace nize that changes in the stance of policy near its potential, could at some point are now expressed in terms of the fedbegin to put more pressure on costs eral funds rate. These changes were not and prices, and growth somewhat above intended to alter the substance of the potential, which some members saw as a directive or the Committee's operating distinct possibility, would be even more procedures. likely to produce that result. While there At the conclusion of the Committee's were no current indications that inflation discussion, all the members expressed might be accelerating and no policy their support of a directive that called move was called for at this time, the for maintaining conditions in reserve members saw a need for continuing markets that were consistent with an vigilance. As at earlier meetings, a num- unchanged federal funds rate of about ber of them expressed the view that an 5Vi percent. All the members also anticipatory policy move to counter agreed on the desirability of retaining a intensifying inflationary pressures likely bias in the directive toward the possible would be needed at some point. firming of reserve conditions and a In the Committee's discussion of pos- higher federal funds rate during the sible adjustments to policy during the intermeeting period. Accordingly, in the intermeeting period, members agreed context of the Committee's long-run that the retention of an asymmetric objectives for price stability and sustaindirective toward tightening was con- able economic growth, and giving caresistent with their view that the risks ful consideration to economic, financial, remained biased toward a rise in infla- and monetary developments, the Comtion. Accordingly, while they did not mittee decided that a somewhat higher attach a high probability to the prospect federal funds rate would be acceptable that the incoming information would or a slightly lower federal funds rate warrant a tightening move during the might be acceptable during the inter- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 84th Annual Report, 1997 meeting period. The reserve conditions The Federal Open Market Committee contemplated at this meeting were seeks monetary and financial conditions that will foster price stability and promote susexpected to be consistent with moderate tainable growth in output. In furtherance of expansion in M2 and M3 over coming these objectives, the Committee at its meetmonths. ing in July reaffirmed the ranges it had estab- The Federal Reserve Bank of New lished in February for growth of M2 and M3 York was authorized and directed, until of 1 to 5 percent and 2 to 6 percent respecinstructed otherwise by the Committee, tively, measured from the fourth quarter of 1996 to the fourth quarter of 1997. The range to execute transactions in the System for growth of total domestic nonfinancial Account in accordance with the followdebt was maintained at 3 to 7 percent for the ing domestic policy directive: year. For 1998, the Committee agreed on a tentative basis to set the same ranges as in The information reviewed at this meeting 1997 for growth of the monetary aggregates suggests that economic activity is expanding and debt, measured from the fourth quarter at a moderate pace. In labor markets, hiring of 1997 to the fourth quarter of 1998. The remained robust at midyear, and the civilian behavior of the monetary aggregates will unemployment rate, at 4.8 percent in July, continue to be evaluated in the light of matched its low for the current economic progress toward price level stability, moveexpansion. Industrial production increased ments in their velocities, and developments relatively slowly in July, owing in part to a in the economy and financial markets. temporary drop in motor vehicle assemblies. In the implementation of policy for the Retail sales rose briskly in June and July immediate future, the Committee seeks conafter having changed little over the preced- ditions in reserve markets consistent with ing three months. Housing starts rebounded maintaining the federal funds rate at an averin June and July after having weakened in age of around 5Vi percent. In the context of May. Business fixed investment increased the Committee's long-run objectives for substantially further in the second quarter price stability and sustainable economic and available indicators point to further siz- growth, and giving careful consideration to able gains in the current quarter. The nomi- economic, financial, and monetary developnal deficit on U.S. trade in goods and ser- ments, a somewhat higher federal funds rate vices narrowed slightly on balance over would or a slightly lower federal funds rate April and May from its downward-revised might be acceptable in the intermeeting average rate in the first quarter. Price infla- period. The contemplated reserve conditions tion has remained subdued and increases in are expected to be consistent with moderate labor compensation have been moderate. growth in M2 and M3 over coming months. Market interest rates generally have declined somewhat further since the start Votes for this action: Messrs. Greenspan, of the Committee meeting on July 1-2, McDonough, Broaddus, Guynn, Kelley, 1997. Share prices in equity markets have Meyer, Moskow, Parry, Mses. Phillips and increased on balance. In foreign exchange Rivlin. Votes against this action: None. markets, the trade-weighted value of the dollar in terms of the other G-10 currencies rose significantly on balance over the intermeeting period. Rules Regarding Availability After fluctuating sharply from April to of Information May, growth of M2 was at a moderate pace over June and July and that of M3 picked By notation vote completed on August up to a relatively rapid rate. For the year 20, 1997, the Committee approved for through July, M2 expanded at a rate near the public comment a revision of its Rules upper bound of its range for the year and M3 Regarding the Availability of Informaat a rate appreciably above the upper bound tion. The purpose of the revision is to of its range. Total domestic nonfinancial debt has continued to expand in recent months at bring the rules into conformance with a rate near the middle of its range. the Electronic Freedom of Information Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 151 Act of 1996 (EFOIA), which amends Mr. Kohn, Secretary and Economist the Freedom of Information Act (FOIA). Mr. Bernard, Deputy Secretary Mr. Coyne, Assistant Secretary The revision does not incorporate any Mr. Gillum, Assistant Secretary substantive changes in the rules other Mr. Mattingly, General Counsel than to conform them to the require- Mr. Baxter, Deputy General Counsel ments of EFOIA and to update and Mr. Prell, Economist clarify the Committee's procedures for processing FOIA requests. After review Messrs. Cecchetti, Goodfriend, of the comments that are received from Eisenbeis, Hunter, Lindsey, the public, the Committee will issue the Promisel, Siegman, Slifman, and Stockton, Associate rules in final form on or before Octo- Economists ber 2, 1997. It was agreed that the next meeting of Mr. Fisher, Manager, System Open the Committee would be held on Tues- Market Account day, September 30, 1997. The meeting adjourned at 12:40 p.m. Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Donald L. Kohn Governors Secretary Messrs. Madigan and Simpson, Meeting Held on Associate Directors, Divisions of September 30, 1997 Monetary Affairs and Research and Statistics respectively, Board A meeting of the Federal Open Market of Governors Committee was held in the offices of the Board of Governors of the Federal Messrs. Alexander, Hooper, and Reserve System in Washington, D.C., Ms. Johnson, Associate Directors, on Tuesday, September 30, 1997, at Division of International Finance, 9:00 a.m. Board of Governors Present: Ms. Low, Open Market Secretariat Mr. Greenspan, Chairman Assistant, Division of Monetary Mr. McDonough, Vice Chairman Affairs, Board of Governors Mr. Broaddus Mr. Guynn Mr. Kelley Mr. Varvel, First Vice President, Mr. Moskow Federal Reserve Bank of Mr. Meyer Richmond Mr. Parry Ms. Phillips Ms. Browne, Messrs. Dewald, Hakkio, Ms. Rivlin Ms. Krieger, Messrs. Lang, Rolnick, Rosenblum, and Messrs. Hoenig, Jordan, Melzer, and Sniderman, Senior Vice Ms. Minehan, Alternate Members Presidents, Federal Reserve Banks of the Federal Open Market of Boston, St. Louis, Kansas City, Committee New York, Philadelphia, Minneapolis, Dallas, and Messrs. Boehne, McTeer, and Stern, Cleveland respectively Presidents of the Federal Reserve Banks of Philadelphia, Dallas, and Minneapolis Mr. Judd, Vice President, Federal respectively Reserve Bank of San Francisco Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 84th Annual Report, 1997 By unanimous vote, the minutes of recent months, and price inflation had the meeting of the Federal Open Market remained subdued. Committee held on August 19, 1997, Private nonfarm payroll employment were approved. rose substantially over July and August The Manager of the System Open despite the retarding effects of a work Market Account reported on develop- stoppage at a major package shipping ments in foreign exchange and inter- firm. Aggregate weekly hours of pronational financial markets in the period duction or nonsupervisory workers were since the previous meeting on August considerably above their second-quarter 19, 1997. There were no open market average over the two months. The civiltransactions in foreign currencies for ian unemployment rate, at 4.9 percent in System account since that meeting, and August, was marginally above its low thus no vote was required of the for the current economic expansion. Committee. Industrial production increased con- The Manager also reported on devel- siderably in July and August, extending opments in domestic financial markets a relatively brisk advance over the first and on System open market transactions half of the year. The output of business in government securities and federal equipment rose strongly over the two agency obligations during the period months, with sizable gains in all major August 19, 1997, through September 29, categories, and the output of consumer 1997. By unanimous vote, the Commit- nondurables turned up after having distee ratified these transactions. played some weakness in earlier months The Committee then turned to a dis- of the year. The production of consumer cussion of the economic outlook and durables also increased on balance over the conduct of monetary policy over the the two months. After having risen intermeeting period ahead. A sum- somewhat in other recent months, the mary of the economic and financial utilization of total manufacturing capacinformation available at the time of the ity was up appreciably in August, reachmeeting and of the Committee's dis- ing its highest level since the spring of cussion is provided below, followed 1995. by the domestic policy directive that Retail sales were up substantially over was approved by the Committee and the summer after having edged lower issued to the Federal Reserve Bank of during the spring. The upturn in recent New York. months included a rebound in sales The information reviewed at this at automotive dealers following some meeting suggested that economic activ- weakness in earlier months. Sales at ity had expanded briskly further in the non-auto durable and at nondurable third quarter. The expansion was paced goods stores also strengthened after by robust growth in consumer spend- having declined on balance during the ing and substantial further increases second quarter. The pickup in consumer in business investment expenditures. spending occurred against a backdrop Housing demand seemed to have been of further strong gains in incomes and well maintained over the summer. household net worth that, according to Employment and production had risen recent surveys, had fostered high levels considerably further since midyear. of consumer confidence. In addition, Despite widespread indications of tight credit continued to be readily available labor markets, increases in labor to most consumers. Total private houscompensation had been moderate in ing starts and building permits declined Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 153 in August to levels somewhat below below their relatively high level of the their averages in earlier months of the second quarter. The July increase in year, but data on overall home sales imports also was spread among nearly and builder ratings of new home sales all trade categories and brought total continued to suggest that demand for imports of goods and services to a level single-family housing was still relatively somewhat above the average for the buoyant. second quarter. The available informa- Real business fixed investment had tion suggested that economic activity remained on a steep uptrend since mid- expanded further in recent months in all year, with exceptional ongoing demand the major foreign industrial countries for computers and communications except Japan. Growth remained relaequipment and relatively robust demand tively robust in Canada and the United in other categories of business equip- Kingdom, and activity apparently picked ment as well. Nonresidential construc- up in France and Germany after having tion activity appeared to have rebounded been sluggish early in the year. Ecosomewhat in late spring and early sum- nomic activity in Japan declined appremer after having declined moderately ciably in the second quarter, and more earlier in the year. While new construc- recent information provided little clear tion contracts displayed little trend, evidence of subsequent strength. favorable conditions for nonresidential Price inflation had remained subdued. construction were suggested by low Consumer price inflation picked up vacancy rates, rising prices for commer- slightly in July and August from a slow cial real estate, and a widespread avail- rate of increase in each of the previous ability of financing. four months; reduced but still appre- The accumulation of nonfarm busi- ciable increases in food prices conness inventories slowed substantially in tributed to the larger advance in both July (latest data) from its average pace months, and a sizable rise in energy in the second quarter. Inventory invest- prices lifted the index in August. At the ment in manufacturing was only a bit producer level, the price index for finbelow its pace in the second quarter, but ished goods rose moderately in August the inventory-shipments ratio for the after having fallen for seven consecutive sector remained at a very low level. In months; the August rise largely reflected wholesale trade, stocks fell after a sharp a jump in energy prices. Over the twelve buildup in June, and the stock-sales months ended in August, consumer ratio for this sector was at the middle of prices were up considerably less than its relatively low range for the past year. in the previous twelve months, while At the retail level, a rise in inventories producer prices of finished goods were in July about matched that in June and down slightly after having increased the inventory-sales ratio for the sector moderately in the previous twelve also was near the middle of its range for months. The behavior of these broad the past year. measures of inflation excluding the The nominal deficit on U.S. trade in effects of food and energy prices also goods and services widened substan- was favorable over the year ended tially in July, reflecting both a decline in in August, albeit slightly less so. Averexports and a rise in imports. The lower age hourly earnings of production and exports of goods and services were asso- nonsupervisory workers picked up in ciated with decreases in most trade cate- August from a much reduced pace in gories and left total exports slightly July; the rise in such earnings over the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 84th Annual Report, 1997 twelve months ended in July was tightening of monetary policy in comslightly above that in the previous ing months. Share prices in equity martwelve months. kets continued to display considerable At its meeting on August 19, 1997, volatility but increased appreciably furthe Committee adopted a directive that ther on balance over the intermeeting called for maintaining conditions in interval. reserve markets that were consistent In foreign exchange markets, the dolwith an unchanged federal funds rate lar experienced mixed changes in relaaveraging about 5Vi percent. The direc- tion to major foreign currencies, largely tive included a bias toward the possible reflecting diverging economic developfirming of reserve conditions and a ments abroad. On balance, the dollar's somewhat higher federal funds rate to trade-weighted value in terms of the reflect a consensus among the members other G-10 currencies declined somethat the economic risks remained biased what over the intermeeting period. The toward higher inflation. Although the dollar was down considerably against members did not see a high probability the mark as data suggesting a pickup in that likely developments would warrant German economic activity and inflation a tightening of policy during the inter- led to market speculation concerning a meeting interval, they continued to possible increase in short-term German anticipate that the next policy move was interest rates. The dollar also registered more likely to be in the direction of sizable declines over the period against some firming than toward some easing. a number of other European currencies. The reserve market conditions associ- On the other hand, the dollar rose appreated with this directive were expected to ciably in relation to the Japanese yen, be consistent with some slowing in the which came under selling pressure growth of M2 and M3 to more moderate against the background of continuing rates over coming months. sluggish economic conditions in Japan, Open market operations were directed persistent problems in its financial systhroughout the intermeeting period tem, and concerns about the potential toward maintaining the existing degree effect on Japan of the recent depreciaof pressure on reserve positions, and the tions of Southeast Asian currencies. The federal funds rate averaged just slightly dollar also strengthened somewhat in above the Committee's intended level of terms of the British pound, in part as a 5Vi percent. Most other interest rates in result of some indications that economic short-term markets were little changed activity in the United Kingdom was not over the period. Rates on longer-term as strong as expected and the sizable obligations were down somewhat on declines that had occurred recently in balance, apparently reflecting a reassess- that nation's long-term interest rates. ment of the outlook for inflation by M2 expanded at a rapid pace in some market participants in the light August and continued to grow at a still of unexpectedly low inflation and other robust though diminished rate in Sepstatistics released during the latter part tember according to the limited data of the period. The downward movement available for that month. The strength of in long-term interest rates resulted in M2 and also that of M3 was related at some further flattening of the slope of least in part to changes in the allocation the yield curve and appeared consistent of financial assets and liabilities rather with an interpretation that market par- than to the growth in spending; in participants saw little likelihood of any ticular, the volatility in the stock market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 155 evidently fostered a redirection of funds ments, members commented on the conto M2 assets, among others, and tinued remarkable performance of the included heavy inflows to the money economy. Strength in consumer spendmarket funds component of M2. For the ing and further acceleration in capital year through August, M2 rose at a rate investment sparked faster-than-expected somewhat above the upper bound of growth in the third quarter, and relathe Committee's range. M3 grew at an tively brisk economic expansion seemed exceptionally rapid rate over the sum- to be in prospect for a period ahead in mer months, with only few signs of the context of very positive business and moderation in September according to consumer sentiment, strong demands for the partial data available for that month. capital goods, and favorable financial Apart from the strength in its M2 com- conditions. The rate of expansion might ponents, the increase in this aggregate subsequently be expected to slow as reflected bank substitution of large time stocks of business capital and consumer deposits for foreign borrowings to durable goods built up relative to sales finance credit growth and also reflected and incomes, inventory investment substantial inflows to institution-only moderated somewhat, and the recent money funds. For the year through strength of the dollar began to exert a August, M3 expanded at a rate well drag on exports. It was an open quesabove the upper bound of its range. tion, however, as to whether these influ- Total domestic nonfinancial debt contin- ences would be sufficient to slow the ued to increase at a relatively moderate growth of demands for goods and serrate in recent months. vices to a more sustainable pace, and The staff forecast prepared for this many members suggested that the risks meeting suggested that the economy to the forecast were on the side of would expand at a pace significantly increases in final demands that would above that anticipated earlier for the sec- press more intensely against the availond half of the year and the early part of able resources. Despite high levels of 1998, but economic growth was likely resource utilization, inflation and inflato moderate appreciably to a more sus- tionary expectations had remained subtainable rate later. In the near term, busi- dued to date, reflecting to some extent ness fixed investment appeared to be special influences like the rise in the providing surprisingly strong impetus foreign exchange value of the dollar. to income growth, and rising levels of Moreover, sizable gains in productivity wealth were stimulating robust con- combined with moderate increases in sumer demand. With sales so strong, wages and salaries seemed to have the downward adjustment in inventory contributed to keeping unit labor costs investment that had been anticipated in and prices under control. However, the the previous staff forecast seemed likely growing tightness in labor markets to occur more gradually. The projected in many parts of the country was strength in aggregate demand appeared being accompanied by some signs of likely to intensify pressures on resources rising pressures on labor compensation, and lead to some pickup in inflation. including the use of special bonuses and Less accommodative financial market other innovative compensation initiaconditions were anticipated to damp tives that are not included in the usual these tendencies over time. statistical measures of labor costs. In In the Committee's discussion of cur- the circumstances, members saw a risk rent and prospective economic develop- of added wage and price inflation if Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 84th Annual Report, 1997 economic activity did not slow to a would continue to provide good support more sustainable pace consistent at a for housing demand. In this regard, minimum with no further appreciable recent statistical and anecdotal informaincrease in labor utilization rates. tion indicated that home sales were With regard to the prospects for final holding up well across the country, demand in key sectors, members took although higher-priced homes appeared note of the rebound in consumer expen- to be selling relatively slowly in some ditures after a sluggish second quarter. areas. Solid gains in employment, incomes, In the Committee's discussion of the and household net worth were seen as prospects for inflation, members dissustaining further robust expansion in cussed the relative absence of price presconsumer spending. In addition, mem- sures in an environment of increasingly bers anticipated that continued further tight labor markets across the country rapid expansion in investment expendi- and rising levels of manufacturing tures by business firms for equipment capacity utilization. In labor markets, and structures would provide strong costs were increasing much less than underlying support for the economic would have been expected on the basis expansion. High rates of return on of previous experience under similarly investments in equipment, particularly tight conditions. Among the possible for computers and communications explanations for this outcome were perequipment where prices were falling sisting concerns about job security; the rapidly, coupled with ready financing muted rise in worker benefits, notably from both internal cash flows and exter- health care; and the increasing use by nal sources were inducing firms to employers of more flexible and innoundertake large investment programs. vative means to attract and retain work- Such investments would expand capac- ers that were in high demand. Moreover, ity, improve productivity, and lower it was suggested that, at least in manucosts of production. Anecdotal reports facturing, productivity had risen unususuggested a mixed picture in nonresi- ally rapidly of late, allowing corporadential real estate markets. In much tions to hold the line on prices despite of the country, commercial and office increases in labor costs. While the vacancies were declining from already underlying reasons for the favorable low levels and lease rates were rising. inflation trends were not entirely clear, Shortages of construction workers were the members noted that, in addition to said to be holding back construction subdued increases in labor costs, the in some areas, but in other parts of the appreciation of the dollar and the relacountry there were indications of some tively sluggish performance of many moderation in construction activity and foreign industrial economies seemed of emerging overcapacity in some mar- to be contributing to the better-thankets. The ready availability of financing expected inflation performance by holdwas a supportive factor in the outlook ing down prices in world commodity for nonresidential construction. markets and prices of imported goods A gradual decline in housing activity more generally. These developments was expected to exert only mild restraint also added to competitive pressures on on the increase of economic activity. businesses, which together with cus- Solid job and income growth, the high tomer resistance were making it very level of household wealth, and the low difficult for firms to raise prices to cash flow burden of homeownership reflect their higher costs. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, September 157 The members commented that while tainability of the expansion. Several few signs of rising price inflation had members emphasized in this regard that surfaced, the widespread tautness of a tightening move could be most labor markets and the emergence of effective if it were implemented prescattered indications of increased pres- emptively, before inflation had time to sure on wages and other labor costs gather upward momentum and become were cause for concern. Anecdotal embedded in financial asset prices and reports suggested that increases in health in business and consumer decisioncare costs were likely to turn up, and making. there were indications that fears about There were, nonetheless, a number of job security might be diminishing and reasons for delaying a tightening of polthat workers were becoming less reluc- icy. The behavior of inflation had been tant to leave their jobs before finding unexpectedly benign for an extended better ones. In addition, businesses were period of time for reasons that were not reporting increasing difficulty in hiring fully understood. Forecasts of an upturn and retaining qualified workers. Growth in inflation were therefore subject to in labor demand had been outpacing a considerable degree of uncertainty, sustainable increases in labor supply; and the expansion of economic activity these reports suggested that the risk of could still slow to a noninflationary an acceleration in labor compensation pace. Members also commented that a was rising. policy tightening was not anticipated at In the Committee's discussion of pol- this time and such an action might thereicy for the intermeeting period ahead, fore have unintended adverse effects on all the members endorsed a proposal to financial markets. Members recognized maintain an unchanged policy stance, that from the standpoint of the level of but several also indicated that economic real short-term interest rates, monetary developments could well require a tight- policy could already be deemed to be ening of policy in the relatively near fairly restrictive. Several noted, howfuture. Members observed in this regard ever, that credit from a wide variety of that some factors that had contributed lenders appeared to be amply available to a currently subdued rate of inflation, in financial markets on favorable terms, notably the appreciation of the dollar, perhaps overly so in present circumdamped wage demands, and relatively stances, and some also noted that the limited increases in the cost of health strength in the broad measures of money benefits, were not likely to continue to in recent months suggested that policy exert the same restraining influence. was not restraining liquidity or financial Moreover, final demands had been unex- conditions more generally. In the course pectedly strong, with economic activity of the Committee's discussion of these and the associated demand for labor diverging considerations, a consensus expanding at an unsustainable pace for emerged for maintaining a steady policy some time, and it was unclear whether course at this time, but members also without-policy action overall demands expressed the need for a heightened would moderate sufficiently to avoid degree of vigilance as they continued to increasing pressures on resources. In assess ongoing developments for signs the circumstances, the risks to the econ- that inflation might intensify in the omy appeared to be strongly tilted future. toward rising inflation whose emer- In their discussion of possible adjustgence would in turn threaten the sus- ments to policy during the intermeeting Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 84th Annual Report, 1997 period, all the members indicated that instructed otherwise by the Committee, they wanted to retain in the operating to execute transactions in the System paragraph of the directive the existing Account in accordance with the followasymmetry toward restraint that was ini- ing domestic policy directive: tially adopted at the May meeting. Such a directive was consistent with their The information reviewed at this meeting view that the risks continued to be suggests that growth of economic activity biased toward rising inflation and indeed remains brisk. In labor markets, hiring continued robust over the summer months and with the view of most members that the civilian unemployment rate, at 4.9 perthose risks might have increased. cent in August, remained near its low for Accordingly, while the probability that the current economic expansion. Industrial the incoming information would war- production increased considerably further rant a tightening move during the inter- in July and August. Retail sales have risen meeting period might not be high, the sharply over recent months after a pause during the spring. Housing starts declined members continued to view the next in July and August, but home sales have policy move as more likely to be in the been strong. Business fixed investment has direction of some firming than toward increased substantially further since midyear easing. and available indicators point to further sizable gains in coming months. After narrow- At the conclusion of the Committee's ing somewhat in the second quarter, the discussion, all the members supported a nominal deficit on U.S. trade in goods and directive that called for maintaining conservices widened substantially in July. Invenditions in reserve markets that were con- tory investment in July was well below the sistent with an unchanged federal funds average pace in prior months of 1997. Price rate of about 5Vi percent. All the mem- inflation has remained subdued and increases in labor compensation have been moderate bers also agreed on the desirability of in recent months. retaining a bias in the directive toward Most market interest rates are about the possible firming of reserve condiunchanged on balance since the day before tions and a higher federal funds rate the Committee meeting on August 19, during the intermeeting period. Accord- 1997. Share prices in equity markets have ingly, in the context of the Committee's increased considerably over the period, with long-run objectives for price stability some stock price indexes reaching new highs. In foreign exchange markets, the and sustainable economic growth, and trade-weighted value of the dollar in terms giving careful consideration to ecoof the other G-10 currencies declined somenomic, financial, and monetary devel- what on balance over the intermeeting opments, the Committee decided that period. a somewhat higher federal funds rate Growth of M2 appears to have moderated would be acceptable or a slightly lower somewhat in September from a very rapid pace in August, while expansion of M3 federal funds rate might be acceptable remained very strong in both months. For the during the intermeeting period. The year through August, M2 expanded at a rate reserve conditions contemplated at this somewhat above the upper bound of its range meeting were expected to be consis- for the year and M3 at a rate substantially tent with some moderation in the ex- above the upper bound of its range. Total pansion in M2 and M3 over coming domestic nonfinancial debt has continued to expand in recent months at a pace near the months. middle of its range. The Federal Reserve Bank of New The Federal Open Market Committee York was authorized and directed, until seeks monetary and financial conditions that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 159 will foster price stability and promote sus- Meeting Held on tainable growth in output. In furtherance November 12, 1997 of these objectives, the Committee at its meeting in July reaffirmed the ranges it had A meeting of the Federal Open Market established in February for growth of M2 Committee was held in the offices of and M3 of 1 to 5 percent and 2 to 6 percent the Board of Governors of the Federal respectively, measured from the fourth quarter of 1996 to the fourth quarter of 1997. Reserve System in Washington, D.C., The range for growth of total domestic non- on Wednesday, November 12, 1997, at financial debt was maintained at 3 to 7 per- 9:00 a.m. cent for the year. For 1998, the Committee agreed on a tentative basis to set the same ranges as in 1997 for growth of the mone- Present: tary aggregates and debt, measured from Mr. Greenspan, Chairman the fourth quarter of 1997 to the fourth Mr. McDonough, Vice Chairman quarter of 1998. The behavior of the mone- Mr. Broaddus tary aggregates will continue to be evaluated Mr. Ferguson in the light of progress toward price level Mr. Gramlich stability, movements in their velocities, and Mr. Guynn developments in the economy and financial Mr. Kelley markets. Mr. Moskow Mr. Meyer In the implementation of policy for the Mr. Parry immediate future, the Committee seeks Ms. Phillips conditions in reserve markets consistent Ms. Rivlin with maintaining the federal funds rate at an average of around 5!/2 percent. In the context of the Committee's long-run Messrs. Hoenig, Jordan, Melzer, and objectives for price stability and sustain- Ms. Minehan, Alternate Members able economic growth, and giving careful of the Federal Open Market consideration to economic, financial, and Committee monetary developments, a somewhat higher federal funds rate would or a slightly lower Messrs. Boehne, McTeer, and Stern, federal funds rate might be acceptable Presidents of the Federal Reserve in the intermeeting period. The contem- Banks of Philadelphia, Dallas, and plated reserve conditions are expected to Minneapolis respectively be consistent with some moderation in the growth of M2 and M3 over coming months. Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Votes for this action: Messrs. Greenspan, Mr. Coyne, Assistant Secretary Mr. Gillum, Assistant Secretary McDonough, Broaddus, Guynn, Kelley, Mr. Mattingly, General Counsel Meyer, Moskow, Parry, Mses. Phillips Mr. Baxter, Deputy General Counsel and Rivlin. Votes against this action: Mr. Prell, Economist None. Mr. Truman, Economist It was agreed that the next meeting Messrs. Cecchetti, Goodfriend, of the Committee would be held on Eisenbeis, Lindsey, Promisel, Wednesday, November 12, 1997. Slifman, and Stockton, Associate The meeting adjourned at 12:45 p.m. Economists Donald L. Kohn Mr. Fisher, Manager, System Open Secretary Market Account Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 84th Annual Report, 1997 Messrs. Madigan and Simpson, ber 30, 1997. There were no System Associate Directors, Divisions of open market transactions in foreign cur- Monetary Affairs and Research rencies during this period, and thus no and Statistics respectively, vote was required of the Committee. Board of Governors The Manager also reported on developments in domestic financial markets Messrs. Alexander, Hooper, and and on System open market transactions Ms. Johnson, Associate Directors, in government securities and federal Division of International Finance, agency obligations during the period Board of Governors September 30, 1997, through November 11, 1997. By unanimous vote, the Ms. Low, Open Market Secretariat Committee ratified these transactions. Assistant, Division of Monetary By unanimous vote, paragraph l.A of Affairs, Board of Governors the Authorization for Domestic Open Market Operations was amended to raise Ms. Pianalto and Mr. Rives, First from $8 billion to $12 billion the dollar Vice Presidents, Federal Reserve limit on intermeeting changes in System Banks of Cleveland and St. Louis Account holdings of U.S. government respectively and federal agency securities for the intermeeting period through Decem- Messrs. Dewald, Hakkio, Rolnick, ber 16, 1997. The Manager advised the and Sniderman, Senior Vice Committee that, as was usually the case Presidents, Federal Reserve Banks at this time of year, the anticipated of St. Louis, Kansas City, Minneapolis, and Cleveland pattern of reserve needs was such that respectively he might want to add considerably to the System's outright holdings of U.S. government securities over the coming Messrs. Bentley, Meyer, and Rosengren, Vice Presidents, intermeeting period. By unanimous Federal Reserve Banks of notation vote, the Committee subse- New York, Philadelphia, and quently approved a further increase in Boston respectively the intermeeting leeway to $17 billion. The increase, effective December 8, was Ms. Gonczy and Mr. Koenig, Assistant made on the recommendation of the Vice Presidents, Federal Reserve Manager who saw the need for substan- Banks of Chicago and Dallas tially more outright purchases of Trearespectively sury obligations than anticipated earlier, largely in light of much greater than Mr. Trehan, Research Officer, Federal projected growth in currency. Reserve Bank of San Francisco With Mr. Broaddus dissenting, the By unanimous vote, the minutes of Committee authorized the renewal for the meeting of the Federal Open Market an additional one-year period of the Committee held on September 30, 1997, System's reciprocal currency ("swap") were approved. arrangements with foreign central banks The Manager of the System Open and the Bank for International Settle- Market Account reported on develop- ments. The amounts and current matuments in foreign exchange and inter- rity dates of the arrangements approved national financial markets in the period for renewal are shown in the table that since the previous meeting on Septem- follows: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 161 view renewal of the existing swap lines Amount of as desirable because they are used priarrangemarily to facilitate market intervention. ment Term Maturity Foreign bank (millions (months) date The Committee then turned to a disof dollars cussion of the economic outlook and the equiva- conduct of monetary policy over the lent) intermeeting period ahead. Austrian National The information reviewed at the Bank 250 12 12/04/97 Bank of England 3,000 i 12/04/97 meeting suggested that economic activ- Bank of Japan 5,000 12/04/97 ity continued to grow rapidly in recent Bank of Norway 250 12/04/97 Bank of Sweden 300 12/04/97 months. The further advance reflected Swiss National Bank . 4,000 12/04/97 a surge in business fixed investment Bank for International Settlements: and consumer spending, while housing Swiss francs 600 12/04/97 demand remained at a high level. Sig- Other authorized European nificant slowing in exports and invencurrencies .... 1,250 12/04/97 tory investment provided only a partial Bank of Mexico 3,000 12/12/97 Bank of Canada 2,000 12/15/97 offset to the strength. Accordingly, National Bank of production and employment recorded Belgium 1,000 12/18/97 National Bank of further large gains. Price inflation re- Denmark 250 12/28/97 Bank of France 2,000 12/28/97 mained subdued despite tight labor mar- German Federal kets and a pickup in the pace of labor Bank 6,000 12/28/97 Bank of Italy 3,000 } 12/28/97 compensation. Netherlands Bank ... 500 12 12/28/97 Nonfarm payroll employment rose substantially further in October. Manufacturing payrolls recorded their largest Mr. Broaddus dissented because he rise in the current economic expansion, believed that the Federal Reserve's par- and aggregate weekly hours worked ticipation in foreign exchange market increased significantly; most of the gain intervention compromises its ability in payrolls occurred at durable goods to conduct monetary policy effectively. establishments. Hiring remained robust Because sterilized intervention cannot in the service-producing sector, led by have sustained effects in the absence sizable increases at computer services of conforming monetary policy actions, and engineering and management ser- Federal Reserve participation in foreign vices firms. The civilian unemployment exchange operations risks one of two rate fell to 4.7 percent in October, its undesirable outcomes. First, the inde- low for the current expansion. pendence of monetary policy is jeopar- Industrial production registered a dized if the System adjusts its policy large advance in the third quarter and actions to support short-term foreign apparently remained strong in October. exchange objectives set by the Treasury. A third-quarter surge in the manufacture Alternatively, the credibility of mone- of durable goods, notably of motor vehitary policy is damaged if the System cles, aircraft, and information processdoes not follow interventions with com- ing equipment, more than offset weak patible policy actions, the interventions expansion in the output of nondurable consequently fail to achieve their objec- goods and a decline in mining activity. tives, and the System is associated in the Although the step-up in manufacturing mind of the public with the failed opera- production boosted further the rate tions. In these circumstances, he did not of utilization of manufacturing capacity, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 84th Annual Report, 1997 the latter was somewhat below its most of its range for the past twelve months. recent peak in January 1995. Wholesale inventories posted another Retail sales posted a sharp rise in the sizable advance in September; the third quarter, though growth in sales of inventory-sales ratio for this sector was both durable and nondurable goods just above the high end of its range for moderated during the quarter. Consumer the past year. Retail stocks fell in August spending on services also continued (latest available data), more than reversto increase at a relatively brisk pace. ing their July increase. The inventory- Growth in such spending was under- sales ratio for the sector also was at the pinned by continuing substantial gains low end of its range for the past year. in incomes, the cumulative increase The nominal deficit on U.S. trade in in household net worth over the past goods and services widened substanseveral years, and the ready availability tially on balance over July and August of credit to most consumers. Housing from its rate in the second quarter. demand remained strong in the third Exports of goods and services changed quarter in association with moderate little on net in the July-August period, interest rates and very positive consumer but imports rose considerably; the largassessments of homebuying conditions. est increases in imports were for aircraft Sales of both new and existing homes and automotive products, though sizable increased a bit, and housing starts were gains also were recorded for computers, little changed in the third quarter from semiconductors, and industrial supplies. the high level recorded during the first Available indicators of economic activhalf of the year. ity in the third quarter pointed to robust Business fixed investment increased expansion in all the major foreign at an unusually rapid rate in the third industrial countries except Japan, where quarter. The rise in outlays was spread activity rebounded only moderately across all categories of producers' dura- from a sharp second-quarter decline. ble equipment, but the largest gains Although timely data were sparse, the were in office, computing, and com- economies of many Asian countries munications equipment. Available data probably were weakening as their on new orders pointed to further broad- exchange rates came under pressure, based and robust expansion in equip- problems in their financial sectors were ment spending in coming months. revealed, and their monetary and fiscal Nonresidential construction grew at a policies moved toward restraint. moderate pace in the latest quarter Consumer price inflation remained despite a decline in September. Avail- subdued in September. The increase in able information suggested that con- both overall consumer prices and the struction would trend upward at a mod- prices of consumer items other than food est rate in coming months. and energy was modest. For the twelve Business inventory investment ap- months ended in September, prices peared to have moderated substantially of consumer items other than food and in the third quarter from the rapid rate energy increased by a considerably of the previous quarter, and on balance smaller amount than in the year-earlier stocks were at relatively low levels period. At the producer level, the Sepin relation to sales. In manufacturing, tember rise in prices was the largest stocks rose somewhat further in Septem- monthly increment since January 1991; ber, but the inventory-to-shipments ratio nonetheless, the overall index was for the sector declined to the low end unchanged over the past twelve months Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 163 after a sizable rise over the previous September 30 meeting, while Treasury twelve-month period. The core index bond yields declined somewhat on also decelerated on a year-over-year balance. Unexpectedly strong incoming basis. The rate of increase in the hourly data on U.S. producer prices, employcompensation of private industry work- ment, and wages tended to exert upward ers was unchanged in the third quarter, pressures on bond yields on some days, but the advance over the past four quar- but these were more than offset by ters was somewhat larger than that for investor desires for safety and quality, the previous four. Growth in average the continuing moderation in consumer hourly earnings picked up in September inflation, and the perception engendered and October, perhaps partly reflecting by international financial developments the effects of an increase in the federal that inflation pressures were likely to minimum wage. remain subdued. At its meeting on September 30, The dollar also was affected by the 1997, the Committee adopted a directive spreading financial turmoil in developthat called for maintaining conditions ing countries, appreciating significantly in reserve markets that were consistent over the intermeeting period against with an unchanged federal funds rate the currencies of a number of Asian averaging around 5 xh percent. The Com- and Latin American countries. Much of mittee retained a tilt in the directive the increase was counterbalanced, howtoward a possible firming of reserve ever, by a sizable decline in the dollar's conditions during the intermeeting trade-weighted value in terms of the period, reflecting its view that the risks currencies of the other G-10 countries. continued to be skewed toward rising The dollar's decline against the German inflation. Reserve market conditions mark and other European currencies associated with this directive were partly reflected diminished market expected to be consistent with some expectations of potential tightening in moderation in the growth of M2 and M3 the United States and a snugging of over coming months. monetary conditions by the Bundesbank Open market operations were directed and other continental European central throughout the intermeeting period banks. Further progress in resolving toward maintaining reserve conditions uncertainties surrounding the European consistent with the Committee's in- Monetary Union also may have contribtended level of around 5!/2 percent for uted to the rise in European currencies. the federal funds rate, and the rate aver- The dollar appreciated slightly on balaged close to that level over the period. ance against the Japanese yen. Other financial markets became quite Growth of M2 and M3 apparently volatile from time to time. Share prices moderated further in October, though in equity markets fluctuated widely in the expansion of these aggregates occasionally turbulent trading activity remained brisk. A sharp slowing of and were down somewhat on balance inflows to money market mutual funds over the period; equity markets in other accounted for much of the deceleration countries, notably in Asia, also were of M2, and an easing in the pace of volatile, and very large declines were issuance of large time deposits, evirecorded in some of those markets. dently reflecting a smaller rise in bank Against this background, U.S. short- credit, also contributed to a modest term interest rates registered small reduction in M3 growth. For the year mixed changes over the period since the through October, M2 expanded at a rate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 84th Annual Report, 1997 that was at the upper bound of the Com- markets and economies would tend mittee's range for the year and M3 at a to damp output and prices in the United rate substantially above the upper bound States. To date, it appeared that the of its range. Total domestic nonfinancial effects on the U.S. economy would be debt increased in recent months at a rate quite limited, but the ultimate extent of somewhat below the middle of its range. the adjustment in Asia was unknown, as The staff forecast prepared for this was its spillover to global financial marmeeting suggested that the economy kets and to the economies of nations that would continue to expand for a time at were important U.S. trading partners. a pace considerably above its potential, The second influence was the apparently but growth was expected to moderate sharp increase in productivity in the to a more sustainable rate later. Further second and third quarters. This was an rapid increases in business investment encouraging development, although it would provide strong impetus to income was too early to judge the persistence of growth in the near term, and the rise in the uptrend in productivity growth and household wealth so far in 1997 would the extent to which it might reduce the stimulate robust consumer demand additional price pressures that would going forward. The projected strength be generated in the event of an extended of domestic demand would be offset to period of further robust economic some extent by a considerable weaken- expansion. ing in the growth of exports in response Strength in consumer spending had to the lagged effects of the earlier appre- provided an important underpinning for ciation of the dollar and sharp antici- robust economic expansion, and subpated reductions in the economic growth stantial growth was likely to persist, susof Asian and other developing countries. tained by increases in employment and In the Committee's discussion of cur- incomes, high levels of confidence, and rent and prospective economic develop- the cumulative effects of very large ments, members focused on widespread gains in stock market wealth over the indications of a continued solid advance past several years. The outlook for capiin economic activity, spurred by strength tal spending also remained quite favorin all major sectors of the domestic able because the factors that were coneconomy, and the persistence of sub- tributing to the ongoing surge in such dued increases in prices. The current spending—its potential for lowering momentum of the expansion, together production costs in highly competitive with broadly supportive financial con- markets and the ready availability of ditions and favorable business and con- finance on attractive terms—were likely sumer sentiment, suggested that eco- to persist. While private domestic nomic growth was likely to be well demand most likely would continue maintained, especially over the nearer to display considerable strength, both term. As a consequence, the members consumption and investment were agreed that there remained a clear risk somewhat vulnerable to developments of additional pressures on already tight in financial markets, perhaps arising resources and ultimately on prices that from further difficulties in Asia. could well need to be curbed by tighter Increased uncertainty about asset values monetary policy. But the members also could engender greater caution on focused on two important influences that spending, and of course a substantial were injecting new uncertainties into decline in equity values would reduce this outlook. Turmoil in Asian financial household wealth and raise the cost of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 165 equity capital. Some members also com- and hold down costs, suggesting that mented that additional appreciation of productivity might be on a higher trend the dollar, perhaps in association with for a time. But it also could be attributed possible further turbulence in Asia and to some extent to the strengthening in weakness in foreign economies, would economic output; such strengthening have adverse implications for net often is associated with a pickup in exports, which already were seen as a productivity as producers react initially somewhat negative factor in the eco- to the upturn in demand by stretching nomic outlook. At the same time, a available labor further. If the pace of the stronger dollar would have a positive economic expansion were to moderate effect on domestic inflation over the pro- in line with current expectations, the jection horizon. growth in productivity also could be In the course of their discussion, the expected to slow, but to an uncertain members gave considerable emphasis to extent. recent developments in labor markets. The trend in productivity gains was a Statistical indicators of rising levels key factor in the outlook for unit costs of employment, low and falling rates of and ultimately for price inflation. As had unemployment, and a diminishing sup- been true for an extended period, inflaply of new workers were reinforced by tion had remained relatively subdued in anecdotal evidence of tight labor mar- comparison with past experience under kets throughout the nation. The demand broadly similar economic conditions. for many types of workers exceeded the The reasons for the relative quiescence supply in many regions, and a number of inflation were not fully understood, of members reported that growth of but they undoubtedly included a number economic activity in various parts of the of special factors beyond higher procountry was being held back by the scar- ductivity such as a lagged response to city of labor. While labor compensation earlier appreciation of the dollar and had accelerated, the pickup was mod- unusually damped increases in the cost erate in light of the taut conditions in of health benefits. As they had at prelabor markets and some of it reflected vious meetings, members suggested the legislated rise in the minimum wage. that these favorable influences were Nonetheless, members cited numerous likely to erode over the year ahead. A examples of efforts to attract or retain number of members again cited reports workers in especially scarce supply of increases in health insurance premithrough a variety of bonus payments ums next year and subsequently. More and other incentives that were not fundamentally, it was difficult to preincluded in standard measures of labor dict whether anticipated increases in compensation. labor compensation would be fully off- The effects on costs and prices of set by productivity gains in coming somewhat faster increases in compensa- quarters and whether, in turn, competition evidently were being muted by what tive market conditions would allow appeared to have been a sharp advance firms to raise prices to compensate for in productivity growth in the past two any increases in their costs. On balance, quarters. The acceleration in produc- the members felt that the risks remained tivity seemed to be related in part to in the direction of rising price inflation the surge in capital spending, which though the extent and timing of that had been stimulated by the ability of outcome were subject to considerable new equipment to enhance efficiency debate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 84th Annual Report, 1997 In the Committee's discussion of pol- In their discussion of possible adjusticy for the intermeeting period ahead, all ments to policy during the intermeeting but one member endorsed a proposal to period, the members indicated that they maintain an unchanged policy stance, wanted to retain in the operating paraand all agreed that the risks remained graph of the directive the existing asymtilted toward rising inflation. While metry toward restraint that was initially developments in Southeast Asia were adopted at the May meeting. Such a not expected to have much effect on the directive was consistent with their view U.S. economy, global financial mar- that the risks continued to be biased kets had not yet settled down and fur- toward rising inflation. Accordingly, the ther adverse developments could have members continued to view the next greater-than-anticipated spillover effects policy move as more likely to be in the on the ongoing expansion. In this envi- direction of some firming than toward ronment, with markets still skittish, easing. a tightening of U.S. monetary policy At the conclusion of the Committee's risked an oversized reaction. Some discussion, all but one member supmembers also emphasized that the rela- ported a directive that called for maintively favorable trends in productivity, taining conditions in reserve markets costs, and prices continued to raise ques- that were consistent with an unchanged tions about the strength and timing of federal funds rate of about 5Vi percent any pickup in inflation. Other members and that retained a bias toward the posstressed that the unsustainable pace of sible firming of reserve conditions and domestic demand and rising resource a higher federal funds rate during the utilization seemed to call for a near-term intermeeting period. Accordingly, in tightening of policy. Some of these the context of the Committee's long-run members noted that overall financial objectives for price stability and conditions remained quite supportive sustainable economic growth, and givdespite the recent market turmoil and ing careful consideration to economic, high real short-term interest rates. Credit financial, and monetary developments, from a wide variety of lenders appeared the Committee decided that a someto be amply available on favorable what higher federal funds rate would be terms, perhaps overly so in present cir- acceptable or a slightly lower federal cumstances. Nonetheless, all but one funds rate might be acceptable during of the members believed that in light of the intermeeting period. The reserve the uncertainties about the economic conditions contemplated at this meeting outlook, an immediate policy tightening were expected to be consistent with was not needed in the absence of firmer moderate growth in M2 and M3 over indications that inflationary pressures coming months. might be emerging. In the view of The Federal Reserve Bank of New one member, however, aggregate final York was authorized and directed, until demand was so strong that, with instructed otherwise by the Committee, economic activity and the associated to execute transactions in the System demand for labor having expanded at an Account in accordance with the followunsustainable pace for some time, one ing domestic policy directive: could be reasonably confident that inflation would most likely pick up in the The information reviewed at this meeting absence of policy action. suggests that economic activity continued Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 167 to grow rapidly in recent months. In labor tively, measured from the fourth quarter of markets, hiring has remained robust and the 1996 to the fourth quarter of 1997. The range civilian unemployment rate fell to 4.7 per- for growth of total domestic nonfinancial cent in October, its low for the current debt was maintained at 3 to 7 percent for the economic expansion. Industrial production year. For 1998, the Committee agreed on a increased very rapidly in the third quarter, tentative basis to set the same ranges as in and appears to have remained strong in Octo- 1997 for growth of the monetary aggregates ber. Retail sales also rose sharply in the third and debt, measured from the fourth quarter quarter, though at a moderating pace as the of 1997 to the fourth quarter of 1998. The summer progressed. Housing starts, while behavior of the monetary aggregates will fluctuating from month to month, were little continue to be evaluated in the light of changed on balance in the third quarter. Busi- progress toward price level stability, moveness fixed investment posted unusually ments in their velocities, and developments strong increases in the latest quarter, and in the economy and financial markets. available indicators point to further sizable In the implementation of policy for the gains in coming months. The nominal deficit immediate future, the Committee seeks conon U.S. trade in goods and services widened ditions in reserve markets consistent with substantially on average in July and August maintaining the federal funds rate at an from its rate in the second quarter. Price average of around 5 Vi percent. In the context inflation has remained subdued despite some of the Committee's long-run objectives for increase in the pace of advance in labor price stability and sustainable economic compensation. growth, and giving careful consideration to Short-term interest rates have registered economic, financial, and monetary developsmall mixed changes since the day before ments, a somewhat higher federal funds rate the Committee meeting on September 30, would or a slightly lower federal funds rate 1997, while bond yields have fallen some- might be acceptable in the intermeeting what. Share prices in U.S. equity markets period. The contemplated reserve conditions have fluctuated widely in turbulent trading are expected to be consistent with moderate activity and are down on balance over the growth in M2 and M3 over coming months. period; equity markets in other countries, notably in Asia, have been volatile as well Votes for this action: Messrs. Greenspan, and some have registered very large declines. McDonough, Ferguson, Gramlich, Guynn, In foreign exchange markets, the trade- Kelley, Meyer, Moskow, Parry, Mses. weighted value of the dollar in terms of the Phillips and Rivlin. Vote against this other G-10 currencies declined somewhat on action: Mr. Broaddus. balance over the intermeeting period. The dollar appreciated significantly, however, in terms of the currencies of a number of Asian Mr. Broaddus dissented because he and Latin American countries. believed that a modest tightening of Growth of M2 and M3 appears to have policy would be prudent in view of the moderated further in October from the recent strength in aggregate demand unusually brisk rates of August. For the year through October, M2 expanded at the upper for goods and services; such demand bound of its range for the year and M3 at a appeared to be growing considerably rate substantially above the upper bound of more rapidly than the sustainable rate its range. Total domestic nonfinancial debt at which it could be supplied without has expanded in recent months at a pace an increase in inflation. While he recogsomewhat below the middle of its range. The Federal Open Market Committee nized that a tightening at this meeting seeks monetary and financial conditions that presented risks in view of recent finanwill foster price stability and promote sus- cial and economic developments in tainable growth in output. In furtherance of East Asia, he believed these risks were these objectives, the Committee at its meetoutweighed by the risk that policy ing in July reaffirmed the ranges it had established in February for growth of M2 and M3 would have to be tightened more aggresof 1 to 5 percent and 2 to 6 percent respec- sively if action were delayed, demand Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 84th Annual Report, 1997 remained robust, and the recent apparent Mr. Guynn reduction in inflationary expectations Mr. Kelley Mr. Moskow were reversed. The negative impact on Mr. Meyer economic activity in such circumstances Mr. Parry would be markedly greater than if a Ms. Phillips more modest action were taken at this Ms. Rivlin meeting. Messrs. Hoenig, Jordan, and Ms. Minehan, Alternate Members Rules Regarding Availability of the Federal Open Market Committee of Information By notation vote the Committee unani- Messrs. Boehne, McTeer, and Stern, Presidents of the Federal Reserve mously approved in final form certain Banks of Philadelphia, Dallas, and revisions to its Rules Regarding the Minneapolis respectively Availability of Information. The final rules take account of comments received Mr. Kohn, Secretary and Economist from the public on the Committee's pro- Mr. Bernard, Deputy Secretary posed revisions to the rules that were Mr. Coyne, Assistant Secretary Mr. Gillum, Assistant Secretary published earlier in the Federal Register. Mr. Mattingly, General Counsel The purpose of the revisions is to bring Mr. Baxter, Deputy General Counsel the rules into conformity with the Elec- Mr. Prell, Economist tronic Freedom of Information Act of Mr. Truman, Economist 1996, which amends the Freedom of Messrs. Beebe, Cecchetti, Eisenbeis, Information Act. The new rules take Goodfriend, Lindsey, Promisel, effect on December 17, 1997. Siegman, Slifman, and Stockton, It was agreed that the next meeting of Associate Economists the Committee would be held on Tues- Mr. Fisher, Manager, System Open day, December 16, 1997. Market Account The meeting adjourned at 1:10 p.m. Mr. Winn, Assistant to the Board, Donald L. Kohn Office of Board Members, Board Secretary of Governors Mr. Ettin, Deputy Director, Division of Meeting Held on Research and Statistics, Board of Governors December 16, 1997 A meeting of the Federal Open Market Messrs. Madigan and Simpson, Associate Directors, Divisions of Committee was held in the offices of Monetary Affairs and Research the Board of Governors of the Federal and Statistics respectively, Board Reserve System in Washington, D.C., of Governors on Wednesday, December 16, 1997, at 9:00 a.m. Messrs. Alexander, Hooper, and Ms. Johnson, Associate Directors, Present: Division of International Finance, Mr. Greenspan, Chairman Board of Governors Mr. McDonough, Vice Chairman Mr. Broaddus Ms. Low, Open Market Secretariat Mr. Ferguson Assistant, Division of Monetary Mr. Gramlich Affairs, Board of Governors Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 169 Messrs. Connolly and Rives, First in recent months. The further advance Vice Presidents, Federal Reserve reflected moderating but still sizable Banks of Boston and St. Louis increases in business fixed investment respectively and consumer spending and an upturn in business inventory accumulation. Hous- Mses. Browne, Krieger, ing demand remained at a high level, Messrs. Dewald, Hakkio, Lang, and Rosenblum, Senior Vice and deepening trade deficits provided Presidents, Federal Reserve Banks only a partial offset to the strength in of Boston, New York, St. Louis, domestic spending. Against this back- Kansas City, Philadelphia, and ground, employment and production Dallas respectively posted further large gains. Price inflation remained subdued despite tight Mr. Miller, Vice President, Federal labor markets and some pickup in the Reserve Bank of Minneapolis rate of wage increases. Nonfarm payroll employment rose Messrs. Bryan and Evans, Assistant Vice Presidents, Federal Reserve sharply further in October and Novem- Banks of Cleveland and Chicago ber. The increases in payrolls were respectively widespread across sectors, and in November they included notably large By unanimous vote, the minutes of gains in the service-producing industhe meeting of the Federal Open Market tries. Manufacturing employment also Committee held on November 12, 1997, rose considerably further in November, were approved. and aggregate weekly hours of produc- The Manager of the System Open tion or nonsupervisory workers regis- Market Account reported on develop- tered a particularly large advance in that ments in foreign exchange and interna- month. The civilian unemployment rate tional financial markets in the period fell to 4.6 percent in November, its low since the previous meeting on Novem- for the current expansion. ber 12, 1997. There were no open mar- Industrial production continued to ket transactions in foreign currencies advance at a brisk pace in October and for System Account during this period, November. The November increase was and thus no vote was required of the widespread across market groups. It fea- Committee. tured particularly strong growth in the The Manager also reported on devel- production of durable goods, including opments in domestic financial markets a surge in the output of motor vehicles and on System open market transactions and parts. Partly offsetting the strength in government securities and federal in the manufacturing sector in Novemagency obligations during the period ber was a decline in mining activity and November 12, 1997, through Decem- in utilities output after two months of ber 15, 1997. By unanimous vote, the robust expansion. The large rise in pro- Committee ratified these transactions. duction boosted the rate of utilization The Committee then turned to a dis- of manufacturing capacity to its highest cussion of the economic outlook and the level in more than two years. conduct of monetary policy over the Growth in consumer spending had intermeeting period ahead. moderated in recent months from a very The information reviewed at this brisk pace during the summer. Retail meeting suggested that economic activ- sales were unchanged on balance over ity had continued to grow at a rapid pace October and November after having Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 84th Annual Report, 1997 increased rapidly in the third quarter. mer. The rise in stocks at the manu- The flat sales for the two months re- facturing level was at a somewhat faster flected some softening in the durable pace in October than in September, but goods category, notably at automotive the buildup in inventories at the wholedealers, and relatively slow growth in sale level, and especially at the retail the nondurable goods sector. Consumer level, moderated in October. On balspending on services appeared to have ance, inventories remained at quite low remained relatively robust in October. levels in relation to shipments and sales. According to recent surveys, consumer The nominal deficit on U.S. trade sentiment continued at an extraor- in goods and services was significantly dinarily ebullient level in the context of larger in the third quarter than in the further strong gains in jobs and incomes, second. Exports of goods and services the cumulative effect of large increases rose only marginally in the third quarter, in household net worth, and the ready as increases in machinery, industrial availability of financing for most supplies, and service receipts were consumers. nearly offset by sharp declines in exports Available information suggested that of aircraft and gold. Imports of goods business capital expenditures had mod- and services rose appreciably in the third erated in recent months from the excep- quarter; the increases were in most tionally strong increases of the second major trade categories and included and third quarters. Shipments of office strong further advances in the quantity and computing equipment fell in nomi- of oil imports. Economic growth in most nal terms in October, while shipments of major foreign industrial countries was communications equipment were about relatively vigorous in the third quarter, unchanged after having posted strong and preliminary indicators for the fourth gains earlier in the year. Shipments of quarter suggested continued above-trend nondefense capital goods other than expansion. However, growth since midaircraft and high tech equipment also year appeared to have recovered only declined in October. Spending on non- modestly in Japan from a sharp secondresidential structures had softened a bit quarter decline. The ongoing financial in recent months. turmoil affecting a number of Asian In the housing sector, demand had economies had led to a significant slowcontinued to display appreciable down in economic activity in the region. strength in recent months in association Available data also suggested a favorwith relatively moderate mortgage rates able economic performance in major and very positive consumer assessments Latin American countries in the third of homebuying conditions. In October, quarter. the latest month for which data were Consumer price inflation had reavailable, sales of new homes were well mained at a low level in recent months, maintained, and sales of existing homes reflecting a variety of influences includrose. Housing starts increased somewhat ing a favorable labor cost environment, in October and November from the falling import prices, small increases already high level reached earlier in the in energy prices, and declining inflation year. expectations. For the twelve months After having picked up considerably ended in November, overall consumer in September, the pace of business in- prices and consumer prices excluding ventory investment in October remained food and energy items increased appreabove that recorded earlier in the sum- ciably less than in the year-earlier Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 111 period. At the producer level, prices for of foreign markets fostered a sense of finished goods edged lower in Novem- unease that was reflected in relatively ber and the index was down somewhat wide yield spreads and, on occasion, in on balance over the past year, reflecting trading activity and price movements. declines in the food and energy compo- Equity markets in other countries, notanents. The rate of increase in average bly in Asia, remained volatile. hourly earnings had picked up in recent In foreign exchange markets, the months, apparently reflecting the effects value of the dollar rose over the interof an increase in the federal minimum meeting period in terms of both the wage and some bidding up of wages in a trade-weighted index of the other G-10 tight labor market. currencies and the currencies of a At its meeting on November 12, number of Asian countries. The dollar's 1997, the Committee adopted a directive appreciation against the German mark that called for maintaining conditions and other Western European currencies in reserve markets that were consis- appeared to reflect market perceptions tent with an unchanged federal funds that the prospects for monetary tightenrate averaging around 5]/2 percent. In ing had ebbed in those countries in light the directive the Committee retained a of the persistence of subdued inflation tilt toward a possible firming of reserve and indications that the continuing conditions during the intermeeting financial turmoil in Asian and other period. Such a bias was seen as consis- emerging economies was likely to have tent with the members' views that the a retarding effect on the economies risks continued to be skewed toward of the industrial countries. The dollar's rising inflation and that the next policy appreciation relative to the yen appeared move was more likely to be in the direc- to reflect rising concerns about the Japation of some firming than toward easing. nese economy in the wake of continuing Reserve market conditions associated financial difficulties in Japan and spillwith this directive were expected to be over effects from events elsewhere in consistent with some moderation in the Asia. The dollar strengthened further in growth of M2 and M3 over coming this period against most of the other months. East Asian currencies, notably against Open market operations throughout the Korean won. the intermeeting period were directed Growth in the broad monetary aggretoward maintaining reserve conditions gates picked up to relatively rapid rates consistent with the intended average of in November. Strength in currency and around 5 Vi percent for the federal funds a surge in liquid deposits boosted the rate, and the average effective rate over expansion of M2, while that of M3 was the period was close to that rate level. In amplified by a step-up in RP borrowing other domestic financial markets, short- to help finance more rapid growth in term interest rates registered small bank credit. For the year through mixed changes since the day before the November, M2 expanded at a rate that Committee meeting on November 12, was slightly above the upper bound of 1997, while bond yields fell somewhat. the Committee's annual range and M3 Share prices in U.S. equity markets at a rate substantially above the upper recorded mixed changes over the period. bound of its range. The increase in total Domestic financial markets became domestic nonfinancial debt for the year somewhat less volatile over the period, to date was at a pace somewhat below though further turmoil in a number the middle of the Committee's range. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 84th Annual Report, 1997 The staff forecast prepared for this damping effect on output and prices in meeting suggested somewhat greater the United States than previously had moderation in economic expansion than been anticipated. Exports to many Asian had been projected earlier and slightly countries, and possibly to other U.S. less pressure on wages and prices. A trading partners whose economies might number of factors were expected to be adversely affected by the spillover contribute to the slowing of aggregate effects of developments in Asia, would demand and reduced pressure on be reduced, and declines in import resources. These included: a slackening prices would ease inflation pressures. in world economic expansion that, in However, the ultimate extent of the conjunction with the appreciation of the adjustment in Asian economies redollar, would substantially restrain U.S. mained unknown, and more substantial exports; some moderation of the growth downward pressure on the economies of in household and business investment; the United States and its trading partners and a diminution in the desired rate of could not be ruled out. inventory accumulation. With regard to the prospects for final In the Committee's discussion of cur- demand in key sectors, the members rent and prospective economic develop- noted that the appreciation of the dollar ments, members commented on indica- against a wide range of currencies, along tions that growth in economic activity with the prospective slackening in world had remained solid and that inflation economic expansion associated with the had continued to be surprisingly low. Asian turmoil, could be expected to While wages appeared to be increas- exert a considerable damping effect on ingly subject to upward pressure, pro- U.S. exports over the next several quarductivity had picked up in recent quar- ters. In addition, increased uncertainty ters, and the persisting strength in profits about financial asset values, possibly suggested that unit labor costs were not related in part to further difficulties in accelerating noticeably. The evidently Asia, could lead to greater caution in higher pace of productivity growth was spending, while a substantial decline very encouraging, though it was still in equity values, should it occur, would difficult to assess how long this favor- have a more pronounced effect by able performance might last and the reducing household wealth and raising extent to which it might ease the price the cost of equity capital. However, a pressures that could emerge if the eco- number of members suggested that connomic expansion did not moderate as sumer spending might hold up relatively members anticipated. Domestic demand well if the effects of the Asian crisis on for goods and services had been quite the U.S. economy were not markedly strong and was likely to remain reason- deeper or more prolonged than currently ably robust. However, the effects of expected. To date, anecdotal reports the persisting turmoil in Asian finan- indicated only scattered signs of weaker cial markets were likely to moderate the export demand, primarily some slackenpace of expansion, though the extent of ing in orders for and shipments of this effect was difficult to judge. The selected commodities such as agriculongoing turbulence since the last Com- tural goods and lumber and wood prodmittee meeting, which included further ucts, and there were few indications noticeable increases in the dollar against of reduced demand for manufactured the currencies of affected countries, goods. At the same time, business likely would have a somewhat greater contacts were optimistic about holiday Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 173 sales, tourism was booming in some some employers were trying out novel parts of the country, and spending for approaches aimed at enticing people not services had been brisk. In the circum- currently seeking a job to enter the work stances, continuing gains in wages and force. While wage increases remained employment, the prevailing high levels moderate on balance, larger increases of confidence, the cumulative effects of were gradually becoming more pervavery large increases in household wealth sive as labor markets tightened. Morein recent years, and the intense competi- over, employers were continuing their tion among retailers for the consumer's efforts to attract or retain workers that attention could promote substantial fur- were in particularly scarce supply by ther growth in consumer expenditures. means of a variety of bonus payments The same factors, along with the fav- and other incentives that were not orable cash flow affordability of home included in standard measures of labor ownership, were maintaining housing compensation. There also were reports demand at a relatively high level. of offers of expanded benefits and, in The outlook for business fixed invest- some instances, the granting of very ment remained favorable. In the near large wage increases to highly skilled term, the low cost of capital, the ready technical personnel. availability of finance on attractive In the course of their discussion, terms, and the potential for reducing many members remarked on the abproduction costs in highly competitive sence of inflationary price pressures durmarkets were providing strong support ing a period when economic activity had for capital spending. Moreover, shrink- risen briskly and labor markets had ing vacancy rates and rising lease rates grown steadily tighter. The muted effect were fostering a rapid increase in the of higher labor compensation on unit number of large commercial building labor costs and prices reflected sharp projects, notably office buildings, that advances in productivity partly assowere planned or under way in many ciated with the rapid expansion of the areas of the country. Even so, the growth stock of capital; the latter had been of business capital spending was stimulated, most probably, by the desire expected to slow from the unusually to enhance efficiency and thus hold rapid pace of recent quarters in response down costs. In addition, the earlier to the projected smaller increases in appreciation of the dollar and the unususales and profits arising from moderat- ally damped increases in the cost of ing economic growth. In addition, busi- health benefits in recent years had ness firms were expected to trim the helped to limit the rise in compensation. pace of their inventory accumulation to As members had noted at previous keep stocks at desired levels relative to meetings, these favorable influences sales. were likely to erode over time. Anec- In their comments on recent develop- dotal reports indicated that health insurments in labor markets, the members ance premiums were beginning to trend emphasized the very limited supply of higher, and the dollar would not rise new workers and the extraordinary tight- indefinitely. More fundamentally, persisness prevailing in markets throughout tent tightness in labor markets risked a the nation. Several reported that the continuing uptrend in labor compensascarcity of available workers was limit- tion increases that, at some point, could ing the growth of economic activity not be fully offset by productivity gains. in some parts of the country and that Under those circumstances, competitive Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

174 84th Annual Report, 1997 market conditions would allow firms to while acknowledging the downside risks raise prices to compensate for increases to the expansion associated with potenin their costs. However, for some period tial developments in Asia, still was ahead, developments associated with the persuaded that the economy probably turmoil in Asia along with the partly would continue to expand at an unsusrelated appreciation of the dollar would tainable pace and that monetary policy tend to intensify import competition and should be tightened promptly to avert a damp the prices of goods. further buildup of pressures in already In the Committee's discussion of pol- strained labor markets, associated icy for the intermeeting period ahead, increases in labor costs, and at some nearly all the members favored a pro- point an inevitable rise in price inflation. posal to maintain an unchanged policy Other considerations cited by some stance. In their discussion, members members in favor of an unchanged polemphasized that price inflation had icy included the possibility that, because remained subdued, indeed with some a policy tightening move was not key price measures indicating declin- expected at this juncture, even a modest ing inflation, despite the persistence of firming action might well have outsized robust economic growth and high levels effects in financial markets, especially of resource use, notably in labor mar- the foreign exchange markets. Current kets. They expressed concern, however, conditions in domestic financial markets that multiplying indications of faster clearly remained supportive of spendwage increases might presage rising ing, but it also was noted that the real price inflation at some point. Weighing federal funds rate was relatively high against the risks of higher inflation was and that growth in the broad measures the financial turmoil that had intensified of money was expected to moderate in Southeast Asia during October and over coming months after a period of more recently in Korea. The effects of robust expansion. The members agreed those developments on the U.S. econ- that the crosscurrents that were generatomy were quite limited thus far, but the ing the present uncertainties in the outmembers expected some damping of look for economic activity and inflation economic expansion and price increases made a flexible approach to monetary in the quarters ahead, and they did not policy particularly desirable at this rule out a potentially strong impact in juncture. the event of an even deeper crisis in Views were somewhat more divided Asia, or one that spread to other coun- with regard to the instruction in the tries. Nonetheless, many members com- directive relating to the possible adjustmented that, with domestic demand still ment of policy during the intermeeting quite strong and the economy possibly period. A majority of the members indiproducing beyond its potential, they cated a preference for a shift to a symviewed the risks on balance as pointing metrical directive even though many to rising price inflation and the next continued to anticipate that the next polpolicy move as likely to be in the direc- icy move was likely to be in a tightention of some tightening. However, most ing direction. They noted that while the members agreed that the need for such a probability of any policy change in the policy adjustment did not appear to be near term was very low, uncertainties imminent and that prevailing near-term in the outlook had increased, and they uncertainties warranted a cautious wait- could not rule out the possibility that the and-see policy posture. One member, next change might be in the direction Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 175 of some easing if, contrary to current Account in accordance with the followexpectations, the turmoil in Asia were to ing domestic policy directive: intensify to the extent that it seemed likely to exert very substantial effects The information reviewed at this meeting on the U.S. economy. A symmetric suggests that economic activity continued to directive would position the Committee grow rapidly in recent months. Nonfarm payto respond flexibly in either direction roll employment increased sharply in October and November; the civilian unemployto unanticipated developments in the ment rate fell to 4.6 percent in November, its period ahead. Other members expressed low for the current economic expansion. a slight preference for retaining a direc- Industrial production continued to advance tive that was tilted toward tightening. In at a brisk pace in October and November. their view, such a directive would con- Retail sales were unchanged on balance tinue to underscore their concern that, over the two months after rising sharply in the third quarter. Housing starts increased at current and prospective levels of slightly further in October and November. resource utilization, rising inflation was Available information suggests on balance the most serious risk to the economy that business fixed investment will slow from and that the Committee remained com- the exceptionally strong increases of the secmitted to fostering progress toward a ond and third quarters. The nominal deficit on U.S. trade in goods and services widened stable price environment that in turn significantly in the third quarter from its rate would heighten the prospects for sus- in the second quarter. Price inflation has tained economic expansion and full remained subdued, despite some increase in employment. the pace of advance in wages. At the conclusion of the Committee's Short-term interest rates have registered small mixed changes since the day before discussion, all but one member endorsed the Committee meeting on November 12, a directive that called for maintaining 1997, while bond yields have fallen someconditions in reserve markets that were what. Share prices in U.S. equity markets consistent with an unchanged federal recorded mixed changes over the period; funds rate of about 5 Vi percent and that equity markets in other countries, notably in Asia, have remained volatile. In foreign did not include a presumption about the exchange markets, the value of the dollar has likely direction of any adjustment to risen over the intermeeting period in terms policy during the intermeeting period. of both the trade-weighted index of the other Accordingly, in the context of the G-10 countries and the currencies of a num- Committee's long-run objectives for ber of Asian countries. price stability and sustainable economic M2 and M3 grew rapidly in November. For the year through November, M2 growth, and giving careful consideration expanded at a rate slightly above the upper to economic, financial, and monetary bound of its range for the year and M3 at a developments, the Committee decided rate substantially above the upper bound of that a slightly higher or a slightly lower its range. Total domestic nonfinancial debt federal funds rate might be acceptable has expanded in recent months at a pace somewhat below the middle of its range. during the intermeeting period. The The Federal Open Market Committee reserve conditions contemplated at this seeks monetary and financial conditions that meeting were expected to be consistent will foster price stability and promote suswith some moderation in the growth of tainable growth in output. In furtherance of M2 and M3 over coming months. these objectives, the Committee at its meeting in July reaffirmed the ranges it had estab- The Federal Reserve Bank of New lished in February for growth of M2 and M3 York was authorized and directed, until of 1 to 5 percent and 2 to 6 percent respecinstructed otherwise by the Committee, tively, measured from the fourth quarter of to execute transactions in the System 1996 to the fourth quarter of 1997. The range Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 84th Annual Report, 1997 for growth of total domestic nonfinancial on U.S. economic activity. He also debt was maintained at 3 to 7 percent for the believed that signaling a greater willingyear. For 1998, the Committee agreed on a ness to tolerate modest policy adjusttentative basis to set the same ranges as in ments in response to emerging devel- 1997 for growth of the monetary aggregates and debt, measured from the fourth quarter opments would foster more flexible of 1997 to the fourth quarter of 1998. The movements in longer-term financial behavior of the monetary aggregates will markets and specifically enable longercontinue to be evaluated in the light of term interest rates to play their tradiprogress toward price level stability, movetional role as automatic stabilizers for ments in their velocities, and developments in the economy and financial markets. the economy more effectively. In the implementation of policy for the It was agreed that the next meeting immediate future, the Committee seeks con- of the Committee would be held on ditions in reserve markets consistent with Tuesday-Wednesday, February 3-4, maintaining the federal funds rate at an 1998. average of around 5!/2 percent. In the context of the Committee's long-run objectives for The meeting adjourned at 12:45 p.m. price stability and sustainable economic growth, and giving careful consideration to Donald L. Kohn economic, financial, and monetary develop- Secretary ments, a slightly higher federal funds rate or a slightly lower federal funds rate might be acceptable in the intermeeting period. The contemplated reserve conditions are expected to be consistent with some moderation in the growth in M2 and M3 over coming months. Votes for this action: Messrs. Greenspan, McDonough, Ferguson, Gramlich, Guynn, Kelley, Meyer, Moskow, Parry, Mses. Phillips and Rivlin. Vote against this action: Mr. Broaddus. Mr. Broaddus dissented because he continued to believe that a modest tightening of policy would be prudent in light of the apparent persisting strength in aggregate demand for goods and services. He recognized the case for holding policy steady given recent developments in East Asian economies and financial markets; he believed, however, that a slight firming at this meeting would provide valuable insurance against the risk that demand growth might remain above a sustainable trend and require a sharper policy response later. He thought further that the potential benefits of this insurance outweighed the risk that such an action would have a significant negative impact Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

177 Consumer and Community Affairs In 1997 the Board's activities in the convenience and needs factors were consumer protection area centered on consistent with approval. making disclosures about transactions For CRA examinations of state memmore helpful to consumers and focused ber banks, the Board in 1997 focused on particularly on automobile leases and working with the other financial regureal estate mortgages. The Board devel- latory agencies to foster consistency in oped a major consumer education cam- the application of examination procepaign related to the disclosures that dures and on analyzing the data colconsumers receive under its consumer lected by large banks on small business leasing regulations. The initiative had and small farm loans and community participation from more than thirty development lending. For large instituagencies and organizations, resulting in tions, revised CRA regulations became the publication of an educational bro- fully effective on July 1, 1997, so that chure on how to make informed leasing all such institutions are now examined choices and the creation of a public Web under the revised regulation and no site. longer have the option to be examined In the area of mortgage transactions, under the previous regulation. the Board joined with the U.S. Depart- In the fair lending area, in addition to ment of Housing and Urban Develop- pursuing corrective measures on its ment (HUD) to review the disclosures own, the Board referred several discurrently given to consumers under the crimination cases involving state mem- Truth in Lending Act and the Real ber banks to the Department of Justice, Estate Settlement Procedures Act, seek- including a case of alleged redlining ing ways to make the disclosures more in brokered loans. The Board referred useful. The agencies determined that other cases raising claims of alleged regulatory change alone would not mortgage discrimination to HUD for achieve the desired improvements called investigation. The Board also published for by the Congress and turned their final rules governing "self tests" that attention to legislative changes to reform allow lenders to keep findings from the current disclosure scheme. any self-tests they conduct confidential The Board acted on bank and bank under a legal privilege; the rules are holding company applications that parallel to rules issued by HUD under involved Community Reinvestment Act the Fair Housing Act. The Board contin- (CRA) protests, adverse CRA ratings, ued to improve the System's process and issues of fair lending and noncom- for fair lending examinations, using pliance with consumer protection reg- enhanced statistical techniques to test ulations. Several applications involving large institutions for compliance. major bank mergers elicited both strong Acting on behalf of the Federal support and strong opposition from Financial Institutions Examination members of the public; all were pro- Council (FFIEC) and HUD, the Board tested on CRA grounds. After extensive prepared Home Mortgage Disclosure analysis, the Board approved all these Act statements for individual lenders applications, finding in each case that and aggregate reports for metropolitan Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 84th Annual Report, 1997 areas, meeting the statutory target for thirty agencies and organizations from delivery. From the data, the Board noted the private and public sectors, including that denial rates continued to show dis- automobile manufacturers and dealers, parities among racial and ethnic groups leasing trade associations, consumer and that although the number of loans to advocacy groups, Reserve Banks, the black applicants increased in 1996 as it Federal Trade Commission, and state had in previous years, the rate of growth attorneys general. decreased. This leasing education team devel- These matters are discussed below, oped "core messages" about leasing— along with other actions by the Board key information that consumers need to in the areas of consumer protection and make informed choices: community affairs. • Leasing is different from buying • Consumers need to consider the costs Leasing Education and at the beginning of, during, and at the Regulatory Changes end of the lease • Consumers need to compare lease Regulation M, which implements the offers and negotiate some terms Consumer Leasing Act, requires lessors • Consumers need to know their to give consumers uniform disclosures rights and responsibilities in lease of the costs and terms of a lease before transactions. the lease becomes legally binding. In September 1996, the Board adopted a These core messages were incorporevised Regulation M following a multi- rated into a new brochure, Keys to Vehiyear review under its Regulatory Plan- cle Leasing—A Consumer Guide, which ning and Review program. Through the was released at a press conference in review the Board identified ways to sim- December. One million copies of the plify the regulation to carry out more brochure were printed and are being diseffectively the congressional intent of tributed by the Federal Reserve and the consumer protection. The review also other organizations that participated in led to the modernization of the rules, to its preparation. address changes that have taken place in The information in the brochure is consumer leasing since 1976, the year also available on the Board's public the Consumer Leasing Act was enacted. Web site, and copies can be printed from The revisions included new disclosures, there (http://www.bog.frb.fed.us/pubs/ primarily for motor vehicle leasing, to leasing). The Web site includes a glosimprove consumers' understanding of sary of leasing terms and provides links lease transactions. The Board deter- to the sites of some members of the mined that these revisions were espe- leasing education team. In December cially necessary given that about one- alone, the Web site recorded almost third of all passenger cars now delivered 20,000 visits.1 to consumers are leased rather than purchased and financed. 1. The Board's Web site provides a wide array Throughout 1997, the Board worked of other information, including educational broto develop an educational program to chures on home mortgages, guidance for filing ensure that consumers could take maxi- complaints, the consumer compliance handbook, and credit card information. It also provides links mum advantage of the new disclosures to the Web sites of the FFIEC and the other about lease transactions. It organized a financial regulatory agencies. For CRA, the broad-based coalition of more than agency sites provide data on CRA ratings, reports, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 179 In March the Board amended Regula- Following a review of the comments tion M to implement changes to the and an analysis conducted by the Board Consumer Leasing Act enacted in 1996. and HUD, the Board in March 1997 The changes primarily streamline the published a finding that, to achieve the advertising disclosures as specified in goals set forth in the amendments, legisthe act; they also revise the rules for lative rather than regulatory changes disclosure of up-front costs in lease would be necessary. The Board invited agreements to parallel the advertising public comment on possible statutory rules and include several other technical changes to TILA and received numerchanges. ous letters from individual consumers. The revised leasing rules adopted in Consumers' primary concern was that 1996 made it necessary for leasing disclosures about mortgage costs be companies and automobile dealerships given earlier in the process than they are to develop new leasing forms and to now, so that they can use the disclosures reprogram the computer software used to comparison shop before applying for to produce the lease disclosures. The a loan from a particular lender. Consumnew rules (and the commentary inter- ers also want the cost disclosures to be preting them) were to become manda- as accurate as possible, so that they will tory on October 1, 1997. In September not face unexpected charges at loan 1997, the Board delayed the mandatory closing, when they no longer have the effective date for compliance to January flexibility to seek other financing. 1, 1998, to give the nation's more than In July, the Board and HUD testified 22,500 new-car dealerships more time before the Senate Banking Committee to install and test the computer software on ways to improve the disclosures and used to produce the disclosures. outlined their plans to develop legislative recommendations. Also in July, the Board and HUD held a public forum to TILA and RESPA Rules hear views on major issues raised by reform efforts. The participants, who During 1997 the Board and HUD studincluded consumer advocates, officials ied ways to improve the disclosures of state agencies, and trade associations about home mortgage transactions given representing lenders, mortgage brokers, to consumers under the Truth in Lendand providers of settlement services, ing Act (TILA) and the Real Estate discussed the goals of TILA and RESPA Settlement Procedures Act (RESPA). In and considered whether significant 1996 the Congress required the two improvement can be made to the existagencies to simplify and improve the ing statutes or whether more compredisclosures if possible and to create a hensive reform is needed. They talked single format for use in complying with about whether lenders should guarantee both laws. In December 1996, the rates and other costs at the time of appliagencies jointly published an advance cation. They also discussed preliminary notice of proposed rulemaking, seeking findings from survey data on consumer comment on regulatory and legislative credit shopping presented by the Board changes that might achieve those goals. indicating that although many consumers rely on the annual percentage rate— the APR—when selecting a loan, few and examination schedules; at year-end, work was understand the measure's mathematical under way to create a centralized interagency database of CRA ratings. significance. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 84th Annual Report, 1997 At year-end, the Board and HUD to the practice of using fictitious appliwere preparing a report and recommen- cants for credit ("testers") but does not dations on disclosures about home mort- apply to creditor reviews and evaluagage transactions, targeted for delivery tions of loan and application files. (HUD to the Congress in 1998. published a similar rule to revise regulations implementing the Fair Housing Act.) Other Regulatory Matters Regulation B Regulation C (Equal Credit Opportunity) (Home Mortgage Disclosure) During 1997 the Board and HUD devel- The Congress in 1996 raised the asset oped rules to govern "self tests" under threshold for coverage of depository the Equal Credit Opportunity Act institutions under the Home Mortgage (ECOA) and the Fair Housing Act. (The Disclosure Act (HMDA) from $10 miltwo agencies were directed by amend- lion, setting a standard based on the ments to the statutes to issue "substan- consumer price index for urban wage tially similar" rules.) In December 1996 earners and clerical workers (the the Board published a proposal to allow CPIW); it left unchanged the asset meaa creditor that voluntarily conducts a sure for nondepository institutions. To self-test of its operations to keep the implement this amendment, the Board results confidential under a legal "privi- in January 1997 published an interim lege." The privilege serves as an incen- rule making an initial adjustment to the tive to do self-testing by ensuring that asset threshold—to $28 million—on the any evidence of discrimination produced basis of the change in the CPIW by a self-test conducted voluntarily will between 1975 and year-end 1996. The not be used against the creditor, pro- Board made the rule final in May. It will vided the creditor takes appropriate cor- make future changes using the annual rective measures for any discrimination average of the CPIW for the twelvethat is found. month period ending in November, a The primary issue addressed in the schedule that will allow publication by rulemaking process was whether to December of any change in the threshdefine "self test" narrowly or broadly; old for the coming year. the Board used a narrow definition in The rule made final in May also esthe proposal but solicited public com- tablishes, pursuant to statutory changes, ment on a broader definition. an alternative way for institutions to The Board's final rule, published in make HMDA disclosure statements December 1997, adopted the narrow available for public inspection. An instidefinition. It defines a self-test as any tution must make a complete copy of program, practice, or study designed and its disclosure statement available to the used specifically to determine the extent public at its home office. For branch or effectiveness of a creditor's compli- offices located in other metropolitan ance with the ECOA by creating data areas, it previously had to make discloor other factual information that is not sures available at one office in each area available and cannot be derived from within ten calendar days; now it has the loan or application files or other records option of posting a notice informing the related to credit transactions. It applies public that disclosures will be provided Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 181 on request (and indicating the address to sions of Regulation E to some electronic which requests should be sent). stored-value products. In December, the Board adjusted the The report noted that even minimal asset threshold to $29 million for data regulation (such as requiring only initial collection in 1998. disclosures) could affect the development of electronic stored-value products if the incremental costs of complying Regulation E with the regulation were large or if (Electronic Fund Transfers) they differed from one product to the In January 1997, the Board published next. Because experience with electronic a proposal to revise Regulation E to stored-value products to date is limited, implement amendments to the Elec- the report concluded that it would be tronic Fund Transfer Act (EFTA) difficult to predict whether the benefits included in the Personal Responsibility to consumers from any particular reguand Work Opportunity Reconciliation latory provision would outweigh the Act of 1996. The amendments exempt corresponding costs of compliance. The from coverage "needs tested" electronic report did not endorse or recommend benefit transfer (EBT) programs estab- any specific course of action at this time. lished by or administered by state or local governments, including those for Regulation Z the disbursement of food stamps and (Truth in Lending) cash assistance to needy families. Federally administered programs—as In January the Board published prowell as pension and other employment- posed revisions to Regulation Z to carry related EBT programs established by out changes to the Truth in Lending Act state or local governments—remain sub- enacted by the Congress in 1996. The ject to Regulation E's special rules for amendments apply to variable-rate loans government programs. Compliance with having a term of more than one year that these special rules, which the Board are secured by the consumer's principal adopted in 1994, became mandatory on dwelling. Previously, creditors had to March 1, 1997. give a fifteen-year historical example of In March the Board submitted to the index values related to the interest rate. Congress, as required by the Economic Now they have the option of providing a Growth and Regulatory Paperwork statement that the periodic payment Reduction Act of 1996, a report on the may increase or decrease substantially, possible costs and consumer benefits together with the disclosure of a maxiresulting from application of the EFTA mum interest rate and a corresponding to electronic stored-value products. The payment based on a $10,000 loan report considered several alternative amount. The Board adopted a final rule approaches, including allowing competi- in November. tion in the market to determine which In June the Board held public hearconsumer protections are provided for a ings in Los Angeles, Atlanta, and Washgiven electronic stored-value product. ington, D.C., to determine how well the Among the sources of information used Home Ownership Equity Protection Act for the analysis were comments submit- (HOEPA) is working. The HOEPA proted to the Board in response to its 1996 visions of Truth in Lending apply to proposal to extend the disclosure provi- loans secured by the homeowner's prin- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 84th Annual Report, 1997 cipal dwelling if the interest rate or clos- Fair Credit Reporting Act adopted in ing costs exceed certain levels. The law 1996, addresses the potential use of such seeks to protect against abusive mort- information to commit financial fraud gage lending practices that target the and the corresponding risk of loss to elderly and the unsophisticated. The act insured depository institutions. requires credit disclosures, beyond those The Board found that information normally given, three days before a about consumers is widely available homeowner becomes obligated on a from both government and commercial loan. sources and that few legal constraints The Board heard a wide range of limit its collection, use, or disseminaviews. Lenders criticized the complexity tion. Some of the information is sensiof HOEPA's coverage tests and sug- tive and can be used to facilitate unlawgested simplifying the rules about which ful activities, such as "identity theft" fees count toward the closing costs involving the illegal use of personal data threshold (and raising the rate and fee to commit financial fraud. Losses from thresholds to keep the same level of identify theft do not seem to present coverage). They also expressed concern a significant risk to insured depository about having to give new disclosures to institutions at this time. Nonetheless, the correct even a small error, because doing report notes, this type of fraud is a growso triggers a new three-day waiting ing risk to consumers and financial instiperiod before funds can be disbursed. tutions, and relatively easy access to Consumer advocates asked for a more personal information may increase the effective enforcement tool to address risk. The report suggests steps that concontinuing abuses and also favored a sumers and financial institutions could prohibition on practices that they say take to reduce the likelihood of fraud, place homes at risk of foreclosure, such but it makes no recommendations for as loans to borrowers who have high legislative or administrative action. debt-to-income ratios and repeated refi- In July the Board published for comnancings (loan flipping) that add fees on ment proposed amendments to the top of fees. model forms in Regulation B related to Although the June hearings were consumer rights under the Fair Credit devoted primarily to home equity lend- Reporting Act. The proposal relates to ing, the Board also used them to explore the disclosures that consumers must be other issues that it must consider in the given when they are denied credit on the future, including issues related to how basis of information obtained from a Truth in Lending's finance charge dis- consumer reporting agency or from an closure could more accurately reflect the affiliate of the creditor. Final action was cost of consumer credit. pending at year-end. Actions under the Fair Credit Interpretations Reporting Act In February the Board revised the offi- In March the Board submitted to the cial staff commentary to Regulation Z Congress a report concerning the avail- (Truth in Lending). The update gives ability and use of sensitive identifying guidance about new tolerances for information about consumers, such as the disclosure of finance charges and their social security numbers. The other matters in connection with homereport, required by amendments to the secured installment loans. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 183 In March the Board revised the offi- on behalf of HUD and the member cial staff commentary to Regulation M agencies of the Federal Financial Institu- (Consumer Leasing). The update offers tions Examination Council.3 guidance for compliance with Regula- The FFIEC prepares individual distion M as revised by the Board in Sep- closure statements for lenders that tember 1996. reported data—one statement for each metropolitan area in which a lender had offices and reported loan activity. The HMDA Data and 42,936 statements produced from the Lending Patterns 1996 data cover 14.8 million loans and applications; the 32 percent increase The Home Mortgage Disclosure Act in loans and applications over 1995 is requires that mortgage lenders covered largely attributable to a sharp increase in by the act collect and make public cer- refinancing activity.4 In July, each institain data about their home purchase, tution made its disclosure statements home improvement, and refinancing public; and in August, reports containloan transactions. Depository instituing aggregate data for all lenders in a tions generally are covered if they were given metropolitan area were made located in metropolitan areas and had available at central depositories in the assets above a certain threshold at the nation's 332 metropolitan areas. preceding year-end; mortgage compa- Lending institutions tend to specialize nies are covered if they were located in in different types of home loans. In or made loans in metropolitan areas and 1996, depository institutions continued had assets of more than $10 million at to be the predominant source of home the preceding year-end (when combined improvement loans and loans for multiwith the assets of any parent company), family residences. Mortgage companies and are also covered, regardless of asset accounted for about 52 percent of size, if they originated 100 or more the conventional home purchase loans home purchase loans in the preceding reported under HMDA and about year.2 In 1997, 8,367 depository institu- 80 percent of the government-backed tions and affiliated mortgage companies home purchase loans. and 961 independent mortgage compa- Mortgage originators and institutions nies reported HMDA data for calendar in the secondary market for mortgages, year 1996. such as Fannie Mae (the Federal Lenders covered by HMDA submit National Mortgage Association) and information about the geographic loca- Freddie Mac (the Federal Home Loan tion of the properties related to their Mortgage Corporation), offer a variety loans and applications, the disposition of conventional home loan programs, of loan applications, and, in most cases, often in concert with private mortgage the race or national origin, income, and sex of applicants and borrowers. The 3. The member agencies of the FFIEC are the Federal Reserve Board processes the Board, the Federal Deposit Insurance Corporation data and produces disclosure statements (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Super- 2. Through 1996, the asset threshold for deposi- vision (OTS). tory institutions was $10 million. In September 4. A summary of the 1996 HMDA data appears 1996, the Congress amended HMDA to raise the in a series of special tables in the Federal Reserve asset threshold according to changes in the CPIW. Bulletin, vol. 83, no. 9 (September 1997), See "Other Regulatory Matters" above. pp. A68-A75. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 84th Annual Report, 1997 insurers, to benefit low-income and The 1996 HMDA data continue to minority households and neighborhoods. show higher rates of credit denial for In recent years, these institutions have conventional home purchase loans for expanded their program offerings, which black and Hispanic applicants than for may account for the continuing increase Asian and white applicants, even within in loans to these homebuyers. From the same income brackets. Overall 1993 to 1996 the number of conven- denial rates for conventional home purtional home purchase loans to low- chase loans were 49 percent for black income borrowers increased 37 percent, applicants, 34 percent for Hispanic compared with 23 percent for high- applicants, 14 percent for Asian appliincome borrowers. cants, and 24 percent for white appli- The Federal Housing Administration cants. All these rates were higher than in (FHA) also has adopted measures to 1993, 1994, and 1995.5 enhance borrowing opportunities for The increase in denial rates over time low-income households; at the same stems in part from changes in the home time, it has worked to make FHA loans lending market. First, the number of more competitive. The agency has low- applications submitted to "subprime" ered its insurance premiums, increased lenders and to institutions that extend flexibility in its underwriting standards, loans for the purchase of manufactured and raised the maximum size of the homes has increased substantially. These loans that it will back. Between 1993 lenders' denial rates are quite high and 1996 the number of government- (about 55 percent on average, compared backed home purchase loans (pre- with about 13 percent for other lenders), dominantly FHA-insured) increased and their increasing share of all applica- 19 percent for low-income borrowers, tions for conventional home purchase compared with 5 percent for high- loans (25 percent in 1996 compared with income borrowers. 11 percent in 1993) results in higher overall denial rates. Second, applications by low-income households consti- Lending Patterns tute an increasing share of all applica- Home purchase lending to minority tions. Because low-income households homebuyers has increased markedly in tend to have relatively high denial rates, recent years: From 1993 to 1996 the overall denial rates also tend to rise. number of home purchase loans Finally, the incidence of multiple appliextended to black applicants increased cations has increased over time. Appli- 53 percent, to Hispanic applicants cants who submit applications to more 56 percent, and to Asian applicants than one prospective lender have high 15 percent—compared with 14 percent denial rates, and their growth in the pool for white applicants. However, the of all applicants also tends to raise overgrowth of lending to blacks slowed in all denial rates. 1996 and was less than the national The data collected under HMDA average. The slower growth may have do not include the wide range of finanbeen due in part to the relatively weaker cial and property-related factors that housing markets in that year in states lenders consider in evaluating loan that have relatively large black populations, principally some states in the mid- 5. For details, see the Special Tables section in Atlantic region and a number of souththe September issue of the Federal Reserve Bulleern states. tin for 1995 and subsequent years. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 185 applicants. Thus, the HMDA data alone Private Mortgage Insurance do not provide an adequate basis The FFIEC, on behalf of the nation's for determining whether a particular eight active private mortgage insurance lender is discriminating unlawfully. But (PMI) companies, compiles information because they can be supplemented by on applications for private mortgage other information available to lenders' insurance similar to the information on supervisory agencies, the data are an home mortgage lending collected under important tool in the enforcement of fair HMDA. Lenders typically require prilending laws. vate mortgage insurance for conventional mortgages that involve small Use of Data by Other Agencies down payments. Working through their national trade Lenders who sell their loans in the secassociation, the Mortgage Insurance ondary market are required under Companies of America, the PMI compa- HMDA to identify the category of purnies submit their data to the FFIEC on a chaser (for example, Fannie Mae or voluntary basis. The FFIEC prepares Freddie Mac). The information helps disclosure statements for each company make it possible to assess the relative and aggregate reports for metropolitan performance of institutions in serving areas. These reports are available for the credit needs of lower-income and public review at the central depositories minority homebuyers.6 at which the HMDA data are available.7 In its oversight of the housing activities of government-sponsored entities, HUD uses the HMDA data to help Fair Lending assess the efforts of Fannie Mae and Freddie Mac to support mortgages for Under the Equal Credit Opportunity low- and moderate-income families and Act, the Board is required to refer to the mortgages on properties in targeted com- Department of Justice any violations munities. The data also serve as one that it has reason to believe constitute a component of the fair lending reviews "pattern or practice" of unlawful disconducted by HUD and the Department crimination. The Board made four such of Justice. In addition, the data assist referrals during 1997. Two of the cases HUD, the Department of Justice, and involved discrimination on the basis of state and local agencies in responding marital status, and a third, discriminato allegations of lending discrimina- tion on the basis of age. The three mattion filed by loan applicants and borrow- ters were returned to the Board for ers and assist in the agencies' target- enforcement. ing of lenders for further inquiry. The fourth case, which was still under consideration by the Department of Justice at the close of 1997, involved a determination that a lender had appar- 6. See, for example, the discussion of which ently engaged in discriminatory "redlininstitutions bear the credit risk of mortgages extended to lower-income and minority home- ing" in residential loans, in violation of buyers in Glenn B. Canner, Wayne Passmore, and Brian J. Surette, "Distribution of Credit Risk among Providers of Mortgages to Lower- 7. A summary of the 1996 PMI data appears Income and Minority Homebuyers," Federal in a series of special tables in the Federal Reserve Bulletin, vol. 82 (December 1996), Reserve Bulletin, vol. 83, no. 9 (September 1997), pp. 1077-1102. pp. A76-A79. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 84th Annual Report, 1997 both the ECOA and the Fair Housing Although community development, Act. The alleged redlining occurred reinvestment, and fair lending continued when the lender, which brokered loans to be central to Community Affairs for another institution, honored the prac- educational and technical assistance tice of that institution to refrain from activities, 1997 was marked by a taking applications from persons resid- broader approach to the economic issues ing in designated urban areas. The confronting low- and moderate-income Board's examination had demonstrated communities. The New York Reserve that those urban areas had significantly Bank, for example, sponsored a conferhigher percentages of minority residents ence on welfare reform and its implicathan the remainder of the institution's tions for lower-income communities. market area and that the lender appeared The Minneapolis Reserve Bank helped to have no nondiscriminatory expla- organize focus groups to discuss the nation for adhering to the institution's possible effects of increased use of elecredlining policy. tronic banking services on low- and moderate-income residents. The development and sponsorship of Community Development educational activities remained a major The Federal Reserve System, through undertaking of the Federal Reserve's its Community Affairs programs at the Community Affairs programs in 1997. Board and the Reserve Banks, engages Overall, the Reserve Banks sponsored in ongoing outreach, informational, and or cosponsored 233 conferences, semieducational activities to help financial nars, and informational meetings on institutions and the public understand community development, reinvestment, and address financial services issues and fair lending topics. The programs affecting low- and moderate-income were attended by more than 11,600 persons. bankers, bank examiners, and represen- In 1997, six Reserve Banks—Boston, tatives of small businesses and commu- New York, Cleveland, St. Louis, Chi- nity and consumer groups. Additionally, cago, and San Francisco—reached the staff members from the Board and the final stages of their Residential Mort- Reserve Banks made more than 275 pregage projects following a two-year ini- sentations at conferences, seminars, and tiative in selected cities to help identify meetings sponsored by banking, govand address barriers to equal access to ernmental, business, and community credit in the homebuying process. In organizations. earlier stages, the Reserve Banks had Programs in 1997 reflected a growing brought together community represen- concern with issues related to small tatives and key industry participants business finance and economic developin the homebuying process to discuss ment. The Cleveland Reserve Bank, problems that affect minority and lower- working with the U.S. Small Business income homebuyers and to forge solu- Administration and the National Countions. Task groups reported their find- cil for Smaller Enterprises, spearheaded ings during 1997. Implementation of an "Access to Capital" initiative for the their recommendations by community Cleveland area. The initiative will bring and industry groups, separately and in together business leaders to review the joint efforts, is expected to improve credit process, identify possible barriers equal access to credit over the long term faced by small firms, and make recomin the cities studied. mendations for improving these firms' Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 187 access to financing. The Boston and of community-based development and San Francisco Reserve Banks spon- consumer groups, and housing, comsored conferences and workshops on munity, and economic development the financing and technical assistance officials. needs of women-owned businesses. The Outreach and technical assistance to Dallas Reserve Bank sponsored a sym- banks—and to community representaposium on financing for very small tives interested in bank involvement in firms—"microenterprises"—and the reinvestment and community develop- Boston Reserve Bank helped create a ment initiatives—continued to play a training curriculum on microenterprise major role in Community Affairs prodevelopment. grams in 1997. Members of the Commu- Economic development in rural areas nity Affairs staffs at the Board and the and on Indian reservations was the focus Reserve Banks conducted more than of educational forums at several Reserve 1,600 outreach meetings with represen- Banks. The Chicago Reserve Bank tatives of financial institutions and local sponsored a conference on rural com- communities to explore community munity economic development, and the credit needs and issues related to the Minneapolis Reserve Bank sponsored a provision of financial services. workshop on women's access to credit In conjunction with their outreach and capital in rural areas and on Indian efforts, several Reserve Banks develop, reservations. The Kansas City and Min- for selected communities, profiles that neapolis Reserve Banks worked with identify key community and economic the Montana-Wyoming Tribal Leaders development needs and describe some Council and the University of Montana organizations that can serve as Law School to cosponsor a conference resources. These profiles are made availon building tribal infrastructure to sup- able to banks and to community and port economic prosperity. business organizations, and they often In 1997 the Community Affairs pro- help stimulate collaborative approaches grams developed or expanded a variety to community reinvestment. During of publications and other informational 1997, the New York Reserve Bank pubresources directed at bankers, small lished profiles for Westchester County businesses, and community organiza- in New York and for Bergen and Passaic tions. The Minneapolis Reserve Bank Counties in New Jersey, and the Chipublished a revised and expanded sec- cago Reserve Bank published a profile ond edition of Principles and Practices for the metropolitan area of Saginawfor Community Development Lending, Bay City-Midland in Michigan. and the Richmond Reserve Bank pub- The St. Louis Reserve Bank devellished a special Marketwise Report oped a profile for the Springfield, on "Community-Based Development." Missouri, metropolitan area and worked The Reserve Banks published a com- with the Dallas Reserve Bank on a probined total of thirteen different com- file of the Texarkana metropolitan area. munity affairs newsletters dealing with The Richmond Reserve Bank developed various aspects of community and a profile of the tricounty area surroundeconomic development, reinvestment, ing Petersburg, Virginia. and fair lending. The combined circula- The San Francisco Reserve Bank tion of these newsletters in 1997 grew developed profiles for the states of Utah, to more than 73,000, including bankers, Idaho, and Washington and the cities small-business owners, representatives of Portland, San Diego, Los Angeles, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 84th Annual Report, 1997 Sacramento, San Francisco, San Jose, Finally, Board and Reserve Bank staff Las Vegas, and Phoenix. Each profile, members provided considerable support about sixty pages long, gives an over- to members of the Board of Governors view of the economic and demographic and to Reserve Bank presidents, who in characteristics of the area and includes 1997 gave increased attention to coma directory of community and govern- munity development, reinvestment, fair ment organizations, programs of interest lending, and consumer credit issues. to bankers, and lending, service, and Members of the Board made speeches at investment opportunities for financial conferences and meetings of commuinstitutions. nity, consumer, and civil rights groups The Atlanta Reserve Bank completed and toured lower-income neighborhoods work on a community contacts database and community development projects in designed to facilitate accessibility and Reserve Bank cities. A member of the greater use of outreach information. The Board continued to serve on the board database has been adopted for use by of directors of the Neighborhood Reinseveral other Reserve Banks, and the vestment Corporation. Activity by the database design has been adopted by Subcommittee on Community Affairs of the FFIEC to facilitate interagency shar- the System's Conference of Presidents ing of community contact informa- also increased. tion for use in assessments of CRA performance. Economic Effects of the In 1997, the Board helped organize Electronic Fund Transfer Act the first formal interagency meeting of Community Affairs representatives of In keeping with statutory requirements, the federal supervisory agencies. Partici- the Board monitors the effects of the pants exchanged information on their Electronic Fund Transfer Act on the agencies' community affairs programs, compliance costs and consumer benefits discussed community development and related to electronic fund transfer serreinvestment issues, and explored ways vices. In 1997 the economic effects of in which the agencies might coordinate the act generally increased because of their activities. continued growth in the use of EFT Community Affairs programs contin- services, although an exemption for ued in 1997 to provide support as the certain electronic benefit transfer pro- Federal Reserve carried out its supervi- grams reduced costs for state and local sory responsibilities. Board and Reserve governments. Bank staff members helped to review As revised in 1997, Regulation E proposals regarding community devel- exempts "needs tested" EBT programs opment investment by banks and bank established or administered by state holding companies and to analyze or local governments. The exemption HMDA and CRA data on small-business reduces the cost of providing benefits lending for use in community affairs electronically and eliminates uncertainty research and publications; and in con- about potential losses associated with ducting CRA examinations, Reserve Regulation E's liability rules. Thus, it Bank examiners increasingly made use will likely encourage the states to of community contacts and other infor- develop EBT programs. Without Regumation provided by Community Affairs lation E, the protections previously staff members. afforded benefit recipients, especially Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 189 protections against unauthorized use, account for a small share of electronic may be diminished somewhat. How- transactions, but their use continued ever, electronic delivery will likely pro- to grow rapidly in 1997. Over the past vide benefit recipients greater security year, the number of point-of-sale transthan the paper-based delivery systems actions rose 26 percent, to 120.2 million previously used. per month from 95.5 million per month During the 1990s, the proportion of in 1996, and the number of point-of-sale U.S. households using EFT services has terminals rose 49 percent, to 1.3 million. grown at an annual rate of about 2 per- The incremental costs associated with cent. About 85 percent of households the EFTA are difficult to quantify now have one or more EFT features on because no one knows how industry their accounts at financial institutions. practices would have evolved in the Automated teller machines remain the absence of statutory requirements. The most widely used EFT service. Nearly benefits of the law are also difficult to two-thirds of all U.S. households cur- measure because they cannot be isolated rently have ATM cards, and most of the from consumer protections that would nation's depository institutions offer have been provided in the absence of consumers access to ATMs. Access to regulation. ATMs has been enhanced by the The available evidence suggests no operation of shared networks; almost all serious consumer problems with elec- ATM terminals are part of one or more tronic transactions at this time. In 1997, shared networks. Over the past year, the about 94 percent of depository instinumber of ATM transactions increased tutions examined by federal banking about 3 percent, from 890.3 million per agencies were in full compliance with month in 1996 to 915.0 million per Regulation E. Violations primarily month in 1997. Over the same period, involved failure to provide all the the number of installed ATMs rose required consumer disclosures. Con- 19 percent, to 165,000. sumer complaints and inquiries filed Direct deposit is another widely used with the System are another source EFT service. More than half of all of information about potential probhouseholds in the United States receive lems. In 1997, 114 of the complaints direct deposit of funds into their processed involved electronic transaccounts. Direct deposit is particularly actions; of the 52 that involved state widespread in the public sector, account- member banks, none involved a violaing for more than half of social security tion of the EFTA or Regulation E. The payments and two-thirds of federal sal- 62 complaints that did not involve state ary and retirement payments. It is less member banks were forwarded to other common in the private sector but has agencies for resolution. grown substantially in recent years. Taking into account both public and private Compliance Examinations payments, the proportion of households receiving direct deposits has grown Since 1977 the Federal Reserve System about 5 percent a year during the 1990s. has maintained a consumer compliance Nearly a third of households now examination program to ensure that state have debit cards, which consumers use member banks and foreign banking at the point of sale to debit their transac- organizations subject to Federal Reserve tion accounts. Point-of-sale systems still examination comply with federal laws Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 84th Annual Report, 1997 governing consumer protections in participants, and three courses in CRA financial services. examination techniques for sixty-six The Oversight Section of the Board's participants. Division of Consumer and Commu- The Reserve Banks supplement nity Affairs coordinates compliance examiner training through departmental examinations, which are conducted by meetings and special training sessions. the consumer affairs examination units In addition, examiners from the Reserve of the twelve Reserve Banks. The sec- Banks routinely participate in special tion reviews a sample of the examina- projects that give them an opportunity to tions for effectiveness, adherence to widen their perspective through work- System policy, and uniformity of ing with other System examiners and approach. Board staff. During the 1997 reporting period During 1997, the Board and the FDIC (July 1, 1996, through June 30, 1997), entered into a memorandum of underthe Federal Reserve conducted 839 standing to jointly develop an examinerexaminations for compliance with workstation module to provide autoconsumer protection laws: 599 of state mated assistance in three areas of member banks and 240 of foreign bank- compliance examinations: loans, deposit ing organizations.8 operations, and home mortgage disclo- Examiner training in the areas of con- sures. The goals of this joint effort are to sumer compliance, fair lending, and increase consistency in examinations, to the Community Reinvestment Act is reduce the time examiners spend on site, an important aspect of the Federal and to provide tools that decrease the Reserve's compliance program. New time examiners spend entering data Reserve Bank examiners attend a two- needed for examinations. week basic consumer compliance The FFIEC is the interagency coordischool, and examiners with six to twelve nating body charged with developing months of field experience attend a uniform examination principles, stantwo-week advanced consumer compli- dards, and report forms. In 1997, the ance school, a two-week fair lending member agencies of the FFIEC jointly school, and a one-week course in CRA revised examination procedures to examination techniques. During the reflect changes in consumer protection 1997 reporting period, the System con- laws and regulations, including the ducted three basic consumer compliance Flood Disaster Protection Act, the Truth schools for a total of fifty-nine partici- in Lending Act, the Fair Debt Collection pants, two advanced consumer compli- Practices Act, the Real Estate Settleance schools for thirty-two participants, ment Procedures Act, and the Electronic three fair lending schools for fifty-three Fund Transfer Act. In addition, the FFIEC worked to promote consistency in examinations 8. The foreign banking organizations examined among the agencies responsible for by the Federal Reserve are organizations operating implementing the CRA. Examiners from under section 25 or 25(a) of the Federal Reserve Act (Edge Act and agreement corporations) and the Board, the FDIC, the OCC, and the state-chartered commercial lending companies OTS reviewed the examination process owned or controlled by foreign banks. These insti- for small institutions, and the agencies tutions are not subject to the Community Reinvestimplemented some of their recommenment Act, and, typically, in comparison with state dations for revising examination procemember banks, engage in relatively few activities that are covered by consumer protection laws. dures and the public evaluation format. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 191 To foster consistency in the application bankers and the public through comof the examination procedures for large munity affairs offices at the Reserve institutions, the agencies held three Banks interagency training sessions under the • Performing CRA analyses in connecauspices of the FFIEC. The agencies are tion with applications from banks and also reviewing the implementation of bank holding companies. the procedures for examining institutions under the lending, investment, and During the 1997 reporting period service tests by reviewing the written (July 1, 1996-June 30, 1997), the performance evaluations and conducting Federal Reserve conducted 586 CRA interagency examinations of eight large examinations. Of the banks examinstitutions. They expect to provide ined, 152 were rated "outstanding" examiner training on the basis of their in meeting community credit needs, findings and to provide interpretive 423 were rated "satisfactory," 10 guidance on issues identified through were rated "needs to improve," and the project. 1 was rated as being in "substantial The FFIEC expanded its CRA Web noncompliance." site to make information on CRA more Regulation BB, as revised in 1995, readily available to the public. The site provides for different evaluation methnow includes the CRA regulation; an ods depending on an institution's size, interagency question-and-answer docu- structure, and operations. The performent; examination procedures; interpre- mance standards for small banks became tive letters; CRA data collected from effective on January 1, 1996. Also as of large institutions; and links to each that date, institutions could choose member agency's CRA Web site for in- whether (1) to submit a strategic plan formation on CRA ratings, examination to serve as a basis for their evaluations, schedules, and performance evaluations. (2) to be evaluated under the lending, investment, and service tests if they were large institutions, or (3) to request to be designated wholesale or limited Community Reinvestment Act purpose institutions and be examined The Federal Reserve assesses the CRA under the regulation's community develperformance of state member banks opment test. Using the lending, service, during regular compliance examina- and investment tests for large retail tions and takes the CRA record (as institutions was mandatory after July 1, well as other factors) into account when 1997, meaning that they could no longer acting on applications from state mem- be evaluated under the earlier regulaber banks and from bank holding tion. Of the 586 CRA examinations concompanies. ducted by the Federal Reserve during The Federal Reserve System has a the reporting period, 460 used the new three-faceted program for fostering and assessment method for small banks; 86 enforcing better bank performance used the assessment-factor method of under the CRA: the earlier regulation; 39 used the lending, investment, and service tests; and 1 • Examining institutions to assess used the community development test. compliance During the 1997 reporting period, the • Disseminating information on com- Board also approved one bank's stramunity development techniques to tegic plan and approved four banks' Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 84th Annual Report, 1997 requests to be designated wholesale failure to take one or more of the followinstitutions. ing actions: • Provide a written notice of adverse Agency Reports on Compliance action containing a statement of the with Consumer Regulations action taken, the name and address The Board is required to report annually of the creditor, an ECOA notice, and on compliance with the regulations that the name and address of the federal implement the Equal Credit Opportunity agency that enforces compliance Act, the Electronic Fund Transfer Act, • For monitoring purposes, collect the Consumer Leasing Act, the Truth in information about the race or national Lending Act, and the Expedited Funds origin, sex, marital status, and age of Availability Act and with the prohibition applicants seeking credit primarily for in Regulation AA against unfair and the purchase or refinancing of a prindeceptive practices. For purposes of this cipal residence report, the Board assembles data from • Notify an applicant of the action taken the Reserve Banks and collects data within the time frames specified in the from the four other financial regulatory regulation agencies (the FDIC, the OCC, the OTS, • Give a statement of reasons for and the NCUA) and from other federal adverse action that is specific and supervisory agencies.9 The extent of indicates the principal reasons for the compliance with these regulations var- credit denial or other adverse action ied widely in 1997, but, overall, compli- • Take a written credit application for ance was better than in 1996. The fol- the purchase or refinancing of a prinlowing sections summarize compliance cipal residence data for July 1, 1996, through June 30, • Retain proper records of credit 1997 (referred to here as the 1997 transactions. reporting period, or simply 1997). The OTS issued three formal enforcement actions addressing violations of Equal Credit Opportunity Act Regulation B, and the FDIC issued two (Regulation B) formal enforcement actions addressing The five financial regulatory agencies violations of consumer protection regureported that 80 percent of the institu- lations, including Regulation B. tions examined during the 1997 report- In 1997, the Federal Trade Commising period were in full compliance with sion (FTC) obtained consent decrees Regulation B, compared with 78 percent against two consumer finance compafor the 1996 reporting period. Of the nies for violations of the ECOA. In one institutions not in full compliance, case, the decree addressed allegations 71 percent had one to five violations that the finance company discriminated (the lowest frequency category). The against applicants on the basis of age most frequent violations involved the and the fact that their income derived from public assistance. In the other case, 9. The financial regulatory agencies use differ- the finance company failed to provide ent methods to compile data on compliance, which applicants who were denied credit a are presented here in terms of percentages of written notice of adverse action. The financial institutions supervised or examined. FTC is continuing its work with other Consequently, the data support only general conclusions. government agencies and with creditor Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 193 and consumer organizations to increase • Provide an adequate initial disclosure awareness of, and compliance with, the at the time a consumer contracts for ECOA. an EFT service or before the first The other agencies that enforce the transfer is made ECOA—the Farm Credit Administra- • Provide customers with a periodic tion (FCA), the Department of Trans- statement of all required information portation, the Securities and Exchange at least quarterly, or monthly if EFT Commission (SEC), the Small Busi- activity occurred. ness Administration, and the Grain The OTS issued one formal enforce- Inspection, Packers and Stockyards ment action addressing violations of Administration of the Department of Regulation E during the 1997 reporting Agriculture—reported substantial comperiod. The FTC issued a final decision pliance among the entities they superand order that was incorporated into a vise. The FCA's examination and consent decree, settling charges against enforcement activities revealed certain a telemarketing company for failing to violations of the ECOA, most of them obtain written authorization from condue to creditors' failure to collect monisumers for preauthorized transfers. In toring information and to comply with addition, the FTC accepted for public rules regarding adverse action notices; comment consent agreements in three however, no formal actions were initicases alleging violations of the EFTA; ated. The SEC reported that no violathe cases involved free trial offers that tions of Regulation B were detected durresulted in unexpected charges for many ing examinations of registered brokerconsumers. The FDIC issued two formal dealers conducted by self-regulatory enforcement actions addressing violaorganizations, the agency's principal tions of consumer protection regulamethod of reviewing for compliance. tions, including Regulation E. The SEC reported that no violations Electronic Fund Transfer Act of Regulation E were detected during (Regulation E) examinations of registered brokerdealers conducted by self-regulatory The five financial regulatory agencies organizations. reported that approximately 94 percent of the institutions examined during the 1997 reporting period were in compli- Consumer Leasing Act ance with Regulation E, the same per- (Regulation M) centage as in 1996. Financial institu- The five financial regulatory agencies tions most frequently failed to comply reported substantial compliance with with the following provisions: Regulation M for the 1997 reporting • Provide, at least once each calendar period. As in 1996, more than 99 peryear, a notice of the procedures for cent of the institutions examined were in resolving alleged errors full compliance with the regulation. The • After receiving notice of an error, few violations involved failure to adhere investigate the alleged error promptly, to specific disclosure requirements. determine whether an error was actu- In 1997 the FTC issued five final ally made, and transmit the results of decisions and orders against major autothe investigation and determination to mobile manufacturers to address viothe consumer within ten business days lations of the Consumer Leasing Act Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 84th Annual Report, 1997 (CLA) and the Truth in Lending Act cated that of the institutions not in (TILA). The orders settled charges that compliance, 62 percent were in the the five companies had violated the CLA lowest-frequency category (one to five in lease promotions that featured low violations), compared with 63 percent in monthly payments or low amounts down 1996. in large, bold print but hid additional The violations of Regulation Z most costs and sometimes contradictory infor- often observed were failure to accumation in "mouse print" that was diffi- rately disclose the finance charge, paycult or impossible to read. The com- ment schedule, annual percentage rate, plaints in these cases also charged the and amount financed and failure to procompanies with violating the CLA by vide a disclosure reflecting the terms of failing to clearly and conspicuously dis- the legal obligation between the parties. close various lease costs and terms as The OTS issued five formal enforcerequired. ment actions addressing violations of In two other cases, the FTC issued Regulation Z, and the FDIC issued two final decisions and orders against auto- formal enforcement actions addressing mobile dealerships for deceptive credit violations of consumer protection reguand lease agreements in violation of the lations, including Regulation Z. CLA and TILA. The FTC also issued A total of 261 institutions supervised for public comment consent agreements by the Board, the FDIC, or the OTS with two major automobile manufactur- were required, under the Interagency ers, and with five dealerships and their Enforcement Policy on Regulation Z, to chief executive officers in the St. Louis refund $2.6 million to consumers in area, for violations of the CLA and 1997 because of improper disclosures. TILA involving misrepresentation and The Department of Transportation hiding or failing to disclose adequately continued during 1997 to prosecute a the terms of advertised automobile lease cease-and-desist consent order issued in deals. 1993 against a travel agency and a char- In 1997 the FTC continued its educa- ter operator. The complaint alleged that tion efforts among consumers and busi- the two organizations had violated nesses and published a new brochure for Regulation Z by routinely failing to send businesses giving information about the credit statements for refund requests advertising requirements of revised to credit card issuers within seven days Regulation M. of receiving fully documented credit refund requests from customers. A motion for a summary judgment is Truth in Lending Act pending before an administrative law (Regulation Z) judge. The five financial regulatory agencies The FTC during the year issued two reported that 75 percent of the institu- final decisions and orders in cases allegtions examined during the 1997 report- ing deceptive disclosures and undering period were in full compliance with stated credit terms, including the annual Regulation Z, compared with 70 percent percentage rate, in violation of Regulain 1996. The Board reported a decrease tion Z and TILA. Another final decision in compliance, the FDIC and the OTS and order included civil penalties and reported an increase, and the OCC and consumer redress for alleged violations the NCUA reported an unchanged level of a prior FTC order relating to failure of compliance. The five agencies indi- to include mandatory credit insurance Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 195 and other costs in credit disclosures to two formal enforcement actions addressconsumers. The agency also issued ing violations of consumer protection seven final decisions and orders and regulations, including Regulation CC. accepted for public comment consent agreements in seven other cases involving lease and credit advertising. These Unfair and Deceptive cases alleged deceptive lease and credit Acts or Practices advertising, in violation of the CLA or (Regulation AA) TILA—specifically, failure to clearly and conspicuously or accurately provide The three financial regulatory agencies required lease or credit advertising with responsibility for enforcing Regudisclosures. lation AA's Credit Practices Rule During the year the FTC also contin- reported that 97 percent of the instituued its consumer and business education tions examined during the 1997 reportefforts through training seminars in sev- ing period were in full compliance with eral regions of the country. the regulation. The most frequent violation was failure to provide a clear, conspicuous disclosure regarding a cosigner's liability. No formal enforcement Expedited Funds Availability Act actions for violations of Regulation AA (Regulation CC) were issued during the period. The five financial regulatory agencies reported that 87 percent of institutions examined during the 1997 reporting Applications period were in full compliance with Regulation CC, the same percentage as In February, the Board adopted amendin 1996. Of the institutions not in full ments to Regulation Y (Bank Holding compliance, 66 percent had one to five Companies and Change in Bank Conviolations (the lowest-frequency cate- trol) that streamlined the applications gory). Institutions most frequently failed process for mergers and acquisitions. to comply with the following provisions: Bank acquisition proposals from wellcapitalized and well-managed bank • Follow special procedures for large holding companies having "satisfacdeposits tory" or better CRA examination • Adequately train employees and prorecords are now eligible for considervide procedures to ensure compliance ation using an expedited review process. • For deposits not subject to next-day Also, comments submitted after the availability, provide immediate availclose of the public comment period are ability to $ 100 no longer routinely considered by the • Make funds from certain checks, both System. local and nonlocal, available for with- In 1997 the Federal Reserve System drawal within the times prescribed by acted on twenty-four bank and bank the regulation holding company applications that • Provide disclosures of the institution's involved CRA protests and six that availability policy. involved adverse CRA ratings. The Sys- The OTS issued two formal enforce- tem reviewed another twenty applicament actions addressing violations of tions involving fair lending and other Regulation CC, and the FDIC issued issues related to compliance with con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 84th Annual Report, 1997 sumer protection laws.10 Among the factory" ratings at their most recent applications processed were several CRA examinations. The Board also conrelated to major bank acquisitions that sidered certain preliminary information were protested on CRA grounds. The developed in the course of its super- Board approved these applications, find- vision of Bane One that raised questions ing in each case that convenience and about fair lending oversight, proceneeds considerations, including CRA dures, and practices at Bane One Mortperformance records, were consistent gage Corporation, a nonbank subsidiary with approval, as described below. of the bank holding company. In its In February, the Board approved the order, the Board noted that the Federal application by Marine Midland Bank Reserve was conducting an examination (Buffalo) to merge with First Federal of Bane One Mortgage Corporation to Savings and Loan of Rochester (Roches- resolve these issues and to ensure comter). Commenters expressed concern pliance with the law. If the examinathat the closing of certain branches tion were to reveal a problem, the operated by the two companies would Board has the supervisory authority to adversely affect low- and moderate- require the bank holding company and income neighborhoods. In its order the nonbank subsidiary to address the approving the application, the Board deficiencies. directed Marine Midland to submit its In October, the Board approved the plan for branch closures, consolidations, application by First Union Corporation and relocations to the New York (Charlotte), the nation's sixth largest Reserve Bank. For each branch being banking organization, to acquire Signet closed in a low- or moderate-income Banking Corporation (Richmond). The or predominantly minority census tract, two organizations competed directly Marine Midland will indicate how it in Virginia, Maryland, and the District plans to help meet the convenience of Columbia, and some commenters and needs of the affected community. expressed concern that branch closings Marine Midland will also notify the resulting from the merger would dispro- Reserve Bank of any changes to the plan portionately disadvantage communities for a period of two years or until the with predominantly low- and moderate- Reserve Bank conducts its next CRA income and minority residents. In light performance examination. of these concerns, the Board reviewed In April, the Board approved the preliminary, confidential information application of Bane One Corporation from First Union on branches slated for (Columbus), at that time the nation's closure as well as the company's branch tenth largest banking organization, to closure policy. The Board also reviewed acquire Liberty Bancorp, Inc. (Okla- the OCC's most recent publicly availhoma City). The order noted that each able CRA performance evaluations for of Bane One's thirty subsidiary banks First Union's subsidiary banks; these had received "outstanding" or "satis- reports indicated that the banks have satisfactory records of opening and closing branches and that they provide 10. Two applications were withdrawn in 1997—one involving an adverse CRA rating and reasonable access to services for all the other, a fair lending issue. The System also segments of their communities. In addireviewed comments submitted in three other cases tion, the Board reviewed data on First (not reflected in the above figures) that were Union's lending record in its communideemed to be more in the nature of invididual consumer complaints than protests. ties and in low- and moderate-income Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 197 areas. The Board concluded that conve- extensive overlap of the two organizanience and needs considerations, includ- tions' branches in Florida markets, the ing CRA performance records, were Board directed NationsBank, as part of consistent with approval. any subsequent application to acquire a In December, the Board approved the depository institution, to report to the application by NationsBank Corporation Federal Reserve its branch closures in (Charlotte), the nation's fifth largest Florida and Georgia during the twobanking organization, to acquire Barnett year period following its acquisition of Banks, Inc. (Jacksonville). The two Barnett. organizations competed directly in a large number of banking markets in Consumer Complaints Florida, as well as in a few markets in Georgia. Several commenters expressed The Federal Reserve investigates comconcern that branch closures resulting plaints against state member banks and from the merger would adversely affect forwards to the appropriate enforcement senior citizens and low- and moderate- agencies complaints involving other income neighborhoods and would result creditors and businesses (see accompain a reduction in community develop- nying table). The Federal Reserve also ment and home mortgage lending. In monitors and analyzes complaints about its order approving the application, unregulated practices. the Board noted that it had considered NationsBank's record of opening and Complaints about State closing branches in other acquisitions, Member Banks in particular, its acquisition of Boatmen's Bancshares, Inc. (St. Louis), in The Federal Reserve received 3,318 December 1996. In that case the Board complaints about financial institutions found that, to date, NationsBank had in 1997: 2,673 by mail, 634 by telefollowed its branch closure policy by phone, and 11 in person. Fewer than assessing the effect of closings in low- half of the complaints (1,524) were and moderate-income areas. Given the against state member banks; of these, Consumer Complaints to the Federal Reserve System Regarding State Member Banks and Other Institutions, by Subject, 1997 Subject State member Other Total banks institutions Regulation B (Equal Credit Opportunity) 69 39 108 Regulation E (Electronic Fund Transfers) 62 52 114 Regulation Z (Truth in Lending) 194 299 493 Regulation BB (Community Reinvestment) ... 1 3 4 Regulation CC (Expedited Funds Availability) 30 31 61 Regulation DD (Truth in Savings) 50 44 94 Fair Credit Reporting Act 56 113 169 Fair Debt Collection Practices Act 13 18 31 Flood insurance 2 1 3 Regulations G, T, U and X 0 1 1 Real Estate Settlement Procedures Act 0 13 13 Unregulated practices ' 1,047 1,180 2,227 Total 1,524 1,794 3,318 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

198 84th Annual Report, 1997 almost two-thirds involved unregulated explanations of laws, regulations, and practices. Of the complaints against banking practices and provide relevant state member banks, about 61 percent printed materials on consumer issues. concerned lending: 5 percent alleged discrimination on a prohibited basis; and Unregulated Practices 56 percent raised a variety of issues, most of them involving lending prac- Under section 18(f) of the Federal Trade tices, including credit denial on a basis Commission Act, the Board monitors not prohibited by law (such as credit complaints about banking practices not history or length of residence) and subject to existing regulations and miscellaneous other practices (such as focuses on complaints involving pracrelease or use of credit information). tices that may be unfair or deceptive. Of Another 25 percent of the complaints the 2,227 complaints about unregulated against state member banks involved practices, the top five categories related disputes about interest on deposits and to credit cards: miscelleneous problems general deposit account practices; the involving credit cards (135), interest remaining 14 percent concerned dis- rates and terms (127), customer service putes about electronic fund transfers, problems (93), pre-approved solicitatrust services, and other miscellaneous tions (78), and penalty charges on bank practices (see accompanying table). accounts (69). The specific complaints The System also received 2,209 about credit cards represented by these inquiries about consumer credit and categories concerned such matters as banking policies and practices. In failure to close accounts as requested, responding to these inquiries, the Board increased interest rates on accounts, and the Reserve Banks give specific changed credit terms on pre-approved Consumer Complaints Received by the Federal Reserve System, by Type and Function, 1997 Complaints against state member banks Total Not investigated Investigated Bank legally correct Complaint Unable Explanation Goodwill Number Percent s to uf o fi b ci t e 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 11 1 0 0 1 1 Credit cards 26 2 1 5 12 1 Other loans 32 2 1 2 13 1 Discrimination not alleged Real estate loans 70 5 2 4 28 14 Credit cards 617 40 11 57 184 168 Other loans 172 11 6 27 64 30 Deposits 379 25 14 31 162 52 Electronic fund transfers 52 3 2 2 18 14 Trust services 12 1 1 13 2 Other 153 10 13 27 43 23 Total 1,524 100 51 156 528 306 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 199 accounts, and penalty charges such as During 1997 HUD referred four comover-limit fees. plaints involving state member banks to Each of these five complaint catego- the Federal Reserve. By year-end the ries accounts for a small portion (4 per- Federal Reserve had completed investicent or less) of all consumer complaints gations into two of the four complaints; received by the System. All other com- the investigations revealed no evidence plaint categories involving unregulated of unlawful discrimination. practices registered fewer than fifty complaints in 1997. Complaint Program Activities In 1997 the Consumer Complaints Sec- Complaint Referrals to HUD tion at the Board continued work on In 1997, in accordance with a memoran- implementing a comprehensive system dum of understanding between HUD designed to replace and consolidate the and the federal bank regulatory agen- complaint program's analysis tools. cies, the Federal Reserve referred to Along with other management tools, the HUD five complaints about state mem- Board's new system for collecting comber banks alleging violations of the Fair plaint data—Complaint Analysis Evalu- Housing Act. Investigations completed ation System and Reports (CAESAR)— for two of the five complaints (and five provides the capability to automatically others that were pending at year-end generate response letters to individual 1996) revealed no evidence of unlawful complaints; analyze the type of discrimidiscrimination; the other three were nation complaints received by the Fedpending at year-end. eral Reserve; and analyze data to deter- 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 0 0 0 9 10 21 0 2 0 0 0 5 6 32 0 1 1 0 0 13 23 55 0 13 3 0 2 4 245 315 18 79 18 6 0 76 488 1,105 4 13 4 1 4 19 274 446 6 50 12 1 4 47 427 806 0 10 0 0 0 6 62 114 0 1 2 0 0 2 15 27 1 26 2 0 2 16 244 397 29 195 42 8 12 197 1,794 3,318 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 84th Annual Report, 1997 mine patterns and trends. As part of this tion of a new brochure and creation of a initiative, the Board is converting the public Web site. mainframe-based Consumer Complaint and Inquiry Tracking System and query- Consumer Advisory Council ing systems to the PC-based CAESAR; implementation throughout the Federal The Consumer Advisory Council con- Reserve is expected by early 1999. vened in April, July, and October to In 1997, individual staff members advise the Board on matters concerning from the Reserve Banks' consumer laws that the Board administers and complaint sections continued to work at other issues related to consumer finanthe Board for several weeks at a time cial services. The council's thirty memto gain familiarity with operations in bers come from consumer and com- Washington. Nine Reserve Banks par- munity organizations, financial and ticipated in the program. academic institutions, and state governments. Council meetings are open to the public. Consumer Policies The streamlining of the Truth in The Consumer Policies program ex- Lending Act and the Real Estate Settleplores alternatives to regulation for pro- ment Procedures Act was a major topic tecting consumers in retail financial ser- during 1997. In April, the council's convices and brings research information to sumer credit committee reported broad bear more directly on policymaking. agreement for providing meaningful dis- During 1997, Consumer Policies staff closures as early as possible and for members provided research analysis for combining disclosures and eliminating reports on finance charges, home equity duplication. Several possibilities were lines of credit, characteristics of house- discussed: a "lender pay all" approach holds without bank accounts, and the for disclosing the amount the borrower TILA-RESPA streamlining initiative. needs at loan closing, with the lender The Consumer Policies Section and assuming the risk for any higher costs; a the Consumer Complaints Section consolidated disclosure approach coverworked to improve the analysis of ing both TILA and RESPA, with the data from the Consumer Satisfaction disclosure delivered before formal appli- Questionnaire, which is distributed cation so that consumers can comparito consumers who lodge complaints son shop; and rolling all loan costs into about state member banks. This analysis a finance charge that is disclosed as an assesses the level of consumers' satis- annual percentage rate. Council memfaction with the handling of their com- bers also talked about enforcement stratplaints, as a measure of the complaint egies, education for homebuyers, and program's performance, and is used to the need to reduce paperwork not identify possible improvements. required by either TILA or RESPA. The Consumer Policies program also In October, the council considered conducted a major educational initiative concepts related to rate disclosures: that targeted automobile leasing disclo- improving the current annual percentage sures and complemented the implemen- rate (APR) disclosure (which is the pertation of the revised Regulation M. The centage equivalent of the finance educational program, discussed earlier charge) by incorporating some costs that in the section "Leasing Education and are currently not included in the finance Regulatory Changes," included prepara- charge; replacing the APR with a disclo- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 201 sure of the note rate and total of all ban on balloon payments, which curclosing costs; and consolidating all costs rently applies only to loans for terms of paid at closing into a single dollar figure less than five years. and converting that figure into a "pre- Community development and reinmium rate" to facilitate comparison vestment was a topic at all three council shopping. Council members had differ- meetings in 1997. In April, members ing views on the APR. Some believed discussed the effects of bank mergers that it is not useful, pointing to findings and acquisitions on local communities. of a Michigan Research Center survey Some members see mergers as giving that consumers do not really understand the resulting institution greater flexibilthe APR. An APR that does not work ity, increased capacity to take risks, and well now, they said, will not be a more focused ability to work with and improved by adding other cost items. provide technical assistance to groups in Others disagreed. They noted that con- local communities. Others believe that sumers in the Michigan survey fre- larger institutions sometimes lack the quently mentioned the APR as a shop- flexibility to meet local needs because ping tool. They also observed that the their programs focus on the statewide APR was initially developed because no potential, and they worry that consoliother rate proved to,be an effective or dation reduces access to loan officers accurate way of describing the cost of and key decisionmakers, who may be credit to consumers. located out of state. The council also discussed issues At the April meeting the council disrelated to the HOEPA provisions of cussed proposed interagency regulations Truth in Lending, which seek to protect that would prohibit a bank from estabhomeowners against abusive mortgage lishing branches outside its home state lending practices. Some members con- primarily for deposit production and tinued to believe that it may be too early focused on how the loan-to-deposit ratio to measure the success of a law that has for the host state should be determined. been in place for only two years. But Council members suggested using a they also noted that it was evident from statewide test, in light of the difficulty of the testimony presented at the Board's determining which branch deposits are hearings in June 1997 that HOEPA has local. The council also discussed the not stopped all fraudulent activity in the service and investment tests under the high-cost mortgage area. Some sug- revised CRA rules and the need for gested that if HOEPA could be changed institutions to publish specific goals to prevent fraudulent activity, it should (such as goals for small business loans be changed now, but they expressed or low-income housing) when they issue doubt about finding effective means to strategic plans for public comment. eliminate abusive practices such as the At the July and October meetings, the entry of inflated income on applications council's discussion of the CRA rules completed by the lender for the bor- addressed such matters as whether rower. Some members suggested sub- financial institutions should receive stantive restrictions—such as requiring CRA credit under the service test for refunds on "points" charged on the ear- providing free or low-cost checking lier loan or prohibiting new closing accounts to facilitate the government's costs—for HOEPA loans refinanced by electronic delivery of federal paythe lender within, say, one year. Mem- ments; the application of the service and bers also posed the idea of extending the investment tests in regard to the perfor- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 84th Annual Report, 1997 mance of large banks, as reflected in values in a community are very quickly CRA public evaluations by the Federal driven down. Discriminatory practices, Reserve; and the clarification of terms— such as an appraisal that bases the valusuch as innovation, complexity, size, and ation on a foreclosure sale miles from impact on the community—used to the property instead of market values define the weight given to "qualified around the block, can add to problems. investments" and to successful, long- In rural areas, the variability of property term investments made previously and types, uses, and size further complicates still outstanding. appraisals. In the case of a property's In October, the council discussed "over-improvement," the difficulty of findings from newly released data on finding valuations on comparable propsmall business, small farm, and commu- erties in the local market adds to the nity development lending collected and difficulty for a developer and a bank reported under the revised CRA regula- seeking to finance a community develtions by large commercial banks and opment project; either the developer savings associations. In light of certain invests more in equity or the bank limitations of these data, the council underwrites a loan with a higher loan-tourged that the Board continue to explore value ratio (causing concern for the methodologies for further analysis and bank's regulator). for measuring loan demand in local In October, the council heard recomcommunities, to provide a context for mendations from the working group on the lending reported. The council also such matters as training and licensing suggested that the Board consider part- of appraisers; providing incentives for nership projects that focus on improving banks to direct resources to the appraisal small business lending, modeled on the process; educating consumers and Federal Reserve's mortgage partnership appraisers about the importance of accuprojects, which have identified obstacles rate, unbiased appraisals; and the need in mortgage lending and strategies for for further research into the appraisal removing them. In addition, council process. members suggested that banks disclose, The council considered a wide array on a voluntary basis, information about of other topics during the year, including their community development loans, such as the kinds and locations of • Options for delivering disclosures projects, as the single number currently electronically under a variety of feddisclosed is not helpful. eral regulations During 1997 a working group of • The federal mandate to convert most the council considered the effects of federal payments to electronic deposit, appraisals on community development and whether special rules are needed lending. In July, members discussed under the Board's Regulation E for some of the negative consequences new accounts offered to about 10 milwhen a property is undervalued by an lion recipients who have no banking appraiser unfamiliar with the commu- relationship nity or a particular community develop- • The circumstances under which finanment initiative: The insurer may not cial institutions ought to receive credit want to insure the loan, or the lender in the assessment of their performance may decide not to close the deal. If the under the CRA rule's service test low valuation becomes a "comparable • The Board's reports to the Congress value" for other properties, property on stored-value products and on the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 203 public availability of identifying infor- The subcommittee hearing also mation about consumers, such as addressed a legislative proposal to bar social security numbers creditors from mailing unsolicited loan A Board-initiated study, headed by the checks to consumers. The Board sug- Board's Vice Chair, of the Federal gested a better course would be to let the Reserve's role in the payments market work without the interference of system. new laws. The Truth in Lending Act requires that full disclosure of credit terms be included in any mailing so that Testimony and Legislative consumers can make informed decisions Recommendations about whether to accept the loans; the primary concern with unsolicited loan In July, the Board testified before the checks is not disclosure, but the poten- Senate Banking Committee on ways to tial for theft and fraud by persons other improve the disclosures required for than the intended recipient. home mortgage loans under TILA and to unify them with the disclosures Recommendations of required under RESPA. The Board's tes- Other Agencies timony discussed how the two statutes regulate home mortgage lending, Each year the Board asks for recommendescribed the Board's and HUD's efforts dations from the other federal superto simplify and streamline the informa- visory agencies for amending the finantion given to consumers, and outlined cial services laws or the implementing the agencies' plans to develop legisla- regulations. tive recommendations. The FDIC suggested addressing In September, the Board testified solicitation and marketing practices before the Subcommittee on Financial related to credit cards, through legis- Institutions and Consumer Credit of the lative or regulatory change, to per- House Banking Committee on debit mit enforcement agencies to more cards that can be used without security adequately supervise trade practices. It codes, requiring only a signature. (These noted some practices that may technicards are often referred to as check cards cally comply with the law but that in the or off-line debit cards.) Some observers opinion of many consumers constitute have expressed concern that consumers deceptive marketing. It also endorsed may not be aware of the risk of unautho- efforts by the Board and HUD to streamrized use associated with these products. line TILA-RESPA requirements to The Board noted its inclination, given facilitate comparison shopping for conthat the industry has voluntarily acted sumers before they submit an applicato limit consumer liability in many tion for credit. instances to $50 or less, to see how well The OCC recommended that the Conthese voluntary efforts work before rec- gress review current consumer discloommending that the Congress amend sures, which may unnecessarily burden the Electronic Fund Transfer Act. It is banks and insufficiently benefit consumalso in everyone's interest, the Board ers, and that it consider disclosures that said, to ensure that consumers under- are less burdensome to depository instistand the risks associated with these tutions and more useful to consumers. cards and are able to make an informed The FTC expressed its support for choice about whether to assume the risk. updating and clarifying the requirements Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 84th Annual Report, 1997 of Regulation B and Regulation Z, scheduled for review soon under the Board's Regulatory Planning and Review program. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

205 Litigation During 1997 the Board of Governors 1394 (D.C. Circuit, filed June 12, 1997), was a party in twenty-three lawsuits or petitioners sought review of a Board appeals filed that year and was a party in order dated May 14, 1997, approving fifteen other cases pending from pre- the application of Bane One Corporavious years, for a total of thirty-eight tion, Inc., Columbus, Ohio, to merge cases. In 1996 the Board had been a with First USA, Inc., Dallas, Texas (83 party in a total of twenty-nine lawsuits. Federal Reserve Bulletin 602). Petition- Three of the twenty-three lawsuits filed ers' motion for a stay pending appeal in 1997 raised questions under the Bank was denied on June 27, 1997. On Holding Company Act. As of Decem- December 12, 1997, the court granted ber 31, 1997, twenty-one cases were the Board's motion to dismiss the petipending. tion (130 F.3d 1088). In The New Mexico Alliance v. Board of Governors, No. 96-9552 (10th Cir- Bank Holding Company Act— cuit, filed December 24, 1996), petition- Review of Board Actions ers seek review of a Board order dated Eliopulos v. Board of Governors, No. December 16, 1996, approving the 97-1442 (D.C. Circuit, filed July 17, acquisition by NationsBank Corpora- 1997), was a petition for review of a tion and NB Holdings Corporation, both Board order dated June 23, 1997, of Charlotte, North Carolina, of Boatapproving the application of First Bank men's Bancshares, Inc., St. Louis, Mis- System, Inc., Minneapolis, Minnesota, souri (83 Federal Reserve Bulletin 148). to acquire U.S. Bancorp, Portland, Ore- First Baird Bancshares, Inc. v. Board gon, and thereby acquire U.S. Bancorp's of Governors, No. 96-1426 (D.C. Cirbanking and nonbanking subsidiaries cuit, filed November 18, 1996), was a (83 Federal Reserve Bulletin 689). On petition for review of a Board order November 10, 1997, the court granted dated November 6, 1996, approving the Board's motion to dismiss the applications of First Commercial Corpopetition. ration, Little Rock, Arkansas; Arvest Greeff v. Board of Governors, No. Bank Group, Inc., Bentonville, Arkan- 97-1976 (4th Circuit, filed June 17, sas; and TRH Bank Group, Inc., Nor- 1997), is a petition for review of a Board man, Oklahoma, to acquire all the shares order dated May 19, 1997, approving of The Oklahoma National Bank of the application of Allied Irish Banks, Duncan, Duncan, Oklahoma (83 Fedpic, Dublin, Ireland, and First Maryland eral Reserve Bulletin 41). On November Bancorp, Baltimore, Maryland, to 20, 1996, the court denied petitioners' acquire Dauphin Deposit Corporation, motion for a stay. The case was dis- Harrisburg, Pennsylvania, and thereby missed by agreement of the parties on acquire Dauphin's banking and non- January 2, 1997. banking subsidiaries (83 Federal The Southeast Raleigh Community Reserve Bulletin 607). Development Corporation v. Board of In Inner City Press/Community on the Governors, No. 96-1054 (D.C. Circuit, Move v. Board of Governors, No. 97- filed February 16, 1996), was a petition Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 84th Annual Report, 1997 for review of a Board order dated Janu- poration, Cleveland, Ohio, through a ary 17, 1996, approving the merger of joint venture (81 Federal Reserve Bulle- First Citizens BancShares, Inc., Raleigh, tin 491). On April 23, 1996, a panel of North Carolina, with Allied Bank Capi- the court of appeals granted the petition tal, Inc., Sanford, North Carolina (82 for review and vacated the Board's Federal Reserve Bulletin 232). Petition- order. The full court subsequently ers' motion for a stay was denied granted the Board's request for rehearon March 5, 1996. On January 2, 1997, ing en bane and vacated the panel's the case was dismissed on petitioners' judgment (94 F.3d 658). The case was motion. dismissed on the parties' joint motion Inner City Press/Community on the on January 7, 1997. Move v. Board of Governors, No. 96- 4008 (2d Circuit, filed January 19, 1996), was a petition for review of a Litigation under the Financial Board order dated January 5, 1996 (82 Institutions Supervisory Act Federal Reserve Bulletin 239), approving the merger of Chemical Banking Leuthe v. Office of Financial Institution Corporation and The Chase Manhat- Adjudication, No. 97-1826 (3d Circuit, tan Corporation, both of New York, filed October 22, 1997), is an appeal of a New York. On March 26, 1996, the district court dismissal (977 F. Supp. court denied petitioners' motion for a 537 (E.D. Pa. 1997)) of an action against stay. On July 2, 1997, the court dis- the Board and other federal banking missed the petition (118 F.3d 905). agencies challenging the constitutional- Lee v. Board of Governors, No. 95- ity of the Office of Financial Institution 4134 (2d Circuit, filed August 22, 1995), Adjudication. was a petition for review of two Board Towe v. Board of Governors, No. 97orders dated July 24, 1995, approving 71143 (9th Circuit, filed September 15, certain steps of a corporate reorgani- 1997), is a petition for review of a Board zation of U.S. Trust Corporation, order dated August 18, 1997 (83 Fed- New York, New York, and the acquisi- eral Reserve Bulletin 849), prohibiting tion of U.S. Trust by The Chase Manhat- Edward Towe and Thomas E. Towe tan Corporation, New York, New York from further participation in the banking (81 Federal Reserve Bulletin 893). The industry. case, which was consolidated with Inner In Banking Consultants of America City Press v. Board of Governors, No. v. Board of Governors, No. 97-2791 96-4008, was dismissed on July 2, 1997 (W.D. Tenn., filed September 2, 1997), (118F.3d905). plaintiffs seek to enjoin an investigation Money Station, Inc. v. Board of Gov- by the Board, the Office of the Compernors, No. 95-1182 (D.C. Circuit, filed troller of the Currency, and the Depart- March 30, 1995), was a petition for ment of Labor. review of a Board order dated March 1, In Vickery v. Board of Governors, No. 1995, approving notices by Bane 97-1344 (D.C. Circuit, filed May 9, One Corporation, Columbus, Ohio; 1997), petitioner seeks review of a CoreStates Financial Corp., Philadel- Board order dated April 14, 1997, prophia, Pennsylvania; PNC Bank Corp., hibiting Charles R. Vickery, Jr., from Pittsburgh, Pennsylvania; and KeyCorp, further participation in the banking Cleveland, Ohio, to acquire certain data industry (83 Federal Reserve Bulletin processing assets of National City Cor- 535). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 207 Pharaon v. Board of Governors, was denied on August 20, 1996. On No. 97-1114 (D.C. Circuit, filed Febru- April 16, 1997, the court affirmed the ary 28, 1997), is a petition for review of Board's order (111 F.3d 376). a Board order dated January 31, 1997, In Board of Governors v. Interameriimposing civil money penalties and an cas Investments, Ltd., No. H—95-565 order of prohibition against Ghaith R. (S.D. Texas, filed February 24, 1995), Pharaon for violations of the Bank Hold- the Board sought to freeze certain assets ing Company Act (83 Federal Reserve of a company pending the adminis- Bulletin 347). trative adjudication of a civil money Snyder v. Board of Governors, No. penalty assessment by the Board. On 96-1403 (D.C. Circuit, filed October 23, March 1, 1995, the court issued a stipu- 1996), was a petition for review of a lated order requiring the company to Board order dated September 11, 1996, deposit $1 million into the registry of prohibiting petitioners from further par- the court. On June 24, 1997, the action ticipation in the banking industry (82 was dismissed following the payment to Federal Reserve Bulletin 1067). On the Board of the assets at issue. May 8, 1997, the court dismissed the In Board of Governors v. Pharaon, petition, and on July 31, 1997, the court No. 91-CIV-6250 (S.D. New York, denied petitioners' motion for rehearing filed September 17, 1991), the Board and rehearing en bane. sought to freeze the assets of an indi- In Clifford v. Board of Governors, vidual pending the administrative adju- No. 96-1342 (D.C. Circuit, filed Sep- dication of a civil money penalty assesstember 17, 1996), petitioners sought ment by the Board. On September 17, review of a Board order dated August 1991, the court issued an order tempo- 21, 1996, denying petitioners' motion to rarily restraining the transfer or disposidismiss an enforcement action against tion of the individual's assets. The order them. On May 6, 1997, the court granted has been extended by agreement. the Board's motion to dismiss the petition. Long v. Board of Governors, No. 96- Other Actions 9526 (10th Circuit, filed July 31, 1996), was a petition for review of a Board Goldman v. Department of the Treasury, order dated July 2, 1996, assessing a No. 1-97-CV-3798 (N.D. Georgia, civil money penalty and imposing a filed December 23, 1997), is a declaracease and desist order for violations of tory judgment action challenging Fedthe Bank Holding Company Act (82 eral Reserve notes as lawful money. Federal Reserve Bulletin 871). On Kerr v. Department of the Treasury, June 30, 1997, the court affirmed the No. CV-S-97-01877-DWH (S.D. Board's order (117 F.3d 1145). Nevada, filed December 22, 1997), is a In Interamericas Investments, Ltd. v. challenge to income taxation and Fed- Board of Governors, No. 96-60326 (5th eral Reserve notes. Circuit, filed May 8, 1996), petitioners Allen v. Indiana Western Mortgage sought review of a Board order dated Corp., No. 97-7744 RJK (CD. Califor- April 9, 1996, imposing civil money nia, filed November 12, 1997), is a cuspenalties and a cease and desist order tomer dispute with a bank. against them (82 Federal Reserve Bulle- Patrick v. United States, No. 97tin 609). Petitioners' motion to stay 75564 (E.D. Michigan, filed Novemthe order pending judicial review ber 7, 1997), and Patrick v. United Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 84th Annual Report, 1997 States, No. 97-75017 (E.D. Michigan, damages for alleged violations of civil filed September 30, 1997), are actions rights by a federal savings bank. for damages arising out of tax disputes. Research Triangle Institute v. Board Artis v. Greenspan, No. 97-5235 of Governors, No. 97-1282 (4th Circuit, (D.C. Circuit, filed September 19, filed February 24, 1997), was an appeal 1997), is an appeal of a district court of a district court's dismissal of a conorder dismissing a class complaint alleg- tract claim (962 F. Supp. 61 (M.D.N.C. ing race discrimination in employment. 1997)). On December 29, 1997, the A related employment discrimination court of appeals affirmed the district case, Artis v. Greenspan, No. 97-5234 court's dismissal of the action (13 F.3d (D.C. Circuit, filed September 19, 985). 1997), is an appeal of the dismissal of Jones v. Board of Governors, No. an individual discrimination claim. CV97-0198 (W.D. Louisiana, filed In Branch v. Board of Governors, No. January 30, 1997), was a complaint 97-5229 (D.C. Circuit, filed Septem- alleging violations of the Fair Housing ber 12, 1997), the plaintiff appeals a Act. On November 13, 1997, the court district court order denying his motion granted the Board's motion to dismiss to compel production of pre-decisional the action. supervisory documents and testimony American Bankers Insurance Group, sought in connection with an action by Inc. v. Board of Governors, No. 96-CV- Bank of New England Corporation's 2383-EGS (D. District of Columbia, trustee in bankruptcy against the Fed- filed October 16, 1996), is an action eral Deposit Insurance Corporation. On seeking declaratory and injunctive relief November 10, 1997, the court denied invalidating a new regulation issued by appellant's request for expedited consid- the Board under the Truth in Lending eration of the appeal. Act relating to treatment of fees for debt Wilkins v. Reno, No. 97-2275 (4th cancellation agreements (12 C.F.R. sec- Circuit, filed September 12, 1997), was tion 226.4(d)(3)). On October 18, 1996, an appeal of a district court's dismissal the district court denied plaintiffs' of a complaint concerning a customer motion for a temporary restraining dispute with a bank. On December 9, order. 1997, the court of appeals affirmed the Kuntz v. Board of Governors, No. 96district court's dismissal. 1079 (D.C. Circuit, filed March 7, Clarkson v. Greenspan, No. 97-CV- 1996), was a petition for review of a 2035 (D. District of Columbia, filed Board order, issued under the Federal September 5, 1997), is a Freedom of Reserve Act and the Bank Merger Act, Information Act case. approving the application of The Fifth Bettersworth v. Board of Governors, Third Bank, Cincinnati, Ohio, and The No. 97-CA-624 (W.D. Texas, filed Fifth Third Bank of Columbus, Colum- August 21, 1997), is a complaint under bus, Ohio, to acquire certain assets and the Privacy Act. assume certain liabilities of twenty-five Wilkins v. Warren, No. 97-CV-590 branches of NBD Bank, Columbus, (E.D. Virginia, filed August 4, 1997), is Ohio (82 Federal Reserve Bulletin 366). a customer dispute with a bank. The court dismissed the petition on Feb- Maunsell v. Greenspan, No. 97-6131 ruary 13, 1997. (2d Circuit, filed May 22, 1997), is an Kuntz v. Board of Governors, No. 95appeal of a district court's dismissal of 1485 (D.C. Circuit, filed September 21, an action for compensatory and punitive 1995), was a petition for review of a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 209 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). On February 13, 1997, the court dismissed the petition. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

211 Legislation Enacted Among the legislation enacted during law or are permissible for out-of-state 1997, the Riegle-Neal Amendments national bank branches located in Act, the Treasury appropriation for fis- New York. The act also provides that cal year 1998, the Depository Institu- the laws of the host state, including laws tions Disaster Relief Act, the 50 States regarding community reinvestment, con- Commemorative Coin Program Act, and sumer protection, fair lending, and an act authorizing the sale of the establishment of intrastate branches, Culpeper facility of the Federal Reserve apply to any out-of-state, state-chartered Bank of Richmond to the Architect of bank branch located in a host state to the the Capitol directly affect the Federal same extent that the host state's laws Reserve System or the institutions it apply to an out-of-state, national bank regulates. branch located in the host state. To the extent that the host state's laws do not apply to the out-of-state branch, the Riegle-Neal Amendments Act home state's laws apply to the branch. In 1994, the Congress enacted the Before it was amended, the Riegle- Riegle-Neal Interstate Banking and Neal Act provided that an out-of-state Branching Act (Riegle-Neal Act) to bank that establishes a branch in a host establish a framework that would gov- state could not conduct any activity at ern interstate branching. The Riegle- that branch that was not permissible for Neal Act permits banks to establish a bank chartered by the host state and interstate branches through mergers with that the host state's laws applied to the other banks, except in states that affir- out-of-state branch to the same extent matively chose, on or before June 1, that they applied to a branch of a bank 1997, not to permit interstate branching chartered by the host state. within their borders. The Riegle-Neal Amendments Act Treasury Appropriation for (Pub. L. 105-24, 111 Stat. 238) (the act) Fiscal Year 1998 provides that an insured state-chartered bank that establishes a branch in a host The Treasury appropriation for fiscal state may conduct any "activity" at the year 1998 (Pub. L. 105-61, 111 Stat. branch that is permissible under the laws 1272) authorizes a permanent indefiof the bank's home state, so long as the nite appropriation to reimburse Fed- "activity" is permissible for a bank eral Reserve Banks for fiscal agency chartered by the host state or for an services rendered to the Treasury out-of-state national bank branch Department. located in the host state. For example, the activities of a branch of a New Jer- Depository Institutions sey state-chartered bank located in Disaster Relief Act New York (host state) would be governed by New Jersey state banking law The Depository Institutions Disaster (home state law) so long as the activities Relief Act (Pub. L. 105-18, 111 Stat. are permissible under New York state 211) (the act) granted the Board of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 84th Annual Report, 1997 Governors the power, for a period of assets and deposits; and (4) the subtrac- 240 days after June 12, 1997, to make tion was consistent with the purposes of exceptions to the Truth in Lending Act section 38 of the FDI Act. Exceptions to (TILA) and the Expedited Funds Avail- section 38 of the FDI Act had to expire ability Act (EFAA) for transactions no later than February 28, 1999. within a geographic area that the Presi- The act also allowed the Board to dent determined, on or after Febru- exercise its authority with respect to ary 28, 1997, to be a major disaster area depository institutions whose principal as a result of the 1997 flooding of the place of business is within, or with re- Red River of the North, the Minnesota spect to transactions or activities within, River, and the tributaries of these rivers. an area designated as a major disaster The Board had the power to grant area as a result of the 1997 flooding of exceptions from TILA and EFAA if it the Red River of the North, the Minnedetermined that an exception could alle- sota River, and the tributaries of these viate hardships to the public resulting rivers without complying with certain from the disaster and that the benefits provisions of the Administrative Proof the relief outweighed the possible cedures Act or with provisions of any adverse effects of granting the excep- other law that requires a notice or opportion. The Board was required to publish tunity for a hearing or that sets time in the Federal Register a description limits for agency action. It also allowed of each exception and a statement of the Board to waive publication requireits benefits, including an explanation of ments for establishing branches. The how the benefits outweighed the pos- Board was required to publish in the sible adverse effects. Exceptions had to Federal Register a description of each expire no later than September 1, 1998. action taken as well as an explanation The act also granted the Board of the need for the action. The act also authority to allow an insured depository granted the Board authority to waive the institution, in calculating compliance application of the appraisal standards with the leverage limits prescribed under prescribed by title XI of the Financial section 38 of the Federal Deposit Insur- Institutions Reform, Recovery, and ance Act (FDI Act), to subtract from the Enforcement Act of 1989 for transacinstitution's total assets an amount not tions involving real property located exceeding the qualifying amount attrib- within the disaster area. utable to insurance proceeds. The Board could grant such an exception if the 50 States Commemorative following conditions were met: (1) the Coin Program Act depository institution had its principal place of business within, and 60 percent The 50 States Commemorative Coin of its total deposits were from persons Program Act (Pub. L. 105-125, 111 located within, an area designated as a Stat. 2534) (the act) grants the Treasury, major disaster area as a result of the among other powers, the authority to 1997 flooding of the Red River of the create a new $1 coin once the supply of North, the Minnesota River, and the Susan B. Anthony $1 coins is depleted. tributaries of these rivers; (2) the deposi- The new coin must (1) be golden in tory institution was adequately capital- color, have a distinctive edge, with tacized before the disaster; (3) the deposi- tile and visual features making it readily tory institution had an acceptable plan discernible, (2) be minted and fabricated for managing the increase in its total in the United States, and (3) have metal- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Legislation Enacted 213 lie anticounterfeiting properties similar to those of U.S. clad coinage in circulation as of December 1, 1997. The act directs the Treasury to adopt a marketing program to promote use of the new coins, to conduct a marketing study, and to report its progress to the Congress. Sale of the Culpeper Facility of the Federal Reserve Bank of Richmond A recent act (Pub. L. 105-144, 111 Stat. 2667) authorized the sale of the Culpeper facility of the Federal Reserve Bank of Richmond to the Architect of the Capitol, on behalf of the United States government. Three parcels totaling approximately forty-one acres, located in Culpeper County, Virginia, and the improvements thereunder will be transferred in the sale. Title will be transferred to the United State government, and the Federal Reserve will not be reimbursed for the property. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

215 Banking Supervision and Regulation The condition of the U.S. banking sys- requirement, in turn, has fueled a need tem remained robust during 1997: The for more prior planning for examinaindustry reported further gains in asset tions, increased training of examiners, quality, continued record earnings, and and additional guidance on sound practhe highest equity-to-asset ratios in tices for both bankers and bank exammore than fifty years. Only one (small) iners. It has also made it necessary for insured commercial bank failed, and the the Federal Reserve to improve its assets of problem banks, at $3.5 bil- own information systems, to allocate lion, continued to decline from already resources more productively, and to low levels. As a result, the U.S. banking make better use of available technology industry appears to be among the stron- in all aspects of its supervisory process. gest and most innovative of the major In recent years the Federal Reserve industrial countries and well positioned has used the opportunity presented by to meet the nation's financial needs. the relatively trouble free domestic This dramatic progress from the banking system to develop and proindustry's stressed condition at the mote sound risk-management practices beginning of the decade is evidence of throughout the industry, both domestithe underlying strength and resilience of cally and abroad; to develop more effithe U.S. banking system and its ability cient techniques for supervision; and, to adapt to and, to a large extent, direct when prudent, to reduce the level of evolving practices in world financial regulatory intrusion into the activities of markets. These practices, the expanded U.S. banks and bank holding companies. application of technology in the design Such efforts account for many of the and management of financial products, Board's accomplishments in bank superand the structural changes that are vision and regulation during 1997. occurring within the U.S. and world These accomplishments include support financial systems present challenges and of international efforts to strengthen and opportunities not only to many U.S. coordinate the supervision of internabanks but also to the Federal Reserve in tionally active banks; reduction of reguits role as a financial supervisor and latory restrictions on the activities of regulator. section 20 affiliates of bank holding Changes in the nature and pace of companies; streamlining of the applicabank activities have been most signifi- tion process for many banks and bank cant among the largest banking organi- holding companies; significant advances zations, for which the growth of trading in the use of automation during bank and derivatives activities has been pro- examinations; and many other initiafound. These events and the growing tives, discussed below. complexity of many activities have More recently, in response to potenrequired that the Federal Reserve, in its tial industry exposure associated with supervisory role, place more emphasis the century date change, the Federal on the management and internal control Reserve has initiated an extensive superprocess within banks and less emphasis vision program that has included the on independent transaction-testing. That issuance of several policy statements, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 84th Annual Report, 1997 the conduct of comprehensive examina- Act and consumer and civil rights laws.1 tions, and an outreach program. Work- The Federal Reserve also examines the ing closely with other federal and state following specialized activities of these banking regulators, the Federal Reserve institutions: information systems, fiduhas been focusing significant attention ciary activities, mutual fund activities, on banking industry preparedness re- government securities dealing and garding automated systems and their brokering, municipal securities dealing, ability to calculate date-dependent infor- securities clearing, and securities undermation after the century date change. writing and dealing through special The outreach program has included subsidiaries. The Federal Reserve also numerous public statements and confer- has responsibility for the supervision of ences intended to provide guidance to (1) all Edge Act corporations and agreethe industry on this significant matter. ment corporations, (2) the international Further, the Federal Reserve is exam- operations of state member banks and ining all banks subject to its super- U.S. bank holding companies, and vision authority by June 30, 1998, for (3) the operations of foreign banking year 2000 readiness. companies in the United States.2 Adverse economic developments in The Federal Reserve exercises impor- Asian countries during the year directed tant regulatory influence over the entry attention to bank exposures in that part into, and the structure of, the U.S. bankof the world as well as to emerging ing system through its administration of markets more generally. Consistent with the Bank Holding Company Act, the the System's risk-focused approach for Bank Merger Act for state member supervising large, internationally active banks, the Change in Bank Control Act banking organizations, the Federal for bank holding companies and state Reserve's supervisory process during member banks, and the International 1997 placed emphasis on evaluating the Banking Act. Also, the Federal Reserve impact of these developments on U.S. is responsible for imposing margin banks that are active in the Asian mar- requirements on securities transactions. kets, and on the U.S. operations of banks that are based there. In this connection, it is noteworthy that U.S. banking orga- 1. The Board's Division of Consumer and Community Affairs is responsible for coordinating nizations continue to report historically the Federal Reserve's supervisory activities with high levels of capital and reserves. regard to the compliance of banking organizations with consumer and civil rights laws. To carry out this responsibility, the Federal Reserve specifically Scope of Responsibilities for trains a number of its bank examiners to evaluate Supervision and Regulation institutions with regard to such compliance. The chapter of this REPORT covering consumer and The Federal Reserve is the federal community affairs describes these regulatory supervisor and regulator of all U.S. bank responsibilities. Compliance with other statutes and regulations, which is treated in this chapter, is holding companies and of statethe responsibility of the Board's Division of Bankchartered commercial banks that are ing Supervision and Regulation and the Reserve members of the Federal Reserve Sys- Banks, whose examiners also check for safety and tem. In overseeing these organizations, soundness. the Federal Reserve primarily seeks to 2. Edge Act corporations are chartered by the Federal Reserve, and agreement corporations are promote their safe and sound operation chartered by the states, to provide all segments of and their compliance with laws and the U.S. economy with a means of financing interregulations, including the Bank Secrecy national trade, especially exports. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 217 In carrying out these responsibilities, State Member Banks the Federal Reserve coordinates its At the end of 1997, 992 state-chartered supervisory activities with other federal banks (excluding nondepository trust and state regulatory agencies and with companies and private banks) were the bank regulatory agencies of other members of the Federal Reserve Sysnations. tem. These banks represented about 10.9 percent of all insured U.S. commer- Supervision for Safety and cial banks and held about 25 percent of Soundness all insured commercial bank assets in the United States. To ensure the safety and soundness The guidelines for Federal Reserve of banking organizations, the Federal examinations of state member banks Reserve conducts on-site examinations are fully consistent with section 10 of and inspections and off-site surveillance the Federal Deposit Insurance Act, as and monitoring. It also undertakes amended by section 111 of the Federal enforcement and other supervisory Deposit Insurance Corporation Improveactions. ment Act of 1991 and by the Riegle Community Development and Regula- Examinations and Inspections tory Improvement Act of 1994. A fullscope, on-site examination is required at The Federal Reserve conducts examinaleast once during each twelve-month tions of state member banks, branches period for most of these depository and agencies of foreign banks, Edge Act institutions; certain well-capitalized and corporations, and agreement corporawell-managed institutions with assets of tions. Many elements reviewed at bank less than $250 million may be examined holding companies and their nonbank every eighteen months. subsidiaries differ from bank examina- During 1997, the Federal Reserve tions; therefore, the Federal Reserve Banks conducted 552 examinations conducts inspections of holding comof state member banks (some of them panies and their subsidiaries. Prejointly with the state agencies), and examination planning and on-site review state banking departments conducted of operations are integral parts of ensur- 346 independent examinations of state ing the safety and soundness of financial member banks. institutions. Regardless of whether it is an examination or an inspection, the review entails (1) an assessment of the Bank Holding Companies quality of the processes in place to identify, measure, monitor, and control risk At year-end 1997, the number of U.S. exposures, (2) an appraisal of the quality bank holding companies totaled 6,102. of the institution's assets, (3) an eval- These organizations controlled about uation of management, including an 7,015 insured commercial banks and assessment of internal policies, proce- held approximately 93.8 percent of all dures, controls, and operations, (4) an insured commercial bank assets. assessment of the key financial factors Federal Reserve guidelines call for of capital, earnings, liquidity, and sensi- annual inspections of large bank holding tivity to market risk, and (5) a review companies and smaller companies that for compliance with applicable laws and have significant nonbank assets. Cerregulations. tain small, noncomplex companies— Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 84th Annual Report, 1997 those that have less than $1 billion alties. Of these, 35 cases involving 67 in consolidated assets, do not have actions were completed by year-end. debt outstanding to the public, and do Of particular note was an action taken not engage in significant nonbank by the Board of Governors with regard activities—are subject to a special to the illegal activities of the Bank of supervisory program that became effec- Credit and Commerce International tive in 1997. The program permits a (BCCI). After a factual hearing before more flexible approach to supervis- an administrative law judge, the Board ing those entities in a risk-focused envi- of Governors assessed a civil money ronment and is designed to improve penalty of $37 million against Ghaith R. the overall effectiveness and efficiency Pharaon for his participation in BCCI's of the Federal Reserve's bank super- illegal acquisition of the failed Indepenvisory efforts. Each such holding dence Bank of Encino, California. company is subject to off-site review In other significant matters, the Board once during each supervisory cycle, of Governors assessed civil money penwhich corresponds to the mandated alties totaling $30 million, including a examination cycle for the company's fine of $5 million, along with an order lead bank. to disgorge profit of $17.32 million, In judging the financial condition of against a foreign bank for allegedly failsubsidiary banks, Federal Reserve ing to file complete and accurate appliexaminers consult the examination cations and reports in connection with reports of the federal and state banking its purchase and ownership of a U.S. authorities that have primary responsi- bank; a fine of $5 million against a bility for the supervision of these banks, foreign bank and its U.S. branch for thereby minimizing duplication of effort misconduct related to the alleged misuse and reducing the burden on banking of confidential supervisory information, organizations. In 1997, the Federal the making of allegedly false statements Reserve inspected 1,682 bank holding to bank supervisory officials, and the companies. Altogether, Federal Reserve alleged obstruction of a formal investiexaminers conducted 1,782 bank hold- gation by bank supervisory officials; ing company inspections, 137 of which and a fine of $2.5 million against a were conducted off-site, and state foreign bank and its U.S. branch for examiners conducted 98 independent allegedly engaging in unsafe and inspections. unsound practices and violations of laws and regulations. All final enforcement orders issued Enforcement Actions, by the Board of Governors and all writ- Civil Money Penalties, and ten agreements executed by the Federal Suspicious Activity Reporting Reserve Banks in 1997 are available to the public. In 1997, they became avail- In 1997, the Federal Reserve Banks rec- able on the Board's public Web site. ommended, and members of the Board's In addition to formal enforcement staff initiated and worked on, 105 actions, the Federal Reserve Banks in enforcement cases involving 207 sepa- 1997 completed 83 informal enforcerate actions, such as cease and desist ment actions, such as memorandums of orders, written agreements, removal and understanding and resolutions from prohibition orders, and civil money pen- boards of directors. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 219 Specialized Examinations Fiduciary Activities The Federal Reserve has supervisory The Federal Reserve conducts specialresponsibility for institutions that ized examinations of banking organitogether hold more than $9.2 trillion zations in the areas of information techof discretionary and nondiscretionary nology, fiduciary activities, government assets in various fiduciary capacities. securities dealing and brokering, This group of institutions comprises 297 municipal securities dealing, securities state-chartered member banks and trust clearing, and securities underwriting and companies, 86 nonmember trust compadealing through so-called section 20 nies that are subsidiaries of bank holdsubsidiaries of bank holding companies. ing companies, and 17 entities that are The Federal Reserve also reviews state either branches or agencies of foreign member banks and bank holding compabanking organizations or Edge corporanies that act as transfer agents. tion subsidiaries of domestic banking institutions. On-site examinations are essential Information Technology to ensure the safety and soundness of financial institutions that have fiduciary Under the Interagency EDP Examinaoperations. These examinations include tion Program, the Federal Reserve (1) an evaluation of management, poliexamines the information technology cies, audit and control procedures, and activities of state member banks, U.S. risk management, (2) an assessment of branches and agencies of foreign banks, the quality of trust assets, (3) an assess- Edge Act and agreement corporations, ment of earnings, (4) a review for conand independent data centers that proflicts of interest, and (5) a review for vide electronic data processing services compliance with laws, regulations, and to these institutions. On-site examinageneral fiduciary principles. During tions are essential to ensure the safe and 1997, Federal Reserve examiners consound operation of financial institutions, ducted 255 on-site trust examinations of at which computer operations may pose state member banks and trust compasignificant exposures. During 1997, the nies, branches and agencies of foreign Federal Reserve conducted 420 examibanking organizations, or Edge corporanations that focused on the safety and tion subsidiaries of domestic banking soundness of information technology institutions. and electronic data processing systems. The Federal Reserve was also the Government Securities Dealers lead agency on 3 examinations of large, and Brokers multiregional data processing servicers examined in cooperation with the The Federal Reserve is responsible for Federal Deposit Insurance Corporation examining the government securities (FDIC), the Office of the Comptroller of dealing and brokering of state member the Currency (OCC), and the Office of banks and foreign banks for compliance Thrift Supervision (OTS). In addition, with the Government Securities Act of Federal Reserve examiners initiated tar- 1986 and with Department of the Treageted reviews of banking organizations sury regulations. Thirty-eight state to assess their progress in preparing for member banks and nine state branches the century date change. of foreign banks have notified the Board Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 84th Annual Report, 1997 that they are government securities deal- each section 20 securities subsidiary. In ers or brokers not exempt from Trea- September 1989 the limit was increased sury's regulations. During 1997, the to 10 percent. Federal Reserve conducted 21 exam- In January 1989, the Board approved inations of broker-dealer activities in applications by bank holding companies government securities at state member to underwrite and deal in corporate and banks and foreign banks. sovereign debt and equity securities, subject, in each case, to reviews of Municipal Securities Dealers managerial and operational infrastrucand Clearing Agencies ture and other conditions and requirements, or firewalls, specified by the Under the Securities Act Amendments Board. In approving this broader range of 1975, the Board of Governors is of activities, the Board also adopted fireresponsible for the supervision of state walls more restrictive than those conmember banks and bank holding compatained in its 1987 approval order. nies that act as municipal securities deal- Significant changes concerning the ers or as clearing agencies. The Board revenue limit and firewalls governing supervises thirty-seven banks that act as the activities of section 20 subsidiaries municipal securities dealers and three were implemented in 1997. On the basis clearing agencies that act as custodians of its experience supervising these secof securities involved in transactions tion 20 subsidiaries as well as developsettled by booking entry. In 1997, the ments in the securities markets since the Federal Reserve examined all three revenue test was adopted, the Board perclearing agencies and twenty of the mitted, effective March 1997, section 20 banks that act as municipal securities firms to derive up to 25 percent of total dealers. revenues from underwriting and dealing in ineligible securities. In August 1997, Securities Subsidiaries of Bank the Board completed a review of fire- Holding Companies walls, as required by the Riegle Com- Section 20 of the Banking Act of 1933 munity Development and Regulatory (the Glass-Steagall Act) prohibits the Improvement Act of 1994, for the puraffiliation of a member bank with a com- pose of eliminating unnecessary regupany that is "engaged principally" in latory burden and enabling section 20 underwriting or dealing in securities. subsidiaries to operate in an efficient, The Board of Governors in 1987 effective manner. As a result of its approved proposals by banking organi- review, the Board eliminated certain zations to underwrite and deal on a lim- restrictions that have proved to be ited basis in specified classes of "bank unduly burdensome or unnecessary in ineligible" securities (that is, commer- light of other laws and regulations. The cial paper, municipal revenue bonds, remaining restrictions have been conconventional residential mortgage- solidated into a series of operating stanrelated securities, and securitized con- dards that are fully consistent with safe sumer loans) in a manner consistent with and sound operations. section 20 of the Glass-Steagall Act and At year-end 1997, forty-five bank the Bank Holding Company Act. At that holding companies held section 20 subtime, the Board limited revenues from sidiaries authorized to underwrite and these newly approved activities to no deal in ineligible securities. Of these, more than 5 percent of total revenues for twenty-eight could underwrite any debt Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 221 or equity security, two could underwrite Call Report data to estimate an examinaany debt security, and fifteen could tion rating for each bank and to identify underwrite only the limited types of debt banks having the potential to become securities approved by the Board in critically undercapitalized over the sub- 1987. The Federal Reserve follows spe- sequent two years. cialized inspection procedures to review During 1997, the Federal Reserve the operations of these securities sub- continued to refine its Systemwide sidiaries; it conducted forty-one such surveillance programs, implementing inspections in 1997. parent-company-only screens that address bank holding company per- Transfer Agents formance on an unconsolidated basis and adding nonbank screens to monitor Federal Reserve examiners also conduct the effect of nonbank activities on the examinations of state member banks and strength of parent bank holding combank holding companies that are regpanies. In addition, changes were made istered transfer agents. Among other to the capital markets monitoring things, transfer agents countersign and screens to address credit derivatives monitor the issuance of securities, reg- activities and the adoption of the market ister the transfer of securities, and risk capital rule. Development of a surexchange or convert securities. During veillance program for small shell bank 1997, Federal Reserve examiners con- holding companies was also begun, to ducted on-site examinations at 59 of the assist with implementation of the Risk- 160 banks and bank holding companies Focused Supervision Policy for Small registered as transfer agents with the Shell Bank Holding Companies adopted Board. by the Board in November. To assist supervisory staff in evaluating individual bank holding compa- Surveillance and Risk Assessment nies, the Federal Reserve produces quar- The Federal Reserve monitors the finan- terly Bank Holding Company Perforcial condition and performance of indi- mance Reports (BHCPRs), which providual banking organizations and of the vide detailed financial information on banking system as a whole to identify the condition and performance of indiareas of supervisory concern. The moni- vidual bank holding companies. During toring is accomplished, in part, through the year, information on derivatives the use of automated screening systems. activities contained in BHCPRs was sig- Surveillance screens address a number nificantly revised to provide more data of aspects of banking performance, on the use of derivative instruments. including capitalization, asset growth, The Federal Reserve also produces sevloan quality, loan concentrations, liquid- eral statistical and analytical reports on ity, and capital markets activities. Infor- the structure and condition of the bankmation from these screens assists in ing industry for use in supervising banks allocating examination resources to and bank holding companies. During institutions experiencing, or vulnerable 1997, development of an Aggregate to, deterioration and is also used in the Loan Quality Analysis Report was comexamination-planning process. Among pleted. This report supplements loan the automated screening systems used concentration surveillance screens by to monitor bank performance are two providing additional detail on the qualeconometric models that use quarterly ity of assets at institutions reporting con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 84th Annual Report, 1997 centrations in loans of various types. In Federal Reserve conducted examinaaddition, electronic access to National tions of 12 foreign branches of state Information Center (NIC) data on banks, member banks and 114 foreign subsidibank holding companies, and surveil- aries of Edge Act corporations and bank lance screen results is provided to super- holding companies. All of the examvisory staff through the Performance inations abroad were conducted with the Report Information and Surveillance cooperation of the supervisory authori- Monitoring system (PRISM). ties of the countries in which they took The Federal Reserve actively works place; when appropriate, the examinawith the other federal banking author- tions were coordinated with the Office ities to enhance surveillance tools of the Comptroller of the Currency. through its representation on the Federal Also, examiners made eight visits to the Financial Institutions Examination overseas offices of U.S. banks to obtain Council Task Force on Surveillance financial and operating information and, Systems. in some instances, to evaluate their compliance with corrective measures or to test-check their adherence to safe and International Activities sound banking practices. The Federal Reserve plays a critical role in the supervision and regulation of the Foreign Branches of Member Banks international activities of U.S. banking organizations and the U.S. activities of At the end of 1997, 89 member banks foreign banking organizations. It super- were operating 786 branches in foreign vises foreign branches of member countries and overseas areas of the banks; overseas investments by member United States; 59 national banks were banks, Edge Act corporations and agree- operating 599 of these branches, and ment corporations, and bank holding 30 state member banks were operating companies; and investments by bank the remaining 187 branches. In addition, holding companies in export trading 19 nonmember banks were operating companies. The Federal Reserve also 29 branches in foreign countries and supervises the U.S. activities of foreign overseas areas of the United States. banking organizations, including U.S. branches, agencies, and representative offices, U.S. bank subsidiaries, and com- Edge Act and Agreement Corporations mercial lending company subsidiaries Edge Act corporations are international and nonbanking subsidiaries. banking organizations chartered by the Board to provide all segments of the U.S. economy with a means of financ- Foreign Office Operations of ing international business, especially U.S. Banking Organizations exports. Agreement corporations are The Federal Reserve examines the inter- state-chartered or federally chartered national operations of state member companies that enter into agreements banks, Edge Act corporations, and bank with the Board not to exercise any holding companies, principally at the power that is impermissible for an Edge U.S. head offices of these organizations, Act corporation. where the ultimate responsibility for Under sections 25 and 25(A) of their foreign offices lies. In 1997 the the Federal Reserve Act, Edge Act and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 223 agreement corporations may engage in 20 percent of U.S. banking assets. These international banking and foreign finan- foreign banks also operated 148 reprecial transactions. These corporations, sentative offices; an additional 97 forwhich in most cases are subsidiaries eign banks operated in the United States of member banks, may (1) conduct a solely through a representative office. deposit and loan business in states other The Federal Reserve has acted to than that of the parent provided that the ensure that all state-licensed and federbusiness is strictly related to interna- ally licensed branches and agencies are tional transactions and (2) make for- examined on-site at least once during eign investments that are broader than each twelve-month period either by the those of member banks because they Federal Reserve or by a state or other can invest in foreign financial organiza- federal regulator. The Federal Reserve tions, such as finance companies and conducted or participated with state and leasing companies, as well as in foreign federal regulatory authorities in 446 banks. examinations during 1997. At year-end 1997, there were eightyfour Edge Act and agreement corporations with thirty domestic branches. Joint Program for Supervising the During the year, the Federal Reserve U.S. Operations of Foreign examined all of these corporations. Banking Organizations In 1995 the Federal Reserve, in cooperation with the other federal and state U.S. Activities of Foreign Banks banking supervisory agencies, formally The Federal Reserve has broad authority adopted a joint program for supervising to supervise and regulate the U.S. activi- the U.S. operations of foreign banking ties of foreign banks that engage in organizations (FBOs). The program has banking and related activities in the two major parts. One part focuses on the United States through branches, agen- examination process for those FBOs that cies, representative offices, commercial have multiple US. operations and is lending companies, Edge Act corpora- intended to improve coordination among tions, banks, and certain nonbank com- the various US. supervisory agencies. panies. Foreign banks continue to be The other part of the program is a significant participants in the U.S. bank- review of the financial and operational ing system. As of year-end 1997, 278 profile of each FBO to assess its general foreign banks from 59 countries oper- ability to support its U.S. operations ated 412 state-licensed branches and and to determine what risks, if any, the agencies (of which 23 were insured by FBO poses through its U.S. operations. the FDIC) as well as 64 branches Together, these two processes provide licensed by the OCC (of which 6 had critical information to the US. super- FDIC insurance). These foreign banks visors in a logical, uniform, and timely also directly owned 16 Edge Act corpo- manner. During 1997 the Federal rations and 3 commercial lending com- Reserve continued to implement propanies; in addition, they held an equity gram goals through coordination with interest of at least 25 percent in 87 U.S. other supervisory agencies and the commercial banks. Altogether, these development of financial and risk U.S. offices of foreign banks at the assessments of foreign banking organiend of 1997 controlled approximately zations and their U.S. operations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 84th Annual Report, 1997 Technical Assistance balance-sheet items to broad categories primarily on the basis of credit risk. In In 1997 the System provided staff for addition, some institutions must meatechnical assistance missions and trainsure their market risk exposure and ing sessions on bank supervisory matinclude that measure in their risk-based ters to a number of central banks in capital calculation. Banking organizacountries of the former Soviet Union, tions are expected to maintain capital Eastern Europe, Asia, the Caribbean, equal to at least 8 percent of their riskand Latin America. adjusted assets. To supplement the risk-based capital standards, the Federal Reserve in 1990 Supervisory Policy issued leverage guidelines setting forth minimum ratios of capital to total assets The Federal Reserve in 1997 issued for to be used in the assessment of an instipublic comment an interim rule and tution's capital adequacy. During 1997, several proposals to amend its capital the Board of Governors approved for adequacy guidelines. It also issued a public comment an interim rule and sevproposal to amend its real estate eral proposals to amend its capital adeappraisal rule for bank holding comquacy guidelines. panies and their nonbank subsidiaries. During the year, the Federal Reserve Market Risk/Specific Risk continued to revise its supervisory process to enhance the effectiveness of On December 30, 1997, the Board, examinations and inspections as well as together with the FDIC and the OCC, to address changes in the banking indus- issued an interim rule, effective at yeartry. As part of these efforts, the Federal end 1997, along with a request for pub- Reserve and the Federal Deposit Insur- lic comment, that amended their respecance Corporation jointly formalized and tive risk-based capital guidelines for implemented a risk-focused supervision market risk applicable to certain instituframework for the examination of com- tions having significant trading activimunity banks. The Federal Reserve also ties. The rule permits institutions to use introduced a parallel framework for the qualifying internal models to determine risk-focused supervision of large, com- their capital requirements in relation to plex banking organizations. specific risk (an element of market risk) without comparing the requirements generated by their internal models with Capital Adequacy Guidelines the so-called standardized specific-risk capital requirement. The rule imple- The risk-based capital requirements, ments a revision to the Basle Accord adopted by the Federal Reserve in 1989, that permits such treatment for instituimplement the international risk-based tions whose internal models adequately capital standards that were developed by measure specific risk. the Basle Committee on Banking Regulation and Supervisory Practices (Basle Recourse Supervisors Committee) and endorsed by the Group of Ten (G-10) countries On November 5, 1997, the Federal in July 1988. The standards include a Reserve, together with the OCC, FDIC, framework for calculating risk-adjusted and OTS, issued a proposal to revise the assets and for assigning assets and off- risk-based capital standards to address Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 225 the regulatory capital treatment of tionships from 50 percent of tier 1 capirecourse obligations and direct credit tal to 100 percent of tier 1 capital. The substitutes that expose banks, bank amendment would also allow the deducholding companies, and thrift institu- tion of servicing assets on financial tions to credit risk. The proposed rules assets other than mortgages from tier 1 would use credit ratings to match the capital. risk-based capital assessment more closely to an institution's relative risk of Leverage Capital Ratios loss in certain asset securitizations. On October 27, 1997, the agencies issued for public comment a proposal Unrealized Gains on Certain addressing their leverage standards. Equity Securities Under the proposal, institutions rated a On October 23, 1997, the agencies composite 1 under the Uniform Finanissued a joint proposal to amend the cial Institutions Rating System would be risk-based capital standards for banks, subject to a minimum 3.0 percent levbank holding companies, and thrift erage ratio, and all other institutions institutions with regard to the treatment would be subject to a minimum 4.0 perof certain unrealized revaluation gains cent leverage ratio. This change would on certain equity securities. Under the simplify and streamline the leverage proposal, institutions would be per- standards and make the agencies' rules mitted to include in tier 2 capital up uniform. to 45 percent of their unrealized gains on certain available-for-sale equity Technical Modifications securities. In October 1997, the agencies issued a proposal to amend their capital Servicing Assets adequacy guidelines to eliminate differ- On August 4, 1997, the agencies issued ences among the agencies. The proa proposal to amend their risk-based and posed amendments pertain to the risktier 1 leverage capital guidelines for based capital treatment of presold onebanks, bank holding companies, and to four-family residential properties, thrift institutions to address the account- second liens on one- to four-family resiing treatment of servicing assets on both dential properties, and investments in mortgage assets and financial assets mutual funds. The amendment would other than mortgages. The proposal permit a 50 percent risk weight for conreflects changes in accounting standards struction loans on all presold one- to for servicing assets made in Statement four-family residential properties. All of Financial Accounting Standard (FAS) first and second liens would be treated No. 125, Accounting for Transfers and separately, with qualifying first liens Servicing of Financial Assets and Extin- risk-weighted at 50 percent and nonguishments of Liabilities. FAS 125 qualifying first liens and all second liens extended the accounting treatment for risk-weighted at 100 percent. At their mortgage servicing to servicing on all option, institutions would be permitted financial assets. The proposed amend- to assign mutual fund investments on a ment would raise the capital limitations pro rata basis among the risk categories on the sum of all mortgage servicing according to the investment limits in the assets and purchased credit card rela- mutual fund prospectus. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 84th Annual Report, 1997 Real Estate Appraisal Regulation Risk-Focused Supervision of Banks In 1990, in accordance with title XI In October 1997, the Federal Reserve of the Financial Institutions Reform formally implemented two risk-focused y Recovery, and Enforcement Act of supervision programs for banks, one for 1989, the Board, along with the other large, complex banking organizations federal banking agencies, adopted and the other for community banks. appraisal regulations for real estate- Both programs rely on an understanding related transactions within their jurisdic- of the institution, the performance of tion and exempted certain transactions risk assessments, the development of a from the regulations. In 1994 the agen- supervisory plan, and examination procies amended several existing exemp- cedures tailored to the institution's risk tions and added several new exemp- profile. tions. On December 5, 1997, the Board issued a proposal to amend its real estate Large, complex banks. For large, appraisal regulation for bank holding complex organizations, the supervision companies and their nonbank subsidi- program emphasizes the need for ongoaries. The proposed amendment would ing supervision, through increased permit a bank holding company or its planning and off-site monitoring, and nonbank subsidiary having the authority for coordination of supervisory activito underwrite or deal in mortgage- ties with an organization's multiple backed securities to do so without dem- regulators, to improve efficiency and onstrating that the loans underlying the avoid duplication. The program also securities are supported by appraisals emphasizes a review of functional that at origination met the Board's activities or business lines, rather than appraisal regulation. The Board pro- just legal entities, because large organiposed this amendment to address con- zations generally are structured accordcerns raised by bank holding companies ing to business functions and manage regarding the inability of their nonbank many important financial and operasubsidiaries to actively participate in the tional activities centrally. As part of this commercial mortgage-backed securities approach, the program endorses the conmarket because of the Board's appraisal cept of conducting, when appropriate, a requirements. A final amendment is series of targeted examinations during a expected in early 1998. given supervisory cycle, each focusing on a single function or business line. Risk-Focused Supervision Community banks. The supervisory Over the past several years the Federal framework for community banks was Reserve has initiated a number of pro- developed jointly by the Federal grams aimed at enhancing the effective- Reserve and the FDIC in close consulness of the supervisory process. The tation with state bank supervisors. The main objective of these initiatives has program sets forth guidelines for planbeen to sharpen the focus on (1) those ning and scoping examinations to focus business activities posing the greatest on the areas of highest risk to the bank risk to banking organizations and (2) the and encourages the performance of as organizations' management processes many supervisory activities as possible for identifing, measuring, monitoring, off-site. It also describes general proceand controlling their risks. dures for examining each of the major Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 227 areas of a bank's risk-bearing activities. on-site inspection is expected to be per- The procedures are set forth in modules formed. Newly formed companies will that are structured in a decision-tree for- still be subject to a full-scope, on-site mat. This format allows an examiner inspection within the first twelve to to draw conclusions about a particular eighteen months of operation. activity after completing a core analysis, which in most cases would require only Examination-Frequency Guidelines a few procedures. If the core analysis indicates that a more in-depth review In February 1997, the Board and the and more testing are needed to draw a other banking agencies revised their conclusion about a particular activ- examination-frequency guidelines to ity, the examiner would perform an address provisions in the Riegle Comexpanded analysis. To aid in conducting munity Development and Regulatory risk-focused examinations, an auto- Improvement Act of 1994 and the Ecomated program has been developed that nomic Growth and Regulatory Paperallows examiners to document their work Reduction Act of 1996. As a result work for each module on their laptop of the revision, certain banks having computers. The program, which also assets of less than $250 million will be provides electronic access to the FDIC subject to an eighteen-month examinaand Federal Reserve examination manu- tion cycle rather than a twelve-month als, is designed to operate on all comput- cycle. To qualify for less-frequent ers currently used by FDIC, Federal examination, a bank must be rated com- Reserve, and state bank supervisors. posite 2 or better, must be well capitalized and well managed, must not be subject to a formal enforcement action, Risk-Focused Supervision of Small and must not have experienced a change Shell Bank Holding Companies of control during the preceding twelve In November 1997, the Board adopted a months. risk-focused supervision program for small shell bank holding companies Risk-Management Guidance that tailors supervisory activities to an assessment of each company's reported In June 1997, in response to an amendcondition and activities and the condi- ment to the Basle Accord on capital tion of its subsidiary banks. Under the requirements for exposure to general program, Reserve Banks are expected to market risk, the Federal Reserve issued perform a risk assessment of each small guidance on the risk-based capital treatshell bank holding company at least ment of credit derivatives held in tradonce during each supervisory cycle, ing accounts. Banking organizations are which depends on the examination fre- expected to hold risk-based capital to quency for the holding company's lead compensate for exposure to counterbank. If the preliminary assessment party credit risk, general market risk, identifies no unusual supervisory issues and specific risk in credit derivative or concerns, no special follow-up with transactions. the company is necessary. However, if it In July 1997, the Board issued guidsupports the assignment of a super- ance on the risk management and capital visory rating (that is, a BOPEC rating) adequacy of secondary-market credit of 3 or worse or a management rating activities such as loan syndications, of less than satisfactory, a full-scope, loan sales and participations, credit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 84th Annual Report, 1997 derivatives, and asset securitizations and and to regulatory authorities. In Novemthe provision of credit and liquidity ber, the Basle Supervisors Committee enhancements to transactions in these and the Technical Committee of the areas. The guidance identifies some International Organisation of Securities of the significant risks involved in Commissions (IOSCO) issued a third several of the more common types joint report on the public disclosure of of secondary-market credit activities. trading and derivatives activities of It also describes sound practices and banks and securities firms worldwide. special considerations that supervisors The report provides an overview and should take into account when assess- analysis of the disclosures about trading ing a banking organization's systems and derivatives activities presented in for managing risks arising from these the 1996 annual reports of a sample of activities. the largest internationally active banks and securities firms in the G-10 countries, and notes improvements since Derivatives Accounting and 1993.3 The analysis was built in part on Disclosures a framework used by the Federal During 1997 the Federal Reserve Reserve in analyzing the trading and provided comments on the Financial derivatives disclosures of major U.S. Accounting Standards Board's (FASB) banking organizations. It revealed that a proposed standard Accounting for number of firms in the sample have con- Derivative and Similar Financial tinued to make general improvements, Instruments and for Hedging Activities. such as the expansion of value-at-risk Although the Federal Reserve supports disclosures, as well as significant volunthe FASB's objective of promoting tary innovations in their annual report greater transparency in financial state- disclosures. Despite these encouraging ments, the Board's comment letters advances, however, some institutions expressed concerns that the FASB have continued to disclose little about approach would not improve the trans- their trading and derivatives activities. parency of financial reporting and The report also contains recommendawould likely constrain prudent risk- tions made by the Basle Committee and management practices that make use of IOSCO in 1995 for further improvederivatives. The Federal Reserve offered ments in disclosures of qualitative and the FASB suggestions for improving quantitative information about instituthe transparency of financial reporting tions' involvement in trading and defor derivatives and all other financial rivatives activities, including their risk instruments. In conjunction with the exposures and risk-management poli- Basle Committee on Banking Super- cies, and the effect of these activities on vision, similar comments were provided earnings. to the International Accounting Standards Committee (IASC) regarding Bank Internal Audit Functions its accounting proposal for financial In December 1997, the Board and the instruments. other federal banking regulators issued a Industry groups and regulators continjoint policy statement that describes ued during 1997 to monitor the quality of bank disclosures of derivatives activi- 3. The total sample consisted of seventy-nine ties, with the goal of making these global institutions holding more than $83 trillion activities more transparent to the public in derivative instruments (notional amounts). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 229 sound practices for managing the inter- grams and implemented a process for nal audit function of banking organiza- focusing future development efforts on tions and includes a major section on risk-based supervision. Several of these internal audit outsourcing. The state- initiatives are discussed below. ment reiterates that directors and senior managers are responsible for ensuring National Information Center and that the system of internal control is National Examination Database adequate for the nature and scope of the organization's business. It provides The National Information Center (NIC) examiners with guidance for assessing is a Federal Reserve System database the quality and effectiveness of an maintained at the Board of Governors organization's internal audit function. and made available to staff members at It also provides guidance on sound the Board, the Reserve Banks, and other practices for internal audit outsourc- federal and state banking agencies. The ing arrangements and on independence NIC contains information about the issues when an accountant plans to serve organizational structure of all deposias the banking organization's external tory institutions, nonbanks, bank holdauditor and as its internal-audit out- ing companies, and foreign banking sourcing vendor. organizations operating in the United States. It also contains financial information such as Call Report data and Information Technology Uniform Performance reports for As described in previous sections, dur- depository institutions, and FR-Y finaning 1997 the Federal Reserve formal- cial reports and Uniform Performance ized risk-based supervision programs for reports for bank holding companies. In large, complex banking organizations addition, the NIC contains supervisory and for community banking organiza- information resulting from examinations. The Division of Banking Supervi- tions and inspections and enables end sion and Regulation views the support users to perform financial analysis on of these programs as its most critical institutions. objective in deploying information tech- During 1997, work continued on nology. The risk-based programs require software to improve NIC's usefulness that (1) the division maintain a current through the use of distributed technolorisk profile of large, complex organiza- gies. The National Examination Data tions subject to Federal Reserve super- (NED) software system was implevision for the purpose of determining mented in December. The system allows the appropriate supervisory strategy for staff members to retrieve and update ensuring safe and sound operations and supervisory and financial information on (2) examination exercises for all organi- depository institutions and bank holding zations focus on areas of highest risk companies. Development of the NED and be conducted in a manner that both system, which was begun in 1995 to leverages to the greatest extent possible take advantage of the Federal Reserve upon existing management information System's intranet and to improve the systems and eliminates duplication of functionality of the NIC through the use effort among regulators and bankers. of client/server technology, will greatly During the year, the division made sig- facilitate the examination process, bank nificant progress in the use of infor- surveillance, and supervisory analysis. mation technology to support these pro- Implementation of similar technological Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

230 84th Annual Report, 1997 improvements to support other areas of to improve the use of automation in the NIC began in 1996 and will con- the conduct of examinations, notably tinue, in several phases, through 1999. through joint efforts with the FDIC and In addition, much progress was made in state bank supervisors. One step was 1997 toward providing public access development of the Examination Laptop to nonconfidential NIC information. Visual Information System (ELVIS). In January, a public Internet page was ELVIS leads examiners through a decimade available to provide access to sion matrix to focus on high-risk activimany of the structure and financial ties and helps ensure consistency among reports contained in the NIC. The page examiners in the use of risk-focused prois reached through the FFIEC home cedures. Because it automatically docupage and through a link on the Board of ments the examination process, the Governor's home page. system also provides cost savings. In 1998 and beyond, the Federal Also during the year, the division Reserve will make the NED system agreed with the FDIC and state superavailable to state banking agencies and visors to use a common, automated will explore ways to use internet tech- tool for analyzing loans. Use of an autonologies to expand the availability of mated loan-analysis tool saves consider- NIC data in general. able examination resources by expediting the selection of loans to be reviewed, eliminating the need to transcribe cer- Foreign Banking Organization tain information available electronically Desktop (FBO Desktop) at the bank, and facilitating greater port- FBO Desktop is an automated system folio analysis. The division also agreed developed by the Federal Reserve to with the FDIC and state supervisors on a assist in the supervision of U.S. branches system for accessing data to be used in and agencies of foreign banking organi- conducting examinations and preparing zations. The system makes possible the examination reports. A production versharing throughout the Federal Reserve sion of the system is expected to be System of information used in the super- ready in late 1998. vision of foreign banking organizations, including information on foreign financial systems, foreign accounting Staff Training standards, and analysis of the financial performance of foreign banking organi- The Supervisory Education Program zations having U.S. operations. The Fed- trains staff members having supervisory eral Reserve plans in May 1998 to or regulatory responsibilities at the implement a similar system for large Reserve Banks, at the Board of Goverdomestic banking organizations that nors, and at state banking departments; includes more types of information. students from supervisory counterparts Also in 1998, access to these two sys- in foreign countries attend the training tems will be extended to state and fed- sessions on a space-available basis. The eral banking regulators. program provides training at the basic, intermediate, and advanced levels for the four disciplines of bank supervi- Examination-Related Initiatives sion: bank examinations, bank holding In 1997, the Division of Banking Super- company inspections, surveillance and vision and Regulation took several steps monitoring, and applications analysis. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 231 Classes are conducted in Washington, banking, information technology, D.C., or at regional locations and may municipal securities dealer activities, be held jointly with regulators of other capital markets, payment systems risk, financial institutions. The program is white collar crime, and real estate lenddesigned to increase the student's ing. In addition, the System co-hosts the knowledge of the entire supervisory and World Bank Seminar for students from regulatory process and thereby provide developing countries. a higher degree of cross-training among The Federal Reserve conducted a staff members. variety of schools and seminars in 1997, The System also participates in train- and staff members participated in seving offered by the Federal Financial In- eral courses offered by or cosponsored stitutions Examination Council (FFIEC) with other agencies, as shown in the and by certain other regulatory agencies. accompanying table. The System's involvement includes In 1997 the Federal Reserve trained developing and implementing basic and 4,199 students in System schools, 1,085 advanced training in various emerging in schools sponsored by the FFIEC, and issues as well as in such specialized 84 in other schools, for a total of 5,368, areas as trust activities, international including 256 representatives from for- Number of Sessions of Training Programs for Banking Supervision and Regulation, 1997 Program Total Regional Schools or seminars conducted by the Federal Reserve Core schools Introduction to examinations 8 6 Financial institution analysis 10 7 Bank management 7 3 Effective writing for banking supervision staff 19 19 Management skills 12 11 Conducting meetings with management 19 19 Other schools Loan analysis 6 5 Real estate lending seminar 5 3 Specialized lending seminar 3 Senior forum for current banking and regulatory issues 5 4 Banking applications 1 Bank holding company inspections 6 ' 5 Basic entry-level trust 1 Advanced trust 1 Consumer compliance examinations I 2 Consumer compliance examinations II 3 CRA examination techniques 3 Fair lending 3 Information systems and emerging technology risk management .. 17 16 Information systems continuing education 2 Intermediate information systems examination 1 Capital markets seminars 16 12 Section 20 securities seminar 4 2 Internal controls 8 5 Seminar for senior supervisors of foreign central banks' 1 Other agencies conducting courses2 Federal Financial Institutions Examination Council 55 7 Office of the Comptroller of the Currency 3 Federal Bureau of Investigation3 1 1 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, and the Office of the Comptroller of the Currency. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 84th Annual Report, 1997 eign central banks. A total of 26,608 Federal Financial Institutions student days of training were provided, Examination Council comparable to the amount of training provided in recent years. Year 2000 The Federal Reserve System also gave scholarship assistance to the states The Federal Reserve is working closely for training their examiners in Federal with the other federal banking agencies Reserve and FFIEC schools. Through to address the banking industry's readithis program 773 state examiners were ness for the year 2000. The supervisory trained: 458 in Federal Reserve courses, program focuses on the industry's 302 in FFIEC programs, and 13 in other efforts to ensure that automated systems courses. will be able to correctly calculate date- Every staff member seeking an exam- dependent information after the century iner's commission is required to pass date change. The program has included a core proficiency examination, which the issuance of several policy stateincludes a core content area and a spe- ments, the development of a uniform cialty area of the student's choice— set of examination procedures, and an safety and soundness, consumer affairs, outreach program that has provided trust, or information technology (for- numerous opportunities for banks and merly information systems). In 1997, bank supervisors to discuss the issues. 131 students took the examination (see Year 2000 supervisory initiatives are table). continuing to intensify and have been of Late in the year, the System initiated great interest to the industry, bank superrevisions to the core training program visors, and the Congress. that leads to the commissioning of assis- The banking agencies, through the tant examiners. The project was under- FFIEC, issued two policy statements to taken to give assistant examiners a all banks in 1997—"Year 2000 Project greater understanding of risk-focused Management Awareness" on May 5 and examination concepts, the components "Safety and Soundness Guidelines Conof sound internal controls, the impor- cerning the Year 2000 Business Risk" tance of management information sys- on December 17. The May statement tems, the concept of risk as it applies to included a set of uniform examination banking, and the key supervisory issues procedures that is being used in the related to integrated supervision. The Year 2000 examination of all banks subchanges will be implemented over 1998 ject to Federal Reserve supervision by and 1999. mid-1998. Status of Students Registered for the Core Proficiency Examination, 1997 Specialty area Student status Core Safety and Information Consumer Trust soundness technology In queue, year-end 1996 33 26 4 1 0 Test taken, 1997 131 82 42 5 6 Passed 114 69 33 5 2 Failed 17 13 9 0 4 In queue, year-end 1997 23 13 9 0 1 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 233 As part of its outreach activities, the the March 1997 report. This change Federal Reserve in June 1997 pro- brought the accounting principles used duced a ten-minute video entitled in bank regulatory reports into confor- "Year 2000 Executive Awareness," mity with those used in bank holding which is intended for viewing by bank company FR-Y reports, savings assoboards of directors and senior manage- ciation Thrift Financial Reports, and ment. Governor Edward W. Kelley, Jr., general-purpose financial statements. introduces the video and emphasizes The FFIEC also revised the Report of that the Year 2000 challenge is a busi- Assets and Liabilities of U.S. Branches ness matter and not exclusively a tech- and Agencies of Foreign Banks (FFIEC nology problem, thus warranting the 002), effective with the March 1997 attention of boards of directors and report, and the Foreign Branch Report senior officers. of Condition (FFIEC 030), effective In an effort to intensify international with the September 1997 report, to involvement by foreign bank super- adopt GAAP and certain other disclovisors, the Federal Reserve and other sures to maintain consistency with the U.S. bank supervisors worked closely bank Call Reports. with the Bank for International Set- In October, the Federal Reserve and tlements's Committee on Banking the other federal banking agencies pro- Supervision to prepare a paper on the posed minor revisions to the bank Call Year 2000 situation that was distributed Reports to improve the agencies' ability in September 1997 to banks and bank to monitor bank compliance with certain supervisors in more than one hundred regulations and to facilitate bank supercountries. The committee encouraged vision. The revisions would, with the BIS member countries to make prepara- March 1998 report, add items to monitor tion for the year 2000 a priority to en- compliance with the risk-based capital sure that banks everywhere are ready for standards for market risk exposures the century date change. and low-level recourse transactions less The Federal Reserve's supervisory frequently as part of the FFIEC's conactivities and internal preparations have tinuing efforts to reduce unnecessary been of significant interest to both the regulatory burden and to streamline House and the Senate Banking Commit- regulatory reports. The proposal would tees as well as to the General Account- also eliminate several detailed items on ing Office. Staff members have been bank trading portfolios and collect cerasked to provide quarterly written and tain deposit information. oral briefings to both houses of Con- Besides implementing or proposing gress beginning with the third quarter changes to Call Report content, the of 1997 and continuing through the cen- FFIEC in 1997 phased out the direct tury date change. filing of Call Reports in paper form and implemented an electronic filing requirement. The FFIEC also revised the Revisions to the Call Report four versions of the Call Report instruc- During 1997 the FFIEC implemented tions into a single set of instructions and changes to the bank Reports of Condi- made the report forms available on the tion and Income (Call Reports) to adopt Internet. These changes are consistent generally accepted accounting principles with the objectives of section 307 of (GAAP) as the reporting basis in all the Riegle Community Development areas of the Call Reports, effective with and Regulatory Improvement Act of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 84th Annual Report, 1997 1994, which requires that the agencies for prior Board approval, the Federal work together to develop a single form Reserve considers several factors, for the filing of core information by including the financial and managerial banks, savings associations, and bank resources of the applicant, the future holding companies; to simplify instruc- prospects of both the applicant and the tions for such reports; and to develop a firm to be acquired, the convenience and system under which such reports can be needs of the community to be served, filed electronically. the potential public benefits, the competitive effects of the proposal, and the applicant's ability to make available to the Board information deemed neces- Regulation of the sary to ensure compliance with applica- U.S. Banking Structure ble law. In the case of a foreign banking The Board administers the Bank Hold- organization seeking to acquire control ing Company Act, the Bank Merger Act, of a U.S. bank, the Federal Reserve also the Change in Bank Control Act, and considers whether the foreign bank is the International Banking Act for bank subject to comprehensive supervision or holding companies, member banks, and regulation on a consolidated basis by its foreign banking organizations. In doing home country supervisor. so, the Federal Reserve acts on a variety In 1997, the Federal Reserve of proposals that directly or indirectly approved 358 proposals by foreign or affect the structure of U.S. banking at domestic companies to become bank the local, regional, and national levels; holding companies; approved 108 prothe international operations of domestic posals by existing bank holding compabanking organizations; and the U.S. nies to merge with other bank holding banking operations of foreign banks; companies; approved 283 proposals by existing bank holding companies to acquire or retain banks; approved 398 Bank Holding Company Act requests by existing bank holding com- Under the Bank Holding Company Act, panies to acquire nonbank firms engaged a company must obtain the Federal in activities closely related to banking; Reserve's approval before forming a and approved 90 other bank holding bank holding company by acquiring company applications or notices and control of one or more banks in the denied 1. Data on these and all other United States. Once formed, a bank decisions are shown in the accomholding company must receive the Fed- panying table. eral Reserve's approval before acquiring additional banks or nonbanking Bank Merger Act companies. The act permits well-run bank holding companies that satisfy spe- The Bank Merger Act requires that all cific criteria to commence certain non- proposed mergers of insured depository banking activities on a de novo basis institutions be acted on by the appropriwithout prior Board approval and estab- ate federal banking agency. If the instilishes an expedited prior notice proce- tution surviving the merger is a state dure for other activities and for small member bank, the Federal Reserve has acquisitions. primary jurisdiction. Before acting on a In reviewing an application or notice proposed merger, the Federal Reserve filed by a bank holding company considers factors relating to the financial Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 235 and managerial resources of the appli- tors to the other federal banking agencant, the future prospects of the existing cies in 1997. and combined institutions, the convenience and needs of the community to be served, and the competitive effects of Change in Bank Control Act the proposal. It also considers the views of certain other agencies regarding the The Change in Bank Control Act competitive factors involved in the requires persons seeking control of a transaction. U.S. bank or bank holding company to During 1997 the Federal Reserve obtain approval from the appropriate approved 156 merger applications. As federal banking agency before comrequired by law, each merger is pleting the transaction. Under the act, described in this REPORT (in table 16 of the Federal Reserve is responsible for the "Statistical Tables" chapter). reviewing changes in control of state When the FDIC, the OCC, or the member banks and of bank holding OTS has jurisdiction over a merger, the companies. In doing so, the Federal Federal Reserve is asked to comment on Reserve reviews the financial position, the competitive factors to ensure com- competence, experience, and integrity of parable enforcement of the antitrust pro- the acquiring person; considers the visions of the Bank Merger Act. The effect on the financial condition of the Federal Reserve and those agencies have bank or bank holding company to be adopted standard terminology for acquired; determines the effect on comassessing competitive factors in merger petition in any relevant market; assesses cases to ensure consistency in adminis- the completeness of information submittering the act. The Federal Reserve sub- ted by the acquiring person; and considmitted 994 reports on competitive fac- ers whether the proposal would have an Decisions h\ the tedera! Reserve. 1)omestic and International Applications, 3997 Action under authority delegated by the Board of Governors Direct action by the Director of the Proposal Board of Governors Division of Banking wince Federal Total Superviiion and Secretary Reserve: Banks Reguation Approved Denied Permitted Approved Denied Approved Approved Permitted Formation of holding company 12 0 0 0 0 1 261 84 358 Merger of holding company 12 0 0 0 0 16 61 19 108 Acquisition of bank .. 25 0 0 0 0 22 155 81 283 Acquisition of nonbank 0 0 124 0 0 44 0 230 398 Merger of bank 23 0 0 0 0 17 116 0 156 Change in control 6 0 0 0 0 4 0 174 184 Establishment of a branch, agency, or representative office by a foreign bank 18 0 1 0 0 0 1 0 20 Other 363 1 58 19 o 169 1,395 129 2,134 Total 459 1 183 19 0 273 1,989 717 3,641 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 84th Annual Report, 1997 adverse effect on the federal deposit the financial resources of the foreign insurance funds. bank and its existing U.S. operations; The appropriate federal banking agen- the managerial resources of the foreign cies are required to publish notice of bank; whether the home country supereach proposed change in control and to visor shares information regarding the invite public comment, particularly from operations of the foreign bank with other persons located in the markets served by supervisory authorities; whether the forthe institution to be acquired. The agen- eign bank has provided adequate assurcies are also required to assess the quali- ances that information concerning its fication of each person seeking control. operations and activities will be made In early 1997, following discussions available to the Board, if deemed neceswith the FDIC, the OCC, and the OTS, sary to determine and enforce complithe Board adopted significant changes to ance with applicable law; and the record the portion of Regulation Y that imple- of the foreign bank with respect to comments the Change in Bank Control Act. pliance with U.S. law.4 The modifications represent an attempt In 1997, the Federal Reserve to reduce unnecessary regulatory burden approved applications by fourteen forand to harmonize the scope and pro- eign banks from twelve foreign councedural requirements of the Federal tries to establish branches, agencies, and Reserve with those of the other federal representative offices in the United banking agencies. As discussed in the States. later section "Recent Regulatory Changes," these revisions were part of a Public Notice of broader effort by the Board to improve Federal Reserve Decisions Regulation Y. Each decision by the Federal Reserve In 1997 the Federal Reserve acted that involves a bank holding company, a on 184 proposed changes in control of bank merger, a change in control, or the state member banks and bank holding establishment of a new U.S. banking companies. presence by a foreign bank is effected by an order or an announcement. Orders International Banking Act state the decision, the essential facts of the application or notice, and the basis The International Banking Act, as for the decision; announcements state amended by the Foreign Bank Supervionly the decision. All orders and sion Enhancement Act of 1991, requires announcements are made public imme- Federal Reserve approval for the estabdiately; they are subsequently reported lishment of branches, agencies, comin the Board's weekly H.2 statistical mercial lending company subsidiaries, release and in the monthly Federal and representative offices by foreign Reserve Bulletin. The H.2 release also banks in the United States. contains announcements of applications In reviewing proposals, the Board and notices received by the Federal generally considers whether the foreign Reserve but not yet acted on. In 1997, bank is subject to comprehensive superthe H.2 release became available on the vision or regulation on a consolidated Board's public Web site. basis by its home country supervisor. It may also take into account whether the 4. The Board may also consider the needs of home country supervisor has consented the community, the foreign bank's history of to the establishment of the U.S. office; operation, and its relative size in its home country. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 237 Timely Processing of Applications run bank holding companies. The Board also reorganized and expanded the list The Federal Reserve maintains target of generally permissible activities of dates and procedures for the processing bank holding companies and updated of applications. The setting of target or eliminated many of the restrictions dates promotes efficiency at the Board under which bank holding companies and the Reserve Banks and reduces the conduct business. The final regulation burden on applicants. The time allowed also adopted a number of measures for a decision ranges from thirty to sixty designed to broaden and improve public days, depending on the type of applicanotice of acquisition proposals. tion or notice. In 1997, 98 percent of In December 1997, the Board decisions met this standard. requested comment on proposed comprehensive revisions to Regulation K, which governs international banking Delegation of Applications operations. The proposed revisions are Historically, the Board of Governors has intended to improve the international delegated certain regulatory functions— competitiveness of U.S. banking organiincluding the authority to approve, zations by expanding permissible activibut not to deny, certain types of ties abroad and reducing regulatory burapplications—to the Reserve Banks, to den associated with the conduct of such the Director of the Board's Division of activities, and to reduce regulatory bur- Banking Supervision and Regulation, den on foreign banks operating in the and to the Secretary of the Board. The United States by streamlining the applidelegation of responsibility for applica- cation and notice process. tions permits staff members at the Board and the Reserve Banks to work more efficiently by removing routine cases Banking and Nonbanking Proposals from the Board of Governors's agenda. During 1997, the Board approved sev- In 1997, 82 percent of the applications eral merger proposals involving some processed were acted on under delegated of the largest banking organizations in authority. the United States. As in previous cases, these proposals generated many comments from the public, particularly with Recent Regulatory Changes respect to Community Reinvestment In February 1997, the Board approved Act, fair lending, and competitive significant revisions to Regulation Y, issues. The Board also continued to which implements the Bank Holding process numerous banking proposals Company Act, the Change in Bank Con- involving mutual holding companies. trol Act, and certain related statutes. The Beginning in the second half of 1996, revisions were intended to improve the the Board adopted a series of changes in competitiveness of bank holding compa- the restrictions applicable to the operanies by eliminating unnecessary regula- tions of section 20 subsidiaries. As a tory burden and operating restrictions result of these changes, the Federal and by streamlining the application and Reserve System in 1997 received signotice process. As part of the final regu- nificantly more proposals involving the lation, the Board implemented a stream- establishment and expansion of seclined and expedited review process for tion 20 subsidiaries by bank holding bank and nonbank proposals by well- companies. By year-end 1997, the Board Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 84th Annual Report, 1997 had approved a variety of proposals by time, legislation was adopted that allows both foreign and domestic banking orga- member banks to invest up to 20 percent nizations to acquire full-service securi- of their capital and surplus with the prior ties brokerage and investment firms. The approval of the Board. During 1997, the number of section 20 subsidiary propos- Board also approved two applications to als from smaller banking organizations establish new agreement corporations. also increased. In the course of acting on other Applications by Member Banks nonbanking proposals by foreign and State member banks must obtain Board domestic bank holding companies, the approval to establish domestic branches, Board continued to expand the scope of and member banks (including national permissible data processing activities to banks) must obtain Board approval to facilitate electronic banking. It also perestablish foreign branches. In considermitted several banking organizations ing proposals for domestic branches, the to acquire or retain certain operations Board reviews the scope of the funcengaged in a broad range of mutual fund tions and the character of the business to activities. be conducted. In reviewing proposals for foreign branches, the Board consid- Overseas Investments by ers, among other things, the condition of U.S. Banking Organizations the bank and the bank's experience in international business. Once a member U.S. banking organizations, with the bank has received authority to open a authorization of the Board, may engage branch in a particular foreign country, in a broad range of activities overseas. the member bank may open additional Most foreign investments may be made branches in that country without prior under general consent procedures that Board approval. In 1997 the Federal involve only after-the-fact notification Reserve acted on merger and new to the Board; significant investments branch proposals related to 1,681 must be reviewed by the Board in domestic branches and granted prior advance. In 1997 the Board approved approval for the establishment of 10 fortwenty-three proposals by U.S. banking eign branches. organizations to make significant investments overseas. Stock Repurchases by The Board also has authority to act on Bank Holding Companies proposals involving Edge Act and agreement corporations, which are established A bank holding company may purchase by banking organizations to provide a its own shares from its shareholders. means of engaging in international busi- When the company borrows money to ness. In 1997 the Board approved two buy the shares, the transaction increases proposals to increase the investment by its debt and decreases its equity. Relaa member bank in its Edge corporation tively larger purchases may undermine subsidiaries above 10 percent of the the financial condition of a bank holding member bank's capital and surplus. company and its bank subsidiaries. The These proposals were novel in that until Federal Reserve may object to stock September 1996, US. banks were pro- repurchases by holding companies that hibited from investing more than 10 per- fail to meet certain standards, including cent of their capital and surplus in Edge the Board's capital guidelines. In 1997 and agreement corporations. At that the Federal Reserve reviewed thirty- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 239 seven proposed stock repurchases by In 1997 the Federal Reserve issued bank holding companies, all of which revised and expanded procedures for were acted upon under delegated author- its examinations for compliance with ity by either the Reserve Banks or the the Bank Secrecy Act that include Secretary of the Board. new interagency anti-money-laundering examination procedures, as required by the provisions of section 404 of the Enforcement of Other Laws Riegle Community Development and and Regulations Regulatory Improvement Act of 1994. The enhancements include procedures Financial Disclosure by that address compliance with anti- State Member Banks money-laundering rules, procedures to determine whether suspicious activities State member banks that issue securities are being monitored and reported, registered under the Securities Exchange procedures to assess training programs Act of 1934 must disclose certain inforfor all relevant staff in the areas of mation of interest to investors, including Bank Secrecy Act compliance and financial reports and proxy statements. anti-money-laundering controls, and By statute, the Board's financial discloprocedures that require bank examinsure rules must be substantially similar ers to address a banking organizato those of the Securities and Exchange tion's compliance with several regula- Commission. At the end of 1997, tions related to anti-money-laundering twenty-eight state member banks, most recently issued by the Department of the of them small or medium sized, were Treasury. registered with the Board under the The Federal Reserve continued in Securities Exchange Act. 1997 to provide expertise and guidance Bank Secrecy Act to the Bank Secrecy Act Advisory Group, a committee established at the The Currency and Foreign Transactions Department of the Treasury by congres- Reporting Act (the Bank Secrecy Act) sional mandate to seek measures to rewas originally designed as a means of duce unnecessary Bank Secrecy Act creating and maintaining records of vari- burdens and to increase the utility of ous financial transactions that otherwise Bank Secrecy Act data to regulators. would not be identifiable in efforts to Also, through the Special Investigations trace the proceeds of illegal activities. In Section of the Division of Banking recent years, the Bank Secrecy Act has Supervision and Regulation, the Federal been regarded as a primary tool in the Reserve has assisted in the investigation fight against money laundering. The of money laundering activities and has records that must be reported and main- provided anti-money-laundering traintained by financial institutions provide ing to designated staff members at each law enforcement authorities, as well as Reserve Bank as well as for law bank regulators, with data useful in enforcement agencies and the banking detecting and preventing unlawful activ- sector. The Federal Reserve has also ity. The Federal Reserve, through its participated extensively in the Financial examination process and other off-site Action Task Force, which in 1997 promeasures, monitors compliance with the vided anti-money-laundering training to Bank Secrecy Act by the institutions it numerous foreign governments and censupervises. tral banking authorities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

240 84th Annual Report, 1997 Loans to Executive Officers Federal Reserve Membership Under section 22(g) of the Federal At the end of 1997, 3,543 banks were Reserve Act, a state member bank must members of the Federal Reserve Sysinclude in its quarterly Call Report tem. At that time, member banks all extensions of credit made by the were operating 45,037 branches and bank to its executive officers since accounted for 39 percent of all commerthe date of the preceding report. The cial banks in the United States and for accompanying table summarizes this 73 percent of all commercial banking information. offices. Loans by State Member Banks totheir Executive Officers, 1996 and 1997 Range of interest Period Number Amount (dollars) rates charged (percent) 7996 October 1-December 31 705 27,555,000 0.0-19.8 1997 January 1-March 31 735 31,815,000 0.0-18.0 April 1-June 30 786 36,167,000 0.0-19.5 July 1-September 30 743 37,229,000 0.0-18.0 SOURCE. Call Reports. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

241 Regulatory Simplification In 1978 the Board of Governors estab- part of its comprehensive review of its lished a regulatory review program to margin regulations. In 1996, the Board help minimize the burden of regulation also proposed amendments to the reguon banking organizations. The objec- lations to reflect statutory changes to tives of the program are to ensure that the Board's margin authority contained the economic consequences of regula- in the National Securities Markets tion for small business are considered, Improvement Act of 1996. In December to afford interested parties the opportu- 1997, the Board adopted amendments nity to participate in designing regula- based on comments on the three propostions and comment on them, and to als. The amendments revise Regulation ensure that regulations are written in U, which formerly covered only comsimple, clear language. Board staff mercial banks, to also cover lenders members continually review regulations formerly subject to Regulation G (lendfor their adherence to these objectives ers other than banks, brokers, and dealand for their consistency with the provi- ers). They also reduce regulatory dissions of the Regulatory Flexibility Act. tinctions between broker-dealers, banks, and other lenders and generally liberalize the treatment of securities credit Comprehensive Reviews transactions. In 1997 the Board continued the review process mandated by the Regulatory Amendments to Promote Uniformity Flexibility Act and by section 303 of the among Lenders and Reduce more recent Riegle Community Devel- Inconsistencies opment and Regulatory Improvement Act. As a result of this process, it The Board's margin authority is found adopted revised versions of Regulation in the Securities Exchange Act of 1934 T, Regulation U, and Regulation Y. It (SEA). The SEA prohibits the Board also eliminated Regulation G (effective from regulating extensions of securities in 1998) by revising Regulation U to credit by banks as comprehensively as it cover lenders formerly covered by regulates extensions of securities credit Regulation G. In addition, the Board by brokers and dealers. In the 1930s, the proposed revising several other major Board adopted Regulation T to cover regulations and combining some regula- brokers and dealers and Regulation U to tions, thereby reducing the total number cover commercial banks. In 1968, it of regulations. adopted Regulation G to cover lenders other than banks, brokers, and dealers. Regulation G was generally more Regulatory Revisions Adopted restrictive than Regulation U. As the Board gained experience with "Regula- Regulations G, T, U, and X tion G lenders," it amended Regulation Securities Credit Transactions G to make it more and more similar to In 1995 and 1996, the Board proposed Regulation U. At the beginning of the revisions to Regulations G, T, and U as comprehensive review of Regulations G Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

242 84th Annual Report, 1997 and U, the primary difference between equity securities under Regulation T in the regulations was based on section 1968 and replaced it with the concept 8(a) of the SEA, which distinguished of "good faith margin." Good faith between bank and nonbank lenders with margin is the amount of margin that a respect to loans to broker-dealers. Sec- broker-dealer, exercising sound credit tion 8(a) of the SEA was repealed by judgment, would customarily require for Congress in 1996, leading the Board to a specified security position; it is estabpropose combining Regulations G and lished without regard to the customer's U. In 1997, the Board announced the other assets or securities portions held extension of Regulation U to cover lend- in connection with unrelated transacers subject to Regulation G and the tions. Although broker-dealers are not elimination of Regulation G, effective required to obtain a specified percentage April 1, 1998. of margin for the purchase of debt secu- Regulation U contains several exemp- rities, Regulation T still contains rules tions from the regular margin require- for debt transactions not found in Reguments for loans made to broker-dealers. lations G and U. For example, under The combining of Regulations G and U Regulation T, margin for debt securities will result in these exemptions applying must be collected within a specified time to lenders formerly subject to Regula- period, and a broker-dealer is required tion G. Although the Board amended to liquidate a customer's securities if the Regulation T in 1983 to include some customer does not pay for margin within of these exemptions, others remained the required time. In addition, Regulaavailable only in Regulation U. In 1997 tion T does not permit the purchase of a the Board announced that all exemp- nonequity security to be financed on an tions for loans to brokers and dealers unsecured basis or against collateral in Regulation U will be extended to other than securities. None of these pro- Regulation T, so that broker-dealers visions are found in Regulations G and seeking exempt credit will be able to U. In 1996, the Board proposed to furborrow from all lenders on the same ther deregulate transactions involving basis. nonequity securities by allowing good A significant difference between the faith margin for all nonequity securicoverage of Regulation T and the cover- ties and by creating a new account for age of Regulations G and U is the treat- such transactions that does not have the ment of transactions involving non- payment period and the sell-out restricequity securities. The Board's margin tions applicable to equity security transauthority under the SEA does not extend actions. In addition, the Board proposed to extensions of credit by banks against to modify the definition of good faith nonequity securities, and the scope of margin to allow broker-dealers to con- Regulations G and U has consequently sider the creditworthiness of the borbeen limited to extensions of credit rower as well as the value of the collatagainst equity securities. In contrast, eral. The proposal was adopted in 1997. Regulation T covers extensions of credit It allows the purchase of debt securities against both debt and equity securities. by unsecured credit and largely deregu- To reduce the disparity between broker- lates broker-dealer credit to the debt dealers and other lenders with respect to markets to provide broker-dealers extensions of credit against debt securi- greater parity with banks and other lendties, the Board eliminated the numerical ers whose credit to the debt markets has margin requirement for marginable non- not been regulated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Regulatory Simplification 243 Another significant difference broker-dealers to borrow securities in between Regulation T and Regulations anticipation of any situation permissible G and U is their treatment of nonmargin under the regulation. equity securities. Under Regulation T, nonmargin equity securities have no loan value, meaning that the customer Amendments to Improve Efficiency and must pay for them in full. Under Regula- Reduce Unnecessary Costs tions G and U, nonmargin equity securities used in connection with a covered The Board has always relied on the listtransaction have "good faith loan ing standards of the national securities value." In 1996, the Board proposed to exchanges in defining what constitutes a expand the definition of "margin secu- "margin stock" or "margin security" rity" in Regulation T. After reviewing under its margin regulations. Since comments, the Board modified its pro- 1968, however, the Board has made an posal and in 1997 announced that all individualized determination regarding securities listed in the NASDAQ Stock the margin status of many over-the- Market will become margin securities counter (OTC) stocks and has published on January 1, 1999. This amendment a list of marginable stocks, known as the reduces the number of nonmargin equity OTC list, on a periodic basis (currently securities under Regulation T, thereby four times a year). Preparation of the list increasing the number of securities eli- is an expense both to the Board and to gible for credit at all lenders. the issuers of OTC securities surveyed Another amendment to promote uni- by the Board. Moreover, publication of formity among lenders announced by a stock's name on the OTC list lags its the Board in 1997 was the exclusion of qualification as an OTC security under money market mutual funds from the the Board's criteria by more than four definition of "margin stock" in Regula- months. In 1997, the Board announced tion U. The exclusion has the effect of changes to the definitions of "margin allowing banks and other lenders to security" in Regulation T and "margin extend "good faith" credit against these stock" in Regulation U that will result securities, as has been allowed under in elimination of the Board's quarterly Regulation T since July 1996. The OTC list by relying on the listing stan- Board also amended the regulations to dards of the NASDAQ Stock Market. reduce internal inconsistencies. For The changes will allow lenders to extend example, Regulation U prohibited the credit against OTC stocks on the basis extension of credit against exchange- of their current trading status without traded options while allowing all other having to wait for the Board to publish exchange-traded equity securities to be its OTC list. purchased with 50 percent margin. In The Board also publishes a list of 1997, the Board amended Regulation U foreign margin stocks for purposes of to provide a uniform margin require- Regulation T. Stocks appear on the forment of 50 percent for all exchange- eign list after meeting Board criteria traded equities, including options. The or appearing on the Financial Times/ Board also reduced the inconsistencies Standard & Poor's World Actuaries in the section of Regulation T that cov- Indices (FT/S&P list). The latter group ers the borrowing and lending of securi- of stocks are included because the Secuties so as to provide uniform treatment rities and Exchange Commission conof all foreign securities and to permit siders them to have a "ready market" Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

244 84th Annual Report, 1997 for purposes of broker-dealer capital issued. In 1997 the Board recognized requirements; the Board amended Regu- the 1996 congressional repeal of section lation T in 1996 to allow margin status 8(a) of the SEA by deleting the provifor foreign stocks with a "ready mar- sions in Regulations G, T, and U that ket." Stocks added to the FT/S&P list had been adopted to implement section are not marginable until they appear on 8(a). The Board also determined that the the Board's quarterly foreign list. In collateral requirements for the borrow- 1997, the Board announced that it will ing and lending of securities under no longer require that a foreign stock Regulation T were unnecessary to effecwith a "ready market" appear on its for- tuate the purposes of Regulation T and eign list to be considered a "margin therefore duplicative of the SEC's cussecurity" under Regulation T. This tomer protection rules in this area and change will allow broker-dealers to of the securities self-regulatory organiextend credit against foreign securities zations' responsibility for overseeing as soon as they are deemed to have a the safety and soundness of member "ready market" without waiting for the broker-dealers. Board to verify that status by publishing the names of the securities on its foreign list. Amendment to Reduce In 1995 the Board solicited comment Regulatory Burden on the mixed collateral provision in Regulation U, which applies to regu- Regulation T requires broker-dealers to lated loans that are secured in part by keep records of customer transactions margin stock and in part by other collat- by recording them in a margin account eral. The Board noted that this provision or other special-purpose account. In makes collateral management extremely general, the requirements for one difficult and appears to be unnecessarily account may not be met by considering burdensome to effectuate the statutory items in another account. As part of its scheme of margin regulation. In 1997, comprehensive review of Regulation T, the Board announced elimination of the the Board announced in 1997 that it was separation requirement in the mixed reducing the number of Regulation T collateral provision. Regulation U lend- accounts from nine to five. The remainers will still be required to determine ing account structure recognizes the disthat the combined loan value of collat- tinction between cash and margin transeral is sufficient to support the credit actions for customers; it incorporates outstanding. a new account for nonequity securities transactions and includes a separate account for transactions between broker-dealers. Amendments to Eliminate Outmoded and Duplicative Requirements As part of its comprehensive review of Regulation Y Regulations G and U, the Board in 1997 Bank Holding Companies announced the deletion of six Board interpretations because they were obso- In 1996 the Board conducted an extenlete or duplicative of regulatory lan- sive review of Regulation Y and issued guage added after the interpretation was a proposal for public comment (dis- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Regulatory Simplification 245 cussed in last year's REPORT). In April Regulatory Revisions Proposed 1997, the Board announced the adoption of revisions to the regulation based on Regulations H and P the proposal. The revisions streamline Membership in the Federal Reserve and expedite the process for reviewing System, and Bank Protection Act bank and nonbank applications submit- The Board proposed in March 1997 to ted by well-run bank holding compaamend subpart A of Regulation H, renies; reorganize and expand the regulagarding the general provisions for memtory list of nonbanking activities and bership in the Federal Reserve System, remove a number of restrictions on the and subpart E of Regulation H, regardnonbanking activities of bank holding ing interpretations. The Board also procompanies that would not apply to inposed to incorporate Regulation P into sured banks engaged in the same activi- Regulation H. In general, the proposed ties; amend the tying restrictions, amendments reorganize, clarify, and reincluding the restrictions on bank holdduce the burden of compliance with subing companies and their nonbank subpart A. They delete application procesidiaries; and make other changes to dures no longer in effect, reflect the eliminate unnecessary regulatory burden requirements of the Community Reinand to streamline and modernize Reguvestment Act in branch applications, lation Y. provide for expedited procedures in con- Effective in October, the Board modinection with certain membership and fied the prudential limitations estabbranch applications, and eliminate prolished in its decisions under the Bank visions that no longer have a significant Holding Company Act and section 20 of effect. The proposal also eliminates a the Glass-Steagall Act permitting nonnumber of interpretations in Regulabank subsidiaries of bank holding comtion H. panies to underwrite and deal in securi- Regulation P implements the requireties. It eliminated restrictions that have ments of the Bank Protection Act of proved unduly burdensome or unneces- 1968. The proposal to subsume Regulasary in light of other laws or regulations tion P in the revised subpart A of Reguand consolidated the remaining restriclation H would not substantively amend tions in a series of eight operating stanthe terms of Regulation P. The proposal dards. The Board concluded that the to combine the regulations is designed narrower set of restrictions is consisto simplify compliance for state member tent with safety and soundness, should banks by consolidating the regulatory increase customer service options, and requirements applying to state member should improve operating efficiencies at banks into one regulation. section 20 subsidiaries. The new operating standards cover capital requirements for bank holding companies and section Regulation I 20 subsidiaries, internal controls, inter- Issue and Cancellation of Federal lock restrictions, customer disclosures, Reserve Bank Stock credit for clearing purposes, funding of securities purchases, reporting require- In March the Board proposed amending ments, and the application of sections Regulation I to reduce regulatory bur- 23 A and 23B of the Federal Reserve Act den and to update requirements. The to foreign banks. proposed amendments simplify, mod- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

246 84th Annual Report, 1997 ernize, and condense the regulation and increased investments by U.S. banks in reflect the replacement of share certifi- Edge Act corporation subsidiaries and cates by a book-entry system. They also to the interstate operations of foreign codify Board and staff interpretations. banks operating in the United States. Finally, the proposed amendments delete references to specific forms, Other Regulatory Proposals many of which are obsolete because they no longer exist or no longer have In November 1997, the Board proposed the same identification numbers. amendments to Regulation D for monetary policy purposes that are intended to reduce regulatory burden. Regulation K International Banking Operations Regulation D After a lengthy review, the Board in Reserve Requirements of December 1997 proposed several revi- Depository Institutions sions to Regulation K. Some of the revisions are intended to improve the The Board proposed amendments to international competitiveness of U.S. move from the existing system of conbanking organizations by expanding the temporaneous reserve maintenance for number of activities that they may institutions that are weekly reporters to engage in abroad and reducing the regu- a system under which reserves are mainlatory burden associated with the con- tained on a lagged basis. Under the duct of such activities; other revisions lagged system, the reserve maintenance are intended to reduce the regulatory period for weekly reporters would begin burden on foreign banks operating in the thirty days after the beginning of a United States by streamlining the appli- reserve computation period. Under the cation and notice process. The proposed current system, the reserve maintenance revisions include expansion of the period begins only two days after the authority of U.S. banking organizations beginning of a computation period. The to engage in equity securities underwrit- longer time between computation and ing and dealing outside the United maintenance of reserves should facili- States; relaxation of limits on the ability tate compliance by weekly reporting of U.S. banking organizations to make institutions and improve the Board's venture capital investments in nonbank ability to estimate the need for reserves organizations outside the United States; on a timely basis. • a streamlined and expedited review process for U.S. banking organizations to branch abroad, and for foreign banking organizations to establish offices in the United States; expedited review of proposals by well-run U.S. banking organizations to make investments abroad; increased flexibility in the standard for determining whether a foreign banking organization would qualify for certain nonbanking exemptions from the Bank Holding Act; and implementation of statutory changes with respect to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

247 Federal Reserve Banks Two major interests of the Federal the Federal Reserve in retail payment Reserve Banks during 1997 were the services. The scenarios ranged from Federal Reserve's role in the payments exiting the check and ACH services mechanism and continued preparation altogether to playing a more active role, for the century date change. Other in collaboration with other providers, in important activities were preparation of moving more rapidly toward electronic revised accounting procedures related to payment services. The scenarios were interstate branching and implementation not designed to be actual policy options, of new procedures for the provision of but were intended to serve as catalysts fiscal agency and depository services for for debate both within the Federal the federal government. Reserve and among payment system participants. The committee held forums around the country so that repre- Major Initiatives sentatives of depository institutions, clearinghouses, other payment service Payment Services providers, consumers, businesses, and The System's Committee on the Federal academics could express their views on Reserve in the Payments Mechanism the various possible future directions. during 1997 reviewed the payment ser- Federal Reserve staff analyzed the likely vices provided by the Federal Reserve impact of each of the alternatives on to depository institutions and began pre- payment systems of the future, with paring its report. Created by Chairman emphasis on efficiency, access by Greenspan in October 1996 in recogni- depository institutions of various sizes, tion of the rapid changes in the financial and whether different roles of the Fedservices and technology sectors, the eral Reserve would accelerate or retard committee had as one of its goals deter- the movement to electronic forms of mining the extent to which the Federal payment. Reserve should be involved in providing The committee came to two general check collection and automated clear- conclusions: (1) The Federal Reserve inghouse (ACH) services and future should remain a provider of both check generations of payment services. Board collection and ACH services, with the of Governors Vice Chair Alice M. explicit goal of enhancing the efficiency, Rivlin chaired the committee; members effectiveness, and convenience of both were Governor Edward W. Kelley, Jr., systems while ensuring access by all William J. McDonough, president of the depository institutions; and (2) The Fed- Federal Reserve Bank of New York, and eral Reserve should play a more active Thomas C. Melzer, president of the Fed- role, working closely and collaboraeral Reserve Bank of St. Louis. tively with providers and users of pay- The committee focused its discus- ment systems, both to enhance the effisions and analyses of critical payment ciency of check and ACH services and systems issues by developing five hypo- to help evolve strategies for moving to thetical scenarios for the future role of the next generation of payment instru- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

248 84th Annual Report, 1997 ments. In reaching these conclusions, Interstate Branching the committee recognized that fostering private-sector competition is vital in As a result of the Riegle-Neal Interstate improving the efficiency of payment Banking and Branching Act of 1994, systems and in developing new payment which became effective in June 1997, instruments. banking organizations that formerly maintained separately chartered institutions in different states may now convert Year 2000 Readiness those institutions into branches of a The Federal Reserve continued in 1997 single chartered bank. With fewer charto focus on its readiness for the century tered institutions, at the end of 1997, date change to ensure that the Reserve Reserve Banks held 9,368 accounts, Banks continue to provide reliable ser- compared with 9,753 at year-end 1996, vices to the nation's banking system and a decrease of 4.0 percent. financial markets. When it began con- To accommodate banking organizasolidating its mainframe data processing tions having an interstate structure, the operations late in 1992, the Federal Reserve Banks established an account Reserve started to address the possibil- structure, effective January 2, 1998, that ity that automated systems would not provides, for each chartered institution, function properly at the turn of the cen- a single (master) account at one Reserve tury. As a result, new centralized appli- Bank, in which all credits and debits cations critical to the Federal Reserve's arising from financial transactions with mission, such as Fedwire funds transfer, the Federal Reserve are settled. Institu- Fedwire securities transfer, and ACH, tions may maintain subaccounts to keep were designed to operate properly into separate several different types of finanthe next century. All changes to Reserve cial transaction information—for exam- Bank computer programs, testing of ple, by geographic region or operational systems, and acceptance testing by Fed- function. The Reserve Banks modified eral Reserve users of those systems are their accounting software to permit instischeduled to be completed by year-end tutions to view intraday activity in the 1998. In addition, critical financial- master account and any subaccounts services systems that interface with separately or combined. This new strucdepository institutions will be year 2000 ture and associated accounting tools perready by mid-1998; this schedule will mit interstate banking organizations to permit approximately eighteen months centralize all their financial information for customer testing. or to segregate information according to Also during the year, the Reserve their needs. Banks initiated a comprehensive pro- The Board of Governors in 1997 gram to raise public awareness of the amended some Federal Reserve regulapotential year 2000 problem and to tions to facilitate the transition to the advise depository institutions of the single Federal Reserve account struc- Federal Reserve's plans and schedules. ture. Specifically, the Board amended The Reserve Banks also participated Regulation J to allow an institution to in domestic and international forums send checks for collection to any to help foster awareness of year 2000 Reserve Bank and to settle for checks issues and to share experiences, ideas, through its single account. It also and best practices. revised Regulations D and I to define Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 249 an institution's location for purposes Developments in Federal Reserve of Federal Reserve membership and Priced Services account location. It further amended The Monetary Control Act of 1980 Regulation D to allow pass-through requires that the Federal Reserve set fees correspondents to hold all their responfor providing "priced services" to dent balances in their single Federal depository institutions that, over the Reserve account, regardless of the localong run, recover all the direct and indition of the respondent; this change rect costs of providing the services as allows U.S. branches and agencies of well as the imputed costs, such as the foreign banks, and also Edge Act and income taxes that would have been paid agreement corporations, to adopt a and the pretax return on equity that single account structure by combining would have been earned had the serthe reserve balances of multiple offices vices been provided by a private firm. into a single pass-through correspondent The imputed costs are collectively account. referred to as the private sector adjustment factor (PSAF).1 Over the past ten Fees for Electronic Payment years, the Federal Reserve System has Services recovered 100.4 percent of its priced services costs, including the PSAF. In March 1997, the Board adopted Overall, fees charged in 1997 for guidelines for the Reserve Banks in priced services were lowered approxiestablishing fees for their electronic mately 3.7 percent from 1996 levels.2 payment services on the basis of The fees for electronic payment services volume. The Board also approved the were lowered significantly, in large part continuation of volume-based fees because of the efficiencies associated for certain electronic check products, with the transition to a consolidated pending completion of an analysis of automation environment and with the whether those fees meet the new guidecentralization of electronic payment prolines. In May, the Reserve Banks implecessing applications. mented volume-based fees for the ACH Revenue from priced services in 1997 service. was $789.1 million, other income related to priced services was $29.7 mil- Fiscal Agency and Depository lion, and costs related to priced services Services were $721.5 million. As a result, net Reserve Banks worked during the year to implement a policy, adopted in late 1. The imputed costs that make up the PSAF, in 1996, to clarify the Reserve Banks' addition to income taxes and the pretax return on unique statutory relationship with the equity, are interest on debt, sales taxes, and assess- Treasury and other federal government ments for deposit insurance from the Federal Deposit Insurance Corporation. Also allocated to entities. The Reserve Banks provide fispriced services are assets and personnel costs of cal agency and depository services for the Board of Governors that are related to priced the U.S. government; the policy, among services; in the pro forma statements at the end of other things, establishes uniform and this chapter, Board expenses are included in operating expenses and Board assets are part of longconsistent practices for accounting, term assets. reporting, and billing for the full costs 2. Based on a chained Fisher Ideal price index of providing these services. not adjusted for quality changes. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

250 84th Annual Report, 1997 revenue was $97.3 million, for a recov- of 3.0 percent over 1996 (see table). The ery rate of 101.5 percent of costs, volume of fine-sort check deposits, including the PSAF. Revenue from which are presorted by the depositing priced services in 1996 was $26.6 mil- bank according to paying bank, lion more than total costs, resulting in a increased 0.7 percent in 1997, compared recovery rate of 103.4 percent, includ- with an 11.9 percent decline in 1996. ing the PSAF.3 The volume of checks deposited that required processing by Reserve Banks rose 3.4 percent. Check Collection To increase the efficiency of the In 1997, total Reserve Bank operating check-collection system, the Reserve expenses and imputed costs for commer- Banks continued to expand the use of cial check services were $581.2 million, electronics in check processing. During compared with $570.7 million in 1996. 1997, the Reserve Banks electronically Revenue from check operations totaled presented approximately 2.2 billion $598.4 million, and other income checks, or 14.1 percent of all checks amounted to $23.2 million, resulting presented to paying banks, an increase in income before income taxes of of about 56 percent over the 1996 level. $40.4 million. The Reserve Banks Both the number of checks presented handled 15.9 billion checks, an increase electronically and the number of checks truncated grew in 1997. The Reserve Banks also continued in 1997 to offer more products involving 3. Expense data reported throughout this document—revenue, other income, cost, net reve- the capture and storage of digital images nue, and income before taxes—can be linked to to support paying banks' use of electhe pro forma statements at the end of this chapter. tronic check products. With the New Other income is revenue from investment of clear- York and Richmond Districts' introducing balances, net of earnings credits, an amount termed net income on clearing balances. Total cost tion of image products during the year, is the sum of operating expenses, imputed costs at least one office in each Federal (interest on debt, interest on float, sales taxes, and Reserve District except the First offered the Federal Deposit Insurance Corporation assessimage products in 1997; the Boston ment), imputed income taxes, and the targeted return on equity. Net revenue is revenue plus net Reserve Bank plans to offer image prodincome on clearing balances minus total cost. ucts in early 1998. Activity in Federal Reserve Priced Services, 1997, 1996, and 1995 Thousands of items Percentage change Service 1997 1996 1995 1996-97 1995-96 Commercial checks 15,949,152 15,486,833 15,465,209 3.0 .1 Funds transfers 91,800 84,871 77,742 8.2 9.2 Securities transfers 4,136 4,125 3,689 .3 11.8 Commercial ACH 2,602,892 2,372,108 2,046,086 9.7 15.9 Noncash collection 887 1,069 838 -17.1 27.6 Cash transportation 2 36 61 -93.9 -41.0 NOTE. Components may not yield percentages shown on line and offline; in ACH, the total number of commerbecause of rounding. Activity in commercial checks is the cial items processed; in noncash collection, the number of total number of commercial checks collected, including items on which fees are assessed; in cash transportation, processed and fine-sort items; in funds transfers and the number of registered mail shipments and FRBsecurities transfers, the number of transactions originated arranged armored carrier stops. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 251 In October 1997, the Boston Reserve centralization of Fedwire funds transfer Bank closed its Regional Check Pro- processing. cessing Center at Lewiston, Maine, and By year-end 1997, all on-line instituconsolidated its check-processing opera- tions (those with an electronic contions at the Boston office. In addition, nection to the Federal Reserve) had the Interdistrict Transportation System adopted a new, expanded-message Fedmoved one of its five airport hubs from wire funds transfer format. The new for- Cleveland to Cincinnati, Ohio, enabling mat (1) reduces manual intervention in Reserve Banks to set later deposit dead- the transfer process, (2) eliminates the lines and to improve funds availability need to truncate payment-related inforfor many depositors. mation when forwarding payment orders that were received via other large-value transfer systems through Fedwire Funds Transfer and Fedwire, and (3) allows additional infor- Net Settlement mation about the originator and beneficiary of a transfer to be included in the Reserve Bank operating expenses and transfer message, as required by the imputed costs for Fedwire funds transfer Bank Secrecy Act rules adopted by the and net settlement services totaled Department of the Treasury. $79.9 million in 1997, compared with On December 8, the Fedwire funds $71.1 million in 1996. Revenue from transfer service began opening at these operations totaled $94.6 million, 12:30 a.m. eastern time, thereby expandand other income amounted to $3.2 miling the Fedwire funds transfer service lion, resulting in income before income day to eighteen hours from the previous taxes of nearly $18.0 million. ten hours. The longer day is useful to the private sector in reducing settle- Funds Transfer ment risk in foreign exchange markets; The number of Fedwire funds transfers it also eliminates an operational barrier originated by depository institutions to potentially important innovations in increased 8.2 percent in 1997, to privately provided payment and settle- 91.8 million, of which 89.5 million were ment services. value (monetary) transfers and 2.4 million were nonvalue messages. The Net Settlement increase in volume was due largely to The Federal Reserve provides net setincreased mutual fund activity and tlement services to approximately 170 aggressive marketing of cash managelocal private-sector clearing and setment services by depository institutions, tlement arrangements and to seven and to a lesser extent to increased nationwide arrangements.4 These mortgage activity and securities-related settlement payments. Fees charged for Fedwire transfers 4. Two of the national arrangements, the Clearing House Interbank Payments System (CHIPS) were lowered 10 percent in 1997, from and the Participants Trust Company (PTC), pro- $0.50 to $0.45 per basic transfer. As a cess and net large-dollar transactions, CHIPS for result, depository institutions paid interbank funds transfers and PTC for the settleapproximately $9.2 million less for ment of mortgage-backed securities transactions. Two of the other national arrangements, VisaNet funds transfers in 1997 than in 1996. ACH and the New York ACH, process and net The reduction generally reflects small-dollar ACH transactions. The other three increased efficiencies resulting from the (Footnote continues on next page.) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

252 84th Annual Report, 1997 arrangements enable participants to for book-entry securities transfers did settle their net positions either via Fed- not change from 1996 to 1997. wire funds transfers using special settle- Seven Reserve Banks converted their ment accounts at Reserve Banks or via Fedwire securities transfer applications accounting entries, which are posted to to the Federal Reserve's new centralized participants' Reserve Bank accounts. application known as the National In 1997, the Federal Reserve Board Book-Entry System (NBES), joining the requested comment on a proposal that four Reserve Banks that converted to would enhance the Reserve Banks' cur- NBES in 1996. The NBES offers sevrent net settlement services. Under the eral benefits, including (1) an expanded proposed changes, the Reserve Banks account structure designed to accomwould offer a fully automated net settle- modate the different needs of Federal ment service to participants in clearing Reserve customers and U.S. government arrangements. The service would pro- agencies, (2) modular, centralized applivide finality of settlement at least once cation software designed to facilitate a on the settlement date, rather than next- more rapid response to changing indusday finality. try needs, (3) improved, standardized contingency and disaster recovery capabilities, and (4) processing efficiencies Fedwire Book-Entry Securities such as uniform operating hours in all Reserve Bank operating expenses and Districts. The conversion process will imputed costs for book-entry securities be complete when the Federal Reserve transfer services totaled $15.5 million in Bank of New York converts to NBES in 1997, compared with $16.2 million in early 1998. 1996. Revenue from book-entry securities operations totaled $16.6 million, and Automated Clearinghouse other income amounted to $0.6 million, resulting in income before income taxes Reserve Bank operating expenses and of $1.7 million. The Reserve Banks pro- imputed costs for commercial ACH sercessed 4.1 million transfers of govern- vices totaled $52.3 million in 1997, ment agency securities on the Fedwire compared with $63.7 million in 1996. book-entry securities transfer system Revenue from ACH operations totaled during the year, an increase of 0.3 per- $70.3 million, and other income cent over the 1996 level.5 Fees charged amounted to $2.4 million, resulting in income before income taxes of $20.4 million. The Reserve Banks pronational arrangements—the National Clearing cessed 2.6 billion commercial ACH House Association, the Interdistrict Check transactions during the year, an increase Exchange and Settlement Service, and the of 9.7 percent over 1996 volume. National Check Exchange—clear and net check transactions. Most local clearing arrangements are The year 1997 was the first full year check clearinghouses. that all Reserve Banks operated with the 5. The revenues, expenses, and volumes new centralized automated system reported here are for transfers of securities issued known as Fed ACH. The ongoing reducby federal government agencies, governmenttion in ACH operating costs in 1997 sponsored enterprises, and international institutions such as the World Bank. The Fedwire bookentry securities service also provides custody, safekeep Treasury securities, and the Treasury transfer, and settlement services for U.S. Treasury assesses fees on depository institutions for some securities. The Reserve Banks act as fiscal agents of these services. For more details, see the section of the United States when they transfer and "Fiscal Agency Services" later in this chapter. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 253 reflects the savings realized from cen- the Jacksonville Branch of the Atlanta tralization. Consolidation of operations Reserve Bank. In the fourth quarter of also made it possible to offer several 1997, all noncash processing was cennew features to depository institu- tralized at the Jacksonville Branch. tions, including additional file delivery options and automated trace and Cash Services research capabilities. In May, the Reserve Banks imple- Because the provision of high-quality mented volume-based fees for ACH currency and coin is a basic responsibiltransactions. The use of volume-based ity of the Federal Reserve, the Reserve fees, an extension of the multipart fees Banks charge fees only for certain already in use, increases the potential special cash services. These services to improve the payment system's effi- include providing wrapped coin, nonciency by permitting the Reserve Banks standard currency packages, and moreto address the differences in demand frequent-than-standard access to cash for services by high-volume customers services. (2,500 items or more per file) and low- The Cleveland District and the Helena volume customers (fewer than 2,500 Branch of the Minneapolis Reserve items per file) through the fees charged Bank provide wrapped coin as a priced for those services. As a result of service. In 1997, the Detroit Branch volume-based pricing, the cost to of the Chicago Reserve Bank and the depository institutions to originate ACH Helena Branch provided currency in transactions declined an average of nonstandard packages, and the Minne- 17 percent and the cost to institutions to apolis and San Francisco Districts and receive ACH transactions declined the Detroit Branch offered access to cash 10 percent. In October, the Reserve services more frequently than that pro- Banks extended the regular billing vided under the Federal Reserve's standeposit deadline for ACH items, which dard access policy. When the uniform reduced the number of customers sub- cash access policy is implemented in ject to premium fees. May 1998, income from fees for nonstandard cash access will be treated as a recovery of expense rather than as Noncash Collection priced-service revenue. The new policy Reserve Bank operating expenses and will provide flexibility by permitting imputed costs for noncash collection depository institutions to obtain cash services totaled $3.2 million in 1997, services from any Reserve Bank office. compared with $4.9 million in 1996. Depository institutions pay the cost of Revenue from noncash operations transporting cash to and from Reserve totaled $4.3 million, and other income Banks. In the past, many of the Reserve amounted to $0.2 million, resulting in Banks arranged transportation to move income before income taxes of $1.3 mil- cash to and from depository institutions lion. The Reserve Banks processed in their Districts. During the third quar- 887,000 noncash collection items (cou- ter of 1997, the last Federal Reserve pons and bonds), a decrease of 17.1 per- office to provide that service stopped cent from 1996. arranging armored carrier cash transpor- Until late in the year, two Federal tation when the Helena Branch canceled Reserve sites processed noncash its armored carrier contract for the items—the Cleveland Reserve Bank and delivery of cash. Seven Districts still Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 84th Annual Report, 1997 provide cash transportation by regis- depository institutions throughout the tered mail. United States; these institutions supply Reserve Bank operating expenses and currency and coin to other depository imputed costs for special cash services institutions and to the public. The value totaled $4.5 million in 1997, compared of currency and coin in circulation with $5.2 million in 1996. Revenue from increased 6.9 percent in 1997 and cash operations totaled $4.9 million, and exceeded $482 billion by year-end. Durother income amounted to $0.2 million, ing the year, the Federal Reserve resulting in income before income taxes received more than 25.3 billion Fedof $0.6 million. eral Reserve notes in deposits from depository institutions and sent more than 25.8 billion Federal Reserve notes Float to depository institutions. The Fed- Federal Reserve float decreased in 1997 eral Reserve finished converting its to a daily average of $282.0 million, currency-processing operations to from a daily average of $413.4 million Giesecke and Devrient's Banknote in 1996. The Federal Reserve recovers Processing System (BPS) 3000, an electhe cost of float associated with priced tronic, high-speed currency processing, services as part of the fees for those destruction, and accounting system. At services. the end of 1997, the 128 BPS 3000 machines installed at Reserve Banks were processing approximately 97 mil- Developments in Currency lion notes each business day. Reserve and Coin Bank operating expenses for processing The Federal Reserve continued in 1997 and storing currency and coin, includto work closely with the Treasury to ing priced cash services, totaled deter the counterfeiting of U.S. currency. $283 million for the year. The Series 1996 currency design pro- In late 1997, the Cleveland Reserve gram continued with the introduction of Bank consolidated the Pittsburgh the new $50 note in October. The Series Branch cash operations at its head office 1996 $100 note, introduced in March in Cleveland, which left the Federal 1996, continued to gain acceptance and Reserve with 36 cash operations. The accounted for more than half of the Pittsburgh Branch continues to receive $100 notes in circulation by the end of currency deposits and to disburse cur- 1997. Work on the Series 1996 $20 note rency shipments prepared at the Clevecontinued; distribution is scheduled for land Reserve Bank. fall 1998. The Federal Reserve's cost to print Developments in Fiscal Agency new currency in 1997 was $356 million. and Government Depository The Treasury's Bureau of Engraving Services and Printing produced 9.5 billion notes in 1997; 15 percent of the notes pro- The Federal Reserve Act provides that duced were of the Series 1996 new when required by the Secretary of the design, 45 percent were $1 notes, and Treasury, Reserve Banks will act as fisthe remaining 40 percent were $5, $10, cal agents and depositories of the United and $20 notes. States. As fiscal agents, Reserve Banks The Federal Reserve supplies cur- provide services for the Department of rency and coin to approximately 9,500 the Treasury related to the federal debt, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 255 such as issuing, transferring or reissu- government consolidated financial stateing, exchanging, and redeeming market- ments. As part of the audit, the GAO able Treasury securities and savings reviewed principal Federal Reserve bonds and processing secondary market operations and automated applications transfers initiated by depository institu- that process Treasury transactions. tions. As depositories, Reserve Banks During the year, the Reserve Banks collect and disburse funds on behalf and the Treasury jointly conducted studof the federal government. The Reserve ies to identify the best ways to provide Banks also provide fiscal agency ser- services to the Treasury over the next vices on behalf of several domestic and five years. The business areas studied international government agencies. were Treasury Direct, Treasury tax and The total cost of providing fiscal loan, collateral, savings bonds, and agency and depository services for Treasury auctions. the Treasury in 1997 amounted to $255.4 million, compared with $265.2 million in 1996 (see table). The Fiscal Agency Services cost of providing services to other government agencies was $48.6 million, The Reserve Banks handle marketable compared with $49.8 million in 1996. Treasury securities and savings bonds Significant Reserve Bank resources and monitor the collateral pledged by were devoted in 1997 to the General depository institutions to the federal Accounting Office (GAO) audit of U.S. government. Expenses of the Federal Reserve Banks for Fiscal Agency and Depository Services, 1997, 1996, and 1995 Thousands of dollars Agency and service 1997 1996 1995 DEPARTMENT OF THE TREASURY Bureau of the Public Debt Savings bonds 70,340.4 78,765.8 80,934.6 Treasury Direct 35,440.4 26,788.8 30,117.4 Commercial book entry 26,809.4 27,099.0 27,705.9 Marketable Treasury issues 14,855.4 22,349.9 22,830.3 Definitive securities and Treasury coupons ... 3,618.9 3,498.5 3,860.6 Total 151,064.5 158,502.0 165,448.8 Financial Management Service Treasury tax and loan and Treasury general account 35,265.9 38,828.2 35,749.3 Government check processing 26,548.0 22,604.1 24,347.4 Automated clearinghouse 14,477.3 20,557.0 22,238.0 Government agency deposits 2,795.3 3,366.1 3,823.5 Fedwire funds transfers 422.0 455.3 357.9 Other services 20,994.2 17,346.3 16,376.7 Total 100,502.7 103,157.1 102,892.8 Other Total 3,840.0 3,554.6 4,017.5 Total, Treasury ... 255,407.2 265,213.6 272,359.1 OTHER FEDERAL AGENCIES Securities services 17,042.1 18,788.8 18,547.2 Food coupons 25,495.7 25,287.6 24,251.4 Postal money orders 6,108.7 5,722.9 5,467.8 Total, other agencies 48,646.5 49,799.3 48,266.4 Total 304,053.7 315,012.9 320,625.5 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 84th Annual Report, 1997 Marketable Treasury Securities ments for discounts, interest, and redemption proceeds; 2.8 million pay- Reserve Bank operating expenses for ments for savings bonds; and more than activities related to marketable Treasury 51,000 interest payments for definitive securities (Treasury Direct, commercial Treasury issues. book entry, Treasury issues, and defini- In 1997, the Federal Reserve worked tive securities and coupons) totaled with the Treasury's Bureau of the Public $80.7 million in 1997, a 1.2 percent Debt to make several changes that beneincrease over 1996. The New York, Chi- fit Treasury Direct investors. First, the cago, and San Francisco Reserve Banks Treasury Direct account statement was processed more than 411,000 commer- redesigned for clarity. Second, the "Buy cial tenders for government securities Direct" program was introduced; it perin Treasury auctions, 7.6 percent fewer mits certain Treasury Direct investors to than in 1996. pay for Treasury securities by means of The Reserve Banks operate two book- an ACH debit to their bank account on entry securities systems for the custody the security's issue date rather than by a and transfer of Treasury securities—the personal or certified check submitted in Fedwire system and Treasury Direct. advance. Third, the "Reinvest Direct" Almost all book-entry Treasury securi- program was begun; it permits investors ties, 97.6 percent of the total par value to schedule their reinvestments elecoutstanding at year-end 1997, were tronically using a touch-tone telephone. maintained on Fedwire; the remainder Finally, the Chicago Reserve Bank were maintained on Treasury Direct. introduced the "Sell Direct" program; The Reserve Banks in 1997 processed for a fee, the Bank will liquidate Trea- 8.8 million Fedwire transfers of Trea- sury securities on the secondary market sury securities, a 1.9 percent decline for Treasury Direct investors; in the last from 1996. They also processed four months of the year, the Bank sold 23.9 million interest and principal more than 4,000 securities worth payments for Treasury and govern- $132.3 million at the request of Treament agency securities, a 10.8 percent sury Direct investors. increase over 1996. Treasury Direct, operated by the Savings Bonds Philadelphia Reserve Bank, is a system of book-entry securities accounts for Reserve Bank operating expenses for institutions and individuals planning to savings bond activities totaled hold their Treasury securities to matu- $70.3 million in 1997, a decrease of rity. The Treasury Direct system holds 10.8 percent from 1996. The Reserve more than 1.9 million accounts. During Banks printed and mailed 51.4 million 1997, the Reserve Banks processed savings bonds on behalf of the Treanearly 433,000 tenders for Treasury sury's Bureau of the Public Debt, a Direct customers seeking to purchase 6.8 percent decline from 1996. They Treasury securities at Treasury auctions processed 39 million original-issue and handled 1.7 million reinvestment transactions. They also processed requests; the volume of tenders was approximately 674,000 redemption, 3.9 percent lower than in 1996, and the reissue, and exchange transactions, a volume of reinvestment requests was 1.5 percent increase over 1996. In addi- 13.2 percent lower. The Philadelphia tion, the Reserve Banks responded to Reserve Bank issued 6.9 million pay- 1.7 million service calls from owners of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 257 savings bonds, approximately the same Treasury's account, and make electronic number as in 1996. payments on behalf of the Treasury. Savings bond operations are conducted at five Reserve Bank offices: Federal Tax Payments Buffalo, Pittsburgh, Richmond, Minne- Reserve Bank operating expenses reapolis, and Kansas City. All five offices lated to federal tax payment activities in process savings bond transactions, but 1997 totaled $35.3 million. The Reserve only the Pittsburgh and Kansas City Banks processed approximately 334,000 offices print and mail savings bonds. paper and 5.7 million electronic advices of credit from depository institutions Other Initiatives handling tax payments for businesses The St. Louis Reserve Bank in 1997 and individuals. (Advices of credit are completed development and installation notices from depository institutions to of Cash Track for the Treasury's Finan- the Federal Reserve and the Treasury cial Management Service. By consoli- summarizing taxes collected on a given dating information about receipts and day.) The number of paper advices of payments processed on behalf of the credit declined 61.7 percent from 1996 Treasury, Cash Track makes it easier for to 1997, and the number of tax paythe Treasury to forecast its cash needs. ments submitted electronically increased The average daily flow reported by Cash 5.8 percent. The Reserve Banks also Track is $13.4 billion. At year-end, the received a small number of tax pay- Treasury was running parallel systems ments directly. Depository institutions and expected to implement Cash Track that receive tax payments may place fully in 1998. the funds in a Treasury tax and loan (TT&L) account or remit the funds to The Federal Reserve also worked a Reserve Bank. The Minneapolis with the Financial Management Service Reserve Bank operates an automated to implement the Treasury Offset Prosystem through which businesses pay gram, which electronically compares taxes that are due on the same day the information about delinquent debts tax liability is determined. These elecowed the U.S. government with infortronic tax payments, a part of the Treamation about payments being issued by sury's Electronic Federal Tax Payment the government. If a match occurs, the System, are invested in depository insti- Treasury applies a portion of the paytutions' TT&L balances via the Federal ment to the delinquent debt. The Federal Reserve's TT&L mechanism. In 1997, Reserve Bank of San Francisco develthis electronic tax application processed oped the software with which the Treaapproximately 56,000 tax payments sury maintained an interim delinquent from 5.3 million taxpayers totaling debtor database for matching against $70.8 billion. payments and provided support to the Treasury in its efforts to develop software for longer-term use. Payments Processed for the Treasury Reserve Bank operating expenses related to government payment opera- Depository Services tions (check processing, ACH, agency The Reserve Banks maintain the Trea- deposits, and funds transfers) totaled sury's funds account, accept deposits of $44.2 million in 1997. The Treasury federal taxes, pay checks drawn on the continued to encourage electronic pay- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

258 84th Annual Report, 1997 ments. For example, ACH transactions Banks may (1) maintain book-entry processed for the Treasury (social secu- accounts of government agency securirity, pension, salary, and vendor pay- ties and handle their transfer, (2) provide ments) totaled 677 million, an increase custody for the stock of unissued, definiof 8.4 percent over 1996. All recurring tive securities, (3) maintain and update Treasury Direct payments and most balances of outstanding book-entry and definitive securities interest payments definitive securities for issuers, (4) perare made via the ACH. form various other securities-servicing The Treasury also continues to reduce activities, and (5) maintain funds the number of payments made by check. accounts for some government agencies. The Reserve Banks processed 378 mil- One such service is the provision lion paper government checks in 1997, of food coupon services for the U.S. a decrease of 13.3 percent from 1996. Department of Agriculture. Reserve They also issued 1.6 million fiscal Bank operating expenses for food couagency checks, a decrease of 19.1 per- pon services in 1997 totaled $25.5 milcent from 1996. Fiscal agency checks lion, 0.8 percent higher than in 1996. were used primarily to pay semiannual The Reserve Banks redeemed 2.9 billion interest on registered, definitive Trea- food coupons, a decrease of 21.5 persury notes and bonds and Series H and cent from 1996. The volume of paper HH savings bonds; they were also used food coupons redeemed by the Reserve to pay the principal of matured securi- Banks is expected to continue to decline ties and coupons and to make discount each year as a result of the Department payments to first-time purchasers of of Agriculture's program to provide government securities through Treasury benefits electronically. Direct. In 1997, the Reserve Banks began to Information Technology capture and store digital images of U.S. government checks for the Treasury's In 1997, Federal Reserve Automation Financial Management Service; full Services (FRAS) continued to consoliimplementation of the system is ex- date the Federal Reserve System's data pected in 1998. Digital imaging will processing and data communications improve the Treasury's check reconcili- systems, managed the three consolidated ation and claims processing by eliminat- data centers, and continued to explore ing manual research and by reducing new technologies for improved comthe time needed to make information munications strategies.6 By the end of on paid Treasury checks available for 1997, most Reserve Bank applications research and inquiry. except check processing had been converted to the shared processing environment; mainframe computers dedicated Services Provided to Other Entities to check processing remained in ten When required to do so by the Secretary Districts. of the Treasury or when required or At year-end, the Federal Reserve suppermitted to do so by federal statute, the ported approximately 12,450 Fedline Reserve Banks provide fiscal agency connections (electronic links between and depository services to other domestic and international agencies. Depend- 6. The consolidated data centers are located at ing on the authority under which the East Rutherford, New Jersey; Richmond, Virginia; services are provided, the Reserve and Dallas, Texas. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 259 small depository institutions and soring Organizations (COSO) of the Reserve Banks) and 580 computer inter- Treadway Commission. Following face connections, enabling depository COSO's four control objectives, the institutions to access Federal Reserve examinations concentrated on (1) effiservices and to report information; ciency and effectiveness of operations, depository institutions that transmit (2) accuracy of financial data, (3) comlarge numbers of transactions to Reserve pliance with applicable laws and regu- Banks use more sophisticated computer lations, and (4) safeguarding of assets. interface connections over dedicated The Reserve Banks have also adopted leased circuits. In 1997, FRAS contin- the COSO framework as it applies to ued its ongoing efforts to explore alter- the accuracy of financial reporting, for native, more efficient electronic ser- implementation in 1998. To prepare for vices, such as web-based technology. implementation, three Reserve Banks in During 1997, the Reserve Banks com- 1997 conducted pilot self-assessments pleted FEDNET, the new Federal of their internal control systems for Reserve telecommunications network. financial reporting. FEDNET offers a consistent level of As in past years, the division in 1997 service to all points in the System, as assessed compliance with policies estabwell as improved reliability, security, lished by the Federal Open Market and disaster recovery capabilities. Committee (FOMC) by examining the accounts and holdings of the System Open Market Account at the Federal Reserve Bank of New York and the for- Financial Examinations of eign currency operations conducted by Federal Reserve Banks that Reserve Bank. In addition, at year- Section 21 of the Federal Reserve Act end a public accounting firm certified requires that the Board of Governors the schedule of participated asset and order an examination of each Reserve liability accounts and the related sched- Bank at least once a year. The Board has ule of participated income accounts. assigned this responsibility to its Division of Reserve Bank Operations and Income and Expenses Payment Systems. Every year since 1995, the division has engaged a public The accompanying table summarizes the accounting firm to audit the combined income, expenses, and distributions of financial statement of the Reserve net earnings of the Federal Reserve Banks. In addition, in 1997 the public Banks for 1997 and 1996. accounting firm audited the individual Income in 1997 was $26,917 million, year-end financial statement of each compared with $25,164 million in 1996. of the twelve Reserve Banks; the firm Total expenses were $2,151 million relied, in part, on the division's 1997 ($1,618 million in operating expenses, reviews of the major operating areas of $359 million in earnings credits granted the twelve Reserve Banks for these to depository institutions, and $174 milaudits. lion in assessments for expenditures by In addition, the division rendered an the Board of Governors). The cost of opinion on the management control new currency (including printing, shipsystem at each Reserve Bank, using a ping, and other expenses) was $364 milformat consistent with the integrated lion. Revenue from priced services was framework of the Committee of Spon- $789 million. Unreimbursed expenses Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 84th Annual Report, 1997 for services provided to the Treasury sary to bring the surplus of the Reserve and other government entities amounted Banks to the level of capital paid-in. In to $35 million.7 addition, the Federal Reserve in 1997 The profit and loss account showed a made a lump-sum payment of $107 milnet loss of $2,577 million. The loss was lion to the U.S. Treasury from the surdue primarily to realized and unrealized plus account of the Reserve Banks, as losses on assets denominated in for- required by statute, compared with eign currencies that were revalued to $106 million in 1996. reflect current market exchange rates. In the "Statistical Tables" chapter of Statutory dividends paid to member this REPORT, table 6 details the income banks totaled $300 million, $44 million and expenses of each Federal Reserve more than in 1996; the rise reflects an Bank for 1997, and table 7 shows a increase in the capital and surplus of condensed statement for each Bank for member banks and a consequent 1914-97. A detailed account of the increase in the paid-in capital stock of assessments and expenditures of the the Reserve Banks. Board of Governors appears in the fol- Payments to the Treasury in the form lowing chapter, "Board of Governors of interest on Federal Reserve notes Financial Statements." totaled $20,659 million in 1997, up from $20,083 million in 1996; the payments equal net income after the deduction of Holdings of Securities and Loans dividends paid and of the amount neces- The Reserve Banks' average daily holdings of securities and loans during 1997 amounted to $417,805 million, an 7. The Reserve Banks bill the Treasury and increase of $27,537 million over 1996 other government entities for the cost of certain (see table). Holdings of U.S. governservices, and the portions of the bills that are not ment securities increased $27,466 milpaid are reported as unreimbursed expenses. Income, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 1997 and 1996 Millions of dollars Item 1997 1996 Current income 26,917 25,164 Current expenses 1,976 1,948 Operating expenses' 1,618 1,639 Earnings credits granted 359 309 Current net income 24,941 23,216 Net additions to (deductions from, - ) current net income -2,577 -1,639 Cost of unreimbursed services to Treasury 35 38 Assessments by the Board of Governors 539 565 For expenditures of Board 174 163 For cost of currency 364 403 Net income before payments to Treasury 21,790 20,975 Dividends paid 300 256 Transferred to surplus 832 635 Payments to Treasury2 20,659 20,083 NOTE. In this and the following table, components 2. Interest on Federal Reserve notes. may not sum to totals because of rounding. 1. Includes a net periodic credit for pension costs of $200.0 million in 1997 and $139.5 million in 1996. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 261 Securities and Loans of Federal Reserve Banks, 1995-97 Millions of dollars except as noted U.S. Item and year Total government Loans2 securities' Average daily holdings* 1995 376,069 375,867 202 1996 390,268 390,063 206 1997 417,805 417,529 277 Earnings 1995 23,837 23,826 11 1996 . . 23,895 23,884 11 1997 25,714 25,699 15 Average interest rate (percent) 1995 6.34 6.34 5.62 1996 6.12 6.12 5.27 1997 6.15 6.16 5.27 1. Includes federal agency obligations. 3. Based on holdings at opening of business. 2. Does not include indebtedness assumed by the Federal Deposit Insurance Corporation. lion, and holdings of loans increased Multiyear renovation programs con- $71 million. tinued for the New York Reserve Bank's The average rate of interest earned on headquarters building and the Oklahoma Reserve Banks' holdings of government City, Seattle, Portland, and Salt Lake securities rose to 6.16 percent, from City Branches. The Board approved the 6.12 percent in 1996. The average rate New York Reserve Bank's request to of interest earned on loans remained lease space in a nearby office building in constant at 5.27 percent. New York City and to make necessary leasehold improvements to the facility. The Chicago Reserve Bank relocated Volume of Operations its Des Moines, Iowa, office to leased Table 9 in the "Statistical Tables" chap- space in a new building near the airport. ter shows the volume of operations in The Atlanta Reserve Bank sold its headthe principal departments of the Federal quarters building, and the Minneapolis Reserve Banks for the years 1994 Reserve Bank sold its former headquarthrough 1997. ters building before relocating to its new building. • Federal Reserve Bank Premises During 1997, construction was completed on the new headquarters building for the Minneapolis Reserve Bank; relocation of staff and operations was completed in October. The expansion and renovation of the headquarters building of the Cleveland Reserve Bank continued during the year, as did design work for the Atlanta Reserve Bank's new headquarters building and its new Birmingham Branch building. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 84th Annual Report, 1997 Pro Forma Financial Statements for Federal Reserve Priced Services Pro Forma Balance Sheet for Priced Services, December 31, 1997 and 1996 Millions of dollars Item 1997 1996' Short-term assets (Note 1) [mputed reserve requirements on clearing balances 658.0 658.3 Investment in marketable securities ... 5,922.0 5,924.7 Receivables . 72.8 69.0 Materials and supplies 2.8 3.0 Prepaid expenses 9.0 23.0 Items in process of collection 3,742.3 7,548.4 Total short-term assets 10,406.8 14,226.4 Long-term assets (Note 2) Premises . 389.2 394.6 Furniture and equipment 137.4 148.4 Leases and leasehold improvements .. 31.8 29.5 Prepaid pension costs 350.2 287.4 Total long-term assets 908.5 859.9 Total assets 11,315.3 15,086.3 Short-term liabilities Clearing balances and balances arising from early credit of uncollected items 7,114.8 12,366.3 Deferred-availability items 3,207.5 1,765.1 Short-term debt 84.5 95.0 Total short-term liabilities 10,406.8 14,226.4 Long-term liabilities Obligations under capital leases .7 2.3 Long-term debt 188.8 189.3 Postretirement/postemployment benefits obligation 205.0 191.8 Total long-term liabilities 394.5 383.4 Total liabilities 10,801.3 14,609.8 Equity 514.0 476.5 Total liabilities and equity (Note 3).. 11,315.3 15,086.3 NOTE. Components may not sum to totals because of 1. Some of these data have been revised. rounding. The priced services financial statements consist of these tables and the accompanying notes. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 263 Pro Forma Income Statement for Federal Reserve Priced Services, 1997 and 1996 Millions of dollars Item 1997 1996 Revenue from services provided to depository institutions (Note 4) 789.1 787.2 Operating expenses (Note 5) 672.6 666.0 Income from operations 116.4 121.2 Imputed costs (Note 6) Interest on float .... 14.6 21.9 Interest on debt 17.5 17.3 Sales taxes 9.8 11.6 FDIC insurance 6.9 48.9 0.0 50.8 Income from operations after imputed costs . . .... 67.6 70.4 Other income and expenses (Note 7) Investment income 367.7 315.8 Earnings credits -338.0 29.7 -287.1 28.7 Income before income taxes 97.3 99.1 Imputed income taxes (Note 8) 31.2 29.6 Net income (Note 9) 66.1 69.5 MEMO: Targeted return on equity (Note 10) .. 54.3 42.9 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, 1997 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 789.1 598.4 94.6 16.6 70.3 4.3 4.9 Operating expenses (Note 5) 672.6 540.3 76.1 14.8 49.3 2.9 4.3 Income from operations 116.4 58.1 18.6 1.8 21.0 1.4 .6 Imputed costs (Note 6) 48.9 40.9 3.8 .7 3.0 .3 .2 Income from operations after imputed costs 67.6 17.1 14.8 1.1 18.0 1.1 .4 Other income and expenses, net (Note 7) 29.7 23.2 3.2 .6 2.4 .2 .2 Income before income taxes . 97.3 40.4 18.0 1.7 20.4 1.3 .6 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

264 84th Annual Report, 1997 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 and postretirement benefits costs and obligations on treatment comparable to that of compensating balances capital leases. held at correspondent banks by respondent institutions. The reserve requirement imposed on respondent balances must be held as vault cash or as non-earning 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 $2.9 million in 1997 and cash items in process of collection (CIPC) stated on a $2.8 million in 1996. 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 $62.8 million in 1997 and $45.3 million in among priced services according to the ratio of operating 1996 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 1997 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 545.5 long-term debt and equity in a proportion equal to the Unrecovered float 16.7 ratio of long-term debt to equity for the fifty largest bank Float subject to recovery 528.8 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 52.9 sists of the taxes that would have been paid and the return As-of adjustments 263.5 on capital that would have been provided had priced Direct charges 103.9 services been furnished by a private-sector firm. Other Per-item fees 108.5 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 265 Unrecovered float includes float generated by services lion for 1996. The Reserve Banks plan to recover these to government agencies and by other central bank ser- amounts, along with a finance charge, by the end of the vices. Float recovered through income on clearing bal- year 2001. After-tax return on equity has not been allocated by service because it relates to the organization as a ances is the result of the increase in investable clearing whole. balances; the increase is produced by a deduction for float for cash items in process of collection, which reduces imputed reserve requirements. The income on clearing balances reduces the float to be recovered through other means. As-of adjustments and direct charges are midweek closing float and interterritory check float, which may be recovered from depositing institutions through adjustments to the institution's reserve or clearing balance or by valuing the float at the federal funds rate and billing the institution directly. Float recovered through per-item fees is valued at the federal funds rate and has been added to the cost base subject to recovery in 1997. (7) OTHER INCOME AND EXPENSES Consists of investment income on clearing balances and 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 clearing balance maintained, adjusted for the effect of reserve requirements on clearing balances. Expenses for earnings credits granted to depository institutions on their clearing balances are derived by applying the average federal funds rate to the required portion of the clearing balances, adjusted for the net effect of reserve requirements on clearing balances. Because clearing balances relate directly to the Federal Reserve's offering of priced services, the income and cost associated with these balances are allocated to each service based on each service's ratio of income to total income. (8) INCOME TAXES Imputed income taxes are calculated at the effective tax rate derived from the PSAF model (see note 3). Taxes have not been allocated by service because they relate to the organization as a whole. (9) ADJUSTMENTS TO NET INCOME FOR PRICE SETTING In setting fees, certain costs are excluded in accordance with the System's overage and shortfalls policy and its automation consolidation policy. Accordingly, to compare the financial results reported in this table with the projections used to set prices, adjust net income as follows (amounts shown are net of tax): 1997 1996 Net income 66.1 69.5 Amortization of the initial effect of implementing SFAS87 -10.2 -10.5 Deferred costs of automation consolidation -8.5 -6.3 Adiusted net income 47.4 52.7 (10) RETURN ON EQUITY The after-tax rate of return on equity that the Federal Reserve would have earned had it been a private business firm, as derived from the PSAF model (see note 3). This amount is adjusted to reflect the recovery of $8.5 million of automation consolidation costs for 1997 and $6.3 mil- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

267 Board of Governors Financial Statements The financial statements of the Board for 1997 and 1996 were audited by Price Waterhouse, independent public accountants. Price Waterhouse 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, 1997 and 1996, 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 the standards applicable to financial audits contained in 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, 1997 and 1996, 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 16, 1998 on our consideration of the Board's internal controls and a report dated March 16, 1998 on its compliance with laws and regulations. U.P March 16, 1998 Arlington, Virginia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

268 84th Annual Report, 1997 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEET As of December 31, 1997 1996 ASSETS CURRENT ASSETS Cash $ 23,364,834 $ 15,712,258 Accounts receivable 1,071,278 2,561,975 Transfers receivable—surplus Federal Reserve Bank earnings (Note 1) 652,913,560 659,862,602 Prepaid expenses and other assets 992,096 2,247,391 Total current assets 678,341,768 680,384,226 PROPERTY, BUILDINGS, AND EQUIPMENT, NET (Note 4) 64,220,105 61,110,184 Total assets $742,561,873 $741,494,410 LIABILITIES AND FUND BALANCE CURRENT LIABILITIES Accounts payable and accrued liabilities $ 9,797,829 $ 10,435,545 Accrued payroll and related taxes 7,609,781 6,804,678 Transfers payable—surplus Federal Reserve Bank earnings (Note 1) 652,913,560 659,862,602 Accrued annual leave 7,477,187 6,966,327 Capital lease payable (current portion) 98,772 0 Unearned revenues and other liabilities 2,016,190 2,263,338 Total current liabilities 679,913,319 686,332,490 CAPITAL LEASE PAYABLE (non-current portion) 516,228 0 ACCUMULATED RETIREMENT BENEFIT OBLIGATION (Note 2) 740,497 466,056 ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (Note 3) 20,193,034 18,171,722 ACCUMULATED POSTEMPLOYMENT BENEFIT OBLIGATION (Note 3) 1,769,646 1,409,343 FUND BALANCE 39,429,149 35,114,799 Total liabilities and fund balance $742,561,873 $741,494,410 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 269 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENT OF REVENUES AND EXPENSES AND FUND BALANCE For the years ended December 31, 1997 1996 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $ 174,406,600 $ 162,642,400 Other revenues (Note 5) 9,460,475 9,789,141 Total operating revenues 183,867,075 172,431,541 BOARD OPERATING EXPENSES Salaries 108,870,919 106,353,644 Retirement and insurance contributions 19,835,377 18,417,943 Contractual services and professional fees 10,735,745 11,159,490 Depreciation and net losses on disposals 9,306,428 8,626,785 Travel 4,680,031 4,942,020 Equipment and facilities rental 4,291,093 4,356,715 Postage and supplies 4,261,161 4,263,382 Utilities 4,172,795 4,189,203 Software 4,130,603 3,907,874 Repairs and maintenance 2,895,097 3,417,539 Printing and binding 2,707,738 2,665,188 Other expenses (Note 5) 3,665,738 4,354,734 Total operating expenses 179,552,725 176,654,517 BOARD OPERATING REVENUES OVER (UNDER) EXPENSES 4,314,350 (4,222,976) ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 363,738,623 403,232,215 Expenses for currency printing, issuance, retirement, and shipping 363,738,623 403,232,215 CURRENCY ASSESSMENTS OVER (UNDER) EXPENSES 0 0 TOTAL REVENUE OVER (UNDER) EXPENSES 4,314,350 (4,222,976) FUND BALANCE, Beginning of year 35,114,799 39,337,775 TRANSFERS TO THE U.S. TREASURY Transfers and accrued transfers from surplus Federal Reserve Bank earnings (Note 1) 20,765,972,296 5,623,716,034 Transfers and accrued transfers to the U.S. Treasury (Note 1) (20,765,972,296) (5,623,716,034) FUND BALANCE, End of year $ 39,429,149 $ 35,114,799 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 84th Annual Report, 1997 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENT OF CASH FLOWS Increase (Decrease) in Cash For the years ended December 31, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Board operating revenues over (under) expenses $ 4,314,350 $ (4,222,976) Adjustments to reconcile operating revenue over (under) expenses to net cash provided by operating activities: Depreciation and net losses on disposals 9,306,428 8,626,785 Decrease (increase) in transfers receivable—surplus Federal Reserve Bank earnings 6,949,042 (659,862,602) Increase in accumulated postretirement benefits 2,021,312 1,097,134 Increase in accumulated retirement benefits 274,441 466,056 Increase in accumulated postemployment benefits 360,303 315,943 Decrease (increase) in accounts receivable, prepaid expenses, and other assets 2,745,993 (1,684,189) Increase in accrued annual leave 510,860 365,323 (Decrease) increase in accounts payable and accrued liabilities (637,716) 2,855,174 (Decrease) increase in transfers payable—surplus Federal Reserve Bank earnings (6,949,042) 659,862,602 Increase in payroll payable and related taxes 805,103 1,936,181 (Decrease) increase in unearned revenues and other liabilities (247,148) 78,456 Net cash provided by operating activities 19,453,926 9,833,887 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals of furniture and equipment 18,301 70,500 Capital expenditures (11,819,651) (10,334,324) Net cash used in investing activities (11,801,350) (10,263,824) NET INCREASE (DECREASE) IN CASH 7,652,576 (429,937) CASH BALANCE, Beginning of year 15,712,258 16,142,195 CASH BALANCE, End of year $23,364,834 $ 15,712,258 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Capital lease obligations incurred $ 615,000 $ 0 The accompanying notes are an integral part of these statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 271 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOTES TO FINANCIAL STATEMENTS contributory defined benefits program under the System Plan. Contributions to the System Plan are actuarially determined and funded by participating employers at (1) SIGNIFICANT ACCOUNTING POLICIES amounts prescribed by the System Plan's administrator. Board Operating Revenues and Expenses— Based on actuarial calculations, it was determined that Assessments made on the Federal Reserve Banks for employer funding contributions were not required for the Board operating expenses and capital expenditures are years 1997 and 1996, and the Board was not assessed a calculated based on expected cash needs. These assess- contribution for these years. Excess Plan assets will conments, other operating revenues, and operating expenses tinue to fund future years' contributions. The Board is not are recorded on the accrual basis of accounting. accountable for the assets of this plan. Issuance and Redemption of Federal Reserve Notes— A relatively small number of Board employees partici- The Board incurs expenses and assesses the Federal pate in the Civil Service Retirement System (CSRS) or Reserve Banks for the costs of printing, issuing, shipping, the Federal Employees' Retirement System (FERS). The and retiring Federal Reserve Notes. These assessments Board matches employee contributions to these plans. and expenses are separately reported in the statements of These defined benefits plans are administered by the revenues and expenses because they are not Board operat- Office of Personnel Management. The Board's contribuing transactions. tions to these plans totaled $98,000 and $201,500 in 1997 Property, Buildings and Equipment—The Board's and 1996 respectively. The Board has no liability for property, buildings and equipment are stated at cost less future payments to retirees under these programs, and it is accumulated depreciation. Depreciation is calculated on a not accountable for the assets of the plans. straight-line basis over the estimated useful lives of the Effective January 1, 1996, Board employees covered assets, which range from 4 to 10 years for furniture and under the System Plan are also covered under a Benefits equipment and from 10 to 50 years for building equip- Equalization Plan (BEP). Benefits paid under the BEP ment and structures. Upon the sale or other disposition of are limited to those benefits that cannot be paid from the a depreciable asset, the cost and related accumulated System Plan because of limitations imposed by Sections depreciation are removed from the accounts and any gain 401(a)(17), 415(b), and 415(e) of the Internal Revenue or loss is recognized. Code of 1986. Pension costs attributed to the BEP reduce Federal Reserve Bank Surplus Earnings—The Omni- the pension costs of the System Plan. The net periodic bus Budget Reconciliation Act of 1993 requires that pension cost for the BEP for 1997 and 1996 included the surplus Federal Reserve Bank earnings be transferred following components: from the Banks to the Board and then to the U.S. Treasury for the period October 1, 1996, to September 30, 1998. 1997 1996 Prior to this time the Federal Reserve Banks made their Service cost (benefits transfers directly to the Treasury. The Board accounts for attributed to employee these transfers when earned and due, which may result in services during the year). $ 133,331 $260,868 transfers receivable and payable as of the balance sheet Interest cost on projected date. benefit obligation 81,060 102,594 Estimates—The preparation of financial statements in Amortization of unrecognized accordance with generally accepted accounting principles net liabilitiy 102,594 102,594 requires management to make estimates that affect the Amortization of unrecognized reported amounts of assets and liabilities at the date of the prior service cost (13,490) 0 financial statements and the reported amounts of revenue Amortization of unrecognized and expenses during the reporting period. net (gain)/loss (29,054) 0 Reclassifications—Certain 1996 disclosures have been reclassified to conform with the 1997 presentation, the Net periodic pension cost $274,441 $466,056 effect of which is immaterial. Although these pension costs are recorded using the (2) RETIREMENT BENEFITS accrual basis of accounting in accordance with Statement Substantially all of the Board's employees participate of Financial Accounting Standards No. 87, Employers' in the Retirement Plan for Employees of the Federal Accounting for Pensions (FAS 87), the Board's current Reserve System (System Plan). The System Plan is a policy is to fund the cost of these benefits on a pay-asmultiemployer plan that covers employees of the Federal you-go basis. Reserve Banks, the Board, and the Plan Administrative The net periodic pension cost was determined using a Office. Employees of the Board who entered on duty prior 7.25 percent discount rate and average compensation to 1984 are covered by a contributory defined benefits growth of 5 percent. program under the System Plan. Employees of the Board The FAS 87 accumulated benefit obligation at Decemwho entered on duty after 1983 are covered by a non- ber 31, 1997, comprises: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

272 84th Annual Report, 1997 1997 1996 1997 1996 Accumulated benefit obligation Retirees $16,959,528 $14,393,309 Fully eligible active plan Vested $ 329,000 $ 218,000 participants 3,574,930 3,512,825 Nonvested 20,000 21,000 Other active plan Total $ 349,000 $ 239,000 participants 2,439,440 3,422,992 22,973,898 21,329,126 Plan assets at fair value 0 Unrecognized net loss ... (2,780,864) (3,157,404) Less: Actuarial present value of projected Liability for accumulated benefit obligation (527,980) (1,589,924) postretirement benefit obligation $20,193,034 $18,171,722 Projected benefit obligation in excess of plan assets (527,980) (1,589,924) The liability for the accumulated postretirement benefit Less: Unrecognized obligation and the net periodic benefit cost were deternet transition mined using a 7.25 percent discount rate. Unrecognized obligation ... 1,260,447 1,363,041 losses of $2,780,864 result from changes in the discount Unrecognized prior rate used to measure the liabilities. Under FAS 106, the service cost .. (996,371) (190,000) Board may have to record some of these unrecognized Unrecognized net losses in operations in future years. The assumed health (gain)/loss ... (476,593) (49,173) care cost trend rate for measuring the increase in costs Unfunded pension cost .. i (740,497) $ (466,056) from 1997 to 1998 was 9.5 percent. These rates were assumed to gradually decline to an ultimate rate of 5.0 percent in the year 2005 for the purpose of calculating The liability as of December 31,1997, was determined the December 31, 1997, accumulated postretirement using a 7.25 percent discount rate and average compensabenefit obligation. The effect of a 1 percent increase in the tion growth of 5 percent. The Board has elected to amorassumed health care cost trend rate would increase tize the unrecognized prior service cost over 14.3 years. the accumulated postretirement benefit obligation by $1,777,007 at December 31, 1997, and the net periodic (3) OTHER BENEFIT PLANS benefit cost by $172,488 for the year. The assumed salary Employees of the Board may also participate in the trend rate for measuring the increase in postretirement Federal Reserve System's Thrift Plan. Under the Thrift benefits related to life insurance was an average of Plan, members may contribute up to a fixed percentage of 5 percent. their salary. Board contributions are based upon a fixed The above accumulated postretirement benefit obligapercentage of each member's basic contribution and were tion is related to the Board sponsored health benefits and $4,771,700 in 1997 and $4,644,100 in 1996. life insurance programs. During 1997, a special retire- The Board also provides certain defined benefit health ment program was offered to employees who were eliand life insurance for its active employees and retirees gible to retire by May 31, 1998. This resulted in a under federal and Board-sponsored programs. The net curtailment loss of $1,174,489 during the year, comprisperiodic postretirement benefit cost for 1997 and 1996 ing $1,044,096 for 62 employees covered by the Boardincluded the following components: sponsored health benefits plan and $130,393 for 78 employees covered by the Board-sponsored life insurance 1997 1996 plan. The Board has no liability for future payments to employees who continue coverage under the federally Service cost (benefits attributed to employee sponsored programs upon retiring. Contributions for services during the active employees participating in federally sponsored proyear) $ 154,474 $ 195,016 grams totaled $3,667,300 and $3,553,400 in 1997 and Interest cost on accumulated 1996 respectively. postretirement benefit The Board provides certain postemployment benefits to eligible employees after employment but before retireobligation 1,474,782 1,461,103 ment. Effective January 1, 1994, the Board adopted Amortization of gains Statement of Financial Accounting Standards No. 112, and losses 112,493 372,253 Employers' Accounting for Postemployment Benefits Curtailment effect 1,174,489 0 (FAS 112), which requires that employers providing Net periodic postretirement postemployment benefits to their employees accrue the benefit cost $2,916,238 $2,028,372 cost of such benefits. Prior to January 1994, postemployment benefit expenses were recognized on a pay-asyou-go basis. Although postretirement benefits are recorded using the accrual basis of accounting in accordance with FAS 106, the Board's current policy is to fund the cost of these (4) PROPERTY, BUILDINGS AND EQUIPMENT benefits on a pay-as-you-go basis. The following is a summary of the components of the The FAS 106 accumulated postretirement benefit obli- Board's fixed assets, at cost, net of accumulated gation at December 31, 1997 and 1996, comprises: depreciation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 273 As of December 31, Rental expenses under the operating leases were 1997 1996 $3,960,400 and $3,930,700 in 1997 and 1996 Land and respectively. improvements $ 1,301,314 $ 1,301,314 Buildings 65,611,228 65,343,600 (7) FEDERAL FINANCIAL INSTITUTIONS Furniture and EXAMINATION COUNCIL equipment 63,486,071 55,102,012 The Board is one of the five member agencies of the 130,398,613 121,746,926 Federal Financial Institutions Examination Council (the Less accumulated depreciation .. (66,178,508) (60,636,742) "Council"). During 1997 and 1996, the Board paid $228,200 and $224,600 respectively in assessments for Total property, buildings and operating expenses of the Council. These amounts are equipment $ 64,220,105 $ 61,110,184 included in subsidies and contributions for 1997 and 1996. During 1997 and 1996, the Board paid $157,800 Furniture and equipment and accumulated depreciation and $127,100 respectively for office space subleased from as of December 31, 1997, includes $615,000, and $0, the Council. • respectively for capitalized leases, which were acquired during 1997. (5) OTHER REVENUES AND OTHER EXPENSES The following are summaries of the components of Other Revenues and Other Expenses. For the years ended December 31, 1997 1996 Other Revenues Data processing revenue $5,184,075 $4,612,476 National Information Center 2,156,191 1,974,295 Subscription revenue 1,394,394 1,583,193 Reimbursable services to other agencies . 399,426 424,940 Miscellaneous 326,389 1,194,237 Total Other Revenues ... $9,460,475 $9,789,141 Other Expenses Tuition, registration, and membership fees $1,118,683 $1,290,090 Cafeteria operations, net 794,019 870,429 Subsidies and contributions ... 653,207 646,194 Miscellaneous 1,099,833 1,548,021 Total Other Expenses .. $3,665,742 $4,354,734 (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, 1997, are as follows: 1998 $ 3,689,825 1999 3,707,625 2000 3,965,158 2001 3,948,759 after 2001 ... 13,215,854 $28,527,221 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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

276 84th Annual Report, 1997 1. Detailed Statement of Condition of All Federal Reserve Banks Combined, December 31, 1997 and 1996 Millions of dollars Item 1997 1996 ASSETS Gold certificate account 11,047 11,048 Special drawing rights certificate account 9,200 9,718 Coin 460 591 Loans and securities Loans to depository institutions 2,035 85 Federal agency obligations Bought outright 685 2,225 Held under repurchase agreement. 2,652 1,612 U.S. Treasury securities Bought outright Bills 197,123 190,647 Notes 174,206 150,922 Bonds 59,407 49,339 Total bought outright 430,736 390,907 21,188 19,971 Held under repurchase agreement.. 451,924 410,878 Total U.S. Treasury securities. 457,295 414,800 Total loans and securities Items in process of collection Transit items 6,982 11,741 Other items in process of collection. 1,395 1,387 Total items in process of collection 8,378 13,128 Bank premises Land 194 192 Buildings (including vaults) 1,100 934 Building machinery and equipment . 255 241 Construction account 61 194 Total bank premises 1,610 1,562 Less: Depreciation allowance... 338 329 Bank premises, net 1,272 1,233 Other assets Furniture and equipment 1,258 1,230 Less: Depreciation allowance. 749 707 Total furniture and equipment, net 510 524 Denominated in foreign currencies' 17,046 19,264 Interest accrued 4,386 3,891 Premium on securities 7,194 6,004 Overdrafts 33 6 Prepaid expenses 1,239 991 Suspense account 22 3 Real estate acquired for banking-house purposes. 6 10 Other 333 299 Total other assets. 30,768 30,992 Total assets 518,420 481,510 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 277 I.—Continued Item 1997 1996 LIABILITIES Federal Reserve notes Outstanding (issued to Federal Reserve Banks) . 549,600 526,826 Less: Held by Federal Reserve Banks . 92,131 100,304 Total Federal Reserve notes, net 457,469 426,522 Deposits Depository institutions 30,838 24,524 U.S. Treasury, general account 5,444 7,742 Foreign, official accounts 457 167 Other deposits Officers' and certified checks 18 26 International organizations 100 108 Other2 779 759 Total other deposits 897 893 Deferred credit items 7,817 7,831 Other liabilities Discount on securities 3,899 3,844 Sundry items payable 119 103 Suspense account 8 4 All other 819 783 Total other liabilities 4,845 4,734 Total liabilities 507,767 472,413 CAPITAL ACCOUNTS Capital paid in 5,433 4,602 Surplus 5,220 4,496 Other capital accounts3 0 0 Total liabilities and capital accounts . 518,420 481,510 NOTE. Amounts in boldface type indicate items in the invested with foreign central banks and the Bank for Board's weekly statement of condition of the Federal International Settlements. Reserve Banks. 2. In closing out the other capital accounts at year-end, Components may not sum to totals because of the Reserve Bank earnings that are payable to the Trearounding. sury are included in this account pending payment. 1. Of this amount, $8,117.2 million in 1997 and 3. During the year, includes undistributed net income, $8,291.8 million in 1996 were invested in securities which is closed out on December 31. issued by foreign governments, and the balance was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 84th Annual Report, 1997 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1997 and 1996 Millions of dollars Total Boston Item 1997 1996 1997 1996 ASSETS Gold certificate account 11,047 11,048 624 661 Special drawing rights certificate account 9,200 9,718 530 636 Coin 460 591 23 !3 Loans To depository institutions 2,035 85 21 0 Other 0 0 0 0 Acceptances held under repurchase agreements 0 0 0 0 Federal agency obligations Bought outright 685 2,225 42 131 Held under repurchase agreements 2,652 1,612 0 0 U.S. Treasury securities Bought outright' 430,736 390,907 26,259 23,000 Held under repurchase agreements 21,188 19,971 0 0 Total loans and securities 457,295 414,800 26,322 23,131 Items in process of collection 8,378 13,128 441 706 Bank premises 1,272 1,233 94 95 Other assets Denominated in foreign currencies2 17,046 19,264 637 830 Mother 13,722 11,729 697 534 Interdistrict Settlement Account 0 0 -3,621 1,024 Total assets 518,420 481,510 25,746 27,629 LIABILITIES Federal Reserve notes 457,469 426,522 22,984 25,417 Deposits Depository institutions 30,838 24,524 1,544 1,048 U.S. Treasury, general account 5,444 7,742 0 0 Foreign, official accounts 457 167 5 6 Other 897 893 2 38 Total deposits 37,636 33,326 1,551 1,092 Deferred credit items 7,817 7,831 412 511 4,845 4,734 283 268 Other liabilities and accrued dividends3 07,767 472,413 25,231 27,289 Total liabilities CAPITAL ACCOUNTS 5,433 4,602 262 172 Capital paid in 5,220 4,496 254 168 Surplus 0 0 0 0 Other capital accounts 518,420 481,510 25,746 27,629 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 549,600 526,826 27,943 30,331 Federal Reserve notes outstanding (issued to Bank) 92,131 100,304 4,959 4,914 Less: Held by Federal Reserve Bank 457,469 426,522 22,984 25,417 Federal Reserve notes, net Collateral for Federal Reserve notes Gold certificate account 11,047 11,048 Special drawing rights certificate account 9,200 9,718 Other eligible assets 0 0 U.S. Treasury and federal agency securities 437,222 405,756 Digitized Tfootra lF cRoAllaSteEraRl 457,469 426,522 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 279 2.—Continued New York Philadelphia Cleveland Richmond 1997 1996 1997 1996 1997 1996 1997 1996 3,934 4,049 350 423 669 624 965 919 3,202 3,385 282 396 574 543 792 835 20 21 53 43 27 25 64 113 1,465 0 16 9 0 0 0 0 0 0 0 0 0 0 0 0 221 827 23 86 47 131 65 184 2,652 1,612 0 0 0 0 0 0 139,322 145,377 14,400 15,129 29,794 22,976 40,983 32,416 21,188 19,971 0 0 0 0 0 0 164,848 167,787 14,438 15,224 29,842 23,106 41,048 32,600 1,026 1,796 222 476 352 688 474 1,064 156 150 51 50 132 108 126 128 3,885 5,128 1,014 924 1,083 1,257 1,177 1,416 5,941 5,783 384 356 764 530 1,157 910 16,310 -27,599 -162 -1,762 -1,888 5,007 -8,468 3,821 199,322 160,499 16,632 16,131 31,556 31,889 37^36 41,805 179,316 139,364 13,970 13,822 28,441 29,861 32,459 38,736 9,257 8,167 1,720 1,297 1,815 856 2,062 1,275 5,444 7,742 0 0 0 0 0 0 346 62 9 7 9 9 10 11 360 410 11 9 54 43 77 88 15,406 16,381 1,740 1,313 1,879 909 2,149 1,374 794 883 184 261 235 280 650 698 1,643 1,796 181 194 316 261 427 369 197,159 158,425 16,075 15,590 30,871 31,311 35,684 41,177 1,108 1,051 284 273 349 292 833 318 1,055 1,023 273 268 335 286 818 310 0 0 0 0 0 0 0 0 199,322 160,499 16,632 16,131 31,556 31,889 37336 41,805 209,843 183,368 16,784 16,172 31,706 32,850 39,172 45,352 30,527 44,004 2,815 2,351 3,265 2,989 6,713 6,616 179,316 139,364 13,970 13,822 28,441 29,861 32,459 38,736 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 84th Annual Report, 1997 2. Statement of Condition of Each Federal Reserve Bank, December 31, 1997 and 1996—Continued Millions of dollars Atlanta Chicago Item 1997 1996 1997 1996 ASSETS Gold certificate account 723 769 1,069 1,140 Special drawing rights certificate account 602 745 900 979 Coin 45 81 52 70 Loans To depository institutions 163 13 18 Other 0 0 0 Acceptances held under repurchase agreements Federal agency obligations Bought outright 46 148 73 241 Held under repurchase agreements 0 0 0 0 U.S. Treasury securities Bought outright' 28,743 26,087 45,944 42,364 Held under repurchase agreements 0 0 0 0 Total loans and securities 28,952 26,236 46,031 42,623 Items in process of collection 1,287 1,556 773 1,537 Bank premises 78 80 108 110 Other assets Denominated in foreign currencies2 1,574 1,890 1,989 2,296 All other 764 631 1,222 1,006 Interdistrict Settlement Account 793 -511 -5,705 157 Total assets 34,818 31,477 46,438 49,919 LIABILITIES Federal Reserve notes 30,390 27,511 40,531 44,858 Deposits Depository institutions 2,081 1,708 3,570 2,574 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 13 14 17 17 Other 99 54 125 120 Total deposits 2,193 1,775 3,712 2,712 Deferred credit items 1,210 1,033 679 808 328 318 487 479 Other liabilities and accrued dividends3 34,121 30,637 45,409 48,857 Total liabilities CAPITAL ACCOUNTS 359 425 527 537 Capital paid in 338 415 502 524 Surplus 0 0 0 0 Other capital accounts 34,818 31,477 46,438 49,919 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 38,413 34,458 47,119 51,546 Federal Reserve notes outstanding (issued to Bank) 8,023 6,947 6,589 6,688 Less: Held by Federal Reserve Bank Federal Reserve notes, net 30,390 27,511 40,531 44,858 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

Statistical Tables 281 2.—Continued St. Louis Minneapolis Kansas City Dallas San Francisco 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996 401 474 147 168 286 321 459 433 1,420 1,067 340 419 123 144 247 280 367 399 1,241 957 15 29 20 19 36 56 37 49 68 74 4 29 5 7 13 7 0 1 335 15 0 0 0 0 0 0 0 0 0 0 27 104 10 34 20 70 25 80 86 188 0 0 0 0 0 0 0 0 0 0 17,156 18,312 5,999 5,896 12,299 12,244 15,643 13,998 54,194 33,108 0 0 0 0 0 0 0 0 0 0 17,186 18,445 6,014 5,936 12,332 12,321 15,668 14,078 54,615 33,312 93 666 701 639 440 843 359 1,284 2,210 1,873 31 31 132 111 55 56 150 155 159 160 424 476 395 481 647 737 951 1,197 3,270 2,631 439 411 191 151 331 293 420 344 1,411 780 -534 -2,694 -1,205 -453 880 -650 5,259 218 -1,658 23,441 18,396 18,257 6,517 7,195 15,253 14,258 23,670 18,156 62,737 64,295 16,422 16,769 4,792 5,503 13,541 12,435 20,007 15,340 54,617 56,905 1,244 718 629 721 761 817 2,479 1,730 3,677 3,612 0 0 0 0 0 0 0 0 0 0 4 4 3 4 5 5 8 9 28 20 29 32 5 8 63 21 13 18 59 51 1,276 754 637 732 830 844 2,501 1,757 3,763 3,683 252 292 610 653 473 463 424 374 1,893 1,575 197 216 96 96 164 171 184 178 539 388 18,147 18,031 6,135 6,985 15,007 13,912 23,116 17,649 60,812 62,551 127 114 194 107 127 175 283 257 980 880 122 112 189 104 119 171 271 250 945 865 0 0 0 0 0 0 0 0 0 0 18,396 18,257 6,517 7,195 15,253 14,258 23,670 18,156 62,737 64,295 18,568 19,480 6,480 7,027 15,339 14,148 26,054 21,005 72,179 71,088 2,145 2,711 1,689 1,524 1,798 1,713 6,047 5,666 17,562 14,182 16,422 16,769 4,792 5,503 13,541 12,435 20,007 15,340 54,617 56,905 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

282 84th Annual Report, 1997 3. Federal Reserve Open Market Transactions, 1997 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 40,346 New bills 40,346 Redemptions 0 Others within 1 year Gross purchases .. 0 Gross sales 0 Maturity shift 2,481 Exchanges -550 Redemptions 607 1 to 5 years Gross purchases . 0 Gross sales 0 Maturity shift.... -2,481 Exchanges 550 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 oooo oooo 0 0 0 0 33,997 31,720 33,647 31,720 0 0 818 0 0 0 5,086 3,143 -2,864 -1,534 0 0 1,125 2,861 0 0 -4,926 -3,143 1,874 1,534 0 0 1,236 890 0 0 -1,396 450 0 1,943 0 0 607 0 285,667 250,867 283,240 254,741 74,422 48,805 86,673 45,747 oooo 4,006 0 33,160 33,160 0 0 0 2,006 -2,100 376 1,924 0 -2,006 1,700 1,117 0 0 0 3,978 0 0 288,373 288,073 60,425 60,718 oooo oooo 5,930 0 376 303,056 301,177 102,578 62,685 -10,430 1,127 3,984 47,326 0 0 0 0 0 0 0 0 187 27 17 24 17,668 9,795 14,300 10,178 17,995 9,454 14,830 10,285 Net change in agency obligations -514 314 -547 -131 Total net change in System Open Market Account 10,944 1,441 3,437 47,195 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

Statistical Tables 283 3.— Continued May June July Aug. Sept. Oct. Nov. Dec. Total 0 596 0 0 0 0 0 4,545 9,147 0 0 0 0 0 0 0 0 0 47,456 33,022 35,948 35,666 28,328 39,313 33,485 26,905 419,347 47,456 33,022 35,948 35,666 28,328 39,313 33,485 26,905 418,997 0 0 0 0 0 0 0 0 0 383 494 0 0 644 0 1,462 1,947 5,748 0 0 0 0 0 0 0 0 0 5,666 1,476 4,359 7,487 1,596 3,193 5,231 1,748 43,473 -4,229 -2,250 -1,087 -2,780 -2,382 -1,267 -4,126 -2,329 -27,499 0 0 598 0 0 416 0 0 0 1,102 2,797 0 0 2,697 0 3,323 4,471 20,299 0 0 0 0 0 0 0 0 0 -4,685 -1,476 -4,359 -5,247 -1,596 -3,193 -4,883 -1,748 -39,744 2,479 2,250 1,087 1,170 2,382 1,267 1,651 2,329 20,274 734 499 0 0 0 770 485 613 3,101 0 0 0 0 0 0 0 0 0 -981 0 0 -2,240 0 0 31 0 -1,954 1,750 0 0 880 0 0 1,295 0 5,215 988 906 0 0 0 648 954 1,214 5,827 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -379 0 -1,775 0 0 0 730 0 0 1,180 0 2,360 3,206 5,292 0 0 3,341 1,418 6,224 12,790 44,122 0 0 0 0 0 0 0 0 0 0 0 598 0 0 416 0 0 1,996 287,229 293,506 307,101 317,008 311,153 316,425 272,474 353,726 3,588,905 287,826 293,008 309,578 315,439 312,083 318,485 269,586 355,668 3,586,584 46,552 55,073 44,087 54,561 77,109 75,323 73,618 97,932 810,485 89,477 47,070 53,217 50,340 74,960 78,157 73,064 87,160 809,268 -40,316 13,793 -12,205 5,790 4,560 -3,893 9,666 21,620 41,022 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 474 287 179 105 215 26 0 1,540 7,954 8,401 10,437 13,131 9,796 15,639 23,054 20,056 160,409 7,096 9,131 10,811 11,252 11,196 15,157 20,976 21,186 159,369 858 -1,204 -661 1,700 -1,505 267 2,052 -1,130 -500 -39,458 12,589 -12,866 7,490 3,055 -3,626 11,718 20,490 40,522 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

284 84th Annual Report, 1997 4. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31, 1995-97 Millions of dollars December 31 Change Description 1996 to 1995 to 1997 1996 1995 1997 1996 U.S. TREASURY SECURITIES Held outrightl 447,762 405,613 390,534 42,149 15,079 By remaining maturity Bills 1-91 days 112,892 106,063 101,564 6,829 4,499 92 days to 1 year 101,257 99,289 93,888 1,968 5,401 Notes and bonds 1 year or less 49,370 29,045 41,419 20,325 -12,374 More than 1 year through 5 years 95,028 95,608 90,031 -580 5,577 More than 5 years through 10 years ... 40,907 33,782 31,469 7,125 2,313 More than 10 years 48,308 41,826 36,921 6,482 4,905 By type Bills 214,149 205,353 195,451 8,796 9,902 Notes 174,206 150,922 151,013 23,284 -91 Bonds 59,407 49,339 44,069 10,068 5,270 Repurchase agreements 21,188 19,971 12,762 1,217 7,209 MSPs, foreign accounts 17,027 14,706 12,336 2,321 2,370 MSPs, in the market 0 0 0 0 0 FEDERAL AGENCY SECURITIES Held outright' 685 2,225 2,634 -1,540 -409 By remaining maturity 1 year or less 252 1,223 1,241 -971 -18 More than 1 year through 5 years 153 520 841 -367 -321 More than 5 years through 10 years 255 457 527 -202 -70 More than 10 years 25 25 25 0 0 By issuer Federal Farm Credit Banks 10 912 912 -902 0 Federal Home Loan Banks 57 115 230 -58 -115 Federal Land Banks 0 17 66 -17 -49 Federal National Mortgage Association .. 618 1,181 1,425 -563 -244 Repurchase agreements 2,652 1,612 1,025 1,040 587 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

Statistical Tables 285 Number and Annual Salaries of Officers and Employees of Federal Reserve Banks, December 31. 1997 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 192,900 58 6,349,450 1,039 159 47,957,251 1,257 54,499,601 New York 247,100 239 31,801,892 3,561 77 165,589,803 3,878 197,638,795 Philadelphia 219,300 55 5,986,400 1,118 66 43,343,736 1,240 49,549,436 Cleveland 196,700 46 4,871,100 1,238 67 43,944,303 1,352 49,012,103 Richmond 193,900 76 7,483,800 1,862 155 66,495,814 2,094 74,173,514 Atlanta 207,950 81 8,033,535 2,241 54 75,219,153 2,377 83,460,638 Chicago 218,600 92 9,707,227 1,966 61 81,666,507 2,120 91,592,334 St. Louis 225,100 60 5,537,600 1,062 73 37,131,767 1,196 42,894,467 Minneapolis 206,300 48 5,023,350 1,073 102 39,964,829 1,224 45,194,479 Kansas City 192,400 55 5,360,400 1,379 54 49,452,754 1,489 55,005,554 Dallas 193,700 56 5,635,500 1,375 52 51,274,259 1,484 57,103,459 San Francisco ... 273,900 95 11,005,400 2,270 80 100,939,143 2,446 112,218,443 Federal Reserve Automation Service 0 24 2,767,200 518 7 28,027,052 549 30,794,252 Total 2,567,850 985 109,562,854 20,702 1,007 831,006,371 22,706 943,137,075 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

286 84th Annual Report, 1997 6. Income and Expenses of Federal Reserve Banks, 1997 Thousands of dollars Item Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 14,584 480 1,909 135 395 U.S. Treasury and federal agency securities 25,698,971 1,519,193 9,013,874 878,282 1,667,701 Foreign currencies 375,386 14,182 86,691 22,007 23,901 Priced services 789,092 68,359 98,372 40,299 50,119 Other 39,180 827 28,509 1,575 361 Total 26,917,213 1,603,041 9,229,356 942,297 1,742,477 CURRENT EXPENSES Salaries and other personnel expenses 1,029,650 58,871 221,353 51,763 54,070 Retirement and other benefits 269,708 16,344 62,917 13,323 14,679 Net periodic pension costs' . -200,083 26 -200,404 29 16 Fees 41,066 2,038 7,255 760 3,053 Travel 44,344 1,958 6,741 2,033 2,512 Software expenses 57,267 2,298 11,300 1,682 1,760 Postage and other shipping costs 79,363 38,616 6,106 1,409 2,056 Communications 10,577 405 2,275 391 702 Materials and supplies 53,890 2,645 10,094 3,170 2,989 Building expenses Taxes on real estate 31,233 4,004 4,105 1,662 2,798 Property depreciation 56,635 4,297 9,872 2,476 3,673 Utilities 31,488 2,599 7,067 2,688 1,696 Rent 38,880 849 15,883 259 2,493 Other 26,108 558 5,738 1,380 567 Equipment Purchases 8,893 345 1,936 774 241 Rentals 33,382 105 2,336 267 216 Depreciation 137,435 5,005 21,859 5,229 6,202 Repairs and maintenance 82,287 4,329 12,626 3,538 4,581 Earnings-credit costs 358,896 22,880 60,336 26,072 25,295 Other 66,629 3,950 21,227 1,831 3,255 Shared costs, net2 0 -1,793 15,279 12,101 13,170 Recoveries -54,723 -9,689 -8,168 -3,301 -922 Expenses capitalized3 -2,762 -230 0 -288 -322 Total 2,200,164 160,408 297,729 129,246 144,779 Reimbursements -223,710 -7,490 -47,040 -19,767 -23,547 Net expenses 1,976,453 152,917 250,689 109,479 121,232 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 287 6.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 500 396 2,153 2,071 3,948 1,590 136 872 2,308,544 1,679,290 2,696,166 1,051,531 358,570 737,993 910,319 2,877,507 26,049 34,813 43,869 9,325 8,738 14,264 21,115 70,428 62,270 98,419 94,794 37,750 46,557 53,675 53,194 85,283 560 1,474 1,150 333 626 155 272 3,338 2,397,923 1,814,392 2,838,134 1,101,012 418,440 807,677 985,037 3,037,429 113,029 88,213 102,807 46,304 49,757 61,597 60,981 120,906 28,623 24,872 24,649 13,513 12,899 15,006 17,312 25,569 13 39 32 13 20 20 14 98 11,765 1,492 2,442 2,246 1,340 669 892 7,114 5,080 4,544 4,486 2,462 2,728 2,756 2,949 6,096 24,411 3,146 2,772 2,040 1,729 1,277 1,374 3,478 3,391 4,932 4,472 2,238 3,909 4,219 2,381 5,634 1,156 889 932 525 738 876 844 845 6,412 6,269 5,234 2,870 2,125 3,303 3,393 5,386 2,157 1,583 3,961 328 5,296 679 1,989 2,672 5,900 4,051 6,022 2,804 1,549 3,804 5,188 6,999 3,005 1,923 2,505 1,511 1,556 1,375 2,184 3,381 10,409 5,008 1,449 480 886 387 338 438 2,866 2,507 5,930 850 843 748 1,765 2,356 1,519 1,024 618 265 257 404 558 952 28,210 646 735 147 262 102 93 262 55,588 9,242 8,676 3,116 3,787 4,202 5,360 9,171 18,701 9,210 8,068 3,036 2,854 2,705 3,657 8,982 37,598 31,698 50,454 16,378 6,364 14,199 25,972 41,649 4,923 6,217 5,989 3,627 2,153 3,419 3,391 6,648 -137,766 14,484 20,829 12,002 8,824 18,127 14,024 10,718 -15,324 -2,701 -4,502 -1,013 -597 -565 -4,625 -3,318 -166 -528 -225 -119 -343 -373 -81 -86 211,499 218,762 258,336 115,622 108,940 138,937 149,954 265,952 -25,586 -10,818 -17,196 -10,960 -15,816 -18,635 -7,201 -19,655 185,913 207,943 241,140 104,662 93,125 120,303 142,754 246,297 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

288 84th Annual Report, 1997 6. Income and Expenses of Federal Reserve Banks, 1997—Continued Thousands of dollars Item Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 24,940,759 1,450,123 8,978,667 832,818 1,621,245 Additions to and deductions from (-) current net income* Profits on sales of U.S. Treasury and federal agency securities 13,153 799 4,309 446 898 Other additions 2,801 30 6 0 3 Total additions 15,954 830 4,315 446 901 Losses on foreign exchange transactions -2,592,718 -96,832 -591,244 -154,267 -164,746 Other deductions -88 -2 -18 -2 -2 Total deductions -2,592,806 -96,834 -591,263 -154,269 -164,747 Net addition to or deductions from (-) current net income -2,576,852 -96,004 -586,948 -153,823 -163,846 Cost of unreimbursed Treasury services 34,718 1,241 2,264 2,423 1,470 Assessments by Board Board expenditures5 .. 174,407 6,540 39,315 10,278 10,837 Cost of currency 364,454 21,723 119,098 11,816 25,508 Net income before payment to U.S. Treasury 21,790,329 1,324,616 8,231,043 654,478 1,419,584 Dividends paid 299,652 11,405 65,286 16,987 19,320 Payments to U.S. Treasury (interest on Federal Reserve notes) 0 0 0 0 0 Statutory transfer 20,658,972 1,223,253 8,109,194 626,418 1,343,641 Surplus transfer -107,000 -4,003 -24,447 -6,352 -6,801 Transferred to surplus . 831,705 89,958 56,563 11,073 56,623 Surplus, January 1 4,495,745 167,603 1,023,159 268,111 285,579 Surplus, December 31 5,220,449 253,558 1,055,274 272,832 335,400 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. Reflects the effect of Financial Accounting Stan- ucts are consumed. dards Board's Statement of Financial Accounting Stan- 4. Includes reimbursement from the U.S. Treasury for dards No. 87, Employers' Accounting for Pensions (SFAS uncut sheets of Federal Reserve notes, gains and losses on 87). The System Retirement Plan for employees is the sale of Reserve Bank buildings, counterfeit currency recorded on behalf of the System on the books of the that is not charged back to the depositing institution, and Federal Reserve Bank of New York, resulting in a reduc- stale Reserve Bank checks that are written off. tion in expenses of $200,813 thousand. 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 Reserve Bank for the benefit of one or more other Reserve Banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 289 6.— Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 2,212,010 1,606,449 2,596,994 996,350 325,315 687,374 842,283 2,791,132 1,238 878 1,405 532 184 379 477 1,608 15 2,449 12 0 277 1 5 1 1,253 3,327 1,417 532 462 380 482 1,610 -179,047 -239,317 -302,502 -64,439 -60,000 -98,463 -144,589 -497,272 -15 -3 -11 -7 -4 -8 -9 -7 -179,062 -239,320 -302,513 -64,446 -60,004 -98,471 -144,598 -497,280 -177,809 -235,993 -301,096 -63,914 -59,542 -98,092 -144,115 -495,670 5,636 1,818 4,325 2,068 3,127 2,405 2,683 5,259 14,815 14,955 20,070 4,206 4,421 6,206 9,579 33,187 33,096 23,517 38,330 14,334 4,704 10,626 13,110 48,593 1,980,655 1,330,166 2,233,173 911,828 253,521 570,045 672,796 2,208,424 34,077 23,140 31,693 6,800 9,337 9,014 15,905 56,688 0 0 0 0 0 0 0 0 1,431,350 1,373,317 2,211,352 892,486 157,002 608,850 630,418 2,051,693 -7,395 -9,884 -12,487 -2,659 -2,478 -4,064 -5,975 -20,454 515,228 -66,290 -9,871 12,542 87,183 -47,819 26,473 100,043 310,232 414,670 524,405 111,745 103,945 170,720 250,379 865,197 818,065 338,496 502,046 121,628 188,649 118,837 270,877 944,786 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

290 84th Annual Report, 1997 7. Income and Expenses of Federal Reserve Banks, 1914-97 Thousands of 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 2,018 6 302 1916 5,218 2,082 -193 192 1917 16,128 4,922 -1,387 238 1918 67,584 10,577 -3,909 383 1919 102,381 18,745 -4,673 595 1920 181,297 27,549 -3,744 710 1921 122,866 33,722 -6,315 741 1922 50,499 28,837 -4,442 723 1923 50,709 29,062 -8,233 703 1924 38,340 27,768 -6,191 663 1925 41,801 26,819 -4,823 709 1926 47,600 24,914 -3,638 722 1,714 1927 43,024 24,894 -2,457 779 1,845 1928 : 64,053 25,401 -5,026 698 806 1929 70,955 25,810 -4,862 782 3,099 1930 36,424 25,358 -93 810 2,176 1931 29,701 24,843 311 719 1,479 1932 50,019 24,457 -1,413 729 1,106 1933 49,487 25,918 -12,307 800 2,505 1934 48,903 26,844 -4,430 1,372 1,026 1935 42,752 28,695 -1,737 1,406 1,477 1936 37,901 26,016 486 1,680 2,178 1937 41,233 25,295 -1,631 1,748 1,757 1938 36,261 25,557 2,232 1,725 1,630 1939 38,501 25,669 2,390 1,621 1,356 1940 43,538 25,951 11,488 1,704 1,511 1941 41,380 28,536 721 1,840 2,588 1942 52,663 32,051 -1,568 1,746 4,826 1943 69,306 35,794 23,768 2,416 5,336 1944 104,392 39,659 3,222 2,296 7,220 1945 142,210 41,666 -830 2,341 4,710 1946 150,385 50,493 -626 2,260 4,482 1947 158,656 58,191 1,973 2,640 4,562 1948 304,161 64,280 -34,318 3,244 5,186 1949 316,537 67,931 -12,122 3,243 6,304 1950 275,839 69,822 36,294 3,434 7,316 1951 394,656 83,793 -2,128 4,095 7,581 1952 456,060 92,051 1,584 4,122 8,521 1953 513,037 98,493 -1,059 4,100 10,922 1954 438,486 99,068 -134 4,175 6,490 1955 412,488 101,159 -265 4,194 4,707 1956 595,649 110,240 -23 5,340 5,603 1957 763,348 117,932 -7,141 7,508 6,374 1958 742,068 125,831 124 5,917 5,973 1959 886,226 131,848 98,247 6,471 6,384 1960 1,103,385 139,894 13,875 6,534 7,455 1961 941,648 148,254 3,482 6,265 6,756 1962 1,048,508 161,451 -56 6,655 8,030 1963 1,151,120 169,638 615 7,573 10,063 1964 1,343,747 171,511 726 8,655 17,230 1965 1,559,484 172,111 1,022 8,576 23,603 1966 1,908,500 178,212 996 9,022 20,167 1967 2,190,404 190,561 2,094 10,770 18,790 1968 2,764,446 207,678 8,520 14,198 20,474 1969 3,373,361 237,828 -558 15,020 22,126 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 291 7.—Continued Payments toU.S. Treasury Div p i a d i e d nds Statutory Interest on T X t V o 1 i c ir l s i l l u c S r f l p p C r l I r u i ^ C s H vi T 1 t 1 V o d Q l l s n u J c I r " C f p p I l r I u r C f s U ^f\ transfers2 Federal Reserve (section 13b) (section 7) notes 217 1,743 6,804 1,134 1,134 5,541 48,334 5,012 2,704 70,652 5.654 60,725 82,916 6,120 59,974 15,993 6,307 10,851 -660 6,553 3,613 2,546 6,682 114 -3,078 6,916 59 2,474 7,329 818 8,464 7,755 250 5,044 8,458 2,585 21,079 9,584 4,283 22,536 10,269 17 -2,298 10,030 -7,058 9,282 2,0 il 11,021 8,874 -917 8,782 -60 6,510 8,505 ' 298 28 607 7,830 227 103 353 7,941 177 67 2,616 8,019 120 -419 1,862 8,110 25 -426 4,534 8,215 82 -54 17,617 8,430 141 -4 571 8,669 198 50 3,554 8,911 245 135 40,327 9,500 327 201 48,410 10,183 248 262 81,970 10,962 67 28 81,467 11,523 36 75,284 87 8,366 11,920 166,690 18,523 12,329 193,146 21,462 13,083 196,629 21,849 13,865 254,874 28,321 14,682 291,935 46,334 15,558 342,568 40,337 16,442 276,289 35,888 17,712 251,741 32,710 18,905 401,556 53,983 20,081 542,708 61,604 21,197 524,059 59,215 22,722 910,650 -93,601 23,948 896,816 42,613 25,570 687,393 70,892 27,412 799,366 45,538 28,912 879,685 55,864 30,782 1,582,119 -465,823 32,352 1,296,810 27,054 33,696 1,649,455 18,944 35,027 1,907,498 29,851 36,959 2,463,629 30,027 39,237 3,019,161 39,432 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

292 84th Annual Report, 1997 7. Income and Expenses of Federal Reserve Banks, 1914-97—Continued Thousands of dollars Assessments by Net additions Board of Governors Federal Reserve Bank Current Net or and period income expenses deductions (-)1 Board Costs expenditures of currency 1970. 3,877,218 276,572 11,442 21,228 23,574 1971. 3,723,370 319,608 94,266 32,634 24,943 1972. 3,792,335 347,917 -49,616 35,234 31,455 1973. 5,016,769 416,879 -80,653 44,412 33,826 1974. 6,280,091 476,235 -78,487 41,117 30,190 1975. 6,257,937 514,359 -202,370 33,577 37,130 1976. 6,623,220 558,129 7,311 41,828 48,819 1977. 6,891,317 568,851 -177,033 47,366 55,008 1978. 8,455,309 592,558 -633,123 53,322 60,059 1979. 10,310,148 625,168 -151,148 50,530 68,391 1980.... 12,802,319 718,033 -115,386 62,231 73,124 1981.... 15,508,350 814,190 -372,879 63,163 82,924 1982.... 16,517,385 926,034 -68,833 61,813 98,441 1983.... 16,068,362 1,023,678 ^00,366 71,551 152,135 1984.... 18,068,821 1,102,444 -412,943 82,116 162,606 1985.... 18,131,983 1,127,744 1,301,624 77,378 173,739 1986.... 17,464,528 1,156,868 1,975,893 97,338 180,780 1987.... 17,633,012 1,146,911 1,796,594 81,870 170,675 1988.... 19,526,431 1,205,960 -516,910 84,411 164,245 1989.... 22,249,276 1,332,161 1,254,613 89,580 175,044 1990.... 23,476,604 1,349,726 2,099,328 103,752 193,007 1991.... 22,553,002 1,429,322 405,729 109,631 261,316 1992.... 20,235,028 1,474,531 -987,788 128,955 295,401 1993.... 18,914,251 1,657,800 -230,268 140,466 355,947 1994.... 20,910,742 1,795,328 2,363,862 146,866 368,187 1995.... 25,395,148 1,818,416 857,788 161,348 370,203 1996 ... 25,164,303 1,947,861 -1,676,716 162,642 402,517 1997 ... 26,917,213 1,976,453 -2,611,570 174,407 364,454 Total, 1914-97. 444,326,051 32,523,434 3,474,202 2,488,662 4,753,587 Aggregate for each Bank, 1914-97 Boston 24,017,634 2,183,100 90,732 92,064 280,959 New York 143,400,992 5,616,0824 1,222,234 657,442 1,486,522 Philadelphia 17,057,720 1,797,441 49,413 116,496 190,350 Cleveland 28,769,688 2,039,232 134,992 173,053 298,052 Richmond 35,431,346 2,796,667 168,188 152,440 418,383 Atlanta 20,497,504 3,022,109 300,425 208,712 265,542 Chicago 58,777,829 4,187,289 434,357 324,832 595,521 St. Louis 15,426,913 1,649,321 51,834 69,433 182,239 Minneapolis 8,188,820 1,521,072 92,686 70,524 83,885 Kansas City 17,597,697 2,078,129 108,207 100,228 191,063 Dallas . 22,374,862 2,052,356 362,996 166,541 230,784 San Francisco 52,785,046 3,580,635 458,139 356,897 530,287 Total 444,326,051 32,523,434 3,474,202 2,488,662 4,753,587 NOTE. Components may not sum to totals because of on Bank premises (1927), $139,300 thousand for contrirounding. butions to capital of the Federal Deposit Insurance Corpo- 1. For 1987 and subsequent years, includes the cost of ration (1934), $4 thousand net upon elimination of secservices provided to the Treasury by Federal Reserve tion 13b surplus (1958), and $106,000 thousand (1996) Banks for which reimbursement was not received. and $107,000 thousand (1997) transferred to the Treasury 2. Represents transfers made as a franchise tax from as statutorily required; and was increased by transfer of 1917 to 1932; transfers made under section 13b of the $11,131 thousand from reserves for contingencies (1955), Federal Reserve Act from 1935 to 1947; and transfers leaving a balance of $5,220,449 thousand on Decemmade under section 7 of the Federal Reserve Act for 1996 ber 31, 1997. and 1997. 4. This amount is reduced $1,117,482 thousand, which 3. The $5,562,121 thousand transferred to surplus was is related to the System Retirement Plan. See note 1, reduced by direct charges of $500 thousand for charge-off table 6. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 293 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 2 Fed In er te a r l e R st e s o e 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 41,137 3,493,571 32,580 43,488 3,356,560 40,403 46,184 3,231,268 50,661 49,140 4,340,680 51,178 52,580 5,549,999 51,483 54,610 5,382,064 33,828 57,351 5,870,463 53,940 60,182 5,937,148 45,728 63,280 7,005,779 47,268 67,194 9,278,576 69,141 70,355 11,706,370 56,821 74,574 14,023,723 76,897 79,352 15,204,591 78,320 85,152 14,228,816 106,663 92,620 16,054,095 161,996 103,029 17,796,464 155,253 109,588 17,803,895 91,954 117,499 17,738,880 173,771 125,616 17,364,319 64,971 129,885 21,646,417 130,802 140,758 23,608,398 180,292 152,553 20,777,552 228,356 171,763 16,774,477 402,114 195,422 15,986,765 347,583 212,090 20,470,011 282,122 230,527 23,389,367 283,075 255,884 5,517,716 14,565,624 635,343 299,652 20,658,972 0 831,705 3,948,566 26,328,016 372,195,871 -4 5,562,1213 157,144 1,558,701 19,564,040 135 272,222 1,059,330 10,547,740 124,111,328 -433 1,145,215 197,631 777,704 13,728,622 291 298,598 286,824 1,658,804 24,086,374 -10 362,351 244,986 1,889,932 29,258,068 -72 839,130 313,412 1,707,668 14,916,441 5 364,041 506,983 2,818,689 50,236,364 12 542,495 111,722 1,166,038 12,167,994 -27 132,025 110,068 224,564 6,073,680 65 197,649 155,409 770,467 14,279,520 -9 131,097 251,646 780,250 18,968,511 55 287,716 553,412 2,427,458 44,804,931 -17 989,583 3,948,566 26,328,016 372,195,871 -4 5,562,121 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

294 84th Annual Report, 1997 Acquisition Costs and Net Book Value of Premises of Federal Reserve Banks and Branches, December 31, 1997 Thousands of 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 22,074 97,863 7,441 127,377 93,906 NEW YORK 20,330 133,536 44,703 198,569 151,031 888 4,072 3,017 4,896 Buffalo 7,976 2,380 60,976 7,672 50,587 PHILADELPHIA 71,028 2,715 96,700 16,690 104,816 CLEVELAND 2,247 15,158 8,373 116,105 11,683 Cincinnati 1,658 12,904 5,953 25,777 15,567 Pittsburgh 20,515 RICHMOND 6,261 61,059 22,098 89,418 70,583 5,708 Baltimore 6,478 27,101 4,569 38,148 26,927 Charlotte 3,130 27,477 4,750 35,356 28,802 ATLANTA4 23,524 5,115 0 28,639 28,638 Birmingham 5,861 1,890 1,749 9,501 6,994 Jacksonville 1,730 17,226 2,859 21,815 17,309 48 Miami 3,823 13,556 2,728 20,108 14,120 Nashville 612 2,558 2,386 5,555 2,884 New Orleans 3,497 5,850 2,827 12,174 8,225 CHICAGO 5,030 117,615 13,974 136,619 99,367 Detroit 798 5,591 3,610 9,999 8,190 ST. LOUIS 700 18,797 6,001 25,498 17,412 Little Rock 1,148 3,701 1,110 5,960 4,708 Louisville 700 3,634 1,503 5,837 4,077 Memphis 1,136 4,360 2,755 8,250 5,186 MINNEAPOLIS 8,049 101,634 13,160 122,842 121,920 Helena 1,955 9,335 766 12,056 10,567 KANSAS CITY 2,048 18,173 8,264 28,486 18,507 Denver 3,188 6,134 3,455 12,777 8,319 Oklahoma City 646 11,454 2,881 14,981 12,326 Omaha 6,535 10,987 1,401 18,923 15,410 DALLAS 28,512 102,692 18,601 149,806 133,611 El Paso 262 2,865 908 4,035 3,266 Houston 2,205 4,749 1,688 8,643 6,768 San Antonio 482 5,279 2,686 8,448 6,360 SAN FRANCISCO 15,600 71,813 18,321 105,734 76,755 Los Angeles 3,892 52,417 9,210 65,519 50,847 Portland 2,754 9,659 2,144 14,557 12,951 Salt Lake City 495 7,195 2,360 10,050 8,064 Seattle 325 10,090 2,727 13,142 10,415 Total 193,670 1,161,212 255,343 1,610,225 1,271,996 5,757 NOTE. Components may not sum to totals because of 3. Covers acquisitions for banking-house purposes and rounding. Bank premises formerly occupied and being held pending 1. Includes expenditures for construction at some sale. offices, pending allocation to appropriate accounts. 4. The Atlanta Bank sold its building and its building 2. Excludes charge-offs of $17,699 thousand before machinery and equipment in 1997. The Bank is leasing 1952. back the building pending completion of a new facility. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 295 9. Operations in Principal Departments of Federal Reserve Banks, 1994-97 Operation 1997 1996 1995 1994 Millions of pieces (except as noted) Loans (thousands) 7 6 6 8 Currency received and counted 24,510 23,436 22,594 20,166 Currency verified and destroyed 7,769 8,686 8,911 7,244 Coin received and counted 9,603 8,654 7,578 6,950 Checks handled U.S. government checks 378 436 460 470 Postal money orders 204 206 203 200 All other 15,949 15,487 15,465 16,479 Government securities transfers ' 13 13 13 13 Transfer of funds 90 83 76 72 Automated clearinghouse transactions 2 Commercial 2,603 2,372 2,046 1,737 Government 677 625 599 574 Food stamps redeemed 2,854 3,637 3,954 4,229 Millions of dollars Loans 39,863 25,350 22,854 22,853 Currency received and counted 399,080 375,399 345,318 277,685 Currency verified and destroyed 123,359 148,394 113,828 76,620 Coin received and counted 1,212 1,175 1,112 1,045 Checks handled U.S. government checks 401,989 462,647 490,299 504,479 Postal money orders 26,464 25,831 24,835 23,764 All other 12,169,087 11,584,276 11,567,820 12,079,107 Government securities transfers ' 174,949,330 160,637,460 149,764,431 144,702,226 Transfer of funds 288,419,808 249,140,021 222,954,083 211,201,540 Automated clearinghouse transactions2 Commercial 9,128,779 8,287,711 7,817,323 7,094,246 Government 1,581,552 1,250,472 1,117,452 948,984 Food stamps redeemed 15,054 18,669 20,862 21,867 1. Beginning with the 1994 Annual Report, "Govern- ing for the fiscal area, for which complex definitional ment securities transfers" replaced the previous time changes have occurred over the reported years. series that included "Issues, redemptions, and exchanges 2. Beginning in 1997, the reported ACH volumes no of U.S. Treasury and federal agency securities." This longer include non-value items. change was made to enable consistent time series report- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

296 84th Annual Report, 1997 10. Federal Reserve Bank Interest Rates on Loans to Depository Institutions, December 31, 1997 Extended credit3 Adjustment Seasonal Reserve Bank credit • credit2 First thirty days After thirty days of borrowing of borrowing All Federal Reserve Banks 5.00 5.65 5.00 6.15 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. Adjustment credit is usually provided at the involve only a particular institution or when an institution basic discount rate, but under certain circumstances a is experiencing difficulties adjusting to changing market special rate or rates above the basic discount rate may be conditions over a longer period of time. See section applied. See section 201.3(a) of Regulation A. 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

Statistical Tables 297 11. Reserve Requirements of Depository Institutions, December 31, 1997 Requirements Type of deposit Percentage of deposits Effective date Net transaction accounts' $0 million-$47.8 million2 3 1-1-98 More than $47.8 million3 10 1-1-98 Nonpersonal time deposits 4 0 12-27-90 Eurocurrency liabilities5 0 12-27-90 NOTE. Required reserves must be held in the form of liabilities subject to a zero percent reserve requirement deposits with Federal Reserve Banks or vault cash. Non- each year for the succeeding calendar year by 80 percent member institutions may maintain reserve balances with a of the percentage increase in the total reservable liabilities Federal Reserve Bank indirectly, on a pass-through basis, of all depository institutions, measured on an annual basis with certain approved institutions. For previous reserve as of June 30. No corresponding adjustment is made in requirements, see earlier editions of the Annual Report or the event of a decrease. 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 1, 1998, 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 15, 1998, for institutions that report quarterly, the 1. Transaction accounts include all deposits against exemption was raised from $4.4 million to $4.7 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 Vi years was reduced from 3 permay be by check, draft, debit card, or similar order cent to 1 Vi 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 than cent reserve requirement applies be modified annually by Wi 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 Vi years or more has been nance period beginning January 1, 1998, for depository zero since October 6, 1983. institutions that report weekly, and with the reserve main- 5. The reserve requirement on Euroccurency liabilities tenance period beginning January 15, 1998, for institu- was reduced from 3 percent to zero in the same manner tions that report quarterly, the amount was decreased and on the same dates as the reserve requirement on from $49.3 million to $47.8 million. nonpersonal time deposits with an original maturity of Under the Garn-St Germain Depository Institutions less than 1XA 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

298 84th Annual Report, 1997 12. Initial Margin Requirements under Regulations T, U, G, and X Percent of market value Effective date M sto a c rg k i s n Con b v o e n r d t s ible Sh T o o rt n s ly al 1 es, 1934, Oct. 1 . 25^5 1936, Feb. 1 . 25-55 Apr. 1 . 55 1937, Nov. 1. 40 '50' 1945, Feb. 5 . 50 50 July 5 . 75 75 1946, Jan. 21 100 100 1947, Feb. 21 75 75 1949, Mar. 3. 50 50 1951, Jan. 17 75 75 1953, Feb. 20 50 50 1955, Jan. 4 . 60 60 Apr. 23 70 70 1958, Jan. 16 50 50 Aug. 5. 70 70 Oct. 16 90 90 1960, July 28 70 70 1962, July 10 50 50 1963, Nov. 6. 70 70 1968, Mar. 11 70 *50' 70 June 8. 80 60 80 1970, May 6. 65 50 65 1971, Dec. 6. 55 50 55 1972, Nov. 24 65 50 65 1974, Jan. 3 . 50 50 50 NOTE. These regulations, adopted by the Board of 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

Statistical Tables 299 13. Principal Assets and Liabilities and Number of Insured Commercial Banks in the United States, by Class of Bank, June 30, 1997 and 1996 Millions of dollars, except as noted Member banks Nonmember Item Total banks Total National State 1997 ASSETS Loans and investments 3,412,288 2,616,982 1,974,445 642,536 795,307 Gross loans 2,593,208 2,018,481 1,567,741 450,740 574,727 Net loans 2,589,450 2,016,325 1,565,973 450,352 573,125 Investments 819,080 598,501 406,705 191,796 220,580 U.S. Treasury and federal agency securities 298,280 190,202 130,366 59,837 108,078 Other 520,800 408,298 276,339 131,959 112,502 Cash assets, total 242,325 200,589 148,152 52,437 41,736 LIABILITIES Deposits, total 2,769,594 2,094,630 1,573,413 521,217 674,964 Interbank 49,463 42,445 31,929 10,516 7,017 Other transaction 725,105 557,081 415,078 142,003 168,024 Other nontransaction 2,163,105 1,598,717 1,204,788 393,928 564,388 Equity capital 402,005 315,374 231,752 83,622 86,630 Number of banks 9,259 3,632 2,646 986 5,627 1996 r ASSETS Loans and investments 3,208,537 827,250 1,833,815 547,472 827,250 Gross loans 2,398,633 589,707 1,434,639 374,287 589,707 Net loans 2,394,569 587,924 1,432,835 373,810 587,924 Investments 809,904 237,543 399,176 173,185 237,543 U.S. Treasury and federal agency securities 310,423 116,790 136,589 57,044 116,790 Other 499,481 120,753 262,586 116,141 120,753 Cash assets, total 208,992 42,293 131,457 35,243 42,293 LIABILITIES Deposits, total 2,601,770 695,640 1,486,541 419,588 695,640 Interbank 41,738 6,654 26,990 8,093 6,654 Other transaction 724,573 181,001 423,587 119,986 181,001 Other nontransaction 2,039,109 582,040 1,136,828 320,241 582,040 Equity capital 365,064 90,097 207,372 67,594 90,097 Number of banks 9,651 3,774 2,753 1,021 5,877 NOTE. Components may not sum to totals because of rounding, r. Some data have been revised. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

300 84th Annual Report, 1997 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-97, and Month-End 1997 Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasuryand cial Treafederal agency securities draw- sury Period Other Gold ing curu H n e d l e d r Loans Float3 ot A he ll r4 R Fe e d se e r r v a e l Total stock6 c ri e g r h ti t f s - r o en u c t- y Total o B u o tr u ig gh h t t' r c e h p a u s r e - assets5 ic a a c t - e s i t n an g d 7 agree- count ment2 1918 239 239 0 1,766 199 294 0 2,498 2,873 1,795 1919 300 300 0 2,215 201 575 0 3,292 2,707 1,707 1920 287 287 0 2,687 119 262 0 3,355 2,639 1,709 1921 234 234 0 1,144 40 146 0 1,563 3,373 1,842 1922 436 436 0 618 78 273 0 1,405 3,642 1,958 1923 134 80 54 723 27 355 0 1,238 3,957 2,009 1924 540 536 4 320 52 390 0 1,302 4,212 2,025 1925 375 367 8 643 63 378 0 1,459 4,112 1,977 1926 315 312 3 637 45 384 0 1,381 4,205 1,991 1927 617 560 57 582 63 393 0 1,655 4,092 2,006 1928 228 197 31 1,056 24 500 0 1,809 3,854 2,012 1929 511 488 23 632 34 405 0 1,583 3,997 2,022 1930 739 686 43 251 21 372 0 1,373 4,306 2,027 1931 817 775 42 638 20 378 0 1,853 4,173 2,035 1932 1,855 1,851 4 235 14 41 0 2,145 4,226 2,204 1933 2,437 2,435 2 98 15 137 0 2,688 4,036 2,303 1934 2,430 2,430 0 7 5 21 0 2,463 8,238 2,511 1935 2,431 2,430 1 5 12 38 0 2,486 10,125 2,476 1936 2,430 2,430 0 3 39 28 0 2,500 11,258 2,532 1937 2,564 2,564 0 10 19 19 0 2,612 12,760 2,637 1938 2,564 2,564 0 4 17 16 0 2,601 14,512 2,798 1939 2,484 2,484 0 7 91 11 0 2,593 17,644 2,963 1940 2,184 2,184 0 3 80 8 0 2,274 21,995 3,087 1941 2,254 2,254 0 3 94 10 0 2,361 22,737 3,247 1942 6,189 6,189 0 6 471 14 0 6,679 22,726 3,648 1943 11,543 11,543 0 5 681 10 0 12,239 21,938 4,094 1944 18,846 18,846 0 80 815 4 0 19,745 20,619 4,131 1945 24,252 24,252 0 249 578 2 0 15,091 20,065 4,339 1946 23,350 23,350 0 163 580 1 0 24,093 20,529 4,562 1947 22,559 22,559 0 85 535 1 0 23,181 22,754 4,562 1948 23,333 23,333 0 223 541 1 0 24,097 24,244 4,589 1949 18,885 18,885 0 78 534 2 0 19,499 24,427 4,598 1950 20,778 20,725 53 67 1,368 3 0 22,216 22,706 4,636 1951 23,801 23,605 196 19 1,184 5 0 25,009 22,695 4,709 1952 24,697 24,034 663 156 967 4 0 25,825 23,187 4,812 1953 25,916 25,318 598 28 935 2 0 26,880 22,030 4,894 1954 24,932 24,888 44 143 808 1 0 25,885 21,713 4,985 1955 24,785 24,391 394 108 1,585 29 0 26,507 21,690 5,008 1956 24,915 24,610 305 50 1,665 70 0 26,699 21,949 5,066 1957 24,238 23,719 519 55 1,424 66 0 25,784 22,781 5,146 1958 26,347 26,252 95 64 1,296 49 0 27,755 20,534 5,234 1959 26,648 26,607 41 458 1,590 75 0 28,771 19,456 5,311 1960 27,384 26,984 400 33 1,847 74 0 29,338 17,767 5,398 1961 28,881 30,478 159 130 2,300 51 0 31,362 16,889 5,585 1962 30,820 28,722 342 38 2,903 110 0 33,871 15,978 5,567 1963 33,593 33,582 11 63 2,600 162 0 36,418 15,513 5,578 Digitized f1o9r6 4FRASE37R,0 44 36,506 538 186 2,606 94 0 39,930 15,388 5,405 http://fraser.stlouisfed.org/ For notes see end of table. Federal Reserve Bank of St. Louis

Statistical Tables 301 14.— Continued Factors absorbing reservefunds Deposits, other Member bank than reserves, with Federa ReserveBanks Other reserves9 Cur- Re- Trea- Other Federal rency sury Federal quired Reserve in cash Reserve clear- liacir- hold- ac- ing bilities With Curc t u io la n - ings8 T s r u e r a y - e F i o g r n - Other counts 5 a b n a c l e - s ca a p n it d al5 R F B e e a d s n e e r k r v a s e l c r o e a n n in c d 1 y 0 qu R ire e d - '' ce E s x s - 11 4,951 288 51 96 25 118 0 " 0 ,636 0 1,585 51 5,091 385 51 73 28 208 0 0 ,890 0 1,822 68 5,325 218 57 5 18 298 0 0 ,781 0 0 0 4,403 214 96 12 15 285 0 0 ,753 0 1,654 99 4,530 225 11 3 26 276 0 0 ,934 0 0 0 4,757 213 38 4 19 275 0 0 ,898 0 1,884 14 4,760 211 51 19 20 258 0 0 2,220 0 2,161 59 4,817 203 16 8 21 272 0 0 2,212 0 2,256 -44 4,808 201 17 46 19 293 0 0 2,194 0 2.250 -56 4,716 208 18 5 21 301 0 0 2,487 0 2,424 63 4,686 202 23 6 21 348 0 0 2,389 0 2,430 -41 4,578 216 29 6 24 393 0 0 2,355 0 2,428 -73 4,603 211 19 6 22 375 0 0 2,471 0 2,375 96 5,360 222 54 79 31 354 0 0 1,961 0 1,994 -33 5,388 272 8 19 24 355 0 0 2,509 0 1,933 576 5,519 284 3 4 128 360 0 0 2,729 0 1,870 859 5,536 3,029 121 20 169 241 0 0 4,096 0 2,282 1,814 5,882 2,566 544 29 226 253 0 0 5,587 0 2,743 2,844 6,543 2,376 244 99 160 261 0 0 6,606 0 4,622 1,984 6,550 3,619 142 172 235 263 0 0 7,027 0 5,815 1,212 6,856 2,706 923 199 242 260 0 0 8,724 0 5,519 3,205 7,598 2,409 634 397 256 251 0 0 11,653 0 6,444 5,209 8,732 2,213 368 1,133 599 284 0 0 4,026 0 7,411 6,615 11,160 2,215 867 774 586 291 0 0 12,450 0 9,365 3,085 15,410 2,193 799 793 485 256 0 0 13,117 0 11,129 1,988 20,499 2,303 579 1,360 356 339 0 0 12,886 0 11,650 1,236 25,307 2,375 440 1,204 394 402 0 0 14,373 0 12,748 1,625 28,515 2,287 977 862 446 495 0 0 15,915 0 14,457 1,458 28,952 2,272 393 508 314 607 0 0 16,139 0 15,577 562 28,868 ,336 870 392 569 563 0 0 17,899 0 16,400 1,499 28,224 ,325 1,123 642 547 590 0 0 20,479 0 19,277 1,202 27,600 ,312 821 767 750 106 0 0 16,568 0 15,550 1,018 27,741 ,293 668 895 565 714 0 0 17,681 0 16,509 1,172 29,206 ,270 247 526 363 746 0 0 20,056 0 19,667 389 30,433 ,270 389 550 455 111 0 0 19,950 0 20,520 -570 30,781 761 346 423 493 839 0 0 20,160 0 19,397 763 30,509 796 563 490 441 907 0 0 18,876 0 18,618 258 31,158 767 394 402 554 925 0 0 19,005 0 18,903 102 31,790 775 441 322 426 901 0 0 19,059 0 19,089 -30 31,834 761 481 356 246 998 0 0 19,034 0 19,091 -57 32,193 683 358 272 391 1,122 0 0 18,504 0 18,574 -70 32,591 391 504 345 694 841 0 0 18,174 310 18,619 -135 32,869 377 485 217 533 941 0 0 17,081 2,544 18,988 637 33,918 422 465 279 320 1,044 0 0 17,387 2,544 18,988 96 35,338 380 597 247 393 1,007 0 0 17,454 3,262 20,071 645 37,692 361 880 171 291 1,065 0 0 17,049 4,099 20,677 471 Digitized f3o9r, 6F1R9 ASE6R12 820 229 321 1,036 0 0 18,086 4,151 21,663 574 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

302 84th Annual Report, 1997 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-97 and Month-End 1997—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasuryand cial Treafederal agency securities draw- sury Period Total o B u o tr u i g g h h t t' r u c H e h n p e a d u l s e d r e r - Loans Float3 ot A h l e l r4 R F a O e e ss d s th e e e r t e r s v a r 5 e l Total s G to o c l k d 6 c r i i e c i a g n r a c h t g t i - t e f s - s r i t c o e n a u n u n g r c t d - - 7 y agree- count ment2 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 7,1545 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 1997 455,260 431,420 23,840 2,035 561 0 32,044 489,901 11,047 9,200 25,644 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 303 14.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with Federa1 ReserveBanks Other reserves9 Cur- Re- Trea- Other Federal rency sury Federal quired Reserve cash Reserve liacir- ing With Curhold- ac- bilities cula- Trea- For- bal- Federal rency Re- Extion ings8 sury eign Other counts ~ ances and Reserve and quired '' cess11-12 capital5 Banks coin10 42,056 760 668 150 355 211 0 0 18,447 4,163 22,848 -238 44,663 1,176 416 174 588 -147 0 0 19,779 4,310 24,321 -232 47,226 1,344 1,123 135 563 -773 0 0 21,092 4,631 25,905 -182 50,961 695 703 216 747 -1,353 0 0 21,818 4,921 27,439 -700 53,950 596 1,312 134 807 0 0 1,919 22,085 5,187 28,173 -901 57,903 431 1,156 148 1,233 0 0 1,986 24,150 5,423 30,033 -460 61,068 460 2,020 294 999 0 0 2,131 27,788 5,743 32,496 1,035 66,516 345 1,855 325 840 0 0 2,143 25,647 6,216 32,044 98 12 72,497 317 2,542 251 1,419 l3 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 l4 93,717 460 10,393 352 1,357 0 0 3,063 25,158 8,628 35,461 -1,535 103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,615 -1,265 114,645 240 4,196 368 1,256 0 0 4,275 31,152 10,538 42,694 -893 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 -1,442 154,908 429 5,033 328 1,033 0 436 4,990 26,053 16,666 41,391 1,328 171,935 479 3,661 191 851 0 ,013 5,392 20,413 17,821 39,179 -945 183,796 513 5,316 253 867 0 ,126 5,952 20,693 197,488 550 9,351 480 1,041 0 ,490 5,940 27,141 211,995 447 7,588 287 917 0 ,812 6,088 46,295 230,205 454 5,313 244 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 1,706 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 17,922 482,428 225 5,444 457 900 0 6,667 15,500 24,171 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

304 84th Annual Report, 1997 14. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items- Year-End 1918-97, and Month-End 1997—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 Float3 ot A he ll r4 R Fe e d se e r r v a e l Total stock6 c ri e g r h ti t f s - re o n u c t- y Total o B u o tr u i g g h h t t' r c e h p a u s r e - assets5 ic a a c t - e s i t n an g d 7 agree- count ment2 1997 Jan. ... 402,771 393,766 9,005 30 363 0 30,971 434,135 11,048 9,400 25,047 Feb. ... 405,213 392,809 12,404 36 601 0 29,365 435,215 11,051 9,400 25,111 Mar. ... 408,651 397,070 11,581 3,998 381 0 30,275 443,305 11,050 9,200 25,173 Apr. ... 455,850 404,483 51,367 156 432 0 33,263 489,702 11,051 9,200 25,231 May ... 416,394 407,094 9,300 571 227 0 30,050 447,242 11,051 9,200 25,284 June ... 428,984 412,411 16,573 1,894 592 0 32,517 463,987 11,050 9,200 25,335 July .... 416,117 409,048 7,069 411 222 0 31,437 448,188 11,051 9,200 25,376 Aug. ... 423,609 410,440 13,169 468 -34 0 29,886 453,929 11,050 9,200 25,414 Sept. ... 426,665 412,747 13,918 313 738 0 31,682 459,398 11,050 9,200 25,462 Oct. ... 423,043 411,477 11,566 175 14 0 32,946 456,178 11,050 9,200 25,532 Nov. ... 434,765 420,567 14,198 90 395 0 30,993 466,244 11,051 9,200 25,588 Dec. ... 455,260 431,420 23,840 2,035 561 0 32,044 489,901 11,047 9,200 25,644 NOTE. For a description of figures and discussion of capital accounts, and other liabilities and accrued divitheir significance, see Banking and Monetary Statistics, dends, less the sum of bank premises and other assets, 1941-1970 (Board of Governors of the Federal Reserve and is reported as "Other Federal Reserve accounts"; System, 1976), pp. 507-23. Components may not sum to thereafter, "Other Federal Reserve assets" and "Other totals because of rounding. Federal Reserve liabilities and capital" are shown . . . Not applicable. separately. n.a. Not available. 6. Before January 30, 1934, includes gold held in 1. Beginning in 1969, includes securities loaned— Federal Reserve Banks and in circulation. fully guaranteed by U.S. government securities pledged 7. Includes currency and coin (other than gold) issued with Federal Reserve Banks—and excludes securities directly by the Treasury. The largest components are sold and scheduled to be bought back under matched fractional and dollar coins. For details see "Currency and sale-purchase transactions. Coin in Circulation," Treasury Bulletin. 2. Beginning December 1, 1966, includes federal 8. Coin and paper currency held by the Treasury, as agency obligations held under repurchase agreements and well as any gold in excess of the gold certificates issued beginning September 29, 1971, includes federal agency to the Reserve Bank. issues bought outright. 9. Beginning in November 1979, includes reserves 3. Beginning in 1960, figures reflect a minor change in of member banks, Edge Act corporations, and U.S. agenconcept; see Federal Reserve Bulletin, vol. 47 (February cies and branches of foreign banks. Beginning on 1961), p. 164. November 13, 1980, includes reserves of all depository 4. Principally acceptances and, until August 21, 1959, institutions. industrial loans, authority for which expired on that date. Beginning in 1984, data on "Currency and coin" and 5. For the period before April 16, 1969, includes the "Required" and "Excess" reserves changed from daily total of Federal Reserve capital paid in, surplus, other to biweekly basis. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 305 14.— Continued Factors absorbing reserve funds Deposits, other than reserves, with Me r m es b e e rv r e b s a 9 nk 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 - ings8 T s r u e r a y - F ei o g r n - Other counts 5 bal- ca a p n it d al5 R Fe e d se e r r v a e l re a n n c d y qu R ire e d - '' ces E s x 11 - -12 Banks coin l0 438,394 249 6,770 167 359 0 6,764 13,384 13,543 441,655 280 5,258 229 345 0 6,815 14,135 12,061 444,544 313 5,945 916 350 0 6,756 14,816 15,089 446,632 309 52,215 169 348 0 6,918 14,977 13,616 451,141 330 5,174 177 325 0 6,887 16,037 12,705 453,624 343 16,368 178 321 0 6,952 15,517 16,267 455,074 311 5,014 175 325 0 6,893 14,785 11,239 459,479 278 4,700 169 327 0 6,757 16,144 11,740 458,262 255 7,692 188 386 0 6,738 16,536 15,053 461,542 237 4,616 190 337 0 6,787 16,328 11,922 471,216 234 5,127 167 509 0 6,711 15,559 12,560 482,428 225 5,444 457 900 0 6,667 15,500 24,171 10. Between December 1, 1959, and November 23, 13. For the period before July 1973, includes certain 1960, part was allowed as reserves; thereafter all was deposits of domestic nonmember banks and foreignallowed. owned banking institutions held with member banks and 11. Estimated through 1958. Before 1929, data were redeposited in full with Federal Reserve Banks in connecavailable only on call dates (in 1920 and 1922 the call tion with voluntary participation by nonmember institudate was December 29). Beginning on September 12, tions in the Federal Reserve System program of credit 1968, the amount is based on close-of-business figures for restraint. the reserve period two weeks before the report date. As of December 12, 1974, the amount of voluntary 12. Beginning with week ending November 15, 1972, nonmember bank and foreign-agency and branch deposits includes $450 million of reserve deficiencies on which at Federal Reserve Banks that are associated with mar- Federal Reserve Banks are allowed to waive penalties for ginal reserves are no longer reported. However, two a transition period in connection with bank adaptation to amounts are reported: (1) deposits voluntarily held as Regulation J as amended, effective November 9, 1972. reserves by agencies and branches of foreign banks oper- Allowable deficiencies are as follows (beginning with ating in the United States and (2) Eurodollar liabilities. first statement week of quarter, in millions): 1973—Ql, 14. Adjusted to include waivers of penalties for re- $279; Q2, $172; Q3, $112; Q4, $84; 1974—Ql, $67; Q2, serve deficiencies, in accordance with change in Board $58. The transition period ended with the second quarter policy effective November 19, 1975. of 1974. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

306 84th Annual Report, 1997 15. Banking Offices, and Banks Affiliated with Bank Holding Companies in the United States, December 31, 1996 and 1997 Commercial banks! Statechartered Type of office Total Member savings Total Nonmember banks Total National State All banking offices BANKS Number, Dec. 31, 1996 .. 9,993 9,487 3,698 2,684 1,014 5,789 506 Changes during 1997 New banks 224 207 77 61 16 130 17 Banks converted into branches -587 -565 -297 -215 -82 -268 -22 Ceased banking operation2 -47 -33 -11 -8 -3 -22 -14 Others 0 7 76 29 47 -69 -7 Net change -410 -384 -155 -133 -22 -229 -26 Number, Dec. 31,1997 .. 9,583 9,103 3,543 2,551 992 5,560 480 BRANCHES AND ADDITIONAL OFFICES Number, Dec. 31,1996 .. 62,644 59,139 40,828 31,211 9,617 18,311 3,505 Changes during 1997 New branches 3,348 3,122 2,294 1,771 523 828 226 Branches converted from banks 587 575 336 241 95 239 12 Discontinued2 -1,784 -1,636 -1,238 -941 -297 -398 -148 Other3 0 434 2,817 2,878 -61 -2,383 -434 Net change 2,151 2,495 4,209 3,949 260 -1,714 -344 Number, Dec. 31, 1997 .. 64,795 61,634 45,037 35,160 9,877 16,597 3,161 Banks affiliated with bank holding companies BANKS Number, Dec. 31,1996 .. 7,366 7,241 2,981 2,161 820 4,260 125 Changes during 1997 BHC-affiliated new banks 323 306 125 92 33 181 17 Banks converted into branches -514 -501 -268 -194 -74 -233 -13 Ceased banking operation2 -41 -34 -14 -11 -3 -20 -7 Other3 0 3 65 29 36 -62 -3 Net change -232 -226 -92 -84 -8 -134 -6 Number, Dec. 31,1997 .. 7,134 7,015 2,889 2,077 812 4,126 119 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 and its territories as amended and implemented in Federal Reserve Regula- and possessions (affiliated insular areas). tion Y. Generally, a bank is any institution that accepts 2. Institutions that no longer meet the Regulation Y demand deposits and is engaged in the business of definition of bank. 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

Statistical Tables 307 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1997 Bank of the West, El Paso, Texas to acquire SUMMARY REPORT BY THE ATTORNEY GENERAL assets and liabilities of one branch of Nations- (3-10-97) Bank of Texas, N.A., Dallas, Texas The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (1-16-97) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (2-20-97) cantly adverse to competition. The applicant has assets of $299 million; the target has assets of $2 million. The parties operate in the BASIS FOR APPROVAL BY THE FEDERAL RESERVE same market. The banking factors and consider- (2-3-96) ations relating to the convenience and needs of the The applicant has assets of $273 million; the target community are consistent with approval. has assets of $55 million. The parties operate in the same market. The banking factors and considerations relating to the convenience and needs of Santa Barbara Bank and Trust Company, the community are consistent with approval. Santa Barbara, California to merge with First Valley Bank, Lompoc, California Marine Midland Bank, Buffalo, New York to SUMMARY REPORT BY THE ATTORNEY GENERAL merge with First Federal Savings and Loan (2-13-97) Association of Rochester, Rochester, New York The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (12-2-96) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (2-26-97) cantly adverse to competition. The applicant has assets of $1.2 billion; the target has assets of $131 million. The parties operate in BASIS FOR APPROVAL BY THE FEDERAL RESERVE the same market. The banking factors and consid- (2-3-97) erations relating to the convenience and needs of The applicant has assets of $22 billion; the target the community are consistent with approval. has assets of $7 billion. The parties operate in the same markets. The banking factors and considerations relating to the convenience and needs of the Community Bank & Trust Company, Neosho, community are consistent with approval. Missouri to merge with The Diamond Bank, Diamond, Missouri Humboldt Bank, Eureka, California to acquire SUMMARY REPORT BY THE ATTORNEY GENERAL assets and liabilities o/the Garberville branch of (3-10-97) California Federal Bank, F.S.B., San Francisco, The proposed transaction would not be signifi- California cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (1-30-97) (3-12-97) The proposed transaction would not be signifi- The applicant has assets of $177 million; the target cantly adverse to competition. has assets of $19 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 (2-12-96) the community are consistent with approval. The applicant has assets of $208 million; the target has assets of $26 million. The parties do not operate in the same market. The banking factors First United Bank, Boca Raton, Florida to and considerations relating to the convenience merge with Island National Bank and Trust and needs of the community are consistent with Company, Palm Beach, Florida approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (2-13-97) Tri-City Bank and Trust Company, Blountville, The proposed transaction would not be signifi- Tennessee to acquire assets and liabilities of the cantly adverse to competition. Kingsport, Tennessee branch of Greene County BASIS FOR APPROVAL BY THE FEDERAL RESERVE Bank, Greeneville, Tennessee (3-19-97) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

308 84th Annual Report, 1997 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1997—Continued The applicant has assets of $557 million; the target Johnstown Bank & Trust Company, Johnshas assets of $131 million. The parties operate in town, Pennsylvania to acquire assets and liabilithe same market. The banking factors and consid- ties of three branches of National City Bank of erations relating to the convenience and needs of Pennsylvania, Pittsburgh, Pennsylvania the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (5-1-97) The proposed transaction would not be signifi- Republic Security Bank, West Palm Beach, cantly adverse to competition. Florida to merge with Family Bank, Hallandale, Florida BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5-9-97) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $866 million; the tar- (3-10-97) gets have assets of $72 million. The parties oper- The proposed transaction would not be signifiate in the same markets. The banking factors cantly adverse to competition. and considerations relating to the convenience BASIS FOR APPROVAL BY THE FEDERAL RESERVE and needs of the community are consistent with (4-2-97) approval. The applicant has assets of $326 million; the target has assets of $231 million. The parties operate in Security Savings Bank, Gowrie, Iowa to acquire the same market. The banking factors and consid- assets and liabilities of the Boxholm, Iowa, erations relating to the convenience and needs of branch of Boone Bank & Trust Company, the community are consistent with approval. Boone, Iowa SUMMARY REPORT BY THE ATTORNEY GENERAL U.S. Bank of Utah, Salt Lake City, Utah to (4-10-97) merge with Sun Capital Bank, Saint George, The proposed transaction would not be signifi- Utah cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (3-27-97) (5-14-97) The proposed transaction would not be signifi- The applicant has assets of $30 million; the target cantly adverse to competition. has assets of $4 million. The parties do not operate in the same market. The banking factors and con- BASIS FOR APPROVAL BY THE FEDERAL RESERVE siderations relating to the convenience and needs (4-3-97) of the community are consistent with approval. The applicant has assets of $812 million; the target has assets of $73 million. The parties operate in Huron Community Bank, East Tawas, Michithe same market. The banking factors and considerations relating to the convenience and needs of gan to acquire assets and liabilities of the the community are consistent with approval. Au Gres branch of Citizens Bank, Flint, Michigan SUMMARY REPORT BY THE ATTORNEY GENERAL Minden Bank & Trust Company, Minden, (5-1-97) Louisiana to merge with First Federal Savings The proposed transaction would not be signifi- Bank, Shreveport, Louisiana cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (4-10-97) (5-16-97) The proposed transaction would not be signifi- The applicant has assets of $84 million; the target cantly adverse to competition. has assets of $6 million. The parties do not operate in the same market. The banking factors and con- BASIS FOR APPROVAL BY THE FEDERAL RESERVE (4-29-97) siderations relating to the convenience and needs The applicant has assets of $250 million; the target of the community are consistent with approval. has assets of $36 million. The parties operate in the same markets. The banking factors and consid- Colonial Bank, Montgomery, Alabama to merge erations relating to the convenience and needs of with Great Southern Bank, West Palm Beach, the community are consistent with approval. Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 309 16.—Continued SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5-13-97) (5-27-97) The proposed transaction would not be signifi- The applicant has assets of $14 billion; the target cantly adverse to competition. has assets of $888 million. The parties operate in the same market. The banking factors and consid- BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5-21-97) erations relating to the convenience and needs of The applicant has assets of $5 billion; the target the community are consistent with approval. has assets of $119 million. The parties do not operate in the same market. The banking factors Gulf Bank, Gulf Shores, Alabama to merge with and considerations relating to the convenience First Bank of Baldwin County, Robertsdale, and needs of the community are consistent with Alabama approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (5-13-97) Colonial Bank, Montgomery, Alabama to merge The proposed transaction would not be signifiwith First Commerce Bank of Polk County, cantly adverse to competition. Winter Haven, Florida BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (5-29-97) (5-13-97) The applicant has assets of $40 million; the target The proposed transaction would not be signifihas assets of $35 million. The parties do not cantly adverse to competition. operate in the same market. The banking factors BASIS FOR APPROVAL BY THE FEDERAL RESERVE and considerations relating to the convenience and (5-21-97) needs of the community are consistent with The applicant has assets of $5 billion; the target approval. has assets of $106 million. The parties do not operate in the same market. The banking factors Summit Bank, Hackensack, New Jersey to and considerations relating to the convenience merge with Collective Bank, Egg Harbor City, and needs of the community are consistent with New Jersey approval. SUMMARY REPORT BY THE ATTORNEY GENERAL Consolidated Bank and Trust Company, Rich- (5-13-97) mond, Virginia to acquire assets and liabilities of The proposed transaction would not be signifithree branches of First Union National Bank of cantly adverse to competition. Virginia, Roanoke, Virginia BASIS FOR APPROVAL BY THE FEDERAL RESERVE (5-29-97) SUMMARY REPORT BY THE ATTORNEY GENERAL (4-10-97) The applicant has assets of $21 billion; the target The proposed transaction would not be signifi- has assets of $6 billion. The parties operate in the cantly adverse to competition. same markets. The banking factors and considerations relating to the convenience and needs of the BASIS FOR APPROVAL BY THE FEDERAL RESERVE community are consistent with approval. (5-22-97) The applicant has assets of $95 million; the targets have assets of $27 million. The parties operate in First Security Bank of Nevada, Las Vegas, the same market. The banking factors and consid- Nevada to merge with American Bank of Comerations relating to the convenience and needs of merce, Las Vegas, Nevada the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (5-23-97) Banco Popular de Puerto Rico, Hato Rey, The proposed transaction would not be signifi- Puerto Rico to merge with Roig Commercial cantly adverse to competition. Bank, Humacao, Puerto Rico BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (5-30-97) (3-27-97) The applicant has assets of $467 million; the target The proposed transaction would not be signifi- has assets of $318 million. The parties operate in cantly adverse to competition. the same market. The banking factors and consid- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

310 84th Annual Report, 1997 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1997—Continued 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 Fifth Third Bank, Cincinnati, Ohio to merge (6-30-97) with Suburban FSB, Cincinnati, Ohio The applicant has assets of $5 billion; the target has assets of $4 billion. The parties operate in the SUMMARY REPORT BY THE ATTORNEY GENERAL (5-23-97) same markets. The banking factors and consider- The proposed transaction would not be signifi- ations relating to the convenience and needs of the community are consistent with approval. cantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (6-12-97) Triangle Bank, Raleigh, North Carolina to acquire assets and liabilities of eight branches The applicant has assets of $10 billion; the target of United Carolina Bank, Whiteville, North has assets of $219 million. The parties operate in Carolina and two branches of Branch Bankthe same market. The banking factors and considing and Trust Company, Winston-Salem, erations relating to the convenience and needs of North Carolina the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (7-2-97) 1st United Bank, Boca Raton, Florida to merge The proposed transaction would not be signifiwith Seaboard Savings Bank, F.S.B., Stuart, cantly adverse to competition. Florida BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (5-23-97) (7-1-97) The applicant has assets of $1 billion; the targets The proposed transaction would not be signifihave assets of $215 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 (6-17-97) the community are consistent with approval. The applicant has assets of $716 million; the target has assets of $75 million. The parties operate in First Community Bank of Southwest Virginia, the same market. The banking factors and consid- Inc., Tazewell, Virginia to acquire assets and erations relating to the convenience and needs of liabilities of the Clintwood, Virginia, branch of the community are consistent with approval. First Virginia Bank-Mountain Empire, Damascus, Virginia; the Pound, Virginia, branch of United Bank, Arlington, Virginia to merge with Premier Bank-Central, N.A., Honaker, Vir- Patriot National Bank, Reston, Virginia ginia; and the Fort Chiswell, Virginia, branch SUMMARY REPORT BY THE ATTORNEY GENERAL of Premier Bank-South, N.A., Wytheville, (5-23-97) Virginia The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (7-2-97) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (6-20-97) cantly adverse to competition. The applicant has assets of $122 million; the target BASIS FOR APPROVAL BY THE FEDERAL RESERVE has assets of $189 million. The parties operate in (7-9-97) the same market. The banking factors and consid- The applicant has assets of $53 million; the targets erations relating to the convenience and needs of have assets of $46 million. The parties do not the community are consistent with approval. operate in the same market. The banking factors and considerations relating to the convenience Marshall & Ilsley Bank, Milwaukee, Wisconsin and needs of the community are consistent with to merge with Security Bank SSB, Milwaukee, approval. Wisconsin SUMMARY REPORT BY THE ATTORNEY GENERAL Centura Bank, Rocky Mount, North Carolina (7-17-97) to acquire assets and liabilities of nine branches Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 311 16.—Continued of United Carolina Bank, Whiteville, North BASIS FOR APPROVAL BY THE FEDERAL RESERVE Carolina, and five branches of Branch Banking (7-31-97) and Trust Company, Winston-Salem, North The applicant has assets of $1 billion; the targets Carolina have assets of $752,000. The parties operate in the same market. The banking factors and consid- SUMMARY REPORT BY THE ATTORNEY GENERAL erations relating to the convenience and needs of (7-2-97) the community are consistent with approval. The proposed transaction would not be significantly adverse to competition. Provident Bank of Florida, Apollo Beach, BASIS FOR APPROVAL BY THE FEDERAL RESERVE Florida to merge with Enterprise National Bank (7-10-97) of Sarasota, Sarasota, Florida The applicant has assets of $6 billion; the targets have assets of $200 million. The parties operate in SUMMARY REPORT BY THE ATTORNEY GENERAL the same markets. The banking factors and consid- (7-17-97) 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 Vectra Bank, Denver, Colorado to merge with (7-31-97) Professional Bank, Denver, Colorado The applicant has assets of $49 million; the target has assets of $163 million. The parties do not SUMMARY REPORT BY THE ATTORNEY GENERAL (7-17-97) operate in the same market. The banking factors The proposed transaction would not be signifi- and considerations relating to the convenience cantly adverse to competition. and needs of the community are consistent with approval. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (7-16-97) The applicant has assets of $580 million; the target Colonial Bank, Montgomery, Alabama to merge has assets of $85 million. The parties operate in with First Independence Bank of Florida, the same market. The banking factors and consid- Fort Myers, Florida erations relating to the convenience and needs of SUMMARY REPORT BY THE ATTORNEY GENERAL the community are consistent with approval. (8-5-97) The proposed transaction would not be signifi- Fifth Third Bank Cincinnati, Cincinnati, Ohio cantly adverse to competition. to acquire assets and liabilities of five branches BASIS FOR APPROVAL BY THE FEDERAL RESERVE of Great Lakes National Bank, Hamilton, Ohio (8-6-97) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $6 billion; the target (7-17-97) has assets of $74 million. The parties do not 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. (7-31-97) The applicant has assets of $10 billion; the targets have assets of $ 17 million. The parties operate in Resource Bank, Virginia Beach, Virginia to the same market. The banking factors and consid- merge with Eastern American Bank, F.S.B., erations relating to the convenience and needs of Herndon, Virginia the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (8-5-97) Fifth Third Bank Columbus, Columbus, Ohio The proposed transaction would not be signifito acquire assets and liabilities of three branches cantly adverse to competition. of Great Lakes National Bank, Hamilton, Ohio BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (8-7-97) (7-17-97) The applicant has assets of $115 million; the target The proposed transaction would not be signifi- has assets of $87 million. The parties do not cantly adverse to competition. operate in the same market. The banking factors Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

312 84th Annual Report, 1997 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1997—Continued and considerations relating to the convenience Minnesota, branch of TCF National Bank, and needs of the community are consistent with Minneapolis, Minnesota approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (8-25-97) Community Bank & Trust Company, Neosho, The proposed transaction would not be signifi- Missouri to merge with Citizens State Bank, cantly adverse to competition. Galena, Missouri BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (8-28-97) (8-5-97) The applicant has assets of $28 million; the target The proposed transaction would not be signifi- has assets of $14 million. The parties do not cantly adverse to competition. operate in the same market. The banking factors and considerations relating to the convenience BASIS FOR APPROVAL BY THE FEDERAL RESERVE and needs of the community are consistent with (8-12-97) approval. The applicant has assets of $202 million; the target has assets of $18 million. The parties operate in the same market. The banking factors and consid- First Community Bank, Inc., Buckhannon, erations relating to the convenience and needs of West Virginia to acquire assets and liabilities of the community are consistent with approval. the Man, West Virginia, branch of The Huntington National Bank, Columbus, Ohio Colonial Bank, Montgomery, Alabama to merge SUMMARY REPORT BY THE ATTORNEY GENERAL with Dadeland Bank, Miami, Florida (9-9-97) The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (8-25-97) The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (9-4-97) The applicant has assets of $341 million; the target BASIS FOR APPROVAL BY THE FEDERAL RESERVE has assets of $51 million. The parties do not (8-20-97) operate in the same market. The banking factors The applicant has assets of $4 billion; the target and considerations relating to the convenience has assets of $134 million. The parties do not and needs of the community are consistent with operate in the same market. The banking factors approval. and considerations relating to the convenience and needs of the community are consistent with Citizens Commercial Bank & Trust Company, approval. Celina, Ohio to acquire assets and liabilities of eleven branches of KeyBank, N.A., Cleveland, Santa Barbara Bank and Trust, Santa Barbara, Ohio California to merge with Citizens State Bank of SUMMARY REPORT BY THE ATTORNEY GENERAL Santa Paula, Santa Paula, California (9-9-97) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (7-17-97) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (9-8-97) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $215 million; the tar- (8-21-97) gets have assets of $364 million. The parties oper- The applicant has assets of $1 billion; the target ate in the same market. The banking factors has assets of $86 million. The parties operate in and considerations relating to the convenience the same market. The banking factors and consid- and needs of the community are consistent with erations relating to the convenience and needs of approval. the community are consistent with approval. Crestar Bank, Richmond, Virginia to merge with LeSueur State Bank, LeSueur, Minnesota to American National Savings Bank, F.S.B., Baltiacquire assets and liabilities of the Cloquet, more, Maryland Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 313 16,— Continued SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (9-9-97) (9-30-97) The proposed transaction would not be signifi- The applicant has assets of $624 million; the target cantly adverse to competition. has assets of $238 million. The parties do not operate in the same market. The banking factors BASIS FOR APPROVAL BY THE FEDERAL RESERVE and considerations relating to the convenience (9-8-97) and needs of the community are consistent with The applicant has assets of $22 billion; the target approval. has assets of $509 million. The parties operate in the same market. The banking factors and considerations relating to the convenience and needs of Community Bank & Trust Company, Neosho, the community are consistent with approval. Missouri to acquire assets and liabilities of two branches of Citizens Bank of Missouri, Carl F&M Bank—Portage County, Stevens Point, Junction, Missouri Wisconsin to acquire assets and liabilities of the SUMMARY REPORT BY THE ATTORNEY GENERAL Antigo branch of Security Bank, S.S.B., Mil- (9-25-97) waukee, Wisconsin The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (9-25-97) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (10-3-97) cantly adverse to competition. The applicant has assets of $202 million; the tar- BASIS FOR APPROVAL BY THE FEDERAL RESERVE gets have assets of $34 million. The parties oper- (9-11-97) ate in the same market. The banking factors The applicant has assets of $75 million; the target and considerations relating to the convenience has assets of $295,000. The parties do not operate and needs of the community are consistent with in the same market. The banking factors and con- approval. siderations relating to the convenience and needs of the community are consistent with approval. Centura Bank, Rocky Mount, North Carolina to acquire assets and liabilities of five First Farmers Bank & Trust Company, Con- branches of NationsBank, N.A., Charlotte, verse, Indiana to acquire assets and liabilities of North Carolina the Sheridan, Indiana, branch of NBD Bank, N.A., Indianapolis, Indiana SUMMARY REPORT BY THE ATTORNEY GENERAL (10-1-97) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (9-9-97) cantly adverse to competition. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (10-6-97) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $7 billion; the targets (9-29-97) have assets of $73 million. The parties operate in The applicant has assets of $154,000; the target the same markets. The banking factors and considhas assets of $28 million. The parties do not erations relating to the convenience and needs of operate in the same market. The banking factors the community are consistent with approval. and considerations relating to the convenience and needs of the community are consistent with approval. Weststar Bank, Vail, Colorado to merge with Western Community Bank, Cedaredge, Republic Security Bank, West Palm Beach, Colorado Florida to merge with County National Bank of SUMMARY REPORT BY THE ATTORNEY GENERAL South Florida, North Miami Beach, Florida (10-1-97) The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL (10-9-97) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (10-9-97) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

314 84th Annual Report, 1997 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1997—Continued The applicant has assets of $148 million; the target erations relating to the convenience and needs of has assets of $44 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 the community are consistent with approval. Community Bank and Trust Company, Forest City, Pennsylvania to acquire assets and liabilities of the Factoryville and Enyon branches Citizens Banking Company, Salineville, Ohio to of First Union National Bank, Avondale, acquire assets and liabilities of three branches of Pennsylvania Metropolitan Savings Bank of Ohio, Youngstown, Ohio SUMMARY REPORT BY THE ATTORNEY GENERAL (10-9-97) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (10-1-97) cantly adverse to competition. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (10-24-97) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $356,000; the targets (10-10-97) have assets of $22 million. The parties operate in The applicant has assets of $1 billion; the targets the same market. The banking factors and considhave assets of $66 million. The parties do not erations relating to the convenience and needs of operate in the same market. The banking factors the community are consistent with approval. and considerations relating to the convenience and needs of the community are consistent with approval. Centura Bank, Rocky Mount, North Carolina to acquire assets and liabilities of the Bakersville, North Carolina, branch of First Union National Compass Bank, Birmingham, Alabama to Bank, Charlotte, Pennsylvania merge with Gainesville State Bank, Gainesville, Florida SUMMARY REPORT BY THE ATTORNEY GENERAL (10-9-97) SUMMARY REPORT BY THE ATTORNEY GENERAL The proposed transaction would not be signifi- (10-1-97) cantly adverse to competition. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11-10-97) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The applicant has assets of $7 billion; the target (10-10-97) has assets of $22 million. The parties operate in The applicant has assets of $7 billion; the target the same market. The banking factors and considhas assets of $206 million. The parties do not erations relating to the convenience and needs of operate in the same market. The banking factors the community are consistent with approval. and considerations relating to the convenience and needs of the community are consistent with approval. Colonial Bank, Montgomery, Alabama to merge with Ashville Savings Bank, Ashville, Alabama Citizens Bank, Lawton, Oklahoma to merge SUMMARY REPORT BY THE ATTORNEY GENERAL with First Commercial Bank, SSB, Lawton, (11-17-97) Oklahoma The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL cantly adverse to competition. (10-29-97) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (11-19-97) cantly adverse to competition. The applicant has assets of $5 billion; the target BASIS FOR APPROVAL BY THE FEDERAL RESERVE has assets of $142 million. The parties do not (10-22-97) operate in the same market. The banking factors The applicant has assets of $121 million; the target and considerations relating to the convenience has assets of $42 million. The parties operate in and needs of the community are consistent with the same market. The banking factors and consid- approval. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 315 16.—Continued Colonial Bank, Montgomery, Alabama to merge SUMMARY REPORT BY THE ATTORNEY GENERAL with First Central Bank, St. Petersburg, Florida (11-26-97) The proposed transaction would not be signifi- SUMMARY REPORT BY THE ATTORNEY GENERAL (11-17-97) cantly adverse to competition. The proposed transaction would not be signifi- BASIS FOR APPROVAL BY THE FEDERAL RESERVE cantly adverse to competition. (12-2-97) The applicant has assets of $1 billion; the targets BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11-19-97) have assets of $230 million. The parties operate in the same markets. The banking factors and consid- The applicant has assets of $5 billion; the target erations relating to the convenience and needs of has assets of $55 million. The parties do not the community are consistent with approval. operate in the same market. The banking factors and considerations relating to the convenience and needs of the community are consistent with Atlantic Bank, Ocean City, Maryland to acquire approval. assets and liabilities of three branches of Signet Bank, Richmond, Virginia Colonial Bank, Montgomery, Alabama to merge SUMMARY REPORT BY THE ATTORNEY GENERAL with First National Bank at Bonita Springs, (11-21-97) Bonita Springs, Florida The proposed transaction would not be significantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL (11-21-97) BASIS FOR APPROVAL BY THE FEDERAL RESERVE The proposed transaction would not be signifi- (12-5-97) cantly adverse to competition. The applicant has assets of $57 million; the targets have assets of $75 million. The parties operate in BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11-19-97) the same market. The banking factors and considerations relating to the convenience and needs of The applicant has assets of $5 billion; the target has assets of $245 million. The parties do not the community are consistent with approval. operate in the same market. The banking factors and considerations relating to the convenience Farmers Bank of Maryland, Annapolis, Maryand needs of the community are consistent with land to acquire assets and liabilities of three approval. branches of Signet Bank, Richmond, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL Sabina Bank, Sabina, Ohio to acquire assets and (11-21-97) liabilities of the Ada and Waynesfield branches The proposed transaction would not be signifiof Fifth Third Bank of Western Ohio, Dayton, cantly adverse to competition. Ohio BASIS FOR APPROVAL BY THE FEDERAL RESERVE SUMMARY REPORT BY THE ATTORNEY GENERAL (12-5-97) (11-26-97) The applicant has assets of $840 million; the tar- The proposed transaction would not be signifi- gets have assets of $46 million. The parties opercantly adverse to competition. ate in the same market. The banking factors and considerations relating to the convenience and BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11-26-97) needs of the community are consistent with The applicant has assets of $36 million; the targets approval. have assets of $31 million. The parties do not operate in the same market. The banking factors First Virginia Bank of Tidewater, Norfolk, Virand considerations relating to the convenience ginia to acquire assets and liabilities of the and needs of the community are consistent with Mappsville, Virginia, branch of Signet Bank, approval. Richmond, Virginia SUMMARY REPORT BY THE ATTORNEY GENERAL Bancfirst, Oklahoma City, Oklahoma to acquire (11-21-97) assets and liabilities of eleven branches of The proposed transaction would not be signifi- NationsBank NA, Charlotte, North Carolina cantly adverse to competition. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

316 84th Annual Report, 1997 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1997—Continued BASIS FOR APPROVAL BY THE FEDERAL RESERVE First State B&TC of Larned, Larned, Kansas (12-5-97) to acquire assets and liabilities of the Pratt and The applicant has assets of $477 million; the target Iuka branches of NationsBank NA, Charlotte, has assets of $26 million. The parties operate in North Carolina the same market. The banking factors and consid- SUMMARY REPORT BY THE ATTORNEY GENERAL erations relating to the convenience and needs of (12-10-97) the community are consistent with approval. The proposed transaction would not be significantly adverse to competition. Citizens Banking Company, Salineville, Ohio to BASIS FOR APPROVAL BY THE FEDERAL RESERVE merge with Unibank, Steubenville, Ohio (12-10-97) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $56 million; the targets (12-10-97) have assets of $17 million. The parties operate in The proposed transaction would not be signifi- the same market. The banking factors and considcantly adverse to competition. erations relating to the convenience and needs BASIS FOR APPROVAL BY THE FEDERAL RESERVE of the community are consistent with approval. (12-8-97) The applicant has assets of $1 billion; the target Colonial Bank, Montgomery, Alabama to merge has assets of $220 million. The parties operate in with United American Bank of Central Florida, the same markets. The banking factors and consid- Orlando, Florida erations relating to the convenience and needs of the community are consistent with approval. SUMMARY REPORT BY THE ATTORNEY GENERAL (12-10-97) The proposed transaction would not be signifi- Compass Bank, Birmingham, Alabama to cantly adverse to competition. merge with West University Bank, N.A., Houston, Texas BASIS FOR APPROVAL BY THE FEDERAL RESERVE (12-11-97) SUMMARY REPORT BY THE ATTORNEY GENERAL The applicant has assets of $5 billion; the target (11-26-97) has assets of $238 million. The parties do not The proposed transaction would not be signifioperate in the same market. The banking factors cantly adverse to competition. and considerations relating to the convenience BASIS FOR APPROVAL BY THE FEDERAL RESERVE and needs of the community are consistent with (12-10-97) approval. The applicant has assets of $8 billion; the target has assets of $66 million. The parties operate in the same market. The banking factors and consid- Capital City Bank, Tallahassee, Florida to erations relating to the convenience and needs of acquire assets and liabilities of five branches of the community are consistent with approval. First Federal Savings and Loan Association of Florida, Lakeland, Florida Farmers and Merchants Bank, Stuttgart, SUMMARY REPORT BY THE ATTORNEY GENERAL Arkansas to acquire assets and liabilities of the (12-30-97) DeValls Bluff, Arkansas, branch of Union The proposed transaction would not be signifi- Planters NB, Memphis, Tennessee cantly adverse to competition. SUMMARY REPORT BY THE ATTORNEY GENERAL BASIS FOR APPROVAL BY THE FEDERAL RESERVE (11-21-97) (12-17-97) The proposed transaction would not be signifi- The applicant has assets of $867 million; the tarcantly adverse to competition. gets have assets of $61 million. The parties operate in the same market. The banking factors BASIS FOR APPROVAL BY THE FEDERAL RESERVE and considerations relating to the convenience (12-10-97) and needs of the community are consistent with The applicant has assets of $162 million; the target approval. has assets of $13 million. The parties operate in the same market. The banking factors and considerations relating to the convenience and needs of King George State Bank, King George, Virthe community are consistent with approval. ginia to acquire assets and liabilities of one Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 317 16.—Continued branch of First Union National Bank, Char- operate in the same market. The banking factors lotte, Virginia and considerations relating to the convenience and needs of the community are consistent with SUMMARY REPORT BY THE ATTORNEY GENERAL (12-17-97) approval. The proposed transaction would not be significantly adverse to competition. Compass Bank, Birmingham, Alabama to merge with Fidelity Bank, N.A., University BASIS FOR APPROVAL BY THE FEDERAL RESERVE Park, Texas (12-17-97) The applicant has assets of $53 million; the target SUMMARY REPORT BY THE ATTORNEY GENERAL has assets of $18 million. The parties operate in (12-11-97) 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 (12-18-97) Northern Neck State Bank, Warsaw, Virginia to The applicant has assets of $8 billion; the target acquire assets and liabilities of six branches of has assets of $318 million. The parties do not First Union National Bank, Charlotte, Virginia operate in the same market. The banking factors and considerations relating to the convenience SUMMARY REPORT BY THE ATTORNEY GENERAL (12-17-97) and needs of the community are consistent with approval. The proposed transaction would not be significantly adverse to competition. BASIS FOR APPROVAL BY THE FEDERAL RESERVE (12-17-97) The applicant has assets of $143 million; the targets have assets of $68 million. The parties do not Table 16 continued on next page. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

318 84th Annual Report, 1997 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1997—Continued Mergers Approved Involving Wholly Owned porate reorganization. The Board of Governors, Subsidiaries of the Same Bank Holding the Federal Reserve Bank, or the Secretary of the Company Board of Governors, whichever approved the The following transactions involve banks that are application, determined that the competitive subsidiaries of the same bank holding company. In effects of the proposed transaction, the financial each case, the Summary Report by the Attorney and managerial resources and prospects of the General indicates that the transaction would not banks concerned, as well as the convenience and have a significantly adverse effect on competition needs of the community to be served were consisbecause the proposed merger is essentially a cor- tent with approval. Assets Date of Institution' (millions approval of dollars) Pullman Bank and Trust Company, Chicago, Illinois 317 1-9-97 Merger Pullman Bank of Commerce & Industry, Chicago, Illinois 152 Farmers Bank of Maryland, Annapolis, Maryland 576 1-22-97 Merger First Virginia Bank-Central Maryland, Bel Air, Maryland 268 Crestar Bank, Vienna, Virginia 18,300 1-29-97 Merger Citizens Bank of Maryland, Laurel, Maryland 3,900 Citizens Bank of Washington, N.A., Washington, D.C 285 La Salle State Bank, La Salle, Illinois 2-13-97 Merger 71 Community Bank of Utica, Utica, Illinois 13 Adams B&TC, Ogallala, Nebraska 2-19-97 Merger 174 First State Bank, Lodgepole, Nebraska 12 Manufacturers and Traders Trust Company, Buffalo, New York 2-28-97 Merger 10,854 The East New York Savings Bank, Brooklyn, New York 2,041 First Bank of Arkansas, Jonesboro, Arkansas 3-27-97 Merger 411 First Bank of Arkansas, Wynne, Arkansas 52 Pointe Bank, Pembroke Pines, Florida 3-28-97 Merger 50 Pointe Federal Savings Bank, Boca Raton, Florida 108 AmSouth Bank of Alabama, Birmingham, Alabama 4-14-97 Merger 10,400 AmSouth Bank of Florida, Tampa, Florida AmSouth Bank of Georgia, Rome, Georgia 7,000 AmSouth Bank of Tennessee, Chattanooga, Tennessee 325 AmSouth Bank of Walker County, Jasper, Alabama 1,100 Digitized for FRASER 65 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 319 16.—Continued Assets Date of Institution' (millions approval of dollars) Mercantile Bank of Topeka, Topeka, Kansas 322 4-22-97 Merger Mercantile Bank, Overland, Kansas 2,008 Old Kent Bank, Grand Rapids, Michigan 10,614 4-24-97 Merger The Algonac Savings Bank, Algonac, Michigan 124 The Commercial and Savings Bank of St. Clair County, St. Clair, Michigan 257 Bank of White Sulphur Springs, White Sulphur Springs, West Virginia 69 4-28-97 Merger Bank of Marlinton, Marlinton, West Virginia 60 M&I Madison Bank, Madison, Wisconsin 1,628 4-28-97 Merger M&I Bank Southwest, Spring Green, Wisconsin 321 M&I Bank of Janesville, Janesville, Wisconsin 391 5-2-97 Merger M&I Bank of Beloit, Beloit, Wisconsin 142 M&I Bank of Delavan, Delavan, Wisconsin 110 Dacotah Bank, Aberdeen, South Dakota 179 5-5-97 Merger Dacotah Bank, Clark, South Dakota 66 Dacotah Bank, Faulkton, South Dakota 23 Dacotah Bank, Lemmon, South Dakota 73 Dacotah Bank, Mobridge, South Dakota 54 Dacotah Bank, Webster, South Dakota 45 First Virginia Bank-Southwest, Roanoke, Virginia 486 5-5-97 Merger First Virginia Bank-Highlands, Covington, Virginia 128 The George Mason Bank, Fairfax, Virginia 784 5-7-97 Merger George Mason Bank, National Association, Bethesda, Maryland 99 Colonial Bank, Montgomery, Alabama 4,156 5-14-97 Merger Colonial Bank, Ardmore, Tennessee 98 Colonial Bank, Orlando, Florida 291 Colonial Bank, Lawrenceville, Georgia 487 First Interstate Bank of Commerce, Billings, Montana 1,054 5-14-97 Merger First Interstate Bank of Montana, N.A., Kalispell, Montana 294 Mountain Bank, Whitefish, Montana 70 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

320 84th Annual Report, 1997 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1997—Continued Assets Institutionl (millions Date of approval of dollars) Citizens Bank, Flint, Michigan 3,300 5-16-97 Merger City Bank and Trust Company, Jackson, Michigan 470 City Bank, St. Johns, Michigan 209 CB-North, Charlevoix, Michigan 184 WestAmerica Bank, San Rafael, California 2,400 5-27-97 Merger ValliWide Bank, Fresno, California 1,300 Fifth Third Bank of Western Ohio, Piqua, Ohio 1,000 5-29-97 Merger Fifth Third Cincinnati (29 branches), Cincinnati, Ohio 865 Mercantile Bank, Overland Park, Kansas 2,008 6-10-97 Merger Mark Twain Bank Kansas City, Kansas City, Missouri 322 ElDorado Bank, Tustin, California 404 6-11-97 Merger Commerce Security Bank, Sacramento, California 252 Liberty National Bank, Huntington, California 149 San Dieguito National Bank, Encinitas, California 58 Old Kent Bank, Grand Rapids, Michigan 6-13-97 Merger 10,614 Old Kent Bank, Elmhurst, Illinois 2,189 M&I Marshall & Ilsley Bank, Milwaukee, Wisconsin 6-30-97 Merger 5,184 M&I Bank Eagle River, Eagle River, Wisconsin 140 M&I Bank Fox Valley, Appleton, Wisconsin 715 M&I Bank NE, Green Bay, Wisconsin 662 M&I Bank of Menomonee Falls, Menomonee Falls, Wisconsin 265 M&I Bank of Racine, Racine, Wisconsin 138 M&I Bank of Shawano, Shawano, Wisconsin 162 M&I Bank S Central, Watertown, Wisconsin 224 M&I Central State Bank, Ripon, Wisconsin 365 M&I First American Bank, Wausau, Wisconsin 401 M&I Lake Country Bank, Hartland, Wisconsin 253 M&I Merchants Bank, Rhinelander, Wisconsin 242 OmniBank, Macomb, Illinois 105 7-31-97 Merger Farmers State Bank of Ferris, Ferris, Illinois 45 Tiskilwa State Bank, Tiskilwa, Illinois 24 7-31-97 Merger Tampico National Bank, Tampico, Illinois 17 First National Bank of Manlius, Manlius, Illinois 55 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 321 16.—Continued Assets Date of Institution' (millions approval of dollars) UnionBank, Streator, Illinois 269 7-31-97 Merger UnionBank Sandwich, Sandwich, Illinois 40 First Virginia Bank-Southwest, Roanoke, Virginia 614 8-6-97 Merger Premier Bank-South, National Association, Wytheville, Virginia 225 The Provident Bank, Cincinnati, Ohio 6,600 8-14-97 Merger The Provident Bank of Kentucky, Alexandria, Kentucky 269 Compass Bank, Birmingham, Alabama 6,000 8-20-97 Merger Compass Bank, Jacksonville, Florida 1,200 Citizens Commercial Bank & Trust Company, Celina, Ohio .... 215 8-22-97 Merger Van Wert National Bank, Van Wert, Ohio 127 First Bank of Hennessey, Hennessey, Oklahoma 172 8-28-97 Merger The Peoples National Bank of Kingfisher, Kingfisher, Oklahoma 148 Capital City Bank, Tallahassee, Florida 851 8-29-97 Merger Levy County State Bank, Chiefland, Florida 81 Farmers & Merchants Bank of Trenton, Trenton, Florida 37 Branford State Bank, Branford, Florida 30 F&M Bank-Fennimore, Fennimore, Wisconsin 47 9-4-97 Merger F&M Bank-Potosi, Potosi, Wisconsin 33 F&M Bank-Lancaster, Lancaster, Wisconsin 43 Mercantile Bank, Overland, Kansas 3,172 9-11-97 Merger Roosevelt Bank, Chesterfield, Missouri 679 Johnstown Bank & Trust Company, Johnstown, Pennsylvania .. 949 9-17-97 Merger Laurel Bank, Ebensburg, Pennsylvania 233 Fayette Bank, Uniontown, Pennsylvania 355 First Virginia Bank-Clinch Valley, Richlands, Virginia 9-23-97 Merger 80 Premier Bank, National Association, Tazewell, Virginia 199 First Virginia Bank-Mountain Empire, Damascus, Virginia 9-23-97 Merger 115 Premier Bank-Central, N.A., Honaker, Virginia 307 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

322 84th Annual Report, 1997 16. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1997—Continued Assets Date of Institution' (millions approval of dollars) First Bank, Creve Coeur, Missouri 873 10-16-97 Merger First Bank, O'Fallon, Illinois 824 Omni Bank, Macomb, Illinois 100 10-23-97 Merger Farmers State Bank of Ferris, Ferris, Illinois 47 First Interstate Bank, Billings, Montana 1,449 10-29-97 Merger First Interstate Bank, fsb, Hamilton, Montana 4 Alabama Exchange Bank, Tuskegee, Alabama 47 11-12-97 Merger First National Bank of Ashland, Ashland, Alabama 56 Southern California Bank, Anaheim, California 508 11-13-97 Merger National Bank of Southern California, Newport Beach, California .. 452 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

Statistical Tables 323 16.—Continued Mergers Approved Involving a Non-Operating of 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 indi- effects and that the financial factors and considercates that the transaction will merely combine an ations relating to the convenience and needs of the existing bank with a non-operating institution; in community were consistent with approval. consequence, and without regard to the acquisition Assets Date of Institution' (millions of dollars)2 approval Blue Ridge Bank, Sparta, North Carolina 106 3-12-97 Merger Blue Ridge Acquisition Bank, Inc., Sparta, North Carolina Guaranty Bank, Charlottesville, Virginia 4-15-97 Merger Guaranty Savings & Loan, F.A., Charlottesville, Virginia 115 Quad City Bank and Trust Company, Bettendorf, Iowa 140 5-29-97 Merger Quad City Bank and Trust Company-Illinois, Moline, Iowa New North Shore Bank, Duluth, Minnesota 7-17-97 Merger North Shore Bank of Commerce, Duluth, Minnesota 119 Bank of Mecklenburg, Charlotte, North Carolina 273 8-6-97 Merger Triangle-Mecklenburg Interim Bank, Charlotte, North Carolina Premier Bank, Doylestown, Pennsylvania 185 10-30-97 Merger Premier Interim Bank, Doylestown, Pennsylvania Bank of Greenville, Greenville, West Virginia 18 12-11-97 Merger Greenville Interim Bank, Greenville, West Virginia 1. Each proposed transaction was to be effected under 2. Where no assets are listed, the bank is newly organthe charter of the first-named bank. The entries are in ized 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

326 84th Annual Report, 1997 Board of Governors of the Federal Reserve System December 31,1997 Members Term expires January 31, ALAN GREENSPAN, of New York, Chairmanl 2006 ALICE M. RlVLIN, of Pennsylvania, Vice Chair1 2010 SUSAN M. PHILLIPS, of Iowa 1998 ROGER W. FERGUSON, JR., of Massachusetts 2000 LAURENCE H. MEYER, of Missouri 2002 EDWARD W. KELLEY, JR., of Texas 2004 EDWARD M. GRAMLICH, of Virginia 2008 Officers OFFICE OF BOARD MEMBERS OFFICE OF THE SECRETARY Joseph R. Coyne, Assistant to the Board William W. Wiles, Secretary Donald J. Winn, Assistant to the Board Jennifer J. Johnson, Deputy Secretary Theodore E. Allison, Assistant to the Board Barbara R. Lowrey, Associate Secretary for Federal Reserve System Affairs and Ombudsman Lynn Fox, Deputy Congressional Liaison Bob Stahly Moore, Special Assistant DIVISION OF INTERNATIONAL FINANCE to the Board Edwin M. Truman, Staff Director Winthrop P. Hambley, Special Assistant _, . , . . , . T T c to the Board Larry J* Promise1' Semor Adviser Diane E. Werneke, Special Assistant Charles L SieSman' Senior Adviser to the Board L.S. Alexander, Associate Director Portia W Thompson, Equal Employment Dale W. Henderson, Associate Director Opportunity Programs Adviser Peter Hooper III, Associate Director Karen H. Johnson, Associate Director LEGAL DIVISION David H. Howard, Senior Adviser J. Virgil Mattingly, Jr., General Counsel Donald B- Adams' Assistant Director Scott G. Alvarez, Associate General Thomas A. Connors, Assistant Director Counsel Richard M. Ashton, Associate DIVISION OF MONETARY AFFAIRS General Counsel ^ Donald L Koh Direcfor Oliver Ireland, Associate General David R Lmd D DirecWr Counsel _ . , - , , , . ,. r^- ^ 11 *>r rvm A ^ i Brian F. Madigan, Associate Director TKathleen M. O Day, Associate General _. , , _ _ ° _ Counsel Richard D. Porter, Deputy Associate Robert deV. Frierson, Assistant General . _ _ . , . _. w A Counsel Vincent R. Reinhart, Assistant Director Katherine H. Wheatley, Assistant General NormandR.V Bernard, Special Assistant Counsel t0 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 have terminated sooner. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 327 Board of Governors—Continued DIVISION OF RESEARCH Norah M. Barger, Assistant Director AND STATISTICS Betsy Cross Jacowski, Assistant Director Michael J. Prell, Director Richard A. Small, Assistant Director Edward C. Ettin, Deputy Director William C. Schneider, Jr., Project Director, David J. Stockton, Deputy Director National Information Center Martha Bethea, Associate Director William R. Jones, Associate Director DIVISION OF CONSUMER Myron L. Kwast, Associate Director AND COMMUNITY AFFAIRS Patrick M. Parkinson, Associate Director Griffith L. Garwood, Director Thomas D. Simpson, Associate Director Glenn E. Loney, Associate Director Lawrence Slifman, Associate Director Dolores S. Smith, Associate Director Martha S. Scanlon, Deputy Maureen P. English, Assistant Director Associate Director Irene Shawn McNulty, Assistant Director Peter A. Tinsley, Deputy Associate Director DIVISION OF FEDERAL RESERVE BANK David S. Jones, Assistant Director OPERATIONS AND PAYMENT SYSTEMS Stephen D. Oliner, Assistant Director Clyde H. Farnsworth, Jr., Director Stephen A. Rhoades, Assistant Director David L. Robinson, Deputy Director Janice Shack-Marquez, Assistant Director (Finance and Control) Charles S. Struckmeyer, Assistant Director Louise L. Roseman, Associate Director Alice Patricia White, Assistant Director Paul W. Bettge, Assistant Director Joyce K. Zickler, Assistant Director Jack Dennis, Jr., Assistant Director Glenn B. Canner, Senior Adviser Earl G. Hamilton, Assistant Director John J. Mingo, Senior Adviser Jeffrey C. Marquardt, Assistant Director Florence M. Young, Assistant Director DIVISION OF BANKING SUPERVISION AND REGULATION OFFICE OF STAFF DIRECTOR Richard Spillenkothen, Director FOR MANAGEMENT Stephen C. Schemering, Deputy Director S. David Frost, Staff Director Herbert A. Biern, Associate Director Sheila Clark, Equal Employment Roger T. Cole, Associate Director Opportunity Programs Director William A. Ryback, Associate Director Gerald A. Edwards, Jr., Deputy OFFICE OF THE CONTROLLER Associate Director George E. Livingston, Controller Stephen M. Hoffman, Jr., Deputy Stephen J. Clark, Assistant Controller Associate Director (Programs and Budgets) James V. Houpt, Jr., Deputy Darrell R. Pauley, Assistant Controller Associate Director (Finance) Jack P. Jennings, Deputy Associate Director DIVISION OF HUMAN Michael G. Martinson, Deputy RESOURCES MANAGEMENT Associate Director David L. Shannon, Director Sidney M. Sussan, Deputy John R. Weis, Associate Director Associate Director Joseph H. Hayes, Jr., Assistant Director Molly S. Wassom, Deputy Fred Horowitz, Assistant Director Associate Director Howard A. Amer, Assistant Director Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

328 84th Annual Report, 1997 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 31,1997 Members ALAN GREENSPAN, Chairman, Board of Governors WILLIAM J. McDoNOUGH, Vice Chairman, President, Federal Reserve Bank of New York J. ALFRED BROADDUS, JR., President, Federal Reserve Bank of Richmond ROGER W. FERGUSON, JR., Board of Governors EDWARD M. GRAMLICH, Board of Governors JACK GUYNN, President, Federal Reserve Bank of Atlanta EDWARD W. KELLY, JR., Board of Governors LAURENCE H. MEYER, Board of Governors MICHAEL H. MOSKOW, President, Federal Reserve Bank of Chicago ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco SUSAN M. PHILLIPS, Board of Governors ALICE M. RIVLIN, Board of Governors Alternate Members CATHY E. MINEHAN, President, Federal Reserve Bank of Boston JERRY L. JORDAN, President, Federal Reserve Bank of Cleveland THOMAS C. MELZER, President, Federal Reserve Bank of St. Louis THOMAS M. HOENIG, President, Federal Reserve Bank of Kansas City 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 329 Federal Open Market Committee—Continued JOHN H. BEEBE, STEPHEN G. CECCHETTI, Associate Economist Associate Economist ROBERT A. EISENBEIS, LARRY J. PROMISEL, Associate Economist Associate Economist MARVIN S. GOODFRIEND, CHARLES J. SIEGMAN, Associate Economist Associate Economist WILLIAM C. HUNTER, LAWRENCE SLIFMAN, Associate Economist Associate Economist DAVID E. LINDSEY, DAVID J. STOCKTON, Associate Economist Associate Economist PETER R. FISHER, Manager, System Open Market Account During 1997 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 31,1997 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—ROBERT W. GILLESPIE, Chairman and Chief Executive Officer, KeyCorp, Cleveland, Ohio District 5—KENNETH D. LEWIS, President, NationsBank Corporation, Charlotte, North Carolina District 6—STEPHEN A. HANSEL, President and Chief Executive Officer, Hibernia National Bank, New Orleans, Louisiana 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 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—VACANCY Officers WALTER V. SHIPLEY, President CHARLES E. NELSON, Vice President HERBERT V. PROCHNOW, Secretary Emeritus JAMES E. ANNABLE, Co-Secretary Digitized for FRASER WILLIAM J. KORSVIK, Co-Secretary http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

330 84th Annual Report, 1997 Federal Advisory Council—Continued Directors WILLIAM M. CROZIER, JR. CHARLES T. DOYLE The Federal Advisory Council met on Feb- industry from each of the twelve Federal ruary 6-7, May 1-2, September 4-5, and Reserve Districts, is required by law to meet October 30-31, 1997. The Board of Gov- in Washington at least four times each year ernors met with the council on Febru- and is authorized by the Federal Reserve Act ary 7, May 2, September 5, and Octo- to consult with, and advise, the Board on all ber 31, 1997. The council, which is com- matters within the jurisdiction of the Board, posed of one representative of the banking Consumer Advisory Council December 31,1997 Members RICHARD S. AMADOR, President and Chief Executive Officer, CHARO Community Development Corporation, Los Angeles, California WAYNE-KENT A. BRADSHAW, President and Chief Executive Officer, Family Savings Bank, FSB, 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 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 JANET C. KOEHLER, Senior Manager of Electronic Commerce, AT&T Universal Card Services, Jacksonville, Florida EUGENE I. LEHRMANN, Immediate Past President, American Association of Retired Persons, Madison, Wisconsin ERROL T. LOUIS, Central Brooklyn Federal Credit Union, Brooklyn, New York PAUL E. MULLINGS, President and Chief Executive Officer, Mortgage Electronic Registration Systems, Inc., McLean, Virginia CAROL PARRY, Executive Vice President, Chase Manhattan Bank, New York, New York Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 331 Consumer Advisory Council—Continued PHILIP PRICE, JR., Executive Director, The Philadelphia Plan, Philadelphia, Pennsylvania RONALD A. PRILL, Vice President, Credit, Dayton Hudson Corporation, Minneapolis, Minnesota LISA RICE, Executive Director, Fair Housing Center, Toledo, Ohio JOHN R. RINES, President, General Motors Acceptance Corporation, Detroit, Michigan MARILYN ROSS, Executive Director, Holy Name Housing Corporation, Omaha, Nebraska MARGOT SAUNDERS, Managing Attorney, National Consumer Law Center, Washington, D.C. GAIL SMALL, Executive Director, Native Action, Lame Deer, Montana YVONNE S. SPARKS, Vice President, Community Investment Department, NationsBank Community Investment Group, St. Louis, 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 THEODORE J. WYSOCKI, JR., Executive Director, CANDO, Chicago, Illinois Officers JULIA W. SEWARD, Chair WILLIAM N. LUND, Vice Chair Vice President and Corporate Director, Office of Consumer Credit Community Reinvestment Officer, Regulation, Signet Banking Corporation, State of Maine, Richmond, Virginia Augusta, Maine The Consumer Advisory Council met with consumer and community interests. It was members of the Board of Governors on established pursuant to the 1976 amend- April 17, July 17, and October 30, 1997. The ments to the Equal Credit Opportunity Act council is composed of academics, state and to advise the Board on consumer financial local government officials, representatives of services. the financial industry, and representatives of Thrift Institutions Advisory Council December 31,1997 Members BARRY C. BURKHOLDER, President and Chief Executive Officer, Bank United of Texas FSB, Houston, Texas DAVID E.A. CARSON, Chairman, President, and Chief Executive Officer, People's Bank, Bridgeport, Connecticut MICHAEL T. CROWLEY, JR., President and Chief Executive Officer, Mutual Savings Bank, Milwaukee, Wisconsin DOUGLAS A. FERRARO, President and Chief Executive Officer, Bellco First Federal Credit Union, Englewood, Colorado WILLIAM A. FITZGERALD, Chairman and Chief Executive Officer, Commercial Federal Bank, Omaha, Nebraska STEPHEN D. HAILER, President and Chief Executive Officer, North Akron Savings Bank, Akron, Ohio Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

332 84th Annual Report, 1997 Thrift Institutions Advisory Council—Continued DAVID F. HOLLAND, Chairman, President, and Chief Executive Officer, Boston Federal Savings Bank, Burlington, Massachusetts EDWARD J. MOLNAR, President and Chief Executive Officer, Harleysville Savings Bank, Harleysville, Pennsylvania GUY C. PINKERTON, Chairman, President, and Chief Executive Officer, Washington Federal Savings and Loan Association, Seattle, Washington CHARLES R. RINEHART, Chairman and Chief Executive Officer, Home Savings of America, FSB, Irwindale, California TERRY R. WEST, President and Chief Executive Officer, Jax Navy Federal Credit Union, Jacksonville, Florida FREDERICK WILLETTS III, President and Chief Executive Officer, Cooperative Bank for Savings, Inc., SSB, Wilmington, North Carolina Officers DAVID F. HOLLAND, President CHARLES R. RINEHART, 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 14, June 13, Octo- advises, the Board on issues pertaining to the ber 10, and December 5, 1997. 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 31,1997 Chairmanl President Vice President BANK or Branch Deputy Chairman First Vice President in charge of Branch BOSTON2 William C. Brainard Cathy E. Minehan Frederick J. Paul M. Connolly Mancheski NEW YORK2 John C. Whitehead William J. McDonough Thomas W. Jones Ernest T. Patrikis Buffalo Bal Dixit Carl W. Turnipseed3 PHILADELPHIA Donald J. Kennedy Edward G. Boehne Joan Carter William H. Stone, Jr. CLEVELAND2 G. Watts Jerry L. Jordan Humphrey, Jr. Sandra Pianalto David H. Hoag Cincinnati George C. Juilfs Charles A. Cerino3 Pittsburgh John T. Ryan III Robert B. Schaub RICHMOND2 Claudine B. Malone J. Alfred Broaddus, Jr. Robert L. Strickland Walter A. Varvel Baltimore Rebecca Hahn William J. Tignanelli3 Windsor Charlotte Dennis D. Lowery Dan M. Bechter3 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 333 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 David R. Jones Patrick K. Barron Birmingham .... D. Bruce Can- Fred R. Herr3 Jacksonville Patrick C. Kelly James D. Hawkins3 Miami Kaaren Johnson-Street James T. Curry III Nashville James E. Dalton Melvyn K. Purcell New Orleans Jo Ann Slaydon Robert J. Musso CHICAGO2 Lester H. Michael H. Moskow McKeever, Jr. William C. Conrad Arthur C. Martinez Detroit Florine Mark David R.Allardice3 ST. LOUIS John F. McDonnell Thomas C. Melzer Susan S. Elliott W. Legrande Rives Little Rock Robert D. Nabholtz, Jr. Robert A. Hopkins Louisville John A. Williams Thomas A. Boone John V. Myers Martha L. Perine Memphis Jean D. Kinsey Gary H. Stern MINNEAPOLIS David A. Koch Colleen K. Strand Matthew J. Quinn John D. Johnson Helena A. Drue Jennings Thomas M. Hoenig KANSAS CITY Jo Marie Dancik Richard K. Rasdall Denver Peter I. Wold Carl M. Gambs3 Oklahoma City . Barry L. Eller Kelly J. Dubbert Omaha Arthur L. Shoener Steven D. Evans DALLAS Roger R. Robert D. McTeer, Jr. Hemminghaus Helen E. Holcomb Cece Smith El Paso Alvin T. Johnson Sammie C. Clay Houston Isaac H. Kempner III Robert Smith IIP San Antonio . H. B. Zachry, Jr. James L.Stull3 SAN FRANCISCO Judith M. Runstad Robert T. Parry Gary G. Michael John F. Moore Los Angeles Anne L. Evans MarkL. Mullinix3 Portland Carol A. Whipple Raymond H. Laurence3 Salt Lake City Gerald R. Sherratt Andrea P. Wolcott Seattle Richard R. Sonstelie Gordon R.G. Werkema4 NOTE. A current list of these officers appears each York; East Rutherford, New Jersey; Columbus, Ohio; month in the Federal Reserve Bulletin. Charleston, West Virginia; Columbia, South Carolina; 1. The Chairman of a Federal Reserve Bank serves, by Indianapolis, Indiana; Milwaukee, Wisconsin; Des statute, as Federal Reserve Agent. Moines, Iowa; and Peoria, Illinois. 2. Additional offices of these Banks are located at 3. Senior Vice President. Windsor Locks, Connecticut; Utica at Oriskany, New 4. Executive Vice President. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

334 84th Annual Report, 1997 Conference of Chairmen On November 10, 1997, the conference elected Colleen Strand as its chair for 1998- The chairmen of the Federal Reserve Banks 99, and Richard Rasdall, First Vice President are organized into the Conference of Chairof the Federal Reserve Bank of Kansas City men, which meets to consider matters of as its vice chair. common interest and to consult with, and advise, the Board of Governors. Such meet- Directors ings, attended also by the deputy chairmen, The following list of directors of Federal were held in Washington on May 28 and 29, Reserve Banks and Branches shows for each and on December 3 and 4, 1997. director the class of directorship, the direc- The members of the Executive Committor's principal organizational affiliation, and tee of the Conference of Chairmen during the date the director's term expires. Each 1997 were Judith M. Runstad, chair; John F. Federal Reserve Bank has a nine-member McDonnell, vice chair; and Donald J. board: three Class A and three Class B direc- Kennedy, member. tors, who are elected by the stockholding On December 4, 1997, the conference member banks, and three Class C directors, elected its Executive Committee for 1998; who are appointed by the Board of Goverit named John F. McDonnell as chair, nors of the Federal Reserve System. G. Watts Humphrey as vice chair, and Jo Class A directors represent the member Marie Dancik as the third member. banks in each Federal Reserve District. Class B and Class C directors represent the Conference of Presidents 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 Presi- agriculture, 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 Thomas M. Hoenig, President of the Fed- directors may not be stockholders of any eral Reserve Bank of Kansas City, served as bank or bank holding company. chair of the conference in 1997, and Jerry L. For the election of Class A and Class B Jordan, President of the Federal Reserve directors, the Board of Governors classifies Bank of Cleveland, served as its vice chair. the member banks of each Federal Reserve Esther L. George, of the Federal Reserve District into three groups. Each group, which Bank of Kansas City, served as its secretary, comprises banks with similar capitalization, and Stephen J. Ong, of the Federal Reserve elects one Class A director and one Class B Bank of Cleveland, served as its assistant director. Annually, the Board of Governors secretary. designates one of the Class C directors as chair of the board and Federal Reserve Agent Conference of First of each District Bank, and it designates Vice Presidents another Class C director as deputy chair. Federal Reserve Branches have either five The Conference of First Vice Presidents of or seven directors, a majority of whom are the Federal Reserve Banks was organized in appointed by the parent Federal Reserve 1969 to meet periodically for the consider- Bank; the others are appointed by the Board ation of operations and other matters. of Governors. One of the directors appointed Sandra Pianalto, First Vice President of by the Board is designated annually as chair the Federal Reserve Bank of Cleveland, of the board of that Branch in a manner served as chair of the conference in 1997, prescribed by the parent Federal Reserve and Colleen K. Strand, First Vice President Bank. of the Federal Reserve Bank of Minneapolis, For the name of the chair and deputy chair served as its vice chair. Martha Maher, of the of the board of directors of each Reserve Federal Reserve Bank of Cleveland, served Bank and of the chair of each Branch, see as its secretary, and Niel D. Willardson, of the preceding table, "Officers of Federal Digitized for FRASER the Federal Reserve Bank of Minneapolis, Reserve Banks and Branches." http://fraser.stlouisfed.org/ served as its assistant secretary. Federal Reserve Bank of St. Louis

Directories and Meetings 335 Term expires Dec. 31 DISTRICT l—BOSTON Class A 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 G. Kenneth Perine President and Chief Executive Officer, National 1999 Bank of Middlebury, Middlebury, Vermont Class B 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 Stephen L. Brown Chairman and Chief Executive Officer, John 1999 Hancock Mutual Life Insurance Company, Boston, Massachusetts Class C Frederick J. Mancheski Chairman Emeritus, Echlin Inc., 1997 Branford, Connecticut William C. Brainard Professor of Economics, Yale University, 1998 New Haven, Connecticut William O. Taylor, Chairman and Chief Executive Officer, 1999 Globe Newspaper Company, Boston, Massachusetts DISTRICT 2—NEW YORK Class A J. Carter Bacot Chairman and Chief Executive Officer, 1997 The Bank of New York, New York, New York Robert G. Wilmers Chairman and Chief Executive Officer, 1998 Manufacturers and Traders Trust Company, Buffalo, New York George W. Hamlin IV President and Chief Executive Officer, 1999 The Canandaigua National Bank and Trust Company, Canandaigua, New York Class B Eugene R. McGrath Chairman, President, and Chief Executive 1997 Officer, Consolidated Edison Company of New York, Inc., New York, New York Vacancy 1998 Ann M. Fudge Executive Vice President, Kraft Foods, Inc., 1999 and President, Coffee and Cereals Division, Tarrytown, New York Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

336 84th Annual Report, 1997 Term expires Dec. 31 DISTRICT 2, NEW YORK—Continued Class C Thomas W. Jones Vice Chairman, Travelers Group, and Chairman 1997 and Chief Executive Officer, Smith Barney Asset Management, New York, New York Peter G. Peterson Chairman, The Blackstone Group, 1998 New York, New York John C. Whitehead Former Chairman, Goldman Sachs and Company, 1999 Inc., New York, New York BUFFALO BRANCH Appointed by the Federal Reserve Bank 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, Marine Midland Bank, 1998 Rochester, New York Louise Woerner Chairman and Chief Executive Officer, HCR, 1999 Rochester, New York Appointed by the Board of Governors Louis J. Thomas Director, District 4, United Steelworkers of 1997 America, Cheektowaga, New York Bal Dixit President and Chief Executive Officer, 1998 Newtex Industries, Inc., Victor, New York Patrick P. Lee Chairman and Chief Executive Officer, 1999 International Motion Control, Inc., Orchard Park, New York DISTRICT 3—PHILADELPHIA Class A 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 David B. Lee President and Chief Executive Officer, 1999 Omega Bank, N.A., State College, Pennsylvania Class B Robert D. Bums President and Chief Executive Officer, 1997 Burns Foods, Inc., Milford, Delaware Howard E. Cosgrove Chairman and Chief Executive Officer, 1998 Conectiv (Delmarva Power and Light Digitized for FRASER Company), Wilmington, Delaware http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 337 Term expires Dec. 31 DISTRICT 3, Class B—Continued J. Richard Jones President and Chief Executive Officer, 1999 Jackson-Cross Company, Philadelphia, Pennsylvania Class C Donald J. Kennedy Legislative Director, International Brotherhood 1997 of Electrical Workers, Local Union No. 269, Trenton, New Jersey Charisse R. Lillie Partner, Ballard, Spahr, Andrews & Ingersoll, 1998 Philadelphia, Pennsylvania Joan Carter President and Chief Operating Officer, 1999 UM Holdings Ltd., Haddonfield, New Jersey DISTRICT 4—CLEVELAND Class A 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 Tiney M. McComb Chairman and President, Heartland BancCorp, 1999 Gahanna, Ohio Class B 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 David L. Nichols Chairman and Chief Executive Officer, 1999 Mercantile Stores Inc., Fairfield, Ohio Class C G. Watts Humphrey, Jr. President, GWH Holdings, Inc., 1997 Pittsburgh, Pennsylvania David H. Hoag Chairman and Chief Executive Officer, 1998 The LTV Corporation, Cleveland, Ohio Robert Y. Farrington Former Executive Secretary-Treasurer, 1999 Ohio State Building and Construction Trades Council, Columbus, Ohio CINCINNATI BRANCH Appointed by the Federal Reserve Bank Jerry A. Grundhofer Chairman, President, and Chief Executive 1997 Officer, Star Bane Corporation, Cincinnati, Ohio Digitized Jfeoarn F RRA. SHEaRle President and Chief Executive Officer, Community 1998 http://fraser.stlouisfed.org/ Trust Bank N.A., Pikeville, Kentucky Federal Reserve Bank of St. Louis

338 84th Annual Report, 1997 Term expires Dec. 31 DISTRICT 4, CINCINNATI BRANCH Appointed by the Federal Reserve Bank—Continued Judith G. Clabes President and Chief Executive Officer, 1999 Scripps Howard Foundation, Cincinnati, Ohio Phillip R. Cox President, Cox Financial Corporation, 1999 Cincinnati, Ohio Appointed by the Board of Governors 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 George C. Juilfs President and Chief Executive Officer, 1999 SENCORP, Newport, Kentucky PITTSBURGH BRANCH Appointed by the Federal Reserve Bank Thomas J. O'Shane Chairman, President, and Chief Executive 1997 Officer, First Western Bancorp, Inc., New Castle, Pennsylvania Edward V. Randall, Jr Chairman, PNC Bank Foundation, 1998 Pittsburgh, Pennsylvania Vacancy 1999 Peter N. Stephans Chairman and Chief Executive Officer, Trigon 1999 Incorporated, McMurray, Pennsylvania Appointed by the Board of Governors 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 Charles E. Bunch Senior Vice President, Strategic Planning and 1999 Corporate Services, PPG Industries, Inc., Pittsburgh, Pennsylvania DISTRICT 5—RICHMOND Class A 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. J. Walter McDowell President—North Carolina Banking, Wachovia 1999 Bank, N.A., Winston-Salem, North Carolina Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 339 Term expires Dec. 31 DISTRICT 5, RICHMOND—Continued Class B 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 Wesley S. Williams, Jr Partner, Covington & Burling, Washington, D.C. 1999 Class C Claudine B. Malone President, Financial & Management 1997 Consulting, Inc., McLean, Virginia Robert L. Strickland Chairman of the Board, Lowe's Companies, Inc., 1998 Winston-Salem, North Carolina Jeremiah J. Sheehan Chairman and Chief Executive Officer, 1999 Reynolds Metals Company, Richmond, Virginia BALTIMORE BRANCH Appointed by the Federal Reserve Bank 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 Morton I. Rapoport, M.D. ...President and Chief Executive Officer, 1999 University of Maryland Medical System, Baltimore, Maryland Appointed by the Board of Governors 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 George L. Russell, Jr Partner, Piper & Marbury L.L.P., 1999 Baltimore, Maryland CHARLOTTE BRANCH Appointed by the Federal Reserve Bank Dorothy H. Aranda President, Dohara Associates, Inc., 1997 Hilton Head Island, South Carolina Cecil W. Sewell, Jr Chairman and Chief Executive Officer, Centura 1997 Banks, Inc., Rocky Mount, North Carolina Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

340 84th Annual Report, 1997 Term expires Dec. 31 DISTRICT 5, CHARLOTTE BRANCH Appointed by the Federal Reserve Bank—Continued William G. Stevens Chief Executive Officer, Greenwood Bank & Trust, 1998 Greenwood, South Carolina Laura M. Fleming President and Chief Executive Officer, 1999 Founders Federal Credit Union, Lancaster, South Carolina Appointed by the Board of Governors 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 Dennis D. Lowery Chief Executive Officer and Chairman, 1999 Continental Industrial Chemicals, Inc., Charlotte, North Carolina DISTRICT 6—ATLANTA Class A 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 Howard L. McMillan, Jr President and Chief Operating Officer, 1999 Deposit Guaranty National Bank, Jackson, Mississippi Class B Maria Camila Leiva Executive Vice President, Miami Free Zone 1997 Corporation, Miami, Florida Vacancy : 1998 Juanita P. Baranco Executive Vice President, Baranco Automotive 1999 Group, Lilburn, Georgia Class C 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 John F. Wieland President, John Wieland Homes, Inc., 1999 Atlanta, Georgia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 341 Term expires Dec. 31 DISTRICT 6, ATLANTA—Continued BIRMINGHAM BRANCH Appointed by the Federal Reserve Bank 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 W. Charles Mayer III Senior Executive Vice President, Alabama 1999 Banking Group Head, AmSouth Bank of Alabama, Birmingham, Alabama Appointed by the Board of Governors D. Bruce Carr International Representative, Laborers' 1997 International Union of North America, Gadsden, Alabama Patricia B. Compton President, Patco, Inc., Georgiana, Alabama 1998 V. Larkin Martin Managing Partner, Martin Farm, 1999 Courtland, Alabama JACKSONVILLE BRANCH Appointed by the Federal Reserve Bank Terry R. West President and Chief Executive Officer, Jax Navy 1997 Federal Credit Union, Jacksonville, Florida Arnold A. Heggestad Professor of Finance and Associate Vice 1997 President of Research and Technology, College of Business Administration, University of Florida, Gainesville, Florida Royce B. Walden Vice President, SouthTrust Securities, 1998 Orlando, Florida William G. Smith, Jr President, Capital City Bank Group, 1999 Tallahassee, Florida Appointed by the Board of Governors Patrick C. Kelly Chairman and Chief Executive Officer, 1997 PSS/World Medical, Inc., Jacksonville, Florida Judy Jones President, J. R. Jones and Associates, 1998 Tallahassee, Florida Marsha G. Rydberg Partner, Foley & Lardner, Tampa, Florida 1999 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

342 84th Annual Report, 1997 Term expires Dec. 31 DISTRICT 6, ATLANTA—Continued MIAMI BRANCH Appointed by the Federal Reserve Bank Carlos A. Migoya President, Dade/Monroe Counties, First Union 1997 National Bank of Florida, Miami, Florida E. Anthony Newton Former President and Chief Executive Officer, 1998 Island National Bank and Trust Company, West Palm Beach, Florida D. Keith Cobb Former Vice Chairman and Chief Executive 1999 Officer, Alamo Rent-A-Car, Inc., Ft. Lauderdale, Florida James W. Moore President, Gulf Utility Company, 1999 Fort Myers, Florida Appointed by the Board of Governors Kaaren Johnson-Street Vice President of Minority Business 1997 Development and Urban Initiatives, Enterprise Florida, Coral Gables, Florida R. Kirk Landon Chairman, American Bankers Insurance Group, 1998 Miami, Florida Mark T. Sodders President, Lakeview Farms, Inc., 1999 Pahokee, Florida NASHVILLE BRANCH Appointed by the Federal Reserve Bank Vacancy 1997 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 Leonard A. Walker, Jr Chairman and Chief Executive Officer, First 1999 National Bank and Trust Company, Athens, Tennessee Appointed by the Board of Governors 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 Paula Lovell President, Lovell Communications, Inc., 1999 Nashville, Tennessee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 343 Term expires Dec. 31 DISTRICT 6, ATLANTA—Continued NEW ORLEANS BRANCH Appointed by the Federal Reserve Bank 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 Ho well N. Gage Chairman and Chief Executive Officer, 1998 Merchants Bank, Vicksburg, Mississippi Howard C. Gaines Chairman, First National Bank of Commerce, 1999 New Orleans, Louisiana Appointed by the Board of Governors Jo Ann Slay don President, Slay don Consultants and Insight 1997 Productions and Advertising, Baton Rouge, Louisiana Lucimarian Roberts Community Advocate and Former President, 1998 Mississippi Coast Coliseum Commission, Biloxi, Mississippi Glenn Pumpelly President and Chief Executive Officer, 1999 Pumpelly Oil Inc., Westlake, Louisiana DISTRICT 7—CHICAGO Class A Stefan S. Anderson Chairman, President, and Chief Executive Officer, 1997 First Merchants Corporation, Muncie, Indiana Arnold C. Schultz Chairman and Chief Executive Officer, 1998 Grundy National Bank, Grundy Center, Iowa Verne G. Istock Chairman, President, and Chief Executive Officer, 1999 First Chicago NBD Corporation, Chicago, Illinois Class B 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 Migdalia Rivera Executive Director, Latino Institute, 1999 Chicago, Illinois Class C Lester H. McKeever, Jr Managing Partner, Washington, Pittman & 1997 McKeever, Chicago, Illinois Arthur C. Martinez Chairman and Chief Executive Officer, Sears 1998 Roebuck and Co., Hoffman Estates, Illinois Robert J. Darnall Chairman, President, and Chief Executive Officer, 1999 Inland Steel Industries, Inc., Chicago, Illinois Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

344 84th Annual Report, 1997 Term expires Dec. 31 DISTRICT 7, CHICAGO—Continued DETROIT BRANCH Appointed by the Federal Reserve Bank Charles R. Weeks Chairman, Citizens Banking Corporation, 1997 Flint, Michigan Richard M. Bell President and Chief Executive Officer, 1998 The First National Bank of Three Rivers, Three Rivers, Michigan Denise Hitch Lites Vice Chair, Little Caesars Enterprises, and President, 1999 Olympia Development, Inc., Detroit, Michigan Irma B. Elder President, Troy Motors, Troy, Michigan 1999 Appointed by the Board of Governors 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 Florine Mark President and Chief Executive Officer, 1999 The WW Group, Inc., Farmington Hills, Michigan DISTRICT 8—ST. LOUIS Class A Michael A. Alexander Chairman and President, The First National 1997 Bank of Mount Vernon, Mount Vernon, Illinois Douglas M. Lester President and Chief Executive Officer, 1998 Sea Change Corp., Bowling Green, Kentucky W.D. Glover Chairman and Chief Executive Officer, 1999 First National Bank of Eastern Arkansas, Forrest City, Arkansas Class B 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 Joseph E. Gliessner, Jr Executive Director, New Directions Housing 1999 Corp., Louisville, Kentucky Class C Susan S. Elliott President and Chief Executive Officer, Systems 1997 Service Enterprises, Inc., St. Louis, Missouri John F. McDonnell Former Chairman, McDonnell Douglas 1998 Corporation, St. Louis, Missouri Veo Peoples, Jr. Partner, Peoples & Hale, St. Louis, Missouri 1999 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 345 Term expires Dec. 31 DISTRICT 8, ST. LOUIS—Continued LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank 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 Mark Simmons Chairman, Simmons Foods, Inc., 1999 Siloam Springs, Arkansas Ross M. Whipple Chairman and Chief Executive Officer, 1999 Horizon Bancorp, Inc., Arkadelphia, Arkansas Appointed by the Board of Governors Robert D. Nabholz, Jr Chief Executive Officer, Nabholz Construction 1997 Corporation, Conway, Arkansas Betta M. Carney Chief Executive Officer and Chairman, World 1998 Wide Travel Service, Inc., Little Rock, Arkansas Janet M. Jones President, The Janet Jones Company, 1999 Little Rock, Arkansas LOUISVILLE BRANCH Appointed by the Federal Reserve Bank Thomas E. Spragens, Jr President, Farmers National Bank, 1997 Lebanon, Kentucky Orson Oliver President, Mid-America Bank of Louisville 1998 Louisville, Kentucky Larry E. Dunigan Chairman and Chief Executive Officer, Holiday 1999 Management Corp., Evansville, Indiana Ronald R. Cyrus Executive Secretary and Treasurer, Kentucky 1999 State AFL-CIO, Frankfort, Kentucky Appointed by the Board of Governors Debbie Scoppechio Chairman and Chief Executive Officer, 1997 Creative Alliance, Inc., Louisville, Kentucky Roger Reynolds President and Chief Executive Officer, The 1998 Reynolds Group, Inc., Louisville, Kentucky John A. Williams Chairman and Chief Executive Officer, 1999 Computer Services, Inc., Paducah, Kentucky Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

346 84th Annual Report, 1997 Term expires Dec. 31 DISTRICT 8, ST. LOUIS—Continued MEMPHIS BRANCH Appointed by the Federal Reserve Bank Lewis F. Mallory, Jr. Chairman, President, and Chief Executive Officer, 1997 NBC Capital Corporation, Starkville, Mississippi Anthony M. Rampley President and Chief Executive Officer, 1998 Arkansas Glass Container Corporation, Jonesboro, Arkansas Katie S. Winchester President and Chief Executive Officer, 1999 First Citizens National Bank, Dyersburg, Tennessee John C. Kelley, Jr. President, Memphis Banking Group, First 1999 Tennessee Bank, Memphis, Tennessee Appointed by the Board of Governors Carol G. Crawley ...President, Mid-South Minority Business 1997 Council, Memphis, Tennessee John V. Myers President, Better Business Bureau, 1998 Memphis, Tennessee Mike P. Sturdivant, Jr. Partner, Due West Plantation, Glendora, Mississippi* 1999 DISTRICT 9—MINNEAPOLIS Class A 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 Lynn M. Hoghaug President, Ramsey National Bank and Trust Co., 1999 Devils Lake, North Dakota Class B Kathryn L. Ogren Owner, Bitterroot Motors, Missoula, Montana 1997 Dennis W. Johnson President, TMI Systems Design Corporation, 1998 Dickinson, North Dakota Rob L. Wheeler Vice President, Wheeler Manufacturing Co., Inc., 1999 Lemmon, South Dakota Class C Jean D. Kinsey Professor, Consumption Economics, Director, 1997 Retail Food Industry Center, University of Minnesota, St. Paul, Minnesota James J. Howard Chairman, President, and Chief Executive 1998 Officer, Northern States Power Company, Minneapolis, Minnesota David A. Koch Chairman, Graco, Inc., Minneapolis, Minnesota 1999 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 341 Term expires Dec. 31 DISTRICT 9, MINNEAPOLIS—Continued HELENA BRANCH Appointed by the Federal Reserve Bank Ronald D. Scott President and Chief Executive Officer, 1997 The First State Bank of Malta, Malta, Montana Emil W. Erhardt Chairman and President, Citizens State Bank, 1998 Hamilton, Montana Sandra M. Stash, P.E Vice President, Environmental Services, ARCO 1998 Environmental Remediation L.L.C., Anaconda, Montana Appointed by the Board of Governors Matthew J. Quinn President, Carroll College, Helena, Montana 1997 William P. Underriner General Manager, Selover Buick, Inc., 1998 Billings, Montana DISTRICT 10—KANSAS CITY Class A 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 Dennis E. Barrett President, FirstBank Holding Company of 1999 Colorado, Lakewood, Colorado Class B Hans Helmerich President and Chief Executive Officer, 1997 Helmerich & Payne, Inc., Tulsa, Oklahoma Frank A. Potenziani M&T Trust, Albuquerque, New Mexico 1998 Charles W. Nichols Managing Partner, Davison & Sons Cattle 1999 Company, Arnett, Oklahoma Class C 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 LLP, 1998 Denver, Colorado Colleen D. Hernandez Executive Director, Kansas City Neighborhood 1999 Alliance, Kansas City, Missouri DENVER BRANCH Appointed by the Federal Reserve Bank Richard I. Ledbetter President and Chief Executive Officer, 1997 First National Bank of Farmington, Farmington, New Mexico Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

348 84th Annual Report, 1997 Term expires Dec. 31 DISTRICT 10, DENVER BRANCH Appointed by the Federal Reserve Bank—Continued 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 C. G. Mammel President and Chief Executive Officer, 1999 The Bank of Cherry Creek, N.A., Denver, Colorado Appointed by the Board of Governors Kathryn A. Paul Division President, Kaiser Permanente, 1997 Denver Colorado Peter I. Wold Partner, Wold Oil & Gas Company, 1998 Casper, Wyoming Teresa N. McBride President and Chief Executive Officer, McBride 1999 and Associates, Inc., Albuquerque, New Mexico OKLAHOMA CITY BRANCH Appointed by the Federal Reserve Bank 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 William H. Braum President, Braum Ice Cream Co., 1999 Oklahoma City, Oklahoma Appointed by the Board of Governors 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 Larry W. Brummett Chairman, President, and Chief Executive 1999 Officer, ONEOK, Inc., Tulsa, Oklahoma OMAHA BRANCH Appointed by the Federal Reserve Bank 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 Bruce R. Lauritzen President, First National Bank of Omaha, 1999 Digitized for FRASER Omaha, Nebraska http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 349 Term expires Dec. 31 DISTRICT 10, OMAHA BRANCH—Continued Appointed by the Board of Governors Arthur L. Shoener Management Consultant, Omaha, Nebraska 1997 Gladys Styles Johnston Chancellor, University of Nebraska at Kearney, 1998 Kearney, Nebraska Bob L. Gottsch Vice President, Gottsch Feeding Corporation, 1999 Hastings, Nebraska DISTRICT 11—DALLAS Class A 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 Gayle M. Earls President and Chief Executive Officer, 1999 Texas Independent Bank, Dallas, Texas Class B Robert C. McNair Chairman and Chief Executive Officer, Cogen 1997 Technologies Energy Group, Houston, Texas Julie S. England Vice President, Semiconductor Group, Texas 1998 Instruments, Incorporated, Dallas, Texas Dan Angel President, Stephen F. Austin State University, 1999 Nacogdoches, Texas Class C Cece Smith General Partner, Phillips-Smith Specialty Retail 1997 Group, Dallas, Texas Roger R. Hemminghaus Chairman and Chief Executive Officer, Ultramar 1998 Diamond Shamrock Corp., San Antonio, Texas James A. Martin Second General Vice President, International 1999 Association of Bridge, Structural & Ornamental Iron Workers, Austin, Texas EL PASO BRANCH Appointed by the Federal Reserve Bank 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 James D. Renfrow President and Chief Executive Officer, 1999 The Carlsbad National Bank, Carlsbad, New Mexico Melissa W. O'Rourke President, Charlotte's Inc., El Paso, Texas 1999 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

350 84th Annual Report, 1997 Term expires Dec. 31 DISTRICT 11, EL PASO BRANCH—Continued Appointed by the Board of Governors 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 Patricia Z. Holland-Branch ..President and Chief Executive Officer, PZH 1999 Contract Design, Inc., El Paso, Texas HOUSTON BRANCH Appointed by the Federal Reserve Bank Tieman H. Dippel, Jr Chairman and President, Brenham 1997 Bancshares, Inc., Brenham, Texas J. Michael Solar Principal Attorney, Solar & Fernandes, L.L.R, 1998 Houston, Texas Judith B. Craven President, United Way of the Texas Gulf Coast, 1999 Houston, Texas Ray B. Nesbitt President, Exxon Chemical Company, 1999 Houston, Texas Appointed by the Board of Governors 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, L.P., Houston, Texas Peggy Pearce Caskey Chief Executive Officer, Laboratories for 1999 Genetic Services, Inc., Houston, Texas SAN ANTONIO BRANCH Appointed by the Federal Reserve Bank 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 Juliet V. Garcia President, The University of Texas at Brownsville, 1999 Brownsville, Texas Douglas G. Macdonald President, South Texas National Bank, 1999 Laredo, Texas Appointed by the Board of Governors 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 Patty P. Mueller Vice President/Finance, Mueller Engineering 1999 Corp., Corpus Christi, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 351 Term expires Dec. 31 DISTRICT 12—SAN FRANCISCO Class A Gerry B. Cameron Chairman, U.S. Bancorp, Portland, Oregon 1997 Warren K.K. Luke Vice Chairman, President, and Chief Executive 1998 Officer, Hawaii National Bank, Honolulu, Hawaii E. Lynn Caswell Chairman and Chief Executive Officer, 1999 Pacific Community Banking Group, Laguna Hills, California Class B Krestine Corbin President and Chief Executive Officer, 1997 Sierra Machinery, Inc., Sparks, Nevada Stanley T. Skinner Chairman, Pacific Gas and Electric Co., 1998 San Francisco, California Robert S. Attiyeh Senior Vice President and Chief Financial 1999 Officer, Amgen, Inc., Thousand Oaks, California Class C Judith M. Runstad Partner, Foster Pepper & Shefelman, 1997 Seattle, Washington Cynthia A. Parker Executive Director, Anchorage Neighborhood 1998 Housing Services, Inc., Anchorage, Alaska Gary G. Michael Chairman and Chief Executive Officer 1999 Albertson's, Inc., Boise, Idaho Los ANGELES BRANCH Appointed by the Federal Reserve Bank 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 (MALDEF), Los Angeles, California Stephen G. Carpenter Chairman and Chief Executive Officer, 1998 California United Bank, Encino, California John H. Gleason Senior Vice President, Del Webb Corporation, 1999 Phoenix, Arizona Appointed by the Board of Governors David L. Moore President, Western Growers Association, 1997 Irvine, California Anne L. Evans Chairman, Evans Hotels, San Diego, California 1998 Lori R. Gay President, Los Angeles Neighborhood Housing, 1999 Los Angeles, California Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

352 84th Annual Report, 1997 Term expires Dec. 31 DISTRICT 12, SAN FRANCISCO—Continued PORTLAND BRANCH Appointed by the Federal Reserve Bank Thomas C. Young President, Chairman, and Chief Executive 1997 Officer, Northwest National Bank, Vancouver, Washington John D. Eskildsen Retired President and Chief Executive Officer, 1998 U.S. Bank, Portland, Oregon Phyllis A. Bell President, Oregon Coast Aquarium, 1999 Newport, Oregon Martin Brantley , President and General Manager, KPTV-12, Oregon 1999 Television, Inc., Portland, Oregon Appointed by the Board of Governors Patrick Borunda Executive Director, Oregon Native American 1997 Business Network, Portland, Oregon Carol A. Whipple Proprietor, Rocking C Ranch, Elkton, Oregon 1998 Nancy Wilgenbusch President, Marylhurst College, Marylhurst, Oregon 1999 SALT LAKE CITY BRANCH Appointed by the Federal Reserve Bank 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 J. Pat McMurray President, First Security Bank, N.A., Boise, Idaho 1999 Maria Garciaz Executive Director, Salt Lake Neighborhood 1999 Housing Services, Salt Lake City, Utah Appointed by the Board of Governors Gerald R. Sherratt Retired 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 Nancy S. Mortensen Vice President, Marketing Services, ZCMI, 1999 Salt Lake City, Utah SEATTLE BRANCH Appointed by the Federal Reserve Bank Betsy Lawer Vice Chair and Chief Operating Officer, First 1997 National Bank of Anchorage, Anchorage, Alaska Constance L. Proctor Partner, Alston, Courtnage, Proctor, & 1998 Bassetti, LLP, Seattle, Washington Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Directories and Meetings 353 Term expires Dec. 31 DISTRICT 12, SEATTLE BRANCH Appointed by the Federal Reserve Bank—Continued Tomio Moriguchi Chairman and Chief Executive Officer, 1999 Uwajimaya, Inc., Seattle, Washington John V. Rindlaub Group Executive Vice President, Bank of 1999 America, Northwest Group, Seattle, Washington Appointed by the Board of Governors Richard R. Sonstelie Chairman and Chief Executive Officer, Puget 1997 Sound Energy, Inc., Bellevue, Washington Helen M. Rockey President and Chief Executive Officer, 1998 Brooks Sports, Inc., Bothell, Washington Boyd E. Givan Senior Vice President and Chief Financial 1999 Officer, The Boeing Company, Seattle, 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

356 84th Annual Report, 1997 The Federal Reserve System 9 1 • 2 BOSTON MINNEAPOLIS • 7 12 n • NEW YORK CHICAGO • CLEVELAND PSLADELPHIA • SAN FRANCISCO 10 4 £ KANSAS CITY • > RlCHMONE ST. LOUIS 8 5 6 • 11 • ATLANTA DALLAS ALASKA HAWAII LEGEND Both pages Facing page • Federal Reserve Bank city • Federal Reserve Branch city E3 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 1997. 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 357 1-A 2-B 3-C 4-D 5-E Pittsburgh Balti NY I CT Buffalo Bi •Cincinnati • Charlotte ^ NY BOSTON NEW YORK PHILADELPHIA CLEVELAND RICHMOND 6-F 7-G 8-H •Nashville Birmingham MI Detroit • Little Rock ATLANTA CHICAGO ST. LOUIS 9-1 • Helena MINNEAPOLIS 10-J 12-L Omaha* Denver Oklahoma City OK KANSAS CITY 11-K Salt Lake City El Paso Houston •Los Angeles San Antonio v 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

361 Index Aggregate Loan Quality Analysis Report, Bank supervision and regulation 221 Derivatives activities, 228 Agriculture, Department of, 258 Enforcement actions, 218, 239 Appraisal regulation, 226 International activities, 222-24 Architect of the Capitol, 213 National Information Center, 229 Assets and liabilities Staff training, 230-32 Banks, insured commercial, by class, Banking offices, number of, 306 299 Banking organizations, U.S., overseas Board of Governors, 268 investments, 238 Federal Reserve Banks, 278-81 Basle Committee on Banking Regulation ATM services, 187, 189 and Supervisory Practices, 224 Automated clearinghouse fees and services, Basle Committee on Banking Supervision, 228 89, 252 Board of Governors (See also Federal Automated teller machines (ATMs), 189 Reserve System) Automobile leasing, 86, 178, 193 Bank mergers, consolidations, and Automobile loans, 47 acquisitions, list, 307-23 Availability of Funds and Collection of Decisions, public notice, 236 Checks, Reg. CC, 88, 195 Expenses, 269 Financial statements, 267-73 Balance sheet, Board of Governors, 268 Interest rates, procedure for setting, 91 Bane One Corporation, acquisition, 196 Interpretations, 244 Bank holding companies Litigation, 205-9 Applications, 195-97, 234-37 Members and officers, 326-28 Banks affiliated with, number of, 306 Record of policy actions, 81-91 Inspections by Federal Reserve Banks, Regulatory simplification, 241-46 217 Testimony and legislative Number of, 217 recommendations, 203 Regulation Y, amendment, 87 Brokers and dealers, loans to, 241-43 Risk-based capital guidelines, 85, Business spending, investment, and finance, 224-27 10-12, 39, 48, 62-64 Stock repurchases, 238 Buy Direct program, 256 Supervision and regulation of, 217-24 Bank Holding Companies and Change in CAESAR, 199 Bank Control, Reg. Y, 85, 87, 244 Call Reports, revisions, 233 Bank Holding Company Act of 1956, 234 Capital accounts, Federal Reserve Banks, Bank Holding Company Performance 83, 277, 278-81, 294 Reports (BHCPRs), 221 Capital flows, 67 Bank Merger Act Cash flows, Board of Governors, statement, Applications and regulation, 234 270 Bank mergers, consolidations, and Cash services, 253 acquisitions, list, 307-23 Cash Track, Department of the Treasury, Bank of Credit and Commerce 257 International, 218 Change in Bank Control Act, 235 Bank Protection Act of 1968, 245 Check collection, 85, 250, 295 Bank Secrecy Act, 239 Civil money penalties, 218 Bank Secrecy Act Advisory Group, 239 Commemorative coins, 212 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

362 84th Annual Report, 1997 Commercial banks, number of, 306 Depository institutions—Continued Committee of Sponsoring Organizations Payments system risk, 89 (COSO), 259 Reserves and related items, 300-305 Community Affairs programs, 186-88 Depository Institutions Disaster Relief Act, Community development lending, 186-88 211 Community Reinvestment Act, 190, 191, Deposits 202 Federal Reserve Banks, 277-81, Compensation, 15 300-305 Complaint Analysis Evaluation System and Insured commercial banks, 299 Reports (CAESAR), 199 Derivatives, 228 Compliance examinations, state member Direct deposit, 189 banks and foreign banking Directors, Federal Reserve Banks and organizations, 189-91 Branches, list, 334^9 Compliance with Disaster Relief Act, 211 Consumer Leasing Act, 193 Discount rates, 89-91 Electronic Fund Transfer Act, 193 Dividends, Federal Reserve Banks, 288-96 Equal Credit Opportunity Act, 192 Domestic policy directive, FOMC, 95 Expedited Funds Availability Act, 195 Truth in Lending Act, 194 Economic and financial developments, Unfair and Deceptive Acts or Practices, 7-24 195 Economic development in other countries, Construction, nonresidential, 10 25-31 Consumer Economy "Leasing, 178 Business, 10-12, 39-41, 62-64 Policies program, 200 Foreign developments, 41, 67 Price index, 16-18, 44-46, 57, 71, 180 Government spending, 12-14, 40-42, Regulations, agency reports on 64-66 compliance, 192-95 Household, 7-10, 38, 59, 61 Spending, 38, 59, 61 Labor markets, 14, 42-44, 68-70 Consumer Advisory Council Outlook, 33-37, 53-58 Meetings, 200-203 Overview and performance of, 3-5, Members, list, 330 37-51, 59-78 Consumer and community affairs, 177-204 Prices, 16-18,44-46,71 Consumer Leasing Act, 178, 193 Projections, 35-37, 56-58 Consumer Leasing, Reg. M, 86, 178, 183, Edge Act corporations and agreement 193 corporations, 222, 228 Credit Electronic Fund Transfers, Reg. E Business, 48 Amendments, 83, 181 Consumer, 46-48, 61 Compliance with, 193 Creditor self-tests, 81 Electronic Fund Transfer Act, 181, 188 Depository institutions, 18, 49, 72 Electronic payment services by Federal Currency and coin, 254 Reserve Banks, 249 Currency and Foreign Transactions Employment, 14, 42-44, 68-70 ' Reporting Act of 1970 (Bank Secrecy Enforcement actions, 218 Act), 239 Equal Credit Opportunity, Reg. B, 81, 180, 192 Debit cards, 189 Equity prices, 22-24, 52, 76 Demand deposit accounts, 87 Examination Laptop Visual Information Depository institutions System (ELVIS), 230 Federal Reserve accounts, 85 Examinations, inspections, and audits Home mortgage disclosure, 180, 183 Bank holding companies, 217 Lending patterns, 184 Federal Reserve Banks, 259 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 363 Examinations, inspections, and Federal Reserve Banks—Continued audits—Continued Branches Foreign banking organizations, 189, 217 Directors list, 334-49 Risk management, 227 Premises, 261, 294 Specialized Vice presidents in charge, 332 Fiduciary activities, 219 Capital accounts, 277, 278-81 Government securities dealers and Capital stock, 83 brokers, 219 Condition statement, 276, 278-81 Information technology, 219 Conferences of chairmen, presidents, and Municipal securities dealers and first vice presidents, 334 clearing agencies, 220 Deposits, 277, 278-81 Securities subsidiaries of bank holding Directors of Federal Reserve Banks and companies, 220 Branches, list, 334-49 Transfer agents, 221 State member banks, 189, 217 District Banks Exchange rates, 30, 52, 77 Atlanta, 188 Expedited Funds Availability Act {See also Boston, 186, 187 Regulations: CC), 195, 212 Chicago, 186, 187 Cleveland, 186 Fair Credit Reporting Act, actions Dallas, 187 under, 182 Kansas City, 187 Fair Housing Act, 180 Minneapolis, 186, 187 Fair lending, 185 New York, 186, 187 FBO Desktop, 230 Richmond, 187 Federal Richmond, Culpeper facility, sale of, Debt, 48, 64 213 Spending and receipts, 12, 13, 40, 64 San Francisco, 187 Tax payments, 257 St. Louis, 186, 187 Federal Advisory Council, members, list, Dividends paid, 288-96 329 Earnings, 259, 286-89, 290, 292 Federal agency securities Examinations and audits, 259 Federal Reserve Banks, 276, 278-81, 284, 300-305 Fees for services, 89, 249-54 Federal Reserve open market Income and expenses, 259 transactions, 282 Interest rates, 296 Federal Deposit Insurance Corporation, International activities, 222 190, 192-95 Liabilities and capital accounts, 277 Federal Financial Institutions Examination Loans and securities, 276, 278-81, 284, Council, 183, 190, 231, 232-34 286-89, 300-305 Federal funds checks, 89 Officers and employees, number and Federal Housing Administration, 184 salaries, 285-87 Federal Open Market Committee Officers, list, 332 Meetings, minutes of, 98, 114, 123, 132, Operations, volume, 295 142, 151, 159, 168 Payments to the U.S. Treasury, 291, 293 Members and officers, list, 328 Policy instruments, 93-98 Priced services, 249-54, 262-65 Federal Reserve Automation Services, 258 Salaries of officers and employees, Federal Reserve Banks 285-87 Assessments by Board of Governors, Stock in, 245 288-94 Surveillance and monitoring, 221 Bank premises, 213, 261, 276, 278-81, Treasury appropriation, 211 294 Federal Reserve notes, 278-81, 291 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

364 84th Annual Report, 1997 Federal Reserve System (See also Board of First Union Corporation, acquisition by, Governors) 196 Bank holding company applications, Fiscal agency services by Federal Reserve review of, 195-97 Banks, 249, 255 Banking structure decisions, public Float, 254 notice, 236 Food coupon services, 258, 295 Loans to executive officers, 240 Foreign Maps, 356 Branches of member banks, 222 Membership, 84, 85, 240 Currencies, Federal Reserve income on, Priced services, 262-65 286 Securities and loan holdings, 260 Currency Single accounts for member banks, 85 Directives and operations, 31, 95, 97, Staff, technical assistance to member 98, 101, 103, 104 banks, 224 Warehouse agreement, 104 Staff training, 190, 230 Economies during 1997, 26-28, 41, 67 Exchange developments and operations, Supervision and regulation, 30-32 responsibilities, 216-22 Exchange rates, 52, 77 Supervisory policy, 224-29 Investment, regulation of, 223 Federal Trade Commission, 192, 193, 194 Margin stocks, 243 FEDNET, 259 Fedwire, funds transfer services, 85, 251, Garn-St Germain Depository 256 Institutions Act of 1982, 82 Fees, Federal Reserve services to Gold certificate accounts of Reserve Banks depository institutions and gold stock, 278-81, 300-305 Automated clearinghouse services, 252 Government spending, 12-14, 64-66 Book-entry securities transfer services, 252 Home equity loans, 46 Cash services, 253 Home Mortgage Disclosure Act, 81, 183 Check collection, 247, 250 Home Ownership Equity Protection Act, Currency and coin, 254 181 Developments, 249 Homes, purchases and sales, 8, 39, 60 Electronic payments, 249 Household finance and spending, 7, 8, 38, Fedwire, funds transfer services, 85, 251, 59 256 Housing and Urban Development, U.S. Fiscal agency services, 249, 255 Department of, 179, 180, 185, 199 Float, 254 Income from priced services, 286 Income and expenses Net settlement services, 251 Board of Governors, 269 Noncash collection services, 253 Federal Reserve Banks, 259, 286, 288, Structure, 89 290, 292 Fiduciary activities, supervision of, 219 Personal, 7, 38, 59 50 States Commemorative Coin Program Independence Bank of Encino, California, Act, 212 218 Finance, household, 8 Inflation-indexed securities, 13, 65 Financial Information requests, plans to speed Disclosure, state member banks, 239 process, 88 Markets, 34, 54-56 Information technology, 219, 229, 258 Statements, Board of Governors, 267-73 Insured commercial banks {See also Financial Action Task Force, 239 Commercial banks), assets, liabilities, Financial Management Service, U.S. and number, by class of bank, 299 Department of the Treasury, 258 Interest rates, 22, 51-53, 76-78, 224 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 365 Interest rates charged by Federal Reserve Litigation—Continued Banks, 89-91, 296 Bank Holding Company Act—Continued International Accounting Standards Money Station, Inc., 206 Committee (IASC), 228 New Mexico Alliance, 205 International Banking Act, 236 Southeast Raleigh Community International banking activities and Development Corporation, 205 operations Financial Institutions Supervisory Act Developments, 25-31, 41, 66-68 Banking Consultants of America, 206 Edge Act corporations and agreement Clifford, 207 corporations, 222 Interamericas Investments, Ltd., 207 Foreign office operations of U.S. banking Leuthe, 206 organizations, 222 Long, 207 Regulation K, 84, 246 Pharaon, 207 Transactions, 28-30 Snyder, 207 U.S. activities of foreign banks, 223 Towe, 206 International Organisation of Securities Vickery, 206 Commissions (IOSCO), Technical Other actions Committee, 228 Allen, 207 Interpretations of regulations, 182 American Bankers Insurance Group, Interstate banking and branching, 82, 85, Inc., 208 211,248 Artis, 208 Investment Bettersworth, 208 Business, 10, 39 Branch, 208 Commercial banks, 299 Clarkson, 208 Federal Reserve Banks, 276, 278-81 Goldman, 207 Inventory, 10, 40, 63 Jones, 208 Nonresidential, 40, 63 Kerr, 207 Residential, 8, 39, 60 Kuntz, 208 Maunsell, 208 Justice, U.S. Department of, 185 Patrick, 207 Research Triangle Institute, 208 Keys to Vehicle Leasing—A Consumer Wilkins, 208 Guide, 178 Loans Automobile, 47 Labor market, 14, 42-44, 68-70 Brokers and dealers, 242 Lease advertising, 86, 178 By banks, 19 Leasing, automobile, disclosure Federal Reserve Banks requirements, 86, 178, 183, 193 Holdings and income, 276, 278-81 Legislation enacted, 211-13 Interest rates for depository Legislative recommendations, Board of institutions, 296 Governors, 203 Loans, 300-305 Lending practices, 185 To depository institutions, 276, Leverage capital ratios, proposed rule, 225 278-81, 286 Litigation involving the Board of Variable-rate, 88 Governors Volume of operations, 295 Bank Holding Company Act Home equity, 46 Eliopulos, 205 Home purchase and home improvement, First Baird Bancshares, Inc., 205 183 Greeff, 205 Insured commercial banks, loans by, 299 Inner City Press/Community on the To executive officers, 86 Move, 205, 206 Lee, 206 Maps, Federal Reserve System, 356 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

366 84th Annual Report, 1997 Margin requirements, 298 Pharaon, Ghaith R., 207, 218 Margin stocks, credit for purchasing, 298 Policy actions and statements Marine Midland Bank, merger, 196 Board of Governors, 81-92 Market risk, 224 Federal Open Market Committee Marketwise Report, "Community-Based Domestic open market operations, Development," 187 authorization, 93, 100 Medicaid expenditures, 12 Domestic policy directive, 95 Member banks Foreign currency directive, 97, 103 Assets and liabilities, 299 Foreign currency operations Banking offices, number of, 306 Authorization, 95-97, 101 Membership in the Federal Reserve Procedural instructions, 98, 104 System, 83, 240 Fee structures, volume-based, 89 Reserve requirements, 297 Payments system risk, 89 Monetary aggregates, 19-22, 37, 49-51, Priced services, Federal Reserve, 262-65, 58, 72-75 286 Monetary policy, reports to the Congress Prices, 16-18, 44-46, 71-72 February 26, 1997, 33-53 Principles and Practices for Community July 22, 1997, 53-78 Development Lending, 187 Money laundering, protective measures PRISM, 222 against, 239 Private mortgage insurance, 185 Money market mutual funds, 243 Mortgage Profit and loss, Federal Reserve Banks, 288 Lending practices, 182 Profit, corporations, 10-12, 40, 63 Loans, 183, 184 Prohibition against Payment of Interest on Transactions, disclosures about, 179 Demand Deposits, Reg. Q, 87 Publications National Council for Smaller Keys to Vehicle Leasing—A Consumer Enterprises, 186 Guide, 178 National Examination Data (NED), 229 Marketwise Report, "Community-Based National Federation of Independent Development," 187 Business, 48, 64 Principles and Practices for Community National Information Center (NIC), 229 Development Lending, 187 NationsBank Corporation, acquisition, 197 Net settlement services, 251 Real estate appraisal regulation, 226 Noncash collection services, 253 Real Estate Settlement Procedures Act, Nonmember banks, 299, 306 179, 200 Receipts and outlays, federal, 12, 40, 64 Office of Thrift Supervision, 192, 193, Regulation of the U.S. banking structure 194 Bank Holding Company Act, 234 Officers of Federal Reserve Banks and Banking and nonbanking proposals, 237 Branches, 332 Bank Merger Act, 234 Open market operations, domestic, Change in Bank Control Act, 235 authorization for, 93 Federal Reserve decisions, public notice, Over-the-counter margin stocks, 243 236 Payments system risk, 89 Regulations Performance Report Information and B, Equal Credit Opportunity, 81, 180, Surveillance Monitoring, 222 192 Personal information, risk of easy access, C, Home Mortgage Disclosure, 81, 180 182 D, Reserve Requirements of Depository Personal Responsibility and Work Institutions, 82, 83, 246, 297 Opportunity Reconciliation Act of E, Electronic Fund Transfers, 83, 181, 1996, 181 193 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 367 Regulations—Continued Risk-based capital standards G, Securities Credit by Persons other Market risk measurement and than Banks, Brokers, or Dealers, 84, supervisory policy, 224 241-44, 298 Risk management guidance, 85, 224, 227 H, Membership of State Banking Technical modifications, proposed rule, Organizations in the Federal 225 Reserve System, 84, 85, 245 Risk-focused supervision, 226 I, Issue and Cancellation of Capital Rules Regarding Availability of Stock of Federal Reserve Banks, 83, Information, 88, 150, 168 245 Rules Regarding Delegation of Authority, 83, 88 J, Collection of Checks and Other Items by Federal Reserve Banks and Safety and Soundness Guidelines Funds Transfers through Fedwire, Concerning the Year 2000 Business 85 Risk, 232 K, International Banking Operations, 84, Salaries, Federal Reserve Bank staff, 285 246 Savings bonds, 256 M, Consumer Leasing, 86, 178, 183, Section 20 subsidiaries, regulation, 87, 220, 193, 200 237 O, Loans to Executive Officers, Securities (See also Treasury securities) Directors, and Principal Book-entry transfer services, 252 Shareholders of Member Banks, 86 Credit, 84, 241, 244, 298 P, Bank Protection Act, 245 Depository institution sales practices, 84 Q, Prohibition against Payment of Equity, 225, 246 Interest on Demand Deposits, 87 Foreign, 243 T, Credit by Brokers and Dealers, 84, Government, supervision of, 219 241^4, 298 Inflation-indexed, 13, 65 U, Credit by Banks for the Purpose of Municipal, regulation of, 220 Purchasing or Carrying Margin Nonequity, 242 Stocks, 84, 241-14, 298 Regulations, 239, 241-44 X, Borrowers of Securities Credit, 84, Subsidiaries of bank holding companies, 241-44, 298 220 Y, Bank Holding Companies and Change Treasury, marketable, 256 in Bank Control, 85, 87, 244 Underwriting, section 20 subsidiaries, 87 Z, Truth in Lending, 88, 181, 182, 194 U.S. government, holdings by Federal AA, Unfair and Deceptive Acts or Reserve, 260 Practices, 195 US. Treasury, 282, 284 BB, Community Reinvestment Act, 191 Securities and Exchange Commission, 193 CC, Availability of Funds and Collection Securities Exchange Act, 241 of Checks (See also Expedited Self-tests by creditors, 81, 180 Funds Availability Act), 88, 195 Sell Direct program, 256 Reinvest Direct program, 256 Servicing assets, proposed rule, 225 Reserve requirements of depository Small Business Administration, 186 institutions, 22, 82, 83, 246, 297 Special drawing rights certificates, 276, Reserves of depository institutions, 278-81, 300-305 300-305 State and local government spending, 13, Residential investment, 8, 39, 60 66 Revenue, Board of Governors, 269 State-chartered savings banks, number of, Riegle-Neal Amendments Act, 211 306 Riegle-Neal Interstate Banking and State member banks Branching Efficiency Act of 1994, 85, Applications, 238 211,248 Banking offices, number of, 306 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

368 84th Annual Report, 1997 State member banks—Continued Truth in Lending Act—Continued Compliance examinations, 189-92 Variable-rate loans, 88, 181 Consumer complaints, 197 Examinations by Federal Reserve Banks, Unemployment rate, 15 217, 219 Unfair and Deceptive Acts or Practices, Financial disclosure, 239 Reg. A A, 195 Loans to executive officers, 240 Unregulated banking practices, consumer Number, 217, 299, 306 complaints, 198 Recordkeeping, 84, 85 Regulation H, proposed revision, 245 Variable-rate loans, 88, 181 Regulation P, proposed revision, 245 Video, Year 2000 Executive Awareness, Risk-based capital guidelines, 85, 224 233 Secured loans to executive officers, 86 Supervision and regulation of, 217-24 Wages, 15 Stored-value products, 181 Web site, leasing information, 178 Supervision and regulation, Federal Reserve System, responsibilities, Year 2000 activities, 232, 248 216-22 Year 2000 Executive Awareness, video, 233 Sweep accounts, 22 Year 2000 Project Management Awareness, 232 Technical modifications, proposed rule, 225 Testimony and legislative recommendations, Board of Governors, 203 Thrift Institutions Advisory Council, members, list, 331 Training, Federal Reserve System staff, 190, 230-32 Transfer agents, supervision, 221 Transfers of funds (See also Fees and Regulations: E), 288, 295 Treadway Commission, 259 Treasury Direct, 256, 258 Treasury Offset Program, 257 Treasury securities Bank holdings, by class of bank, 299, 300-305 Federal Reserve Banks Holdings, 276, 278-81, 284, 286 Income, 286 Open market transactions, 282 Repurchase agreements, 276, 278-81, 282, 284, 300-305 Treasury, U.S. Department of the, 211, 213, 257, 258, 291, 293 Truth in Lending Act And RESPA, 179, 200 Compliance with, 194 Exeptions to, 212 Home-secured installment loans, 182 Streamlining of, 200 FRB1/1-12500-0598C Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis