Annual Report of the Federal Reserve Board, 1999

€/lnnual ^Report \ L> 1999 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.federalreserve.gov/ 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 2000 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-sixth annual report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 1999. Sincerely, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Contents Monetary Policy and Economic Developments 3 MONETARY POLICY AND THE ECONOMY IN 1999 7 ECONOMIC AND FINANCIAL DEVELOPMENTS IN 1999 7 The Household Sector 9 The Business Sector 12 The Government Sector 14 The External Sector 15 The Labor Market 17 Prices 18 U.S. Financial Markets 21 Debt and the Monetary Aggregates 23 International Developments 28 Foreign Exchange Operations 31 MONETARY POLICY REPORTS TO THE CONGRESS 31 Report on February 23, 1999 66 Report on July 22, 1999 Federal Reserve Operations 95 CONSUMER AND COMMUNITY AFFAIRS 95 Community Development 99 Consumer Advisory Council 100 Fair Lending 101 Risk-Focused Compliance Examinations 101 The Gramm-Leach-Bliley Act 102 Consumer Policies 103 Civil Money Penalty for Flood Insurance Violations 103 Regulatory Matters 104 Testimony and Legislative Recommendations 105 Economic Effects of the Electronic Fund Transfer Act 105 Compliance Activities 106 Agency Reports on Compliance with Consumer Regulations 110 Community Reinvestment Act Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

CONSUMER AND COMMUNITY AFFAIRS—Continued 110 Applications 111 HMDA Data and Mortgage Lending Patterns 113 Consumer Complaints 117 BANKING SUPERVISION AND REGULATION 120 Scope of Responsibilities for Supervision and Regulation 121 Supervision for Safety and Soundness 128 Supervisory Policy 136 Supervisory Information Technology 138 Staff Training 140 Regulation of the U.S. Banking Structure 145 Enforcement of Other Laws and Regulations 147 Federal Reserve Membership 149 FEDERAL RESERVE BANKS 149 Century Date Change 152 Developments in Federal Reserve Priced Services 157 Developments in Currency and Coin 158 Developments in Fiscal Agency and Government Depository Services 163 Information Technology 164 Financial Examinations of Federal Reserve Banks 164 Income and Expenses 165 Holdings of Securities and Loans 166 Volume of Operations 166 Federal Reserve Bank Premises 167 Pro Forma Financial Statements for Federal Reserve Priced Services 171 THE BOARD OF GOVERNORS AND THE GOVERNMENT PERFORMANCE AND RESULTS ACT 171 Strategic and Performance Plans 171 Goals and Objectives 173 Interagency Coordination 175 FEDERAL LEGISLATIVE DEVELOPMENTS 175 Gramm-Leach-Bliley Act 180 Federal Reserve Retirement Portability Act 180 Consolidated Appropriation for Fiscal Year 2000 180 Act to Amend the Federal Reserve Act Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

181 REGULATORY SIMPLIFICATION 181 Comprehensive Revisions Proposed 181 Other Regulatory Activity Records 185 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS 185 Regulation A (Extensions of Credit by Federal Reserve Banks) 185 Regulation D (Reserve Requirements of Depository Institutions) 186 Regulation H (Membership of State Banking Institutions in the Federal Reserve System) 186 Regulation H, Regulation K (International Banking Operations), and Regulation Y (Bank Holding Companies and Change in Bank Control) 187 Regulation H and Regulation Y 187 Regulation K 188 Regulation L (Management Official Interlocks) 188 Regulation CC (Availability of Funds and Collection of Checks) 189 Regulation DD (Truth in Savings) 190 Miscellaneous Interpretations 190 Policy Statements and Other Actions 192 1999 Discount Rates 195 MINUTES OF FEDERAL OPEN MARKET COMMITTEE MEETINGS 195 Authorization for Domestic Open Market Operations 196 Domestic Policy Directive 197 Authorization for Foreign Currency Operations 199 Foreign Currency Directive 199 Procedural Instructions with Respect to Foreign Currency Operations 200 Meeting Held on February 2-3, 1999 216 Meeting Held on March 30, 1999 224 Meeting Held on May 18, 1999 232 Meeting Held on June 29-30, 1999 244 Meeting Held on August 24, 1999 256 Meeting Held on October 5, 1999 264 Meeting Held on November 16, 1999 273 Meeting Held on December 21, 1999 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

283 LITIGATION 283 Judicial Review of Board Orders under the Bank Holding Company Act 283 Litigation under the Financial Institutions Supervisory Act 284 Other Actions Federal Reserve System Organization 289 BOARD OF GOVERNORS 291 FEDERAL OPEN MARKET COMMITTEE 292 ADVISORY COUNCILS TO THE BOARD OF GOVERNORS 292 Federal Advisory Council 293 Consumer Advisory Council 294 Thrift Institutions Advisory Council 295 FEDERAL RESERVE BANKS 295 Officers of the Banks and Branches 297 Conference of Chairmen 297 Conference of Presidents 297 Conference of First Vice Presidents 297 Directors of the Banks and Branches 318 HISTORICAL RECORDS: MEMBERSHIP OF THE BOARD OF GOVERNORS, 1913-99 Financial Statements and Statistical Tables 323 BOARD OF GOVERNORS FINANCIAL STATEMENTS 333 FEDERAL RESERVE BANKS COMBINED FINANCIAL STATEMENTS 345 STATISTICAL TABLES 346 1. Statement of Condition of the Federal Reserve Banks, by Bank, December 31, 1999 and 1998 350 2. Federal Reserve Open Market Transactions, 1999 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

STATISTICAL TABLES—Continued 352 3. Federal Reserve Bank Holdings of US. Treasury and Federal Agency Securities, December 31, 1997-99 353 4. Number and Annual Salaries of Officers and Employees of the Federal Reserve Banks, December 31, 1999 354 5. Income and Expenses of the Federal Reserve Banks, by Bank, 1999 358 6. Income and Expenses of the Federal Reserve Banks, 1914-99 362 7. Acquisition Costs and Net Book Value of Premises of the Federal Reserve Banks and Branches, December 31, 1999 363 8. Operations in Principal Departments of the Federal Reserve Banks, 1996-99 364 9. Federal Reserve Bank Interest Rates on Loans to Depository Institutions, December 31, 1999 365 10. Reserve Requirements of Depository Institutions, December 31, 1999 366 11. Initial Margin Requirements under Regulations T, U, and X 367 12. Principal Assets and Liabilities and Number of Insured Commercial Banks in the United States, by Class of Bank, June 30, 1999 and 1998 368 13. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—Year-End 1918-99 and Month-End 1999 374 14. Banking Offices and Banks Affiliated with Bank Holding Companies in the United States, December 31, 1998 and 1999 375 15. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1999 391 MAPS OF THE FEDERAL RESERVE SYSTEM 395 INDEX Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and Economic Developments Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and the Economy in 1999 The U.S. economy posted another productivity growth raised expectaexceptional performance in 1999. Eco- tions of future incomes and profits and nomic growth was robust, and, aside thereby helped keep spending moving from the direct effects of higher crude up at a faster clip than current producoil prices, inflation remained subdued, tive capacity. Meanwhile, the prices of in marked contrast to the rising inflation most internationally traded materials that eventually emerged in many pre- rebounded from their earlier declines; vious economic expansions. The year this turnaround, together with a flattenbrought additional evidence of substan- ing of the exchange value of the dollar tial improvement in productivity growth after its earlier appreciation, translated since the mid-1990s, boosting living into an easing of downward pressure on standards while helping to hold down the prices of imports in general. Core increases in costs and prices despite very inflation measures generally remained tight labor markets. low, but with the labor market at its The Federal Open Market Commit- tightest in three decades and becoming tee's pursuit of financial conditions con- still tighter, the risk that pressures on sistent with sustained expansion and low costs and prices would eventually inflation required some adjustments to emerge mounted over the course of the settings of monetary policy instru- the year. To maintain the low-inflation ments during the year. In the latter part environment that has been so important of 1998, to cushion the U.S. economy to the sustained health of the current from the effects of disruptions in world expansion, the FOMC implemented financial markets and to ameliorate three quarter-point increases in the some of the resulting strains, money intended federal funds rate over the year, market conditions had been eased. By ultimately reversing the easings underthe middle of 1999, however, with finan- taken during the autumn 1998 financial cial markets resuming normal function- market turmoil. ing, foreign economies recovering, and The first quarter of 1999 saw a further domestic demand continuing to outpace unwinding of the heightened levels of increases in productive potential, the perceived risk and risk aversion that Committee began to reverse that easing. had afflicted financial markets in the As the year progressed, foreign autumn of 1998; investors became much economies, on the whole, recovered more willing to advance funds, securimore quickly and displayed greater ties issuance picked up, and risk spreads vigor than had seemed likely at the start fell further—though not back to the of the year. Domestically, the rapid unusually low levels of the first half of 1998. At the same time, domestic NOTE. The discussion here and in the next demand remained quite strong, and forchapter is adapted from Monetary Policy Report to eign economies showed some early the Congress pursuant to the Full Employment signs of rebounding. The FOMC conand Balanced Growth Act of 1978 (Board of Govcluded at its February and March meeternors, February 2000). The data cited in the two ings that if these trends were to persist, chapters are those available as of mid-February 2000. the risks of the eventual emergence of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86th Annual Report, 1999 somewhat greater inflation pressures rate lA percentage point. The Committee would increase, and it noted that a case also announced a symmetric directive, could be made for unwinding part of noting that the marked degree of uncerthe easing actions of the preceding tainty about the extent and timing of fall. However, the Committee hesitated prospective inflationary pressures meant to adjust policy before having greater that further firming of policy might assurance that the recoveries in domes- not be undertaken in the near term, tic financial markets and foreign econo- but that the Committee would need mies were on firm footing. to be especially alert to those pressures. By the May meeting, these recoveries Markets rallied on the symmetricwere solidifying, and the pace of domes- directive announcement, and the tic spending appeared once again to be strength of this response, together with outstripping the growth of the econo- market commentary, suggested uncermy's potential, even allowing for an tainty about the interpretation of the appreciable acceleration in productivity. language used to characterize possible The Committee still expected some future developments and about the time slowing in the expansion of aggregate period to which the directive applied. demand, but the timing and extent of In the period between the June and any moderation remained uncertain. August meetings, the ongoing strength Against this backdrop, the FOMC main- of domestic demand and further expantained an unchanged policy stance but sion abroad suggested that at least part announced immediately after the meet- of the remaining easing put in place ing that it had chosen a directive tilted the previous fall to deal with financial toward the possibility of a firming of market stresses was no longer needed. rates. This announcement implemented Consequently, at the August meeting the disclosure policy adopted in Decem- the FOMC raised the intended level of ber 1998, whereby major shifts in the the federal funds rate a further lA per- Committee's views about the balance of centage point, to 5lA percent. The Comrisks or the likely direction of future mittee agreed that this action, along policy would be made public immedi- with that taken in June, would substanately. Members expected that by making tially reduce inflation risks and again the FOMC's concerns public earlier, announced a symmetric directive. In a such announcements would encourage related action, the Board of Governors financial market reactions to subsequent approved an increase in the discount information that would help stabilize the rate to 43/4 percent. At this meeting the economy. In practice, however, those Committee also established a working reactions seemed to be exaggerated and group to assess the FOMC's approach to focus even more than usual on pos- to disclosing its view about prospective sible near-term Committee action. developments and to propose procedural Over subsequent weeks, economic modifications. activity continued to expand vigorously, At its August meeting, the FOMC labor markets remained very tight, and took a number of actions that were oil and other commodity prices rose aimed at enhancing the ability of the further. In this environment, the FOMC Manager of the System Open Market saw an updrift in inflation as a signifi- Account to counter potential liquidity cant risk in the absence of some policy strains in the period around the century firming, and at the June meeting it raised date change and that would also help the intended level of the federal funds ensure the effective implementation of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and the Economy 5 the Committee's monetary policy objec- The broader range of collateral tives. Although members believed that approved for repurchase transactions— efforts to prepare computer systems for mainly pass-through mortgage securities the century date change had made the of government-sponsored enterprises probability of significant disruptions and STRIP securities of the U.S. quite small, some aversion to Y2K risk Treasury—would facilitate the Managexposure was already evident in the er's task of addressing what could be markets, and the costs that might stem very large needs to supply reserves in from a dysfunctional financing market the succeeding months, primarily in at year-end were deemed to be unaccept- response to rapid increases in the ably high. The FOMC agreed to autho- demand for currency, at a time of potenrize, temporarily, (1) a widening of the tially heightened demand in various pool of collateral that could be accepted markets for U.S. government securities. in System open market transactions, The standby financing facility, authoriz- (2) the use of reverse repurchase agree- ing the Federal Reserve Bank of New ment accounting in addition to the cur- York to auction the above-mentioned rently available matched sale-purchase options to the government securities transactions to absorb reserves tempo- dealers that are regular counterparties in rarily, and (3) the auction of options on the System's open market operations, repurchase agreements, reverse repur- would encourage marketmaking and the chase agreements, and matched sale- maintenance of liquid financing markets purchase transactions that could be exer- essential to effective open market operacised in the period around year-end. The tions. The standby facility was also Committee also authorized a permanent viewed as a useful complement to the extension of the maximum maturity on special liquidity facility, which was to regular repurchase and matched sale- provide sound depository institutions purchase transactions from sixty to with unrestricted access to the discount ninety days. window, at a penalty rate, between October 1999 and April 2000. Finally, the decision to extend the maximum Selected Interest Rates maturity on repurchase and matched sale-purchase transactions was intended to bring the terms of such transactions into conformance with market practice and to enhance the Manager's ability over the following months to implement the unusually large reserve operations expected to be required around the turn of the year. Incoming information during the period leading up to the FOMC's October meeting suggested that the growth of domestic economic activity had 1998 1999 picked up from the second quarter's NOTE. The data are daily. Short ticks indicate days on pace, and foreign economies appeared which the Federal Open Market Committee held a scheduled meeting or a policy action was announced. Vertical to be strengthening more than had been lines mark days on which policy actions were announced: anticipated, potentially adding pressure September 29, October 15, and November 17, 1998; and June 30, August 24, and November 16, 1999. to already-taut labor markets and possi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86th Annual Report, 1999 bly creating inflationary imbalances that unchanged and, to avoid any misinterwould undermine economic perfor- pretation of policy intentions that mance. But the FOMC viewed the risk might unsettle financial markets around of a significant increase in inflation in the century date change, announced a the near term as small and decided to symmetric directive. But the statement await more evidence on how the econ- issued after the meeting highlighted omy was responding to its previous members' continuing concern about tightenings before changing its policy inflation risks going forward and indistance. However, the Committee antici- cated the Committee's intention to pated that the evidence might well sig- evaluate, as soon as its next meeting, nal the need for additional tightening, whether those risks suggested that furand it again announced a directive that ther tightening was appropriate. was biased toward restraint. The FOMC also decided on some Information available through mid- modifications to its disclosure proce- November pointed toward robust growth dures at the December meeting, at which in overall economic activity and a the working group established at the further depletion of the pool of unem- August meeting transmitted its final ployed workers willing to take a job. report and proposals. These modifica- Although higher real interest rates tions, announced in January 2000, conappeared to have induced some soften- sisted primarily of a plan to issue a ing in interest-sensitive sectors of the statement after every FOMC meeting economy, the anticipated moderation in that not only would convey the current the growth of aggregate demand did not stance of policy but also would categoappear sufficient to avoid added pres- rize risks to the outlook as either sures on resources, predominantly labor. weighted mainly toward conditions that These conditions, along with further may generate heightened inflation presincreases in oil and other commodity sures, weighted mainly toward condiprices, suggested a significant risk that tions that may generate economic weakinflation would pick up over time, given ness, or balanced with respect to the prevailing financial conditions. Against goals of maximum employment and this backdrop, the FOMC raised the tar- stable prices over the foreseeable future. get for the federal funds rate an addi- The changes eliminated uncertainty tional lA percentage point in November. about the circumstances under which an At that time, a symmetric directive was announcement would be made; they adopted, consistent with the Commit- clarified that the Committee's statement tee's expectation that no further policy about future prospects extended beyond move was likely to be considered before the intermeeting period; and they charthe February meeting. In a related acterized the Committee's views about action, the Board of Governors ap- future developments in a way that reproved an increase in the discount rate flected policy discussions and that memof lA percentage point, to 5 percent. bers hoped would be more helpful to the At the December meeting, FOMC public and to financial markets. • members held the stance of policy Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments in 1999 The U.S. economy retained considerable The combination of a strong U.S. strength in 1999. According to the Com- economy and improving economic conmerce Department's advance estimate, ditions abroad led to firmer prices in the rise in real gross domestic product some markets in 1999. Industrial comover the four quarters of the year modity prices turned up—sharply in exceeded 4 percent for the fourth con- some cases—after having dropped apsecutive year. The growth of household preciably in 1998. Oil prices, respondexpenditures was bolstered by further ing both to OPEC production restraint substantial gains in real income, favor- and to the growth of world demand, able borrowing terms, and a soaring more than doubled over the course of stock market. Businesses seeking to the year, and the prices of non-oil maintain their competitiveness and prof- imports declined less rapidly than in itability continued to invest heavily in previous years, when a rising dollar, as high-tech equipment; external financing well as sluggish conditions abroad, had conditions in both debt and equity mar- pulled them lower. The higher oil prices kets were quite supportive. In the public of 1999 translated into sharp increases sector, further strong growth of revenues in retail energy prices and gave a noticewas accompanied by a step-up in the able boost to consumer prices overall; growth of government consumption and the chain-type price index for personal investment expenditures, the part of consumption expenditures rose 2 pergovernment spending that enters directly cent, double the increase of 1998. Outinto real GDP. The rapid growth of side the energy sector, however, condomestic demand gave rise to a further sumer prices increased at about the same huge increase in real imports of goods low rate as in the previous year, even and services. Exports picked up as for- as the .unemployment rate continued to eign economies strengthened, but the edge down. Rapid gains in productivity gain fell short of that for imports by a enabled businesses to offset a substanlarge margin. tial portion of the increases in nominal compensation, thereby holding the rise of unit labor costs in check, and busi- Change in Real GDP ness pricing practices continued to be Percent, Q4 to Q4 influenced by strong competitive forces that limited the scope for boosting prices. JiiiUli The Household Sector Personal consumption expenditures increased about 5l/z percent in real terms in 1999, a second year of exceptionally rapid advance. As in other recent years, 1991 1993 1993 1997 the strength of consumption in 1999 NOTE. The data are based on chained (1996) dollars and come from the Department of Commerce. reflected sustained increases in employ- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 86th Annual Report, 1999 ment and real hourly pay, which bol- large, supported in part by a strong stered the growth of real disposable per- housing market. Spending on services sonal income. Added impetus came advanced about 4Vz percent in real from another year of rapid growth in net terms, led by sizable increases for recreworth, which, coming on top of the big ation and personal business services. gains of previous years, led households Outlays for nondurables, such as food in the aggregate to spend a larger por- and clothing, also rose rapidly. Exception of their current income than they tional strength in the purchases of some would have otherwise. The personal nondurables toward the end of the year saving rate, as measured in the national may have reflected precautionary buyincome and product accounts, dropped ing by consumers in anticipation of the further, to an average of about 2 per- century date change. cent in the final quarter of 1999; it Households continued to boost their has fallen about 4*/2 percentage points expenditures on residential structures as over the past five years, a period dur- well. After having surged 11 percent in ing which the yearly gain in house- 1998, residential investment rose about hold net worth has averaged more 3V4 percent over the four quarters of than 10 percent in nominal terms and 1999, according to the advance estimate the ratio of household wealth to dispos- from the Commerce Department. Modable personal income has moved up erate declines in investment in the secsharply. ond half of the year offset only part of The strength of consumer spending the increases recorded in the first half. in 1999 extended across a broad front. As with consumption expenditures, Appreciable gains were reported for investment in housing was supported by most types of durable goods. Spending the sizable advances in real income and on motor vehicles, which had surged household net worth, but this spending about 13!/2 percent in 1998, moved category was also tempered a little by a up another 5l/z percent. The inflation- rise in mortgage interest rates, which adjusted increases for furniture, appli- likely was an important factor in the ances, electronics equipment, and other second-half downturn. household durables also were quite Nearly all the indicators of housing activity showed upbeat results for the year. Sales of new and existing homes Wealth and Saving reached new peaks in 1999, surpassing Percent Ratio the previous highs of 1998. Although Personal saving rate sales dropped back a touch in the second half of the year, their level through yearend remained quite high by historical standards. Builders' backlogs also were at high levels and helped support 6 - new construction activity even as sales eased. Late in the year, reports that 4 - Wealth-to-income ratio2 shortages of skilled workers were delaying construction became less frequent as building activity wound down sea- 1963 1969 1975 1981 1987 1993 1999 sonally, but builders also continued to 1. The data are from the Department of Commerce. express concern about potential worker 2. Ratio of net worth of households to disposable personal income. The data extend through 1999.Q3. shortages in 2000. For 1999 in total, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 9 construction began on more than The Business Sector 1.3 million single-family dwellings, the most since the late 1970s; approxi- Private nonresidential fixed investment mately 330,000 multifamily units also increased 7 percent over 1999, extendwere started, about the same number ing by another year a long run of rapid as in each of the two previous years. growth in real investment outlays. House prices rose appreciably and, Strength in capital investment has been together with the new investment, fur- underpinned in recent years by the vigor ther boosted household net worth in of the business expansion, by the adresidential real estate. vance and spread of computer technolo- The increases in consumption and gies, and by the ability of most busiresidential investment in 1999 were nesses to readily obtain funding through financed, in part, by an expansion of the credit and equity markets. household debt estimated at 9Vi per- Investment in high-tech equipment cent, the largest increase in more than a continued to soar in 1999. Outlays for decade. Mortgage debt, which includes communications equipment rose about the borrowing against owner equity that 25 percent over the course of the year, may be used for purposes other than boosted by a number of factors, includresidential investment, grew a whopping ing the expansion of wireless communi- 10V4 percent. Higher interest rates led cations, competition in telephone marto a sharp drop in refinancing activity kets, the continued spread of the Interand prompted a shift toward the use of net, and the demand of Internet users adjustable-rate mortgages, which over for faster access to it. Outlays on comthe year rose from 10 percent to 30 per- puters rose nearly 40 percent in real cent of originations. Consumer credit terms, and purchases of computer softadvanced 11A percent, boosted by heavy ware, which in the national accounts demand for consumer durables and other are now counted as part of private big-ticket purchases. Credit supply con- fixed investment, rose about 13 percent; ditions were also favorable; commercial for both computers and software the banks reported in Federal Reserve sur- increases were roughly in line with the veys that they were more willing than in annual average gains during previous the previous year or two to extend con- years of the expansion. sumer installment loans and that they The timing of investment in highremained quite willing to extend mort- tech equipment in both 1998 and 1999 gage loans. was likely affected to some degree by The household sector's debt-service business preparations for the century burden edged up to its highest level date change. Many large businesses resince the late 1980s; however, with portedly invested most heavily in new employment rising rapidly and asset computer equipment before the start of values escalating, measures of credit 1999 to leave sufficient time for their quality for household debt generally systems to be tested well before the start improved in 1999. Delinquency rates of 2000; a very steep rise in computer on home mortgages and credit cards investment in 1998—roughly 60 percent declined a bit, and those on auto loans in real terms—is consistent with those fell more noticeably. Personal bank- reports. Some of the purchases in preruptcy filings fell sharply after having paration for Y2K most likely spilled risen for several years through 1997 and over into 1999, but the year also brought remaining elevated in 1998. numerous reports of businesses wanting Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 86th Annual Report, 1999 to stand pat with existing systems until After increasing for two years at a the start of 2000. Growth in computer rate of about 6 percent, nonfarm busiinvestment in the final quarter of 1999, ness inventories expanded more slowly just before the century rollover, was the in 1999—about 314 percent according smallest in several quarters. to the advance GDP report. During the Spending on other types of equipment year, some businesses indicated that rose moderately, on balance, in 1999. they planned to carry heavier stocks Outlays for transportation equipment toward year-end to protect themselves increased substantially, led by advances against possible Y2K disruptions, and in business purchases of motor vehicles the rate of accumulation did in fact pick and aircraft. By contrast, a sharp decline up appreciably in the fall. But business in spending on industrial machinery final sales remained strong, and the ratio early in the year held the yearly gain for of nonfarm stocks to final sales changed that category to about 2 percent; over little, holding toward the lower end of the final three quarters of the year, how- the range of the past decade. With the ever, outlays picked up sharply as indus- ratio so low, businesses likely did not trial production strengthened. enter 2000 with excess stocks. Private investment in nonresidential After slowing to a 1 percent rise in structures fell 5 percent in 1999, accord- 1998, the economic profits of U.S. ing to the advance estimate from the corporations—that is, book profits with Commerce Department. Spending on inventory valuation and capital constructures had increased in each of the sumption adjustments—picked up in previous seven years, rather briskly at 1999. Economic profits over the first times, and the level of investment, three quarters of the year averaged about though down in 1999, remained rela- 3V2 percent above the level of a year tively high and likely raised the real earlier. The earnings of corporations stock of capital invested in structures from their operations outside the United appreciably further. Real expenditures States rebounded in 1999 from a brief on office buildings, which have been but steep decline in the second half of climbing rapidly for several years, 1998, when financial market disruptions moved up further in 1999, to the highest level since the peak of the building Before-Tax Profits as a Share of GDP boom of the 1980s. In contrast, invest- Percent ment in other types of commercial structures, which had already regained its Nonfmancial corporations earlier peak, slipped back a little, on net. Spending on industrial structures, which accounts for roughly 10 percent of total real outlays on structures, fell for a third consecutive year. Outlays for the main types of institutional structures also were down, according to initial estimates. Revisions to the data on nonresidential structures often are sizable, and 1979 1984 1989 1994 1999 the estimates for each of the three years NOTE. Profits from domestic operations, with invenpreceding 1999 have eventually shown tory valuation and capital consumption adjustments, a good bit more strength than was ini- divided by gross domestic product of nonfinancial corporate sector. The data extend through 1999:Q3 and are tially reported. from the Department of Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 11 were affecting the world economy. The junk bonds, left issuance of belowprofits earned by financial corporations investment-grade securities down more on their domestic operations also picked than a quarter from the record pace of up after having been slowed in 1998 by 1998. The receptiveness of the capital the financial turmoil; growth of these markets helped firms pay down loans profits in 1999 would have been greater at banks, and growth of these loans— but for a large payout by insurance com- which had been boosted to an lPA perpanies to cover damage from Hurri- cent gain in 1998 by the financial marcane Floyd. The profits that nonfinancial ket turmoil that year—slowed to a more corporations earned on their domestic moderate 5lA percent pace in 1999. The operations in the first three quarters of commercial paper market continued to 1999 were about 2Vi percent above the expand rapidly, with domestic nonfinanlevel of a year earlier; growth of these cial outstandings rising 18 percent on earnings, which account for about two- top of the 14 percent gain in 1998. thirds of all economic profits, had Commercial mortgage borrowing was slowed to just over 2 percent in 1998 strong again as well, as real estate prices after having averaged 13 percent at a generally continued to rise, albeit at a compound annual rate in the previous slower pace than in 1998, and vacancy six years. Nonfinancial corporations rates generally remained near historical boosted volume substantially further lows. The mix of lending shifted back from 1997 to 1999, but profits per unit to banks and life insurance companies of output dropped back somewhat from from commercial-mortgage-backed setheir 1997 peak. As of the third quarter curities, as conditions in the CMBS marof 1999, economic profits of nonfinan- ket, especially investor appetites for cial corporations amounted to slightly lower-rated tranches, remained less less than IIV2 percent of the nominal favorable than they had been before the output of these companies, compared credit market disruptions in the fall of with a quarterly peak of about 123/4 per- 1998. cent two years earlier. Risk spreads on corporate bonds The borrowing needs of nonfinancial seesawed during 1999. Over the early corporations remained sizable in 1999. part of the year, spreads reversed part Capital spending outstripped internal of the 1998 run-up as markets recovcash flow, and equity retirements that ered. During the summer, they rose resulted from stock repurchases and a again in response to concerns about blockbuster pace of merger activity market liquidity, expectations of a surge more than offset record volumes of both in financing before the century date seasoned and initial public equity offer- change, and anticipated firming of ings. Overall, the debt of nonfinancial monetary policy. Swap spreads, in parbusinesses grew IOV2 percent, down ticular, exhibited upward pressure at only a touch from its decade-high 1998 this time. The likelihood of year-end pace. difficulties seemed to diminish in the The strength in business borrowing fall, and spreads again retreated, endwas widespread across funding sources. ing the year down on balance but gener- Corporate bond issuance was robust, ally above the levels that had prevailed particularly in the first half of the year, over the several years up to mid-1998. though the markets' increased prefer- Federal Reserve surveys indicated ence for liquidity and quality, amid that banks firmed terms and standards an appreciable rise in defaults on for commercial and industrial loans a bit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 86th Annual Report, 1999 further, on balance, in 1999. In the syn- spending of more than 3*/2 percent for dicated loan market, spreads for lower- the year, the largest increase of the rated borrowers also ended the year expansion. Federal expenditures on conhigher, on balance, after rising substan- sumption and investment were up nearly tially in 1998. Spreads for higher-rated 3 percent in annual terms; real defense borrowers were fairly steady through expenditures, which had trended lower 1998 and early 1999, widened a bit through most of the 1990s, rose modaround midyear, and then fell back to erately, and outlays for nondefense end the year about where they had consumption and investment increased started. sharply. Meanwhile, the consumption The ratio of net interest payments and investment expenditures of state and to cash flow for nonfinancial firms, a local governments rose more than 4 permeasure of debt strain, remained in the cent in annual terms; growth of these low range it has occupied for the past outlays has picked up appreciably as the few years, but many measures of credit expansion has lengthened. quality nonetheless deteriorated in 1999. At the federal level, expenditures in Moody's Investors Service downgraded the unified budget rose 3 percent in fismore nonfinancial debt issuers than it cal year 1999, just a touch less than the upgraded over the year, affecting a net 3 VA percent rise of the preceding fiscal $78 billion of debt. The problems that year. Faster growth of nominal spending emerged in the bond market were con- on items that are included in consumpcentrated mostly among borrowers in tion and investment was offset in the the junk sector and partly reflected a most recent fiscal year by a deceleration fallout from the large volume of issu- in other categories. Net interest outlays ance and the generous terms available in fell more than 5 percent—enough to 1997 and early 1998; default rates on trim total spending growth about 3A perjunk bonds rose to levels not seen since centage point—and only small increases the recession of 1990-91. Delinquency were recorded in expenditures for social rates on C&I loans at commercial banks insurance and income security, categoticked up in 1999, albeit from very low ries that together account for nearly half levels, while the charge-off rate for of total federal outlays. In contrast, fedthose loans continued on its upward eral expenditures on Medicaid, after trend of the past several years. Business having slowed in 1996 and 1997, picked failures edged up but remained in a his- up again in the past two fiscal years. torically low range. Spending on agriculture doubled in fiscal 1999; the increase resulted both from a step-up in payments under farm safety The Government Sector net programs that were retained in the Buoyed by rapid increases in receipts "freedom to farm" legislation of 1996 and favorable budget balances, the com- and from more recent emergency farm bined real expenditures of federal, state, legislation. and local governments on consumption Federal receipts grew 6 percent in and investment rose about 43/4 percent fiscal 1999 after increases that averaged from the fourth quarter of 1998 to the close to 9 percent in the two previous fourth quarter of 1999. Annual data, fiscal years. Net receipts from taxes on which smooth through some of the quar- individuals continued to outpace the terly noise that is often evident in gov- growth of personal income, but by less ernment outlays, showed a gain in real than in other recent fiscal years, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 13 receipts from corporate income taxes Federal debt growth has mirrored fell moderately. Nonetheless, with total the turnabout in the government's savreceipts growing faster than spending, ing position. In the 1980s and early the surplus in the unified budget con- 1990s, borrowing resulted in large additinued to rise, moving from $69 bil- tions to the volume of outstanding govlion in fiscal 1998 to $124 billion ernment debt. In contrast, with the budin fiscal 1999. Excluding net interest get in surplus the past two years, the payments—a charge resulting from Treasury has been paying down debt. past deficits—the federal government Without the rise in federal saving and recorded a surplus of more than the reversal in borrowing, market inter- $350 billion in fiscal 1999. est rates in recent years likely would Federal saving, a measure that results have been higher than they have been, from a translation of the federal budget and private capital formation, a key elesurplus into terms consistent with the ment in the vigorous economic expannational income and product accounts, sion, would have been lower, perhaps amounted to 2V* percent of nominal appreciably. GDP in the first three quarters of 1999, The Treasury responded to its lower up from P/2 percent in 1998 and V2 per- borrowing requirements in 1999 primacent in 1997. Before 1997, federal sav- rily by reducing the number of auctions ing had been negative for seventeen of thirty-year bonds from three to two consecutive years—by amounts exceed- and by trimming auction sizes for notes ing 3 percent of nominal GDP in sev- and Treasury inflation-indexed securieral years, most recently in 1992. The ties. Weekly bill volumes were inchange in the federal government's sav- creased from 1998 levels, however, to ing position from 1992 to 1999 more help build up cash holdings as a Y2K than offset the sharp drop in the personal precaution. saving rate and helped lift national sav- State and local government debt ing from less than 16 percent of nominal expanded AlA percent in 1999, well GDP in 1992 and 1993 to a range of off the elevated pace of 1998. Borabout 18V^ percent to 19 percent over rowing for new capital investment the past several quarters. edged up, but the roughly fullpercentage-point rise in municipal bond yields over the year led to a sharp drop in advance refundings, which in Federal Government Debt turn pulled gross issuance below last Held by the Public year's level. Tax revenues continued Percent of nominal GDP to grow at a robust rate, improving the financial condition of states and localities, as reflected in a ratio of debt-rating upgrades to downgrades of more than three to one over the year. The surplus in the current account of state and local governments in the first three quarters of 1999 amounted to about V2 percent of nominal GDP, about the same as in 1998 but other- 1959 1969 1979 1989 1999 wise the largest of the past several NOTE. The data are annual. years. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 86th Annual Report, 1999 The External Sector An upturn in U.S. exports to Canada, Mexico, and key Asian emerging markets contrasted with a much flatter pace Trade and the Current Account of exports to Europe, Japan, and South U.S. external balances deteriorated in America. Capital equipment accounted 1999, largely because of continued for about 45 percent of U.S. goods declines in net exports of goods and exports, industrial supplies for 20 perservices and some further weakening of cent, and agricultural, automotive, and net investment income. The nominal consumer goods each for roughly trade deficit for goods and services wid- 10 percent. ened more than $100 billion, to an estimated $270 billion, as imports expanded Capital Account faster than exports. For the first three quarters of the year, the current account U.S. capital flows in 1999 reflected the deficit increased more than one-third, relatively strong cyclical position of the reaching $320 billion at an annual rate, U.S. economy and the global wave of or 2>Vi percent of GDP. In 1998, the corporate mergers. Foreign purchases current account deficit was 2Vi percent of U.S. securities remained brisk—near of GDP. the level of the previous two years, in Real imports of goods and services which they had been elevated by the expanded strongly in 1999—about global financial unrest. The mix of 13 percent according to preliminary foreign securities purchased in 1999 estimates—as the rapid import growth showed a continued shift away from during the first half of the year contin- Treasuries that was due partly to a ued through the second half. The expan- decline in the supply of Treasuries relasion of real imports was fueled by the tive to other securities, reflecting the continued strong growth of U.S. domes- U.S. budget surplus. Another reason tic expenditures. The ongoing though might have been greater tolerance of waning effects of past dollar apprecia- foreign investors for risk as markets tion also contributed by helping to push calmed after their turmoil of late 1998. non-oil import prices down through Available data indicate that private formost of the year. All major import cate- eigners sold on net about $20 billion gories other than aircraft and oil re- in Treasuries, compared with net purcorded strong increases. Although U.S. chases of $50 billion in 1998 and consumption of oil rose about 4 percent $150 billion in 1997. The net sale of in 1999, the quantity of oil imported Treasuries was more than offset by a was about unchanged, and inventories pickup in net foreign purchases of their were drawn down. nearest substitute—government agency Real exports of goods and services bonds—and of corporate bonds and rose an estimated 4 percent in 1999, a equities. somewhat faster pace than in 1998. Foreign direct investment flows into Exports were stimulated by a pickup in the United States were also robust in economic activity abroad, particularly 1999, with the pace of inflows in the in Canada, Mexico, and the developing first three quarters only slightly below economies of Asia. However, this effect the record set in 1998. As in 1998, inwas muted by upward pressure on U.S. flows in 1999 were elevated by several prices relative to those abroad, a delayed large mergers, which left their imprint response to past dollar appreciation. on other parts of the capital account as Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 15 well. In 1998 and 1999, many of the Change in Output per Hour largest mergers were financed by a swap Percent, Q4 to Q4 of equity in the foreign acquiring firm for equity in the U.S. firm being acquired. The Bureau of Economic Analysis estimates that US. residents acquired more than $100 billion of foreign equity through this mechanism in the first three quarters of 1999. Separate data on market transactions indicate that U.S. residents made net purchases of Japanese equities and net sales of European equi- 1991 1993 1995 997 1999 ties, probably in an attempt to rebalance NOTE. Nonfarm business sector. The data are from the portfolios in light of the equity acquired Department of Labor. through stock swaps. U.S. residents on net purchased a small volume of foreign ously reported. The average annual rate bonds in 1999. U.S. direct investment in of rise in output per hour over the past foreign economies also reflected the glo- four years was about 23A percent—up bal wave of merger activity in 1999 and from an average of 1 Vz percent from the likely totaled something near its record mid-1970s to the end of 1995. Some of level of 1998. the step-up in productivity growth since Available data indicate a return to siz- 1995 can be traced to high levels of able capital inflows from foreign official capital spending and an accompanying sources in 1999, following a modest out- faster rate of increase in the amount of flow in 1998. The decline in foreign capital per worker. Beyond that, the official assets in the United States in causes are more difficult to pin down 1998 was fairly widespread, as many quantitatively but are apparently related countries found their currencies under to increased technological and organizaunwanted downward pressure during the tional efficiencies. Firms are not only turmoil. By contrast, the increase in for- expanding the stock of capital but are eign official reserves in the United States also discovering many new uses for the in 1999 was fairly concentrated among a technologies embodied in that capital, relatively few countries that experienced and workers are becoming more skilled unwanted upward pressure on their cur- at employing the new technologies. rencies vis-a-vis the U.S. dollar. The number of jobs on nonfarm payrolls rose slightly more than 2 percent from the end of 1998 to the end of 1999, The Labor Market a net increase of 2.7 million. Annual job As in other recent years, the rapid gains had ranged between 2lA percent growth of aggregate output in 1999 was and 23/4 percent over the 1996-98 associated with both strong growth of period. Once again in 1999, the private productivity and brisk gains in employ- service-producing sector accounted for ment. According to the initial estimate most of the total rise in payroll employfor 1999, output per hour in the nonfarm ment, led by many of the same categobusiness sector rose 3V4 percent over the ries that had been strong in previous four quarters of the year, and historical years—transportation and communicadata were revised to show stronger gains tions, computer services, engineering in the years preceding 1999 than previ- and management, recreation, and per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 86th Annual Report, 1999 sonnel supply. In the construction sec- but are not actively seeking work. Howtor, employment growth remained quite ever, like the unemployment rate itself, brisk—more than 4 percent from the an augmented rate that includes these final quarter of 1998 to the final quarter interested nonparticipants also has of 1999. Manufacturing employment, declined to a low level, as more indiinfluenced by spillover from the disrup- viduals have taken advantage of expandtions in foreign economies, continued to ing opportunities to work. decline sharply in the first half of the Although the supply-demand relayear, but losses thereafter were small, as tionship in the labor market tightened factory production strengthened. Since further in 1999, the added pressure did the start of the expansion in 1991, the not translate into larger increases in job count in manufacturing has changed nominal hourly compensation. The emlittle, on net, but with factory productiv- ployment cost index for hourly compenity rising rapidly, manufacturing output sation of workers in private nonfarm has trended up at a brisk pace. industries rose 3.4 percent in nominal In 1999, employers continued to face terms during 1999, little changed from a tight labor market. Some increase in the increase of the previous year. An the workforce came from the pool of alternative measure of hourly compensathe unemployed, and the jobless rate tion from nonfarm productivity and cost declined to an average of 4.1 percent in data slowed from a 5V* percent increase the fourth quarter, down from an aver- in 1998 to a Al/i percent rise in 1999. age of 4.4 percent in the same quarter Compensation gains in 1999 probably one year earlier. Because the unemploy- were held down, in part, by the very low ment rate is a reflection only of the inflation rate of 1998, which resulted number of persons who are available for in unexpectedly large increases in work and actively looking, it does not inflation-adjusted pay in that year and capture potential labor supply that is probably damped wage increments in one step removed—namely, those indi- 1999. According to the employment cost viduals who are interested in working index, the hourly wages of workers in private industry rose 3V2 percent in Measures of Labor Utilization nominal terms after having increased Percent about 4 percent in each of the two previous years. The hourly cost to employ- Augmented unemployment rate ers of the nonwage benefits provided to employees also rose 3V2 percent in 1999, but this increase was considerably larger than those of the preceding few years. Much of the pickup in benefit costs came from a faster rate of rise in the costs of health insurance, which were Civilian unemployment rate reportedly driven up by several factors: I I a moderate acceleration in the price of 1974 1979 1984 1989 1994 1999 medical care, the efforts of some insur- NOTE. The augmented unemployment rate is the num- ers to rebuild profit margins, and the ber of unemployed plus those who are not in the labor recognition by employers that an attracforce and want a job, divided by the civilian labor force plus those who are not in the labor force and want a job. tive health benefits package was helpful The break in data at January 1994 marks the introduction in hiring and retaining workers in a tight of a redesigned survey; data from that point on are not labor market. directly comparable with those of earlier periods. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 17 Because the employment cost index Alternative Measures of PriceChange does not capture some forms of compen- Percent sation that employers have been using more extensively—for example, stock Price measure 1998 1999 options, signing bonuses, and employee Chain-type price discounts on in-store purchases—it Gross domestic product 1.1 1.6 has likely been understating the true size Gross domestic purchases .7 1.9 Personal consumption expenditures ... 1.0 2.0 of workers' gains. The productivity and Excluding food and energy 1.4 1.5 cost measure of hourly compensation Fixed-weight captures at least some of the labor costs Consumer price index 1.5 2.6 that the employment cost index omits, Excluding food and energy 2.3 2.0 and this broader coverage may explain NOTE. Changes are based on quarterly averages and why the productivity and cost measure are measured to the fourth quarter of the year indicated has been rising faster. However, it, too, from the fourth quarter of the preceding year. is affected by problems of measurement, some of which would lead to ditures increased 2 percent, twice as overstatement of the rate of rise in much as in the previous year, and the hourly compensation. chain-type price index for gross domes- With the rise in output per hour in tic purchases, which measures prices of the nonfarm business sector in 1999 the aggregate purchases of consumers, offsetting about three-fourths of the rise businesses, and governments, moved up in the productivity and cost measure of close to 2 percent after increasing just nominal hourly compensation, nonfarm 3/4 percent in 1998. The consumer price unit labor costs were up just a shade index rose more than 2Vi percent over more than 1 percent. Unit labor costs the four quarters of the year after having had increased slightly more than 2 per- increased IV2 percent in 1998. cent in both 1997 and 1998 and less than The acceleration in the prices of 1 percent in 1996. Because labor costs goods and services purchased was are by far the most important item in driven in part by a reversal in import total unit costs, the small size of the prices. The chain-type price index for increases has been crucial to keeping imports of goods and services had fallen inflation low. 5 percent in 1998, but it rose 3 percent in 1999. A big swing in oil prices— Prices Change in PCE Chain-Type Price Index Rates of increase in the broader mea- Percent, Q4 to Q4 sures of aggregate prices in 1999 were somewhat larger than those of 1998. The chain-type price index for GDP— lllllli.l which measures inflation for goods and services produced domestically—moved up about 1V2 percent, a pickup of V2 percentage point from the increase of 1998. In comparison, acceleration in various price measures for goods and services purchased amounted to 1 percentage 1991 1993 1995 point or more: The chain-type price NOTE. The data are from the Department of index for personal consumption expen- Commerce. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 86th Annual Report, 1999 down in 1998 but up sharply in 1999— and excludes food and energy prices— accounted for a large part of this turn- changed little in 1999. The increase in around. Excluding oil, the prices of the core index for personal consumption imported goods continued to fall in 1999 expenditures, IV2 percent over the four but, according to the initial estimate, quarters of the year, was about the same less rapidly than over the three previous as the increase in 1998. As measured by years, when downward pressure from the CPI, core inflation was 2 percent in appreciation of the dollar had been con- 1999, about VA percentage point lower siderable. The prices of imported mate- than in 1998, but the deceleration was a rials and supplies rebounded, but the reflection of a change in CPI methodolprices of imported capital goods fell ogy that had taken place at the start of sharply further. Meanwhile, the chain- 1999; on a methodologically consistent type price index for exports increased basis, the rise in the core CPI was about 1 percent, reversing a portion of the the same in both years. 2V2 percent drop of 1998, when the slug- In the national accounts, the chaingishness of foreign economies and the type price index for private fixed investstrength of the dollar had pressured U.S. ment edged up lA percent in 1999 after producers to mark down prices charged having fallen about 3A percent in 1998. to foreign buyers. With construction costs rising, the index Prices of domestically produced pri- for residential investment increased mary materials, which tend to be espe- 33/4 percent, its largest advance in sevcially sensitive to developments in eral years. By contrast, the price index world markets, rebounded sharply in for nonresidential investment declined 1999. The producer price index for moderately, as a result of another drop crude materials excluding food and in the index for equipment and software. energy advanced about 10 percent after Failing equipment prices are one chanhaving fallen about 15 percent in 1998, nel through which faster productivity and the PPI for intermediate materials gains have been reshaping the economy excluding food and energy increased in recent years; the drop in prices has about Wi percent, reversing a 1998 contributed to high levels of investment, decline of about that same size. But rapid expansion of the capital stock, further along in the chain of processing and a step-up in the growth of potential and distribution, the effects of these output. increases were not very visible. The producer price index for finished goods U.S. Financial Markets excluding food and energy rose slightly less rapidly in 1999 than in 1998, and Financial markets were somewhat unthe consumer price index for goods settled as 1999 began, with the disexcluding food and energy rose at about ruptions of the previous autumn still the same low rate that it had in 1998. unwinding and the devaluation of the Large gains in productivity and a mar- Brazilian real causing some jitters gin of excess capacity in the industrial around mid-January. However, market sector helped keep prices of goods in conditions improved into the spring, check, even as growth of domestic evidenced in part by increased trading demand remained exceptionally strong. volumes and narrowed bid-asked and "Core" inflation at the consumer credit spreads, as it became increasingly level—which takes account of the prices evident that strong growth was continuof services as well as the prices of goods ing in the United States and that econo- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 19 mies abroad were rebounding. In this ished and incoming economic data indienvironment, market participants began cated surprising vitality. to anticipate that the Federal Reserve Concerns about liquidity and credit would reverse the policy easings of the risk around the century date change led preceding fall, and interest rates rose. to large premiums in private money Nevertheless, improved profit expecta- market rates in the second half of 1999. tions apparently more than offset the During the summer, this "safe haven" interest rate increases, and equity prices demand held down rates on Treasury continued to climb until late spring. bills maturing early in the new year, From May into the fall, both equity until the announcement in August that prices and longer-term interest rates the Treasury was targeting an unusually moved in a choppy fashion, while short- large year-end cash balance, implying term interest rates moved up with that it would issue a substantial volume monetary policy tightenings in June, of January-dated cash management bills. August, and November. Worries about Year-end premiums in eurodollar, com- Y2K became pronounced after midyear, mercial paper, term federal funds, and and expectations of an acceleration of other money markets—measured as the borrowing ahead of the fourth quarter implied forward rate for a monthlong prompted a resurgence in liquidity and period spanning the year-end relative to credit premiums. In the closing months the rate for a neighboring period—rose of the year, however, concerns about earlier and reached much higher levels outsized demands for credit and liquid- than in recent years. ity over the year-end subsided, causing Those year-end premiums peaked in spreads to narrow, and stock prices late October and then declined substansurged once again. tially, as markets reflected increased confidence in technical readiness and special assurances from central banks Interest Rates Over the first few months of 1999, Eurodollar Deposit Forward Premium short-term Treasury rates moved in a Over Year-End narrow range, anchored by an un- Basis points changed stance of monetary policy. Yields on intermediate- and long-term 1999 Treasury securities rose, however, as 200 the flight to quality and liquidity of the 150 preceding fall unwound, and incoming data pointed to continued robust eco- 100 nomic growth and likely Federal 50 Reserve tightening. Over most of the 1997 + rest of the year, short-term Treasury 0 rates moved broadly in line with the three quarter-point increases in the tar- Oct. Nov. Dec. get federal funds rate; longer-term yields NOTE. The data are daily. For October the forward rose less, as markets had already antici- premiums are one-month forward rates two months ahead less one-month forward rates one month ahead; for pated some of those policy actions. November they are one-month forward rates one month Bond and note yields moved sharply ahead less one-month deposit rates; and for December higher from early November 1999 to the they are three-week forward rates one week ahead less one-week deposit rates. The December forward premiums end of the year, as Y2K fears diminextend into the third week of December. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 86th Annual Report, 1999 that sufficient liquidity would be avail- the S&P 500 and Dow Jones industrial able around the century date change. average posted still-impressive gains Important among these assurances were of 20 percent and 25 percent, marking several of the Federal Reserve initia- the fifth consecutive year that all three tives described in the preceding chap- indexes posted double-digit returns. ter. Securities dealers took particular Most stock indexes moved up sharply advantage of the widened pools of over the first few months of the year and acceptable collateral for open market were about flat on net from May through operations and used large volumes of August; they then declined into October federal agency debt and mortgage- before surging in the final months of the backed securities in repurchase agree- year. The Nasdaq index, in particular, ments with the Open Market Desk in the achieved most of its annual gains in closing weeks of the year, which helped November and December. Stock price relieve a potential scarcity of Treasury advances in 1999 were not very broadcollateral over the year-end. Market based, however: More than half of the participants also purchased options on S&P 500 issues lost value over the year. nearly $500 billion worth of repurchase Almost all key industry groups peragreements under the standby financing formed well. One exception was shares facility and pledged more than $650 bil- of financial firms, which were flat, on lion of collateral for borrowing at the balance. Investor perceptions that rising discount window. With the smooth roll- interest rates would hurt earnings and, over, however, none of the RP options possibly, concern over loan quality were exercised, and borrowing at the apparently offset the boost resulting discount window turned out to be fairly from passage in the fall of legislation light. reforming the depression-era Glass- Steagall constraints on combining commercial banking with insurance and Equity Prices investment banking. Small-cap stocks, Nearly all major stock indexes ended which had lagged in 1998, also per- 1999 in record territory. The Nasdaq formed well; the Russell 2000 index composite index paced the advance by climbed 20 percent over the year and soaring 86 percent over the year, and finally surpassed its April 1998 peak in late December. Stock price gains at large firms Major Stock Price Indexes about kept pace with expected earnings Index, January 4, 1999 = 100 growth in 1999, and the S&P 500 oneyear-ahead earnings-price ratio fluctuated around the historically low level 180 of 4 percent even as real interest rates Nasdaq ^ S&P 500 rose. Meanwhile, the Nasdaq composite index's earnings-price ratio (using actual twelve-month trailing earnings) plummeted from an alreadyslim 1 lA percent to Vi percent, suggesting that investors were pricing in expectations of tremendous earnings growth JFMAMJJASONDJ FMAMJ JASOND at technology firms relative to historical 1998 1999 norms. NOTE. The data are daily. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 21 Debt and the years whereby increases in the debt of Monetary Aggregates households, businesses, and state and local governments relative to GDP have come close to matching declines in the Debt and Depository Intermediation federal government share, consistent The debt of domestic nonfinancial sec- with reduced pressure on available savtors is estimated to have grown 6V2 per- ings from the federal sector facilitating cent in 1999 on a fourth-quarter-to- private borrowing. fourth-quarter basis, near the upper end After increasing for several years, the of the FOMC's 3 percent to 7 percent share of total credit accounted for by range and about a percentage point depository institutions leveled out in faster than nominal GDP. As was the 1999. The growth of credit extended case in 1998, robust outlays on con- by those institutions edged down to sumer durable goods, housing, and busi- 6V2 percent, from 63A percent in 1998. ness investment, as well as substantial Adjusted for mark-to-market accounting net equity retirements, helped sustain rules, bank credit growth retreated from nonfederal sector debt growth at rates IOV4 percent in 1998 to SVi percent in above 9 percent. Meanwhile, the dra- 1999, with a considerable portion of the matically increased federal budget sur- slowdown attributable to an unwinding plus allowed the Treasury to reduce its of the surge in holdings of non-U.S. outstanding debt about 2 percent. These government securities and business movements follow the pattern of recent loans that had been built up during the Growth of Money and Debt Percent Domestic Period Ml M2 M3 nonfinancial debt Annuall 1989 .6 5.2 4.1 7.4 1990 4.2 4.2 1.9 6.7 1991 7.9 3.1 1.1 4.5 1992 14.4 1.8 .6 4.5 1993 10.6 1.4 1.0 4.9 1994 2.5 .6 1.7 4.9 1995 -1.5 3.9 6.1 5.5 1996 -4.5 4.5 6.8 5.4 1997 -1.2 5.6 8.9 5.2 1998 2.2 8.5 10.9 6.7 1999 1.9 6.2 7.5 6.6 Quarterly (annual rate)2 1999:1 1.9 7.5 8.2 6.7 2 2.2 6.0 6.0 6.9 3 -2.0 5.5 5.1 6.0 4 5.3 5.4 10.0 6.2 NOTE. Ml consists of currency, travelers checks, Debt consists of the outstanding credit market debt of the demand deposits, and other checkable deposits. M2 con- U.S. government, state and local governments, housesists of Ml plus savings deposits (including money mar- holds and nonprofit organizations, nonfinancial busiket deposit accounts), small-denomination time deposits, nesses, and farms. and balances in retail money market funds. M3 consists 1. From average for fourth quarter of preceding year to of M2 plus large-denomination time deposits, balances in average for fourth quarter of year indicated. institutional money market funds, RP liabilities (over- 2. From average for preceding quarter to average for night and term), and eurodollars (overnight and term). quarter indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 86th Annual Report, 1999 market disruptions in the fall of 1998. ing because of strong loan growth and Real estate loans constituted one of the a buildup in vault cash for Y2K few categories of bank credit that accel- contingencies. Corporations apparently erated in 1999. By contrast, thrift credit accumulated year-end precautionary swelled 9 percent, up from a 4V2 percent liquidity in institution-only money gain in 1998, as rising mortgage interest funds, which provided a further boost to rates led borrowers to opt more fre- M3 late in the year. quently for adjustable-rate mortgages, M2 increased 6lA percent in 1999, which thrifts tend to keep on their somewhat above the FOMC's range of books. The trend toward securiti- 1 percent to 5 percent. Both the easing zation of consumer loans continued in of elevated demands for liquid assets 1999: Bank originations of consumer that had boosted M2 in the fourth quarloans were up about 5 percent, while ter of 1998 and a rise in its opportunity holdings ran off at a 13A percent pace. cost (the difference between interest rates on short-term market instruments and the rates available on M2 assets) The Monetary Aggregates tended to bring down M2 growth in The growth of the broad monetary 1999. That rise in opportunity cost also aggregates moderated significantly in helped to halt the decline in M2 velocity 1999. Nevertheless, as was expected by that had begun in mid-1997, although the FOMC last February and July, both the P/4 percent (annual rate) rise in M2 and M3 finished the year above velocity over the second half of 1999 their annual price-stability ranges. M3 was not enough to offset the drop in the rose IV2 percent in 1999, somewhat out- first half of the year. Within M2, curside the Committee's range of 2 per- rency demand grew briskly over the year cent to 6 percent but far below the as a whole, reflecting booming retail nearly 11 percent pace of 1998. M3 sales and, late in the year, some precaugrowth retreated early in 1999, as the tionary buildup for Y2K. surge in depository credit in the final quarter of 1998 unwound and depository institutions curbed their issuance of M2 Velocity andthe Opportunity Cost the managed liabilities included in that of Holding M2 aggregate. At that time, the expansion Ratio scale Percentage points, ratio scale of institution-only money funds also slowed with the ebbing of heightened 2.1 - M2 velocity _/X preferences for liquid assets. However, 1 25 2.0 - M3 bulged again in the fourth quarter of 1999, as loan growth picked up and / opportunity: !0 banks funded the increase mainly with / cost 1.8 -Lnt U . large time deposits and other managed ~ 3 vV -- i liabilities included in M3. U.S. branches 1.7 f V and agencies of foreign banks stepped - l up issuance of large certificates of •• i I 1 1 1 f 1 1979 1984i 1 ! 119 819 1 1 1 1!9 914 1 1 f 1i999 deposit, in part to augment the liquidity NOTE. The data are quarterly. The velocity of M2 is of their head offices over the century the ratio of nominal gross domestic product to the stock date change, apparently because it was of M2. The opportunity cost of M2 is a two-quarter cheaper to fund in U.S. markets. Domes- moving average of the difference between the threemonth Treasury bill rate and the weighted average return tic banks needed the additional fundon assets included in M2. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 23 In anticipation of a surge in the pub- increased, with Asian emerging-market lic's demand for currency, depository economies in particular bouncing back institutions vastly expanded their hold- strongly from the output declines of the ings of vault cash, beginning in the fall preceding year. Real growth improved to avoid potential constraints in the in almost all the major industrial econoability of the armored car industry to mies as well. This broad strengthenaccommodate large currency shipments ing of activity contributed to a general late in the year. Depositories' cash draw- rise in equity prices and a widespread ings reduced their Federal Reserve bal- increase in interest rates. Despite ances and drained substantial volumes stronger activity and higher prices for of reserves, and in mid-December, large oil and other commodities, average forprecautionary increases in the Trea- eign inflation was lower in 1999 than in sury's cash balance and in foreign cen- 1998, as output remained below potentral banks' liquid investments at the Fed- tial in most countries. eral Reserve did as well. The magnitude Although the general theme in emergof these flows was largely anticipated ing financial markets in 1999 was a by the System, and, to replace the lost return to stability, the year began with reserves, during the fourth quarter the heightened tension as a result of a finan- Desk entered into a number of longer- cial crisis in Brazil. With the effects maturity repurchase agreements timed of the August 1998 collapse of the to mature early in 2000. The Desk also ruble and the default on Russian governexecuted a large number of short-term ment debt still reverberating, Brazil was repurchase transactions for over the forced to abandon its exchange-rateturn of the year, including some in the based stabilization program in January forward market, to provide sufficient 1999. The real, allowed to float, soon reserves and support market liquidity. fell nearly 50 percent against the dollar, The public's demand for currency generating fears of a depreciationthrough year-end, though appreciable, inflation spiral that could return Brazil remained well below the level for which to its high-inflation past. In addition, the banking system was prepared, and there were concerns that the government vault cash at the beginning of January might default on its domestic-currency 2000 stood about $38 billion above its and dollar-indexed debt, the latter totalyear-ago level. This excess vault cash, ing more than $50 billion. In the event, and other century date change effects in these fears proved unfounded. The turnmoney and reserve markets, unwound ing point appears to have come in March quickly after the smooth transition into when a new central bank governor the new year. announced that fighting inflation was a top priority and interest rates were substantially raised to support the real. Over International Developments the remainder of the year, Brazilian Global economic conditions improved financial markets stabilized on balance, in 1999 after a year of depressed growth despite continuing concerns about the and heightened financial market insta- government's ability to reduce the fiscal bility. Financial markets in develop- deficit. Inflation, although up from the ing countries, which had been hit hard previous year, remained under 10 perby crises in Asia and Russia in recent cent. Brazilian economic activity also years, recovered during the year. The recovered somewhat in 1999, after pace of activity in developing countries declining in 1998, as the return of confi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 86th Annual Report, 1999 dence allowed officials to lower short- along with a shift toward fiscal deficits term interest rates substantially from and an ongoing boost to net exports their crisis-related peak levels of early provided by earlier sharp currency in the year. depreciations, laid the foundation for The Brazilian crisis triggered some a strong revival in activity in 1999. renewed financial stress in other Latin Korea's recovery was the most robust, American economies, and domestic with real GDP estimated to have interest rates and Brady bond yield increased more than 10 percent in 1999 spreads increased sharply from levels after falling 5 percent the previous year. already elevated by the -Russian crisis. The government continued to make However, as the situation in Brazil progress toward needed financial and improved, financial conditions in the corporate sector reform. However, sigrest of the region stabilized relatively nificant weaknesses remained, as evirapidly. Even so, the combination of denced by the near collapse of Daewoo, elevated risk premiums and diminished Korea's second largest conglomerate. access to international credit markets Other Asian developing countries that tended to depress activity in much of the experienced financial difficulties in late region in the first half of 1999. Probably 1997 (Thailand, Malaysia, Indonesia, the most strongly affected country was and the Philippines) also recorded Argentina, where the exchange rate peg increases in real GDP in 1999 after to the dollar was maintained only at the declines the previous year. Indonesian cost of continued high real interest rates financial markets were buffeted severely that contributed to a decline in real GDP at times during 1999 by concerns about in 1999. In contrast, real GDP in Mexico political instability, but the rupiah ended rose an estimated 6 percent, aided by the year with a modest net appreciation strong growth in exports to the United against the dollar. The other former cri- States and higher oil prices. The peso sis countries also saw their currencies appreciated against the dollar for the stabilize or slightly appreciate against year as a whole, despite a Mexican infla- the dollar. Inflation rates in these countion rate about 10 percentage points tries generally declined, despite the higher than the U.S. rate. pickup in activity and higher prices for The recovery of activity in Asian oil and other commodities. Inflation was developing countries was earlier, more held down by the elevated, if diminishwidespread, and sharper than in Latin ing, levels of excess capacity and unem- America, just as the downturn had been ployment and by a waning of the inflathe previous year. After a steep drop in tionary impact of previous exchange activity in the immediate wake of the rate depreciations. financial crises that hit several Asian In China, real growth slowed moderemerging-market economies in late ately in 1999. Given China's exchange 1997, the preconditions for a revival in rate peg to the dollar, the sizable depreactivity were set by measures initiated ciations elsewhere in Asia in 1997 and to stabilize shaky financial markets and 1998 led to a sharp appreciation of banking sectors, often in conjunction China's real effective exchange rate, with International Monetary Fund pro- and there was speculation that the grams that provided financial support. renminbi might be devalued. However, Once financial conditions had been with China's trade balance continuing stabilized, monetary policies turned in substantial though reduced suraccommodative in 1998. This stimulus, plus, Chinese officials maintained the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 25 exchange rate peg to the dollar in 1999 weighted basis against the currencies and stated their intention of extending it of a broad group of important U.S. tradfor at least another year. After the onset ing partners, ended 1999 little changed of the Asian financial crisis, continuance from its level at the beginning of the of the Hong Kong currency board's peg year. There appeared to be two main, to the U.S. dollar was also questioned. roughly offsetting, pressures on the dol- In the event, the tie to the dollar was lar over the year. On the one hand, the sustained, but only at the cost of high continued very strong growth of the real interest rates, which contributed to U.S. economy relative to foreign econoa decrease in output in Hong Kong in mies tended to support the dollar. On 1998 and early 1999 and a decline of the other hand, the further rise in U.S. consumer prices over this period. How- external deficits—with the U.S. current ever, real GDP started to move up again account deficit moving up toward 4 perlater in the year, reflecting in part the cent of GDP by the end of the year— strong revival of activity in the rest may have tended to hold down the dolof Asia. lar because of investor concerns that In Russia, economic activity in- the associated strong net demand for creased in 1999 despite persistent and dollar assets might prove unsustainable. severe structural problems. Real GDP, Against the currencies of the major forwhich had dropped nearly 10 percent eign industrial countries, the dollar's in 1998 as a result of the domestic most notable movements in 1999 were financial crisis, recovered about half the a substantial depreciation against the loss during the year. Net exports rose Japanese yen and a significant appreciastrongly, boosted by the lagged effect tion relative to the euro. of the substantial real depreciation of The dollar depreciated 10 percent on the ruble in late 1998 and by higher oil balance against the yen over the course prices. The inflation rate moderated to of 1999. In the first half of the year, the about 50 percent, somewhat greater than dollar strengthened slightly relative to the depreciation of the ruble. the yen, as growth in Japan appeared to The dollar's average foreign exchange value, measured on a trade- U.S. Dollar Exchange Rate against the Japanese Yen and the Euro Nominal Dollar Exchange Rate Indexes Index. January 1997 = 100 Index, January 1997 = 100 Restati 120 Broad 110 100 :ipane 90 1997 1998 1999 1997 1998 1999 NOTE. The data are monthly. Restated German mark is NOTE. The data are monthly. Indexes are trade- the dollar-mark exchange rate rescaled by the official weighted averages of the exchange value of the dollar in conversion factor between the mark and the euro, terms of major currencies and in terms of the currencies 1.95583, through December 1998. Euro exchange rate as of a broad group of important U.S. trading partners. of January 1999. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 86th Annual Report, 1999 remain sluggish and Japanese monetary to weaken against the dollar, influenced authorities reduced short-term interest by indications that euro-area growth rates to near zero in an effort to jump- would remain very slow. After apstart the economy. However, around proaching parity with the dollar in early midyear, several signs of a revival of July, the euro rebounded, partly on gathactivity—particularly the announcement ering signs of European recovery. Howof unanticipated strong growth in real ever, the currency weakened again in the GDP in the first quarter—triggered a fall, and in early December it reached depreciation of the dollar relative to the parity with the dollar, about where it yen amid reports of large inflows of closed the year. The euro's weakness foreign capital into the Japanese stock late in the year was attributed in part to market. Data releases showing that the concerns about the pace of market- U.S. current account deficit had reached oriented structural reforms in continenrecord levels in both the second and tal Europe and to a political wrangle third quarters of the year also appeared over the proposed imposition of a withto be associated with depreciations of holding tax on investment income. On the dollar against the yen. Concerned balance, the dollar appreciated 16 perthat a stronger yen could harm the cent relative to the euro over 1999. fledgling recovery, Japanese monetary Although the euro's foreign exchange authorities intervened heavily, but with value weakened in its first year of operalimited success, to weaken the yen tion, the volume of euro-denominated on numerous occasions. transactions—particularly the issuance Japanese real GDP increased some- of debt securities—expanded rapidly. what in 1999 after having declined for In the eleven European countries that two consecutive years. Growth was con- now fix their currencies to the euro, real centrated in the first half of the year, GDP growth remained weak early in when domestic demand surged, led by 1999 but strengthened subsequently and fiscal stimulus. Later in the year, domes- averaged an estimated 3 percent rate tic demand slumped, as the pace of fis- for the year as a whole. Net exports cal expansion flagged. Net exports made made a significant positive contribution virtually no contribution to growth for to growth, supported by a revival of the year as a whole. Japanese consumer demand in Asia and Eastern Europe prices declined slightly on balance over and by the effects of the euro's depreciathe year. tion. The areawide unemployment rate The new European currency, the euro, declined, albeit to a still-high rate of came into operation at the start of 1999, nearly 10 percent. In the spring, the marking the beginning of stage three European central bank lowered its polof European economic and monetary icy rate 50 basis points, to 2Vi percent. union. The rates of exchange between This move was reversed later in the the euro and the currencies of the eleven year in reaction to accumulating evicountries adopting the new currency dence of a pickup in activity. The eurowere set at the end of 1998; based on area inflation rate edged up in 1999, these rates, the value of the euro at its boosted by higher oil prices, but still creation was just under $1.17. From a remained below the 2 percent target technical perspective, the introduction ceiling. of the euro went smoothly, and on its Growth in the United Kingdom first day of trading its value moved also moved higher on balance in 1999, higher. However, the euro soon started picking up over the course of the year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 27 Along with the strengthening of global neighboring months—started to rise in demand, a key factor stimulating the late summer. However, nearly all of recovery was a series of official inter- the increase was reversed in late Octoest rate reductions, totaling 250 basis ber and early November. The premium points, undertaken by the Bank of moved up more moderately in De- England over the second half of 1998 cember. The sharp October-November and the first half of 1999. Later in 1999 decline in the funding premium came in and early in 2000, the policy rate response to a series of announcements was raised three times, for a total of by major central banks that outlined and 100 basis points, with officials citing the clarified the measures these institutions need to keep inflation below its 2Vi per- were prepared to take to alleviate potencent target level in light of the strength tial liquidity problems related to the of consumption and the housing market century date change. For yen funding, and continuing tight conditions in the the premium moved in a different patlabor market. On balance, the dollar tern, fluctuating around a relatively low appreciated slightly against the pound level before spiking sharply for several over 1999. days just before the year-end. The late- In Canada, real growth recovered in December jump was partly in response 1999 after slumping the previous year to date-change-related illiquidity in the in response to the global slowdown and Japanese government bond repo market the related drop in the prices of Cana- that emerged in early December and dian commodity exports. Strong demand persisted. To counter these conditions, from the United States spurred Cana- toward the end of the year the Bank of dian exports, while rising consumer and Japan infused huge amounts of liquidity business confidence supported domestic into its domestic banking system, which demand. In the spring, the Bank of soon brought short-term yen funding Canada lowered its official interest rate costs back down to near zero. twice, for a total of 50 basis points, Bond yields in the major foreign in an effort to stimulate activity in industrial countries generally moved the context of a rising Canadian dollar. higher on balance in 1999. Long-term The easing was reversed by 25-basis- interest rates were boosted by mounting point increases near the end of the year evidence that economic recovery was and early in 2000 as Canadian infla- taking hold abroad and by rising expection moved above the midpoint of its target range, the pace of output growth Foreign Ten-Year Interest Rates increased, and U.S. interest rates rose. Percent Over the year, the U.S. dollar depreciated 6 percent on balance against the United Kingdom Canadian dollar. Canada Concerns about liquidity and credit risk related to the century date change generated a temporary bulge in year-end premiums in money market rates in the second half of the year in some currencies. For the euro, the premium—as measured by the implied forward interest rate for a one-month loan spanning 1997 1998 1999 the year-end relative to the rates for NOTE. The data are monthly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 86th Annual Report, 1999 tations of monetary tightening in the doubled, from around $12 per barrel United States and, later, in other indus- at the beginning of the year to more trial countries. Over the year, long-term than $26 per barrel in December. The interest rates increased on balance more rebound was driven by a combination than 100 basis points in nearly all the of strengthening world demand and major industrial countries. The notable constrained world supply. The strong exception was Japan, where long-term U.S. economy, combined with a recovrates were little changed. ery of economic activity elsewhere and Equity prices showed strong and a somewhat more normal weather patwidespread increases in 1999, as the tern than in recent years, led to a 2 perpace of global activity quickened and cent increase in world oil consumption. the threat from emerging-market finan- Oil production, on the other hand, cial crises appeared to recede. In the declined 2 percent, primarily because of industrial countries, equity prices on reduced supplies from OPEC and other average rose sharply, extending the key producers. Starting in the spring, general upward trend of recent years. OPEC consistently held production near The average percentage increase of targeted levels, in marked contrast to equity prices in developing countries the widespread lack of compliance that was even larger, as prices recovered characterized earlier agreements. from their crisis-related declines of the The price of gold fluctuated substanprevious year. The fact that emerging tially in 1999. It declined to about Latin American and Asian equity mar- $250 per ounce at midyear—the lowest kets outperformed those in industrial in twenty years—as several central countries lends some support to the banks, including the Bank of England view that global investors increased and the Swiss National Bank, antheir risk tolerance, especially during the nounced plans to sell a sizable porlast months of the year. tion of their reserves. The September Oil prices increased dramatically dur- announcement that fifteen European ing 1999, fully reversing the declines central banks, including the two just in the previous two years. The average mentioned, would limit their aggregate spot price for West Texas intermediate, sales of bullion and curtail leasing the U.S. benchmark crude, more than activities boosted the price; it briefly exceeded $320 per ounce before turning down later in the year. Foreign Equity Indexes Index, January 1997= 100 Foreign Exchange Operations Latin America No foreign exchange intervention opera- 200 japan \ Europe / tions for the accounts of the Federal \ * -/\ 160 Reserve System or the U.S. Treasury were conducted during the year. Major /?£ 120 foreign central banks reported net purchases of $67 billion in 1999, versus net \ v^ 80 sales of $29 billion in 1998. At the end of the year, the Fed- Developing ^\/-N\v ^ eral Reserve held the equivalent of Asia19 97 j 199V8 / 1999 $16,140 million, valued at current ex- NOTE. The data are monthly and are from Morgan Stanley Capital International, Inc. change rates, in euros and yen. Taking Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 29 into account the dollar's appreciation $3.4 billion of U.S. dollars from the U.S. against the euro and depreciation against Treasury's Exchange Stabilization Fund. the yen in 1999, the cumulative valua- The transaction, designed to redress imtion gains on System foreign currency balances between the foreign currency holdings decreased $560 million, to holdings of the two monetary authori- $1,668 million. ties, was conducted at prevailing mar- On March 18, the Federal Reserve ket exchange rates. The sale of euros exchanged $4.8 billion of euros for resulted in a realized profit of $56 mil- $1.4 billion of Japanese yen and lion for the System. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

31 Monetary Policy Reports to the Congress The reports in this chapter were sub- helped to keep inflation low even as mitted to the Congress on February 23 aggregate demand has been surging and and July 22, 1999, pursuant to the Full as labor markets have tightened. Employment and Balanced Growth Act This past year, economic troubles of 1978. abroad posed a significant threat to the performance of the economy. Foreign economic growth slowed markedly, on Report on February 23, 1999 average, as conditions in many countries deteriorated. The recession in Japan deepened, and several emerging market Monetary Policy and the economies in Asia, which had started to Economic Outlook weaken in the wake of the financial cri- In 1998, the U.S. economy again per- ses of 1997, contracted sharply. A worsformed impressively. Output expanded ening economic situation in Russia last rapidly, the unemployment rate fell to summer led to a devaluation of the ruble the lowest level since 1970, and infla- and a moratorium by that country on a tion remained subdued. Transitory fac- substantial portion of its debt payments. tors, most recently falling prices for As the year progressed, conditions in imports and commodities, especially oil, Latin America also weakened. Although have helped to produce the favorable some of the troubled foreign economies outcomes of recent years, but techno- are showing signs of improvement, logical advances and increased effi- others either are not yet in recovery or ciency, likely reflecting in part height- are still contracting. ened global competition and changes The Russian crisis in mid-August in business practices, suggest that some precipitated a period of unusual volatilof the improvement will be more ity in world financial markets. The lasting. losses incurred in Russia and in other Sound fiscal and monetary policies emerging market economies heightened have contributed importantly to the good investors' and lenders' concerns about economic results: Budgetary restraint at other potential problems and led them the federal level has bolstered national to become substantially more cautious saving and permitted the Federal about taking on risk. The resulting Reserve to maintain lower interest rates effects on U.S. financial markets than would otherwise have been pos- included a substantial widening of risk sible. This policy mix and sustained spreads on debt instruments, a jump in progress toward price stability have fos- measures of market uncertainty and tered clearer price signals, more efficient volatility, a drop in equity prices, and a resource use, robust business invest- reduction in the liquidity of many marment, and sizable advances in the pro- kets. To cushion the U.S. economy from ductivity of labor and in the real wages the effects of these financial strains, and of workers. The more rapid expansion potentially to help reduce the strains as of productive potential has, in turn, well, the Federal Reserve eased mone- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

32 86th Annual Report, 1999 tary policy on three occasions in the for this decline against the yen are fall. Global financial market stresses not clear, but repayment of yenlessened somewhat after mid-autumn, denominated loans by international reflecting, in part, these policy steps as investors and decisions by Japanese well as interest rate cuts in other indus- investors to repatriate their assets in trial countries and international efforts light of increased volatility in global to provide support to troubled emerg- markets seem to have contributed. The ing market economies. Although some exchange value of the dollar fluctuated U.S. financial flows were disrupted for moderately against the major currencies a time, most firms and households over the rest of the year, and after remained able to obtain sufficient credit, declining somewhat early in 1999, it has and the turbulence did not appear rebounded strongly in recent weeks, as to constrain spending to a significant incoming data have suggested continued degree. More recently, some markets strength of economic activity in the were unsettled by the devaluation and United States. Since the end of 1998, the subsequent floating of the Brazilian real dollar has appreciated about 7 percent in mid-January, and the problems in against the yen, partly reflecting further Brazil continue to pose risks to global monetary easing in Japan. At the turn markets. Thus far, however, market of the year, the launch of the third stage reaction outside Brazil to that country's of European Economic and Monetary difficulties has been relatively muted. Union fixed the eleven participating The foreign exchange value of the countries' conversion rates and created dollar rose substantially against the cur- a new common currency, the euro. The rencies of the major foreign industrial dollar has appreciated more than 5 percountries over the first eight months of cent against the euro, in part because of 1998, but subsequently it fell sharply, signs that growth has slowed recently in ending the year down a little on net. The some euro-area economies. appreciation of the dollar in the first half With the U.S. economy expanding of the year carried it to an eight-year rapidly, the economies of many U.S. high against the Japanese yen. In June, trading partners struggling, and the forthis strength against the yen prompted eign exchange value of the dollar having the first U.S. foreign exchange interven- risen over 1997 and the first part of tion operation in nearly three years, an 1998, the U.S. trade deficit widened conaction that appeared to slow the dollar's siderably last year. Some domestic rise against the yen over the following industries were especially affected by days and weeks. Later in the summer, reductions in foreign demand or by concerns about the possible impact on increased competition from imports. For the U.S. economy of increasing difficul- example, a wide range of commodity ties in Latin America began to weigh producers, notably those in agriculture, on the dollar's exchange value against oil, and metals, experienced sharp price major foreign currencies. After peaking declines. Parts of the manufacturing secin mid-August, it fell sharply over the tor also suffered adverse consequences course of several weeks, reversing by from the shocks from abroad. Overall, mid-October the appreciation that had real net exports deteriorated sharply, as occurred earlier in the year. The depre- exports stagnated and imports continued ciation during this period was particu- to surge. The deterioration was particularly sharp against the yen. The reasons larly marked in the first half of the year; Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 33 the second half brought a further, more Monetary Policy, Financial modest, net widening of the external Markets, and the Economy over deficit. 1998 and Early 1999 Meanwhile, domestic spending continued to advance rapidly. Household Monetary policy in 1998 needed to balexpenditures were bolstered by gains ance two major risks to the economic in real income and a further rise in expansion. On the one hand, with the wealth, while a low cost of capital and domestic economy displaying consideroptimism about future profitability able momentum and labor markets spurred businesses to invest heavily tight, the Federal Open Market Comin new capital equipment. Although mittee (FOMC) was concerned about securities markets were disrupted in the possible emergence of imbalances late summer and early fall, credit gen- that would lead to higher inflation and erally remained available from alterna- thereby, eventually, put the sustainabiltive sources. Once the strains on securi- ity of the expansion at risk. On the other ties markets had eased, businesses and hand, troubles in many foreign econohouseholds generally had ready access mies and resulting financial turmoil both to credit and other sources of finance on abroad and at home seemed, at times, to relatively favorable terms, although raise the risk of an excessive weakening spreads in some markets remained quite of aggregate demand. elevated, especially for lower-rated bor- Over the first seven months of the rowers. All told, household and business year, neither of these potential tendenoutlays rose even more rapidly than in cies was sufficiently dominant to prompt 1997, and that acceleration kept the a policy action by the FOMC. Although growth of real GDP strong even as net the incoming data gave no evidence of a exports were slumping. sustained slowing of output growth, the Deteriorating economic conditions Committee members believed that the abroad, coupled with the strength of the pace of expansion likely would moderdollar over the first eight months of the ate as businesses began to slow the rapid year, helped to hold down inflation in rates at which they had been adding to the United States by trimming the prices their stocks of inventories and other of oil and other imports. These declines investment goods, and as households reduced both the prices paid by consum- trimmed the large advances in their ers and the costs of production in many spending on consumer durables and lines of business, and the competition homes. Relatively firm real interest from abroad kept businesses from rais- rates, buoyed by a high real federal ing prices as much as they might have funds rate resulting from the decline in otherwise. As the result of a reduced the level of expected inflation, were rate of price inflation, workers enjoyed a thought likely to help restrain the growth larger rise in real purchasing power even of spending by businesses and houseas increases in nominal hourly compen- holds. Another check on growth was sation picked up only slightly on aver- expected to come from the effects on age. Because of increased gains in pro- imports and exports of the economic ductivity, corporations in the aggregate difficulties in emerging market econowere able to absorb the larger real pay mies in Asia and elsewhere. Indeed, proincreases without suffering a serious duction in the manufacturing sector diminution of profitability. slowed substantially in the first half Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 86th Annual Report, 1999 of the year, and capacity utilization Committee again left monetary policy dropped noticeably. Moreover, inflation unchanged at the August meeting, but remained subdued, and a pickup was not it shifted to a symmetric directive, expected in the near-to-intermediate reflecting its perception that the risks to term because of declining oil prices, and the economic outlook, at prevailing because of economic weakness abroad short-term rates, had become roughly and the appreciation of the dollar, which balanced. were expected to trim the prices of Over subsequent weeks, conditions in imported goods and to increase price financial markets and the economic outcompetition for many U.S. producers. look in many foreign countries deterio- Nonetheless, with labor markets already rated further, increasing the dangers quite taut and aggregate demand grow- to the U.S. expansion. With investors ing rapidly—a combination that often around the world apparently reevaluathas signaled the impending buildup of ing the risks associated with various inflationary pressures—the Committee, credits and seemingly becoming less at its meetings from March through willing or able to bear such risks, asset July, judged conditions to be such that, demands shifted toward safer and more if a policy action were to be taken in the liquid instruments. These shifts caused period immediately ahead, it more likely a sharp fall in yields on Treasury securiwould be a tightening than an easing; its ties. Spreads of yields on private debt directives to the Account Manager of securities over those on comparable the Domestic Trading Desk at the Fed- Treasury instruments widened coneral Reserve Bank of New York noted siderably further, and issuance slowed that asymmetry. sharply. Measures of market volatility By the time of the August FOMC increased, and liquidity in many finanmeeting, however, the situation was cial markets was curtailed. Equity prices changing. Although tight labor markets continued to slide lower, with most and rapid output growth continued to broad indexes falling back by early pose a risk of higher inflation, the damp- September to near their levels at the ing influence of foreign economic devel- start of the year. Reflecting the weaker opments on the U.S. economy seemed and more uncertain economic outlook, likely to increase. The contraction in the some banks boosted interest rate spreads emerging market economies in Asia and fees on new loans to businesses and appeared to be deeper than had been tightened their underwriting standards. anticipated, and the economic situation Against this backdrop, at its Septemin Japan had deteriorated. Financial ber meeting the FOMC looked beyond markets in some foreign economies also incoming data suggesting that the econhad experienced greater turmoil, and, omy was continuing to expand at a the day before the Committee met, Rus- robust pace, and it lowered the intended sia was forced to devalue the ruble. level of the federal funds rate lA percent- These difficulties had been weighing on age point. The Committee noted that U.S. asset markets: Stock prices had the rate cut would cushion the effects fallen sharply in late July and into on prospective U.S. economic growth of August as investors became concerned increasing weakness in foreign econoabout the outlook for profits, and risk mies and of less accommodative condispreads in debt markets had widened, tions in domestic financial markets. The albeit from very low levels. Taking directive adopted at the meeting sugaccount of these circumstances, the gested a bias toward further easing over Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 35 the intermeeting period. In the days mies had receded a bit, partly reflecting following the policy move, disturbances concerted international efforts to proin financial markets worsened. Move- vide assistance to Brazil, the foreign ments in the prices of securities were economic outlook remained uncertain. exacerbated by a deterioration in market With downside risks still substantial, liquidity, as some securities dealers cut and in light of the cumulative effect back on their market-making activities, since August of the tightening in many and by the expected unwinding of posi- sectors of the credit markets and the tions by hedge funds and other lever- weakening of economic activity abroad, aged investors. In early October, Trea- the FOMC reduced the intended federal sury yields briefly tumbled to their funds rate a further lA percentage point lowest levels in many years, reflecting at its November meeting, bringing the efforts by investors to exchange other total reduction during the autumn to instruments for riskless and liquid Trea- 3A percentage point. The Board of Govsury securities. ernors also approved a second lA per- Although some measures of mar- centage point cut in the discount rate. ket turbulence had begun to ease a The Committee believed that, with this bit by mid-October, financial markets policy action, financial conditions could remained extremely volatile and risk reasonably be expected to be consistent spreads were very wide. On October 15, with fostering sustained economic consistent with the directive from the expansion while keeping inflationary September meeting, the intended federal pressures subdued. The action provided funds rate was trimmed another lA per- some insurance against an unexpectedly centage point, to 5 percent. This policy severe weakening of the expansion, and move, which occurred between FOMC the Committee therefore established a meetings, came at the initiative of Chair- symmetrical directive. By the time of man Greenspan and followed a confer- the December meeting, the situation in ence call with Committee members. At financial markets had changed little, on the same time, the Board of Governors balance, and the Committee decided that approved a lA percentage point reduc- no further change in rates was desirable tion in the discount rate. These actions and that the directive should remain were taken to buffer the domestic econ- symmetrical. omy from the impact of the less accom- Some measures of financial volatility modative conditions in domestic finan- eased further in the new year, although cial markets, in part by contributing risk spreads on corporate bonds to some stabilization of the global finan- remained at quite high levels. Yields cial situation. on Treasury securities were about flat, Following the October policy move, on balance, in January, as the effect strains in domestic financial markets of stronger-than-expected economic diminished considerably. As safe-haven growth appeared to be about offset by demands for Treasury securities ebbed, data suggesting that inflation remained Treasury yields generally trended quiescent and perhaps also by the effects higher, and measures of financial market of some safe-haven flows prompted by volatility and illiquidity eased. Nonethe- the deteriorating situation in Brazil. less, risk spreads remained very wide, Over the same period, stock prices and liquidity in many markets continued surged higher, led by computer and to be limited. Moreover, although pres- other technology shares, and most stock sures on some emerging market econo- price indexes posted new highs. By Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 86th Annual Report, 1999 the time of the February 2-3 meeting, 4V4 percent to 4Vi percent. With tightfinancial markets were easily accommo- ness of the labor market expected to dating robust demands for credit, and persist and oil and import prices unlikely economic activity seemed to have more to be as weak in 1999 as they were in momentum than many had anticipated. 1998, inflation is expected to move However, the foreign sector continued up somewhat from the rate of this past to pose a threat to U.S. growth going year but to remain low by the standards forward, inflation showed no signs of of the past three decades: The central picking up despite the rapid pace of tendency of the FOMC participants' growth and the very tight labor market, CPI inflation forecasts for 1999 is 2 perand some slowing of economic growth cent to 2Vi percent. The Federal Reserve remained a likely prospect. In these cir- officials' inflation forecasts are closely cumstances, the FOMC concluded that aligned with that of the Administration, it was prudent to wait for further infor- and their forecasts of real GDP and mation, and it left policy unchanged. unemployment depict a somewhat stronger real economy than the Administration is projecting. Economic Projections for 1999 Present circumstances suggest that By and large, the members of the Board domestic demand could continue to rise of Governors and the Federal Reserve briskly for a while longer. Consumer Bank presidents, all of whom participate spending continues to be driven by in the deliberations of the FOMC, strong gains in employment, increases expect the economy to expand moder- in real incomes, and rising levels of ately, on average, in 1999. The central wealth. Those same factors, together tendency of the FOMC participants' with low mortgage interest rates, are forecasts of real GDP growth from the keeping housing activity robust. Busifourth quarter of 1998 to the fourth nesses are still investing heavily in new quarter of 1999 is 2V2 percent to 3 per- capital, especially computers and other cent. The anticipated expansion is high-tech equipment. Households and expected to create enough new jobs to businesses appear willing to take on keep the civilian unemployment rate more debt in support of spending; near its recent average, in a range of although spreads on corporate debt Economic Projections for 1999 Percent Federal Reserve governors and Reserve Bank presidents Indicator Administration Central Range tendency Change, fourth quarter to fourth quarter1 Nominal GDP 33/4-5 4-4V4 4.0 RealGDP2 2-3 ^ 2V&-3 2.0 Consumer price index3 V/i-VA 2-Vh 2.3 Average level, fourth quarter Civilian unemployment rate 4»/4-43/4 VA-AVz 4.9 1. Change from average for fourth quarter of 1998 to 2. Chain-weighted. average for fourth quarter of 1999. 3. All urban consumers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 37 remain elevated, rate levels are per- The future course of inflation will ceived to be attractive for most borrow- depend in part on what happens to the ers, and restraint on access to finance is prices of oil and other imports, and not much in evidence. restraint from those sources seems As the year progresses, however, unlikely to be as great as it was in 1998. gains in domestic spending should The drop in the price of oil this past year begin to moderate. Spending increases left it toward the lower end of its range for housing, consumer durables, and of the past couple of decades and has business equipment have been excep- thereby reduced the incentives for tionally large for a while now, substan- exploration, drilling, and production. tially raising the rate of growth in the Futures markets have been showing a amounts of these goods owned by busi- gradual rise in the price of oil going nesses and households; some modera- forward. Prices of nonoil imports tion in outlays seems likely, lest these changed little in the fourth quarter of holdings become disproportionate to last year after having fallen sharply in underlying trends in income and output. previous quarters. Indicators of the pres- The outlook for spending continues to sures on domestic resources provided be obscured to some degree by uncer- mixed signals over the past year. tainties about the course of equity In manufacturing, capacity utilization prices; a failure of these prices to match declined considerably, to a level below the outsized gains posted in recent years its long run average, reflecting slower would contribute to some moderation in production growth and sizable additions spending growth, especially by house- to the stock of capital. However, labor holds. Government spending, which markets remained very taut, and with accounts for about one-sixth of domes- the economy apparently carrying subtic demand, seems likely to expand at stantial momentum into this year, data a moderate pace overall. Along with on costs and prices will need to be monithe numerous other uncertainties that tored carefully for signs that a rising attend the outlook, an additional uncer- inflation pattern might start to take tainty is present this year because of hold. In that regard, the FOMC will the approach of the year 2000 and the continue to rely not only on the CPI associated Y2K problem. but also on a variety of other price mea- Growth abroad is expected to remain sures to gauge the economy's inflation sluggish, on balance, in 1999, limiting performance in the period ahead. the prospects for exports. At the same time, growth of the U.S. economy prob- Money and Debt Ranges for 1999 ably will continue to generate fairly brisk increases in imports. In total, real At its most recent meeting, the FOMC net exports of goods and services seem reaffirmed the 1999 monetary growth likely to fall further in the coming year, ranges that were chosen on a provisional although several factors—the decline in basis last July: 1 percent to 5 percent the dollar from its peak of last summer, for M2, and 2 percent to 6 percent for the expected slowing of income growth M3. As has been the case for some time, in the United States, and the possibility the FOMC intends these money growth of a slight pickup in economic growth ranges to be benchmarks for growth abroad—provide a basis for thinking under conditions of price stability, susthat this year's drop in net exports might tainable real economic growth, and hisnot be as large as that of 1998. torical velocity relationships rather than Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 86th Annual Report, 1999 ranges that encompass the expected savings in short-term assets in M2. In growth of money over the coming year addition, M2 may have been boosted by or that serve as guides to policy. a desire on the part of some investors to Given continued uncertainty about redirect savings flows away from equimovements in the velocities of M2 and ties after several years of outsized gains M3 (the ratios of nominal GDP to the in stock market wealth. With equity aggregates), the Committee would have wealth still elevated and the yield curve little confidence that money growth likely to remain flat, M2 velocity could within any particular range selected for continue to fall this year. However, the the year would be associated with the pace of decline should slow as some economic performance it expected or households respond to the easing of desired. Nonetheless, the Committee concerns about financial market volatilbelieves that, despite the apparent large ity by reversing a portion of the shift shift in velocity behavior in the early toward M2 assets that occurred last fall. 1990s, money growth has some value as Indeed, this effect may already be visan economic indicator. Indeed, some ible, as M2 growth, while still robust, FOMC members have expressed the has slowed considerably early this year. concern that the unusually rapid growth If velocity does fall, given the Commitin the money and debt aggregates in tee's expectations for nominal income 1998 might have reflected monetary growth, M2 could again exceed its conditions that were too accommodative price-stability benchmark range. and would ultimately lead to an increase M3 expanded 11 percent last year, in inflation pressures. The Committee and its velocity fell 5V4 percent, the will continue to monitor the monetary largest drop in many years. The rapid aggregates as well as a wide variety of growth in this aggregate owed in large other economic and financial data to part to a substantial rise in institutional inform its policy deliberations. money funds. These funds have been Last year, M2 increased 8V2 percent, expanding rapidly in recent years as and with nominal GDP rising 5 percent, nonfinancial firms increasingly employ M2 velocity decreased 3 percent. This them to provide cash management serdrop in velocity was considerably larger vices. Investments in these funds prothan would have been expected on the vide businesses with greater liquidity basis of historical relationships and the than direct holdings of money market modest decline in the opportunity cost instruments, and by substituting for such of M2 (measured as the difference direct holdings, they boost M3. M3 was between the interest rate on Treasury also buoyed last year by a large advance bills and the weighted average rate available on M2 assets). The fall in Ranges for Growth of Monetary velocity in part reflected an increased and Debt Aggregates demand for the safe and liquid assets in Percent M2 as investors responded to the heightened volatility in financial markets in Aggregate 1997 1998 1999 the second half of the year. Other factors that may have contributed include lower M2 1-5 1-5 1-5 M3 2-6 2-6 2-6 long-term interest rates and a very flat Debt 3-7 3-7 3-7 yield curve, which might have suggested to households that they would be giving NOTE. Change from average for fourth quarter of preceding year to average for fourth quarter of year up very little in earnings by parking indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 39 in the managed liabilities banks used to GDP increased a little more than 4 perfund rapid growth in bank credit. In cent over the four quarters of the year. part, the growth in bank credit reflected The economic difficulties facing many demand by borrowers shifting from the of our trading partners and the strength securities markets, and with these mar- of the dollar through much of the year kets again receptive to new issues, bank led to sluggishness in real exports of credit growth this year is expected to goods and services. However, the drag slow to a pace more in line with broader on the economy from that source was debt aggregates However, institutional more than offset by exceptional strength money funds are likely to continue their in the real expenditures of households robust gains, contributing to a further and businesses, which were powered by diminution in M3 velocity and, possibly, strong real income growth, large gains to growth of this aggregate above its in the value of household wealth, ready price-stability range. access to finance during most of the Domestic nonfinancial debt grew year, and widespread optimism regard- 6V4 percent in 1998, somewhat above ing the future of the economy. Although the middle of the 3 percent to 7 per- turmoil in financial markets seemed to cent growth range the Committee estab- threaten the economy for a time in late lished last February. This robust growth summer and early autumn, that threat reflected large rises in the debt of busi- later receded, in part because of the nesses and households owing to sub- steps taken by the Federal Reserve to stantial advances in spending as well as prevent the tightening of credit markets debt-financed mergers and acquisitions. from impairing the expansion of activ- However, the increase in private-sector ity. The final quarter of the year brought debt was partly offset by the first annual brisk expansion of employment and decline in federal debt in almost thirty income, and the limited indicators of years. As with the monetary aggregates, activity in early 1999 have been strong, the Committee left the range for debt on balance. growth unchanged for 1999. After an The increase in the general price level aberrant period in the 1980s during this past year was smaller than that in which debt growth greatly exceeded the previous year, which had itself been growth of nominal GDP, debt growth among the smallest in decades. The over the past decade has returned to its chain-type price index for GDP rose historical pattern of about matching slightly less than 1 percent. The further growth of nominal GDP, and the Com- slowing of price increases was in large mittee members expect debt to fall part a reflection of sluggish conditions within its range this year. in the world economy, which brought declines in the prices of a wide range of imported goods, including oil and other Economic and Financial primary commodities. In the domestic Developments in 1998 economy, nominal hourly compensation and Early 1999 of workers picked up only slightly The U.S. economy continued to display despite the tightness of the labor market, great vigor in 1998, despite a sharp and much of the compensation increase slowing of growth in foreign economies was offset by gains in labor productivand an unsettled world financial envi- ity. As a result, unit labor costs, the most ronment. According to the Commerce important item in total business costs, Department's advance estimate, real rose only modestly. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 86th Annual Report, 1999 The Household Sector cent in real terms, a gain that reflected both increased nominal outlays and a Personal consumption expenditures further substantial decline in computer increased more than 5 percent in real prices. Consumer outlays on motor vehiterms in 1998, the biggest gain in a cles also rose sharply, despite some decade and a half. Support for the large temporary limitations on supply from a rise in spending came from a combina- midyear auto strike. Spending on most tion of circumstances that, on the whole, other types of durable goods registered were exceptionally favorable to house- increases that were well above the averholds. Strong gains in employment and ages of the past decade or so. Because real hourly pay gave another appreciable goods such as these are not consumed boost to the growth of real labor income. all at once—but, rather, add to stocks At the same time, the wealth of house- of durable goods that will be yielding holds recorded another year of substan- services to consumers for a number of tial increase, bolstered in large part by years—they embody a form of ecothe continued rise in equity prices. nomic saving that is not captured in the Although not all balance sheet data for normal measure of the saving rate in the the end of 1998 are available, household national income accounts. net worth at that point appears to have The increases in income and net been up about 10 percent from the level worth that led households to boost conat the end of 1997. The cumulative gain sumption expenditures also led them to in household wealth since 1994 has invest heavily in additions to the stock amounted to nearly 50 percent. of housing. Declines in mortgage inter- The rise in net worth probably est rates weighed in as well, helping to accounts for much of the decline in the maintain the affordability of housing personal saving rate over the past few even as house prices moved up someyears, to an annual average of Vi percent what faster than overall inflation. These in 1998. Households tend to raise their developments brought the objective of saving from current income when they owning a home within the reach of a feel that wealth must be increased to greater number of households, and the meet longer-run objectives, but they are home-ownership rate, which has been willing to reduce their saving from cur- trending up this decade, rose to another rent income when they feel that wealth new high in 1998. already is at satisfactory levels. The low In the single-family sector, sales of level of the saving rate in 1998 is not new and existing homes surged, the so remarkable when gauged against a former rising more than 10 percent from wealth-to-income ratio that has been the previous year's total and the latter running in a range well above its longer- more than 13 percent. Construction of run historical average. single-family houses strengthened mark- All of the major categories of per- edly. The number of these units started sonal consumption expenditures— during the year was the largest since the durables, nondurables, and services— late 1970s, and it exceeded the previous recorded gains in 1998 that were the year's total by about 12 percent. In the largest of the 1990s. Spending on dura- fourth quarter, unusually mild weather ble goods rose more than 12 percent permitted builders to maintain activity over the year. Within that category, later into the season than they normally expenditures on home computers once would have and gave an added kick to again stood out, rising roughly 70 per- housing starts. Starts increased further Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 41 in January of this year, despite harsher market. In addition, with mortgage rates weather in some regions. reaching their lowest levels in many In contrast to the strength in the years, many households refinanced single-family sector, the number of existing mortgages, and some housemultifamily units started in 1998 was holds likely took the opportunity preup only a little from the total for 1997. sented by refinancing to increase the After bottoming out at a very low level size of their mortgages, using the extra early in the 1990s, construction of these funds raised to finance current expendiunits had been trending back up fairly tures or to pay down other debts. briskly until this past year. But with The growth in household debt vacancy rates on multifamily rental units reflected both supply and demand influrunning a touch higher this past year, ences. With wealth rising faster than builders and their creditors may have income over the year and with consumer become concerned about adding too confidence remaining at historically many new units to the stock. Financing high levels, households were willing to appeared generally to be in ample sup- boost their indebtedness to finance ply for projects that looked promising; increased spending. In addition, lenders during the period of financial turmoil, generally remained accommodative the flow of credit was supported by sub- toward all but the most marginal housestantial purchases of multifamily mort- holds, even after the turmoil in many gages and mortgage-backed securities financial markets in the fall. After a by Freddie Mac and Fannie Mae. more general tightening of loan condi- Total outlays for residential invest- tions in response to a rise in losses on ment increased about I2l/z percent in such loans between mid-1995 and midreal terms during 1998, according to the 1997, a smaller and declining fraction Commerce Department's initial tally. of banks tightened consumer lending The large increase reflected not only the standards and terms last year, according construction work undertaken on new to Federal Reserve surveys. However, residential units during the year but also the availability of high loan-to-value sizable advances in real outlays for and subprime home equity loans likely home improvements and in the volume was reduced in the fall because of diffiof sales activity being carried on by real culties in the market for securities estate brokers, which generated substan- backed by such loans. tial gains in commissions. Despite the rapid increase in debt, The robust growth in household measures of household financial stress expenditures in 1998 was accompanied were relatively stable last year, although by an expansion of household debt that some remained at high levels. The delinlikely exceeded 8V2 percent, a some- quency rate on home mortgages has what larger rise than in other recent stayed quite low in recent years, while years. Nonmortgage debt increased the delinquency rate on auto loans at about 6 percent, about 2 percentage domestic auto finance companies has points above the previous year's pace trended lower. The delinquency rate on but down considerably from the double- credit card loans at banks fluctuated in a digit increases posted in 1994 and 1995. fairly narrow range in 1997 and 1998, Home mortgage debt is estimated to but it remained elevated after having have jumped more than 9 percent, its posted a substantial rise over the prelargest annual advance since 1990, vious two years. Personal bankruptcy boosted in part by the robust housing filings have followed a broadly similar Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 86th Annual Report, 1999 pattern: Annual growth has run at about throughout the expansion—namely, the 3 percent over the past year and a half, introduction of machines that offer down from annual increases of roughly greater computing power at increasingly 25 percent between mid-1995 and early attractive prices and that provide busi- 1997. The stability of these measures nesses new and more efficient ways over the past couple of years likely of organizing their operations. Price owes in part to the earlier tightening of declines this past year were especially standards and terms on consumer loans. large, as the cost reductions associated In addition, lower interest rates and with technical change were augmented longer loan maturities, which resulted by heightened international competition from the shift toward mortgage finance, in the markets for semiconductors and have helped to mitigate the effects of other computer components and by price increased borrowing on household debt- cutting to work down the stocks of some service burdens. assembled products. Investment in communications equipment—another high-tech category The Business Sector that is an increasingly important part Business fixed investment increased of total equipment outlays—rose about about HVz percent during 1998, with I8V2 percent in 1998. After having a 17V2 percent rise in equipment spend- traced out an erratic pattern of ups and ing more than accounting for the over- downs through the latter part of the all advance. The strength of the econ- 1980s and the early 1990s, real outlays omy and optimism about its longer-run on this type of equipment began to prospects provided underpinnings for record sustained large annual increases increased investment. Outlays were also in 1994, and the advance last year was bolstered by the efficiencies obtainable one of the largest. Spending on other with new technologies, by the favorable types of equipment displayed varying prices at which many types of capital degrees of strength across different secequipment could be purchased, and, tors but recorded a sizable gain overall. except during the period of financial Investment in transportation equipment market turmoil, by the ready availability was strong across the board, spurred by and low cost of finance, either through the need to move greater volumes of borrowing or through the issuance of goods or to carry more passengers in an equity shares. expanding economy. Spending on indus- Real expenditures on office and com- trial machinery advanced about AVi perputing equipment, after having risen at cent after larger gains in most previous an average rate of roughly 30 percent in years of the expansion, a pattern that real terms from 1991 through 1997, mirrored a slowing of output growth in shifted into even higher gear in 1998, the industrial sector. climbing about 65 percent. The outsized Business investment in nonresiincrease likely owed in part to the efforts dential structures, which accounts for of some businesses to put new computer slightly more than 20 percent of total systems in place before the end of the business fixed investment, was down millennium, in hopes of circumventing slightly in 1998, according to the potential difficulties arising from the advance estimate. Sharply divergent Y2K problem. But, beyond that, invest- trends were evident within the sector, ment in computers is being driven by ranging from considerable strength in the same factors that have been at work the construction of office buildings to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 43 marked weakness in the construction of over the first three quarters of 1998 but industrial buildings. The waxing and at a much slower pace than in most waning of industry-specific construction other years of the current expansion. cycles appears to be the main explana- Companies' earnings from operations in tion for the diverse outcomes of this past the rest of the world fell back a bit, year. Although some of the more specu- as did the profits of private financial lative construction plans may have been corporations from domestic operations. shelved because of a tightening of the The profits of nonfinancial corporations terms and standards on loans, partly in from domestic operations increased at reaction to the financial turmoil, most an annual rate of about \3A percent. builders appear to have been able to Although the volume of output of the eventually obtain financing. Despite the nonfinancial companies continued to sluggishness of spending on structures rise rapidly, profits per unit of output this past year, the level of investment were squeezed a bit by companies' diffiremained high enough to generate con- culties in raising prices in step with costs tinued moderate growth in the real stock in a competitive market environment. of structures. With profits expanding more slowly Business inventories increased about and investment spending still on the 4V2 percent in real terms this past year upswing, businesses' external funding after having risen more than 5 percent needs increased substantially last year. during 1997. Stocks grew at a 7 percent Aggregate borrowing by the nonfinanannual rate in the first quarter, apprecia- cial business sector is estimated to have bly faster than final sales, but inventory expanded 9l/z percent from the end of growth over the remainder of the year 1997 to the end of 1998, the largest was considerably slower than in the first increase in ten years. The rise reflected quarter. At year-end, stocks in most non- growth in all major types of business farm industries were at levels that did debt. Business borrowing was also not seem likely to cause firms to restrain boosted by substantial merger and production going forward. Inventories acquisition activity. Indeed, mergers of vehicles may even have been a little and acquisitions, share repurchases, on the lean side, as a result of both a and foreign purchases of U.S. firms last strike that held down assemblies through year overwhelmed the high level of both the middle part of 1998 and exception- initial and seasoned public equity issues, ally strong demand, which prevented the and net equity retirements likely rebuilding of stocks later in the year. By exceeded $250 billion. contrast, inventories at year-end appear The disruptions in the financial marto have been excessive in a few nonfarm kets in late summer and early fall appear industries that have been hurt by the to have had little effect on total business sluggish world economy. Stocks of farm borrowing but caused a substantial temcommodities also appeared to be exces- porary shift in the sources of credit. sive, having been boosted further this With investors favoring high credit qualpast year by large harvests and sluggish ity and liquidity, yields on lower-rated export demand. corporate bonds rose despite declining The economic profits of U.S. Treasury rates; the spread of yields on corporations—that is, book profits junk bonds over those on comparable adjusted so that inventories and fixed Treasury securities roughly doubled capital are valued at their current between mid-summer and mid-autumn replacement cost—rose further, on net, before falling back somewhat as condi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 86th Annual Report, 1999 tions in financial markets eased. The Despite the rapid growth in debt and spread of rates on lower-tier commercial the relatively small gain in profits last paper over those on higher-quality paper year, the financial condition of nonfinanrose substantially during the fall but had cial businesses remained strong. Interest retraced the rise by the early part of this rates for many businesses fell, on balyear. ance, over the course of the year, and Reflecting these adverse market con- bond yields for investment-grade firms ditions, nonfinancial corporate bond reached their lowest level in many years. issuance fell sharply in August and Reflecting these low borrowing costs, remained low through mid-October, the aggregate debt-service burden for with issuance of junk bonds virtually nonfinancial corporations, measured as halted for a time. Commercial paper the ratio of net interest payments to cash issuance rose sharply in August and flow, remained about 9l/z percent, near September, as some firms apparently its low of 9 percent in 1997 and less decided to delay bond issues, turning than half the peak level reached in temporarily to the commercial paper 1989. The delinquency rate for banks' market instead. Bond issuance picked commercial and industrial loans also up again in late October, however, and remained near the trough reached in late issuance in November was robust. 1997, while that for commercial real Reflecting this rebound, commercial estate loans fell a bit further from the paper outstanding fell back in the fourth already very low level posted in 1997. quarter. More recently, bond issuance Although Moody's Investors Service has remained healthy, while borrowing downgraded more nonfinancial firms in the commercial paper market has than it upgraded over the second half picked up. of the year, the downgraded firms were smaller on average, and so the debt of During the period when financial marthose upgraded about equaled the debt kets were strained, some borrowers subof those downgraded. Through October, stituted bank loans—in some cases business failures remained at the low under credit lines priced before the marend of the range seen over the past kets became volatile—for other sources decade. of credit, and business loans at banks expanded very rapidly for a time before tailing off late in the year. Federal The Government Sector Reserve surveys indicate that banks responded to the turmoil in financial The federal government recorded a surmarkets by tightening standards and plus in the unified budget this past fisterms on new loans and credit lines, cal year for the first time in nearly especially loans to larger customers and three decades. The surplus, amounting those to finance commercial real estate to $69 billion, was equal to about 3A perventures. The tightening reflected the cent of GDP, a huge turnabout from the less favorable or more uncertain eco- deficits of the early 1990s, which in nomic outlook as well as a reduced tol- some years were more than 4V2 percent erance for risk on the part of some of GDP. The swing from deficit to surbanks. Bank lending standards and plus over the past few years is partly terms appear to have tightened only a the result of fiscal policies aimed at lowlittle further since the fall, however, and ering the deficit and partly the result business loans at banks have expanded of the strength of the economy and the a bit since the end of December. stock market. Excluding net interest Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 45 payments—a charge stemming from slower growth of corporate profits. In past deficits—the government recorded the first three months of fiscal 1999, net a surplus of more than $300 billion in receipts from corporate taxes dipped fiscal 1998. below year-earlier levels, but gains in The improvement in the govern- individual income taxes and payroll ment's saving position has permitted taxes kept total federal receipts on a national saving—the combined gross rising trajectory. saving of households, businesses, and Unified outlays increased 3V* percent governments—to move up about 3 per- in fiscal 1998 after having risen 2Vi percentage points from its low of a few cent in the preceding fiscal year. Net years ago, even though personal saving interest payments and nominal expendihas fallen sharply. In turn, that increase tures for defense fell slightly in the latest in national saving has helped facili- fiscal year, and outlays for income secutate the boom in investment spend- rity and Medicare rose only a little. ing—in contrast to the experience of the Social security expenditures increased 1980s and early 1990s, when persistent moderately but somewhat less than in large budget deficits tended to reduce other recent years. By contrast, the national saving, boost interest rates growth of Medicaid payments picked higher than they otherwise would have up to about 6 percent after having been, and thereby crowd out private increased less than 4 percent in each of capital formation. the preceding two years; however, even Federal receipts in the unified budget the 1998 rise was not large compared in fiscal year 1998 were up 9 percent with those of many earlier years when from the previous fiscal year, with much both medical costs and Medicaid caseof the gain coming from personal loads were increasing rapidly and rates income taxes, which rose more than of federal reimbursement to the states 12 percent for a second consecutive were being raised. Federal spending year. These receipts have been rising in fiscal 1999 will be boosted to some faster than personal income in recent degree by new budget authority for a years, for several reasons: Tax rates variety of functions, including defense, at the high end of the income scale embassy security, disaster relief, prepawere raised by legislation that was ration for Y2K, and aid to agriculture; passed in 1993 to help reduce the defi- this authority was created in emergency cit; more taxpayers have moved into legislation that provided an exception to higher tax brackets as income has statutory spending restrictions. increased; and large increases in asset Real federal outlays for consumpvalues have raised tax receipts from tion and investment, the part of fedcapital gains. Social insurance tax eral spending that is counted in GDP, receipts, the second most important increased 1 percent, on net, from the source of federal revenue, increased final quarter of calendar year 1997 to the 6 percent in fiscal 1998, just a touch final quarter of 1998. A reduction in real faster than the increase in fiscal 1997 defense outlays over that period was and roughly in step with the growth more than offset by a jump in the nonof wages and salaries. Receipts from defense category. the taxes on corporate profits, which With the budget balance shifting from account for just over 10 percent of fed- deficit to surplus, the stock of publicly eral revenues, rose less rapidly than in held federal debt declined last year for other recent years, restrained by the the first time since 1969 and fell further Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 86th Annual Report, 1999 as a share of GDP. From the end of 1997 the taxes on individuals' incomes has to the end of 1998, U.S. government been growing very rapidly, keeping total debt fell 1 Vi percent, as the government receipts on a solid upward course. At reduced the outstanding stock of both the same time, the growth of transfer bills and coupon securities. Despite the payments, which had threatened to reduction in its debt, the federal govern- overwhelm state and local budgets earment continued substantial gross bor- lier in the decade, has slowed substanrowing to fund the retirement of matur- tially in recent years. Growth of other ing securities. However, with the need types of spending has been trending up for funds trimmed substantially, the moderately, on balance. The 1998 rise in Treasury changed its auction schedules, real expenditures for consumption and discontinuing the three-year note auc- investment amounted to about 2lA pertions and moving to quarterly, rather cent, according to the initial estimate; than monthly, auctions of five-year annual gains have been in the range of notes. By reducing the number of cou- 2 percent to 23A percent in each of the pon security issues, the Treasury is able past seven years. to boost the size of each, thereby con- Despite rising surpluses, state and tributing to their liquidity. The decrease local government debt increased an estiin the total volume of coupon securities mated 7 percent in 1998, a pickup of is intended to boost the size of bill offer- about 2 percentage points from growth ings over time, helping liquidity in that in 1997. Somewhat more than half of market and also allowing, as the Trea- the long-term borrowing by state and sury prefers, for balanced issuance local governments last year reflected across the yield curve. The Treasury new borrowing to fund current and also announced in October that all future anticipated capital spending on utilities, bill and coupon security auctions would transportation, education, and other employ the single-price format that had capital projects. The combination of already been adopted for the two-year budget surpluses and relatively heavy and five-year note auctions and for auc- borrowing likely reflected a number of tions of inflation-indexed securities. The factors. First, some of these govern- Treasury judged that the single-price ments may have spent the newly raised format had reduced servicing costs and funds on capital projects while at the resulted in broader market participation. same time building up surpluses in The Treasury continued to auction "rainy day funds" for later use. Second, inflation-indexed securities in substan- because state and local governments tial volume last year in an effort to build under some circumstances are allowed up this part of the Treasury market. to hold funds raised in the markets In April, the Treasury issued its first for as long as five years before spendthirty-year indexed bond, and in Sep- ing them, some of the money raised tember it announced a regular schedule last year may not have been spent. of ten- and thirty-year indexed security Finally, there was a substantial volume auctions. The Treasury also began offer- of "advance refunding" last year. In ing inflation-indexed savings bonds in an advance refunding, the borrower September. issues new bonds before existing State and local governments recorded higher-rate bonds can be called, in further increases in their budgetary sur- anticipation of calling the old bonds pluses in 1998, both in absolute terms on the date that option becomes availand as a share of GDP. Revenue from able. While this sort of refinancing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 47 temporarily boosts total debt, it allows investment income from abroad. Until the state or local government to lock 1997, net investment income had helped in the lower rate even if municipal to offset persistent trade deficits. But as bond yields subsequently rise over the U.S. net external debt has risen in the period before the call date. The recent years, net investment income has high level of advance-refunding activ- become increasingly negative, moving ity last year was the result of lower from a $14 billion surplus in 1996 to a borrowing costs. Although yields on $5 billion deficit in 1997 and a deficit tax-exempt municipal securities did averaging $15 billion at an annual rate not decline nearly as much as those on over the first three quarters of 1998. comparable Treasury securities, they Net income from portfolio investment nonetheless reached their lowest levels became increasingly negative during in many years. In addition, rating agen- that period as the net portfolio liability cies upgraded about five times as many position of the United States grew state and local government issues last larger. In addition, net income from year as they downgraded, trimming bor- direct investment slowed last year rowing costs further for the upgraded because slower foreign economic entities. growth lowered U.S. earnings on investment abroad, the appreciation of the dollar reduced the value of U.S. earnings, The External Sector and buoyant U.S. growth boosted foreigners' earnings on direct investment Trade and the Current Account in the United States. U.S. external balances deteriorated fur- The rise in the trade deficit reflected ther in 1998, largely because of the dis- an increase of about 10 percent in real parity between the rapid growth of the imports of goods and services during U.S. economy and the sluggish growth 1998, according to the advance estiof the economies of many of our trading mates from the Commerce Department. partners. The nominal trade deficit for The expansion was fueled by robust goods and services was $169 billion, growth of U.S. domestic demand and by considerably larger than the $110 billion continued declines in import prices, deficit in 1997. For the first three quar- which stemmed in part from the strength ters of the year, the current account defi- of the dollar through mid-August and cit averaged $220 billion at an annual in part from the effects of recessions rate, substantially larger than the 1997 abroad. Of the major trade categories, deficit of $155 billion. The large current increases in imports were sharpest for account deficits of recent years have finished goods, especially capital equipbeen funded with increased net foreign ment and automotive products. The saving in the United States. As a result, quantity of imported oil rose apprecia- U.S. gross domestic investment has bly as demand increased in response to exceeded the level that could have been the strength of U.S. economic activity financed by gross national saving alone, and lower oil prices, while domestic but at the cost of a rise in net U.S. production declined slightly. The price external indebtedness. of imported oil fell about $6.50 per bar- The increase in the current account rel over the four quarters of the year. deficit last year was due to a decline World oil prices fell in response to in net exports of goods and services reduced demand associated with the as well as a further weakening of net economic slowdown in many foreign Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 86th Annual Report, 1999 nations and with unusually warm United States, especially those of indusweather in the Northern Hemisphere as trial countries, rebounded in the fourth well as to an increase in supply from quarter. Iraq. Private capital flows also were Real exports of goods and services affected by the global turmoil. On a grew about 1 percent, on net, in 1998 global basis, capital flows to emerging after posting a 10 percent rise in 1997. market economies fell substantially in Declines during the first three quar- the first half of 1998 and then dropped ters (especially in machinery exports) precipitously in late summer and early were offset by a rebound in the fourth fall in the wake of the Russian crisis. quarter, which was led by increases During the first half of the year, U.S. in exports of automotive products. The residents acquired more than $40 billion price competitiveness of U.S. products of foreign securities. Net purchases virdecreased, reflecting the appreciation tually stopped in July, and in the of the dollar through mid-August. In August-October period U.S. residents, addition, economic activity abroad on net, sold about $40 billion worth weakened sharply; total average foreign of foreign securities. Preliminary data growth (weighted by shares of U.S. indicate a resumption of net U.S. purexports) plunged from 4 percent in 1997 chases in the final two months of 1998. to an estimated Vi percent in 1998. Mod- Foreign net purchases of U.S. securities, erate expansion of exports to Europe, which were substantial in the first half Canada, and Mexico was about offset of the year, fell off markedly in the by a decline in exports associated with July-October period, but preliminary deep recessions in Japan and the emerg- data suggest a significant recovery in ing Asian economies (particularly in the November and December. Thus, there is first half of the year) and in South some evidence that the contraction in America (in the second half of the year). gross capital flows seen in late summer and early fall waned somewhat in the fourth quarter. Capital Flows Balance of payments data available The financial difficulties in a number through the first three quarters of 1998 of emerging market economies had sev- show that total private foreign purchases eral noticeable effects on U.S. interna- of US. securities amounted to $194 biltional capital flows in 1998. Financial lion, somewhat below the level in the turmoil put strains on official reserves first three quarters of 1997. Private forin many emerging market economies. eign purchases of U.S. Treasury securi- Foreign official assets in the United ties were only $22 billion in the first States fell $43 billion in the first three three quarters, compared with $147 bilquarters of the year. This decline, which lion for all of 1997. Private foreigners' began in the fourth quarter of 1997, has purchases of other U.S. securities shifted been largest for developing countries, away from equities and toward bonds, as many of them drew down their for- relative to 1997. U.S. purchases of foreign exchange reserves in response to eign securities slowed markedly from exchange rate pressures. OPEC nations' their 1997 pace, totaling only $27 bilforeign official reserves also shrank in lion for the first three quarters of 1998 the first three quarters of 1998, as oil compared with $89 billion for all of revenues dropped. Preliminary data indi- the preceding year. The contraction in cate that foreign official assets in the private portfolio capital flows, though Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 49 large, was overshadowed by huge direct of the 1990s was just over 1 percent per investment capital flows, which resulted year. Because productivity often picks in part from a number of very large up to a pace above its long-run trend cross-border mergers. The $72 billion in when economic growth accelerates, the foreign direct investment into the United results of the past three years might States in the first three quarters, together well be overstating the rate of efficiency with several large mergers that occurred gain that can be maintained in coming in the fourth quarter, are certain to bring years. However, reasons for thinking the total for last year well above the that the trend might have picked up record-high $93 billion posted in 1997. to some degree are becoming more Merger activity also buoyed U.S. direct compelling in view of the incoming investment abroad: The pace of such data. The 1998 gain in output per hour investment in the first three quarters sug- was particularly impressive in this gests that the annual total will be near regard, in part because it came at a time the record-high $122 billion recorded when many businesses were diverting in 1997. resources to correct the Y2K problem, a move that likely imposed a bit of drag on growth of output per hour. Higher The Labor Market rates of capital formation are raising the The rapid growth of output in 1998 growth of capital per worker, and workwas associated with both increased hir- ers are likely becoming more skilled in ing and continued healthy growth in employing the new technologies. Busilabor productivity. The number of jobs nesses not only are increasing their on nonfarm payrolls rose about 2V4 per- capital inputs but also are continuing cent from the end of 1997 to the end to implement changes to their organizaof 1998, a net increase of 2.8 million. tional structures and operating proce- Manufacturers reduced employment dures that might enhance efficiency and over the year, but in other parts of the bolster profit margins. economy the demand for labor contin- The rising demand for labor continued to rise rapidly. The construction ued to strain supply in 1998. The civilindustry boosted employment about ian labor force rose just a touch more 6 percent over the year, and both the than 1 percent from the fourth quarter of services industries and the finance, 1997 to the fourth quarter of 1998, and insurance, and real estate sector posted with the number of persons holding jobs increases of more than 3Vi percent. rising somewhat faster than the labor Stores selling building materials and force, the civilian unemployment rate home furnishings expanded employ- fell still further. The unemployment rate ment rapidly, as did firms involved in was 4.3 percent at the end of 1998; the computer services, communications, and average for the full year—4.5 percent— managerial services. In the first month was the lowest of any year in almost of 1999, nonfarm payrolls increased an three decades. In January of this year, additional 245,000. the size of the labor force rose rapidly, Output per hour in the nonfarm but so did employment, and the unembusiness sector rose 2Vi percent in 1998 ployment rate remained at 4.3 percent. after having increased about \3A per- The percentage of the working age cent, on average, over the two previous population that is outside the labor force years. By comparison, the average rate and is interested in obtaining work but of rise during the 1980s and the first half not actively seeking it edged down fur- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 86th Annual Report, 1999 ther this past year and has been in the cent in 1998. Businesses were unable to lowest range since the collection of raise prices sufficiently to recoup even these data began in 1970. With the sup- this small increase in costs, however. ply of labor as tight as it is, businesses Labor gained a greater share of the are reaching further into the pool of income generated from production, and individuals who do not have a history the profit share, though still high, fell of strong attachment to the labor force; back a little from its 1997 peak. persons who are attempting to move from welfare to work are among the Prices beneficiaries. Workers have realized large increases The broader measures of aggregate in real wages and real hourly compensa- price change showed inflation continution over the past couple of years. The ing to slow in 1998. The consumer price increases have come partly through index moved up IV2 percent over the faster gains in nominal pay than in the four quarters of the year after having mid-1990s but also though reductions increased nearly 2 percent in 1997. A in the rate of price increase, which have steep decline in energy prices in the been enhancing the real purchasing CPI more than offset a small accelerapower of nominal earnings, perhaps to tion in the prices of other goods and a greater degree than workers might services. Only part of the deceleration have anticipated. According to the in the total CPI was attributable to tech- Labor Department's employment cost nical changes in data collection and index, the hourly compensation of work- aggregation.1 ers in private nonfarm industries rose Measures of aggregate price change 3V2 percent in nominal terms during from the national income and product 1998, a touch more than in 1997 and accounts, which draw heavily on data Vz percentage point more than in 1996. from the CPI but also use data from Taking the consumer price index as the other sources, showed a somewhat more measure of price change, this increase in pronounced deceleration of prices in nominal hourly compensation translated 1998. The chain-type price index for into a 2 percent increase in real hourly personal consumption expenditures, the pay, one of the largest on record in a measure of consumer prices in the series that goes back to the start of the national accounts, rose 3A percent after 1980s; the gain was bigger still if the increasing IV2 percent in 1997. The chain-type price index for personal con- chain-type price index for gross domessumption expenditures is used as the tic purchases—the broadest measure of measure of consumer prices. Moreover, the employment cost index does not cap- 1. Since the end of 1994, the Bureau of Labor ture some of the forms of compensation Statistics has taken a number of steps to make the that employers have been using to attract consumer price index a more accurate price meaand retain workers—for example, stock sure. The agency also introduced new weights into the CPI at the start of 1998. In total, these changes options and signing bonuses. probably reduced the 1998 rise in the CPI by Because of the rapid growth in labor slightly less than V2 percentage point, relative to productivity, unit labor costs have been the increase that would have been reported using rising much less rapidly than hourly the methodologies and weights in existence at the end of 1994. Without the changes that took effect compensation in recent years. The in 1998, the deceleration in the CPI last year increase in unit labor costs in the nonprobably would have been about half as large as farm business sector was only Wi per- was reported. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 51 prices paid by U.S. households, busi- similar patterns of change over the nesses, and governments—increased course of the business cycle. Because only Vi percent in 1998 after moving the unemployment rate applies to the up 1V4 percent over the previous year. entire economy, it presumably should be The rise in the chain-type price index a better indicator of the degree of presfor gross domestic product of slightly sure on resources in general. At present, less than 1 percent was down from an however, slack in the goods-producing increase of PA percent in 1997. sector—a reflection of the sizable addi- Developments in the external sector tions to capacity in this country and helped to bring about the favorable excess capacity abroad—seemingly has inflation outcome of 1998. Consumers enforced a discipline of competitive benefited directly from lower prices of price and cost control that has affected finished goods purchased from abroad. the economy more generally. Lower prices for imports probably also Prices this past year tended to be held down the prices charged by domes- weakest in the sectors most closely tic producers, not only because busi- linked to the external economy. The nesses were concerned about losing price of oil fell almost 40 percent from market share to foreign competitors but December 1997 to December 1998. This also because declines in commodity drop triggered steep declines in the prices in sluggish world markets helped prices of petroleum products purchased reduce domestic production costs to directly by households. The retail price some degree. of motor fuel fell about 15 percent over In manufacturing, one of the sectors the four quarters of the year, and the most heavily affected by the softness in price of home heating fuel also plunged. demand from abroad, the rate of plant With the prices of natural gas and eleccapacity utilization fell noticeably over tricity also falling, the CPI for energy the year—even as the unemployment was down about 9 percent over the year rate continued to decline. The diver- after having slipped 1 percent in 1997. gence of these two key measures of Large declines in the prices of interresource use—the capacity utilization nationally traded commodities other rate and the unemployment rate—is than oil pulled down the prices of many unusual: They typically have exhibited domestically produced primary inputs. The producer price index for crude materials other than energy, which Alternative Measures of Price Change reflects the prices charged by domestic Percent producers of these goods, fell more than 10 percent over the year. However, Price measure 1997 1998 because these non-oil commodities account for a small share of total pro- Fixed-weight Consumer price index 1.9 1.5 duction costs, the effect of their decline Excluding food and energy ... 2.2 2.4 on inflation was much less visible fur- Chain-type ther down the chain of production. Inter- Gross domestic product 1.7 .9 Gross domestic purchases 1.3 .5 mediate materials prices excluding food Personal consumption and energy fell about IV2 percent over expenditures 1.5 .8 Excluding food and energy ... 1.6 1.2 the four quarters of the year, and the prices of finished goods excluding food NOTE. Changes are based on quarterly averages and and energy rose about 1V2 percent. The are measured to the fourth quarter of the year indicated from the fourth quarter of the previous year. latter index was boosted, in part, by an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 86th Annual Report, 1999 unusually large hike in tobacco prices substantial gains. However, after the that followed the settlement last fall of devaluation of the Russian ruble in states' litigation against the tobacco August and subsequent difficulties in companies. In the food sector as well, other emerging market economies, the effects of declining commodity investors appeared to reassess the risks prices became less visible further down and uncertainties facing the U.S. econthe production chain; the PPI for fin- omy and concluded that more cautious ished foods was about unchanged, on postures were in order. That sentiment net, over the year, and price increases at was reinforced by the prospect of an the retail level, though small, were unwinding of positions by some highly somewhat larger than those of the pre- leveraged investors. The resulting shift ceding year. toward safe, liquid investments led to a Consumer prices excluding those of substantial widening of risk spreads on food and energy—the core CPI— debt instruments and to volatile changes continued to rise in 1998, but not very in the prices of many assets. Financial rapidly. As measured by the CPI, these market volatility and many risk spreads prices increased nearly 2Vi percent from returned to more normal levels later in the final quarter of 1997 to the final the year and early this year, as lower quarter of 1998, a shade more than interest rates and robust economic data in 1997. The chain-type price index seemed to reassure market participants for personal consumption expenditures that the economy would remain sound, excluding food and energy—the core even in the face of additional adverse PCE price index—decelerated a bit fur- shocks from abroad. However, lenders ther, rising at roughly half the pace of remained more cautious than they had the core CPI. Methodological differ- been in the first part of last year, espeences between the two measures are cially in the case of riskier credits. numerous; some of the technical problems that have plagued the CPI are less Interest Rates pronounced in the PCE price measure, but the latter also depends partly on Over the first half of 1998, short-term imputations of prices for which observa- Treasury rates moved in a narrow range, tions are not available. Both measures, anchored by unchanged monetary polhowever, seemed to suggest that the icy, while yields on intermediate- and underlying trend of consumer price long-term Treasury securities varied in inflation remained low. A similar mes- response to the market's shifting assesssage came from surveys of consumers, ment of the likely impact of foreign which showed expectations of future economic difficulties on the U.S. econprice increases easing a bit further in omy. In late 1997 and into 1998, spread- 1998—although, as in other recent ing financial crises in Asia were associyears, the expected increases remained ated with declines in U.S. interest rates, somewhat higher than actual price as investors anticipated that weakness increases. abroad would constrain U.S. economic growth and cushion the impact of tight U.S. labor markets on inflation. How- U.S. Financial Markets ever, interest rates moved back up later U.S. interest rates fluctuated in fairly in the first quarter of 1998, as the U.S. narrow ranges over the first half of 1998, economy continued to expand at a and most equity price indexes posted healthy pace, fueled by hefty gains in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 53 domestic demand. After a couple of the late summer showed up clearly in months of small changes, Treasury rates mutual fund flows. High-yield bond fell in May and June, when concerns funds, which had posted net inflows of about foreign economies, particularly in more than $1 billion each month from Asia, once again led some observers to May to July, saw a $3.4 billion outflow expect weaker growth in the United in August and inflows of less than States and may also have boosted the $400 million in September and October demand for safe Treasury securities rela- before rebounding sharply in November. tive to other instruments. By contrast, inflows to government bond Treasury rates changed little, on net, funds jumped from less than $1 billion in the early summer, but they slipped in July to more than $2 billion a month lower in August, reflecting increased in August and September. Equity mutual concern about the Japanese economy funds posted net outflows totaling nearly and financial problems in Russia. The $12 billion in August, the first monthly default by Russia on some government outflow since 1990, and inflows over the debt obligations and the devaluation rest of the year were well below those of the ruble in mid-August not only earlier in the year. resulted in sizable losses for some In part, the foreign difficulties were investors but also undermined confi- transmitted to U.S. markets by losses dence in other emerging market econo- incurred by leveraged investors— mies. The currencies of many of these including banks, brokerage houses, and economies came under substantial pres- hedge funds—as the prospects for dissure, and the market value of the inter- tress sales of riskier assets by such national debt obligations of some investors weighed on market sentiment, countries declined sharply. U.S. inves- depressing prices. Many of these entities tors shared in the resulting losses, and did reduce the scale of their operations U.S. economic growth and the profits and trim their risk exposures, respondof U.S. companies were perceived to ing to pressures from more cautious be vulnerable. In these circumstances, counterparties. As a result, liquidity in many investors, both here and abroad, many markets declined sharply, with appeared to reassess the riskiness of bid-asked spreads widening and large various counterparties and investments transactions becoming more difficult and to become less willing to bear risk. to complete. Even in the market for The resulting shift of demand toward Treasury securities, investors showed an safety and liquidity led to declines increased preference for the liquidity of 40 to 75 basis points in Treasury offered by the most recent issues at each coupon yields between mid-August and maturity, and the yields on these more mid-September. In contrast, yields on actively traded "on-the-run" securities higher-quality private securities fell fell noticeably relative to those available much less, and those on issues of lower- on "off-the-run" issues, the ones that rated firms increased sharply. As a had been outstanding longer. result, spreads of private rates over Conditions in U.S. financial markets Treasury rates rose substantially, reach- deteriorated further following revelaing levels not seen for many years, and tions in mid-September of the magniissuance of corporate securities dropped tude of the positions and the extent of sharply. the losses of a major hedge fund, Long- The desire of investors to limit risk- Term Capital Management. LTCM inditaking as markets became troubled in cated that it sought high rates of return Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 86th Annual Report, 1999 primarily by identifying small discrep- Because of the potential for firms ancies in the prices of different instru- such as LTCM to have a large influence ments relative to historical norms and on U.S. financial markets, Treasury Secthen taking highly leveraged positions retary Robert Rubin asked the Presiin those instruments in the expectation dent's Working Group on Financial that market prices would revert to such Markets to study the economic and regunorms over time. In pursuing its strat- latory implications of the operations of egy, LTCM took very large positions, firms like LTCM and their relationships some of which were in relatively small with their creditors. In addition, the and illiquid markets. extraordinary degree of leverage with LTCM was quite successful between which LTCM was able to operate has 1995 and 1997, but the shocks hitting led the federal agencies responsible for world financial markets last August gen- the prudential oversight of the fund's erated substantial losses for the firm. creditors and counterparties to under- Losses mounted in September, and take reviews of the practices those firms before new investors could be found, the employed in managing their risks. These firm encountered difficulties meeting reviews have suggested significant liquidity demands arising from its collat- weaknesses in the risk-management eral agreements with its creditors and practices of many firms in their dealings counterparties. With world financial with LTCM and—albeit to a lesser markets already suffering from height- degree—in their dealings with other ened risk aversion and illiquidity, offi- highly leveraged entities. Few countercials of the Federal Reserve Bank of parties seem to have had a complete New York judged that the precipitous understanding of LTCM's risk profile, unwinding of LTCM's portfolio that and their credit decisions were heavily would follow the firm's default would influenced by the firm's reputation and significantly add to market problems, strong past performance. Moreover, would distort market prices, and could LTCM's counterparties did not impose impose large losses, not just on LTCM's sufficiently tight limits on their expocreditors and counterparties, but also on sures to LTCM, in part because they other market participants not directly relied on collateral agreements requiring involved with LTCM. frequent marking to market to limit In an effort to avoid these difficulties, the risk of their exposures. While these the Federal Reserve Bank of New York agreements generally provided for colcontacted the major creditors and coun- lateral with a value sufficient to cover terparties of LTCM to see if an alterna- current credit exposures, they did not tive to forcing LTCM into bankruptcy deal adequately with the potential for could be found. At the same time, future increases in exposures from Reserve Bank officials informed some changes in market values. This shortof their colleagues at the Federal coming was especially important in Reserve Board, the Treasury, and other dealings with a firm like LTCM, which financial regulators of their activities. had such large positions in illiquid Subsequent discussions among LTCM's markets that its liquidation would creditors and counterparties led to an likely have moved prices sharply against agreement by the private-sector parties its creditors. In such cases, creditors to provide an additional $3x/2 billion of need to take further steps to limit their capital to LTCM in return for a 90 per- potential future exposures, which might cent equity stake in the firm. include requiring additional collateral Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 55 or simply scaling back their activity with In the high-yield bond market, investors such firms. appeared to be more hesitant, especially The private-sector agreement to for all but the best-known issuers, and recapitalize LTCM allowed its positions the volume of junk bond issuance picked to be reduced in an orderly manner over up less. In the commercial paper market, time, rather than in an abrupt fire sale. yields on higher-quality paper declined; Nonetheless, the actual and anticipated yields on lower-quality paper remained unwinding of LTCM's portfolio, as well elevated, however, and some lower-tier as actual and anticipated sales by other firms reportedly drew on their bank lines similarly placed leveraged investors, for funding, giving a further boost to likely contributed materially to the tre- bank business lending, which had begun mendous volatility of financial markets to pick up during the summer. in early October. Market expectations of Market conditions improved a bit asset price volatility going forward, as further immediately after the Federal reflected in options prices, rose sharply, Reserve's November rate cut, but some as bid-asked spreads and the premium measures of market stress rose again in for on-the-run securities widened. Long- late November and in December. In part, term Treasury yields briefly dipped to this deterioration reflected widespread their lowest levels in more than thirty warnings of lower-than-expected corpoyears, in part because of large demand rate profits, a weakening economic outshifts resulting from concerns about look for Europe, and renewed concerns the safety and liquidity of private and about the situation in Brazil. In addition, emerging market securities. Spreads of with risk a greater-than-usual concern, rates on corporate bonds over those on some market participants were likely comparable Treasury securities rose less willing to hold lower-rated securiconsiderably, and issuance of corporate ties over year-end, when they would bonds, especially by lower-rated firms, have to be reported in annual financial remained very low. statements. As a result, liquidity in some By mid-October, however, market markets appeared to be curtailed, and conditions had stopped deteriorating, price movements were exaggerated. and they began to improve somewhat These effects were particularly noticein the days and weeks following the cut able in the commercial paper market: in the federal funds rate on October 15, The spread between rates on top-tier between Federal Open Market Commit- and lower-tier thirty-day paper jumped tee meetings. Internationally coordi- almost 40 basis points on December 2, nated efforts to help Brazil cope with its when that maturity crossed year-end, financial difficulties, culminating in the and then reversed the rise late in the announcement of an IMF-led support month. package in mid-November, contributed By shortly after year-end, some meato the easing of market strains. In the sures of market stress had eased con- Treasury market, bid-asked spreads nar- siderably from their levels in the fall, rowed a bit and the premium for on-the- although markets remained somewhat run issues declined. With the earlier illiquid relative to historical norms, flight to quality and liquidity unwinding, and risk spreads on corporate bonds Treasury rates backed up considerably. stayed quite elevated. Nonetheless, with Corporate bond spreads reversed a part Treasury yields very low, corporate of their earlier rise, and investment- bond rates were apparently perceived grade bond issuance rebounded sharply. as advantageous, and—following a lull Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 86th Annual Report, 1999 around year-end—many corporate bor- After Russia devalued the ruble and rowers brought new issues to market. defaulted on some debts in mid-August, The devaluation and subsequent float- prices fell further, reflecting the general ing of the Brazilian real in mid-January turbulence in global financial markets. had a relatively small effect on U.S. By the end of the month, most equity financial markets. More recently, indexes had fallen back to roughly their intermediate- and long-term Treasury levels at the start of the year. Commerrates have increased, as incoming data cial bank and investment bank stocks have continued to show the economy fell particularly sharply, as investors expanding briskly, and investors have became concerned about the effect on come to believe that no further easing these institutions' profits of emerging of Federal Reserve policy is likely. market difficulties and of substantial declines in the values of some assets. Equity prices rose for a time in Septem- Equity Prices ber but then fell back by early October Most equity indexes rose strongly, before rebounding as market dislocaon balance, in 1998, with the Nasdaq tions eased and interest rates on many Composite Index up nearly 40 percent, private obligations fell. By December, the S&P 500 Composite Index rising most major indexes were back near more than 25 percent, and the Dow their July highs, although the Russell Jones Industrial Average and the NYSE 2000 remained below its earlier peak. Composite Index advancing more than In late December, and into the new 15 percent. Small capitalization stocks year, stock prices continued to advance, underperformed those of larger firms, with several indexes reaching new with the Russell 2000 Index off 3 per- highs in January. The devaluation of the cent over the year. The variation in stock Brazilian real caused some firms' shares prices over the course of the year was to drop as investors reevaluated prosextremely wide. Prices increased sub- pective earnings from Latin American stantially over the first few months of operations, but all the major stock 1998, as concerns eased that Asian eco- indexes posted gains in January; the nomic problems could lead to a slow- Nasdaq advanced nearly 15 percent over down in the United States and to a con- the month, driven by large advances in sequent decline in profits. The major the stock prices of high-technology indexes declined, on balance, over the firms, especially those related to the following couple of months before Internet. More recently, however, stock rising sharply, in some cases to new prices fell back, as interest rates rose records, in late June and early July, on and some investors apparently conincreasing confidence about the outlook cluded that prices had risen too far, for earnings. The main exception was given the outlook for earnings. the Russell 2000; small capitalization The increase in equity prices last year stocks fell more substantially in the and early this year, coupled with the spring, and their rise in July was rela- slowing of earnings growth, left many tively muted. valuation measures beyond their his- Rising concerns about the outlook torical ranges. After ticking higher in for Japan and other Asian economies, as the late summer and early autumn, the well as the deepening financial prob- ratio of consensus estimates of earnings lems in Russia, caused stock prices to over the coming twelve months to prices retrace their July gains by early August. in the S&P 500 later fell back, dropping Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 57 to a new low in January. In part, the federal debt expanded about 9 percent decline in this measure over the past last year, more than 2 percentage points year likely reflected lower real long- faster than in 1997. By contrast, federal term bond yields. For example, as mea- debt declined \lA percent, following a sured by the difference between the rise of 3A percent the previous year. ten-year nominal Treasury yield and Credit market instruments on the inflation expectations reported in the books of depository institutions rose at a Philadelphia Federal Reserve Bank's somewhat slower pace than did the debt survey of professional forecasters, real aggregate, posting a 53A percent rise in yields fell appreciably between late 1998, about half a percentage point less 1997 and early 1999. (The yield on than in 1997. Growth in depository ten-year inflation-indexed Treasury credit picked up in the second half of the securities actually rose somewhat last year, as the turbulence in financial maryear. However, the increase may have kets apparently led many firms to substireflected the securities' lack of liquidity tute bank loans for funds raised in the and the substantial rise in the premium markets. Banks also added considerably investors were willing to pay for liquid- to their holdings of securities in the third ity.) Since mid-1998, the real interest and fourth quarters, in part reflecting rate has declined somewhat more than the attractive spreads available on nonthe forward earnings yield on stocks, Treasury debt instruments. and the spread between the two conse- Financial firms also appeared to turn quently increased a bit, perhaps reflect- to banks for funding when the financial ing the greater sense of risk in financial markets were volatile, and U.S. banks markets. Nonetheless, the spread has substantially expanded their lending to remained quite small relative to histori- financial firms through repurchase cal norms: Investors may be anticipating agreements and loans to purchase and rapid long-term earnings growth— carry securities. As a result, growth of consistent with the expectations of secu- total bank credit, adjusted to remove the rities analysts—and they may still be effects of mark-to-market accounting satisfied with a lower risk premium for rules, accelerated to lOV^ percent on a holding stocks than they have demanded fourth-quarter to fourth-quarter basis, historically. the largest annual increase in more than a decade. Debt and the Monetary Aggregates The Monetary Aggregates Debt and Depository Intermediation The broad monetary aggregates ex- From the fourth quarter of 1997 to the panded very rapidly last year. From the fourth quarter of 1998, the total debt of fourth quarter of 1997 to the fourth the U.S. household, government, and quarter of 1998, M2 increased 8V2 pernonfinancial business sectors increased cent, placing it well above the upper about 6V4 percent, in the top half of its bound of its 1 percent to 5 percent range. 3 percent to 7 percent range and consid- However, as the FOMC noted last erably faster than nominal GDP. Buoyed February, this range was intended as a by strong spending on durable goods, benchmark for money growth under housing, and business investment, as conditions of stable prices, real ecowell as by merger and acquisition activ- nomic growth near trend, and historical ity that substituted debt for equity, non- velocity relationships. Part of the excess Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 86th Annual Report, 1999 of M2 above its range was the result However, the bulk of the decline of faster growth in nominal spending cannot be explained on the basis of than would likely be consistent with sus- the historical relationship between the tained price stability. In addition, the velocity of M2 and this measure of velocity of M2 (defined as the ratio of its opportunity cost. Three factors not nominal GDP to M2) fell 3 percent. captured in that relationship likely con- Some of the decline resulted from the tributed to the drop in velocity. First, decrease in short-term market interest households seem to have allocated an rates last year—as usual, rates on depos- increased share of savings flows to its fell more slowly than market rates, monetary assets rather than equities folreducing the opportunity cost of holding lowing several years of outsized gains M2 (defined as the difference between in stock market wealth. Second, some the rate on Treasury bills and the aver- evidence suggests that in the 1990s the age return on M2 assets). demand for M2 assets has become more sensitive to longer-term interest rates and to the slope of the yield curve, and Growth of Money and Debt so the decline in long-term Treasury Percent yields last year, and the consequent flattening of the yield curve, may have Domestic non- increased the relative attractiveness of Period Ml M2 M3 financial M2 assets. Finally, a critical source of debt the especially rapid M2 expansion in the Annuall fourth quarter likely was an increased 1988 4.2 5.6 6.4 9.1 demand for safe, liquid assets as inves- 1989 .6 5.2 4.1 7.5 1990 4.2 4.2 1.9 6.7 tors responded to the heightened volatil- 1991 8.0 3.1 1.2 4.5 ity in financial markets. With some of 1992 14.3 1.8 .6 4.5 these safe-haven flows likely being 1993 10.6 1.3 1.0 4.9 1994 2.5 .6 1.7 4.9 reversed, growth in the broad monetary 1995 -1.6 3.9 6.1 5.4 aggregates, while still brisk, has slowed 1996 -4.5 4.6 6.8 5.3 appreciably early this year. 1997 -1.2 5.8 8.8 5.0 1998 1.8 8.5 11.0 6.3 M3 expanded even faster than M2 in 1998, posting an 11 percent rise on a Quarterly (annual rate)2 fourth-quarter to fourth-quarter basis. 1998:Q1 3.2 7.6 10.3 6.2 Last year's growth was the fastest since Q2 1.0 7.5 10.1 6.1 Q3 -2.0 6.9 8.6 6.0 1981 and left the aggregate well above Q4 5.0 11.0 13.2 6.4 the top end of its 2 percent to 6 percent growth range. As with M2, how- NOTE. Ml consists of currency, travelers checks, demand deposits, and other checkable deposits. M2 consists ever, the FOMC established the M3 of Ml plus savings deposits (including money market range as a benchmark for growth under deposit accounts), small-denomination time deposits, and balances in retail money market funds. M3 consists of M2 conditions of stable prices, sustainplus large-denomination time deposits, balances in institu- able output growth, and the historical tional money market funds, RP liabilities (overnight and behavior of velocity. The rapid growth term), and Eurodollars (overnight and term). Debt consists of the outstanding credit market debt of the U.S. of M3 in part simply reflected the rise government, state and local governments, households and in M2. In addition, the non-M2 comnonprofit organizations, nonfinancial businesses, and ponents of M3 increased I8V2 percent farms. 1. From average for fourth quarter of preceding year to over the year, following an even larger average for fourth quarter of year indicated. advance in 1997. The substantial rise 2. From average for preceding quarter to average for in these components last year was quarter indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 59 partly the result of the funding of the grams for other checkable deposits, robust growth in bank credit with man- which had driven double-digit declines aged liabilities, many of which are in in such deposits over the previous three M3. However, M3 growth was boosted years, were less important in 1998, and, to an even greater extent by flows into with nominal spending strong and interinstitution-only money funds, which est rates lower, other checkable deposits have been expanding rapidly in recent were about unchanged on the year. years as they have increased their share As a result of the introduction of retail of the corporate cash management busi- sweep accounts, the average level of ness. Because investments in these required reserve balances (balances that funds substitute for business holdings must be held at Reserve Banks to meet of short-term assets that are not in reserve requirements) has trended lower M3, their rise has generated an increase over the past few years. The decline in M3 growth. In addition, institution- has been associated with an increase only funds pay rates that tend to lag in banks' required clearing balances, movements in market rates, and so their which are balances that banks agree in relative attractiveness was temporarily advance to hold at their Federal Reserve enhanced—and their growth rate Bank in order to facilitate the clearing boosted—by declines in short-term mar- of their payments. Unlike required ket interest rates late last year. reserve balances, banks earn credits Ml increased \3A percent over the on their required clearing balances that four quarters of 1998, its first annual can be applied to the use of Federal increase since 1994. Currency expanded Reserve priced services. Despite the at an 8*/4 percent pace, its largest rise increase in required clearing balances, since 1994. The increase apparently required operating balances, which are reflected continued strong foreign ship- the sum of required reserve balances ments, though at a slower pace than in and required clearing balances, have 1997, and a sharp acceleration in domes- declined over the past few years and in tic demand. Deposits in Ml declined late 1998 reached their lowest level in further in 1998, reflecting the continued several decades. introduction of retail "sweep" pro- The decline in required operating balgrams. Growth of Ml deposits has been ances has generated concerns about depressed for a number of years by these a possible increase in the volatility of programs, which shift—or "sweep"— the federal funds rate. Because a bank's balances from household transactions required level of operating balances accounts, which are subject to reserve must be met only on average over a requirements, into savings accounts, two-week maintenance period, banks are which are not. Because the funds are free to allocate their reserve holdings shifted back to transactions accounts across the days of a maintenance period when needed, depositors' access to their in order to minimize their reserve costs. funds is not affected by these programs. However, banks must also manage their However, banks benefit from the reduc- reserves in order to avoid overdrafts, tion in holdings of required reserves, which the Federal Reserve discourages which do not pay interest. Over 1998, through administrative measures and sweep programs for demand deposit financial penalties. Thus, as required accounts became more popular, contrib- operating balances decline toward the uting to a 4V4 percent decline in such minimum level needed to clear banks' balances. By contrast, new sweep pro- transactions, banks are less and less able Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 86th Annual Report, 1999 to respond to fluctuations in the federal terparty credit limits, or shifted more funds rate by lending funds when the of their placements from term to overrate is high and borrowing when the rate night maturities. The heightened attenis low. As a result, when required oper- tion to credit quality also made banks ating balances are low, the federal funds less willing to borrow at the discount rate is likely to rise further than it other- window, because they were concerned wise would when demands for reserves that other market participants might are unexpectedly strong or supplies detect their borrowing and interpret it as weak; conversely, the federal funds rate a sign of financial weakness. As a result, is likely to fall more in the event many banks that were net takers of of weaker-than-expected demand or funds in short-term markets attempted stronger-than-expected supply. One way to lock in their funding earlier in the to ease this difficulty would be to pay morning. On net, these forces boosted interest on required reserve balances, the demand for reserves and put upward which would reduce banks' incentives pressure on the federal funds rate early to expend resources on sweeps and other in the day. To buffer the effect of these efforts to minimize these balances. changes on volatility in the federal Despite the low level of required funds market, the Federal Reserve operating balances, the federal funds increased the supply of reserves and, rate did not become noticeably more at times, responded to the level of the volatile over the spring and summer of federal funds rate early in the day 1998. In part, this result reflected more when deciding on the need for market frequent overnight open market opera- operations. Because demand had shifted tions by the Federal Reserve to better to earlier in the day, however, the fedmatch the daily demand for and supply eral funds rate often fell appreciably of reserves. Also, banks likely improved below its target level by the end of the the management of their accounts at day. the Federal Reserve Banks. Moreover, At its November meeting, the FOMC large banks apparently increased their amended the Authorization for Domeswillingness to borrow at the discount tic Open Market Operations to extend window. The Federal Reserve's deci- the permitted maturity of System repursion to return to lagged reserve account- chase agreements from fifteen to sixty ing at the end of July also likely contrib- days. Over the remainder of 1998, the uted to reduced volatility in the federal Domestic Trading Desk made use of funds market by enhancing somewhat this new authority on three occasions, the ability of both banks and the Federal arranging System repurchase agree- Reserve to forecast reserve demand. ments with maturities of thirty to forty- In the latter part of 1998 and into five days to meet anticipated seasonal 1999, however, the federal funds rate reserve demands over year-end. While was more volatile. The increase may the Desk had in the past purchased have owed partly to further reductions inflation-indexed securities when rollin required operating balances resulting ing over holdings of maturing nominal from new sweep programs, but other securities, it undertook its first outright factors were probably more important, open market purchase devoted solely to at least for a time. Market participants inflation-indexed Treasury securities in were scrutinizing borrowing banks more 1998, thereby according those securities closely, and in some cases lenders pared the same status in open market operaor more tightly administered their coun- tions as other Treasury securities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 61 International Developments narrower range and ended the period little changed against the dollar. In Sep- In 1998, developments in interna- tember, Malaysia imposed capital and tional financial markets continued to be exchange controls, fixing the ringgit's dominated by the unfolding crises in exchange rate against the dollar. The emerging markets that had begun Hong Kong dollar came under pressure in Thailand in 1997. Financial market at times during the year, but its peg to turbulence spread to other emerging the U.S. dollar remained intact, although markets around the globe, spilling over at the cost of interest rates that were at from Korea, Indonesia, Malaysia, times considerably elevated. Short-term Singapore, the Philippines, and Hong interest rates in Asian economies other Kong in late 1997 and in the first part than Indonesia declined in 1998, and as of 1998 to Russia in the summer, and some stability returned to Indonesian to Latin America, particularly Brazil, markets near the end of the year, shortshortly thereafter. The Asian crisis con- term rates in that nation began to retreat tributed to a deepening recession in from their highs. Japan last year, and as the year pro- As the year progressed, the financial gressed, growth in several other major storm moved from Asia to Russia. foreign industrial economies slowed as At first the Russian central bank was well. able to defend the ruble's peg to the At the beginning of 1998, many Asian dollar with interest rate increases and currencies were declining or were under sporadic intervention. By midyear, howpressure. The Indonesian rupiah dropped ever, the government's failure to reach sharply in January, amid widespread a new assistance agreement with the rioting and talk of a coup, and fell again International Monetary Fund, reported in May and June, as the deepening shortfalls in tax revenues, and the disrecession prompted more social unrest ruption of rail travel by striking coal and ultimately the ouster of President miners protesting late wage payments Suharto. Some of the rupiah's losses brought to the fore the deep structural were reversed in the second half of the and political problems faced by Russia. year, following the relatively orderly In addition, declining oil prices were transition of power to President Habibie. lowering government revenues and Tighter Indonesian monetary policy, worsening the current account. As a which pushed short-term interest rates result of these difficulties, the ruble as high as 70 percent by July, contrib- came under renewed pressure, forcing uted to the rupiah's recovery. On bal- Russian interest rates sharply higher, ance, between December 1997 and and Russian equity prices fell abruptly. December 1998, the rupiah depreciated A disbursement of $4.8 billion from the more than 35 percent against the dollar. IMF in July was quickly spent to keep In contrast, the Thai baht and Korean the currency near its level of 6.2 rubles won, which had declined sharply in per dollar, but the lack of progress on 1997, gained more than 20 percent fiscal reform put the next IMF tranche against the dollar over the course of in doubt. 1998. Policy reforms and stable political On August 17, Russia announced a environments helped boost these curren- devaluation of the ruble and a moracies. Between these extremes, the cur- torium on servicing official short-term rencies of the Philippines, Malaysia, debt. Subsequently, the ruble depreci- Singapore, and Taiwan fluctuated in a ated more than 70 percent against the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

62 86th Annual Report, 1999 dollar, the government imposed condi- tember and October. The details of the tions on most of its foreign and domes- $41.5 billion loan package were tic debt that implied substantial losses announced in November, but after the for creditors, and many Russian finan- package was approved by the IMF in cial institutions became insolvent. The early December, Brazil's Congress events in Russia precipitated a global rejected a part of the government's fisincrease in financial market turbulence, cal austerity plan, sparking renewed including a pullback of credit to highly financial turmoil. In mid-December, leveraged investors and a widening $9.3 billion of the loan package was of credit spreads in emerging market disbursed, but as the year ended, the economies and in many industrial continuing pressure from investors countries, which did not abate until after seeking to take funds out of Brazil put central banks in a number of industrial the long-run viability of the crawling countries eased policy in the fall. exchange rate peg in doubt. The real Latin American financial markets came under pressure again in early Januwere only moderately disrupted by the ary after the state of Minas Gerais Asian and Russian problems during threatened not to pay its debt to the the first half of 1998. The reaction to federal government. On January 13, the the Russian default, however, was swift real was devalued 8 percent, and two and strong, and the prices of Latin days later it was allowed to float. Since American assets fell precipitously. The the end of 1998, the real has depreciated spreads between yields on Latin Ameri- nearly 38 percent against the dollar, and can Brady bonds and comparable U.S. capital flight from Brazil has likely per- Treasuries widened considerably (with sisted. The collapse of the real exerted increases ranging from 900 basis points some downward pressure on the currenin Argentina to 1500 basis points in cies of other Latin American countries. Brazil) and peaked in early September Thus far, however, contagion has been before retracing part of the rise. Latin more limited than it was after the American equity prices plunged, ending Russian devaluation; unlike Russia, the year down 25 percent or more. Sev- Brazil has continued to meet debt sereral currencies came under pressure, vice obligations, and investors appardespite sharp increases in short-term ently had an opportunity to adjust posiinterest rates. The Mexican peso, which tions in advance of the devaluation was also weakened by the effects of and have drawn a distinction between falling oil prices, depreciated 18 percent Brazil's problems and those of other against the dollar over the year. The economies. Colombian peso and the Ecuadorian The fallout from the financial crises sucre were devalued, but Argentina's that hit several Asian emerging marcurrency board arrangement survived. ket economies in late 1997 triggered a Brazil's central bank defended the further decline in output in the region in real's crawling peg until mid-January early 1998. In the countries most heavily 1999 but is estimated to have used more affected—Thailand, Korea, Malaysia, than half of the $75 billion in foreign and Indonesia—output dropped at exchange reserves it had amassed as of double-digit annual rates in the first last April. Anticipation of the IMF-led half of the year, as credit disruptions, financial assistance package for Brazil widespread failures in the financial helped spur a partial recovery in Latin and corporate sectors, and a resulting American asset markets in late Sep- high degree of economic uncertainty Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 63 depressed activity severely. Output in from the Asian financial turbulence was Hong Kong also dropped in early 1998, limited. The Russian financial crisis in as interest rates rose sharply amid pres- August, in contrast, had a strong impact sure on its currency peg. Later in the on real activity in Latin America, paryear, with financial conditions in most ticularly Brazil and Argentina, where of the Asian crisis countries stabilizing interest rates moved sharply higher in somewhat, output started to bottom out. response to exchange rate pressures. The Asian crisis had a relatively mod- Output in both countries is estimated to erate effect on China, although it may have declined in the second half of the have encouraged authorities in that year at annual rates of about 5 percent. country to move ahead more quickly Activity in Mexico and Venezuela was with various financial sector reforms. also depressed by lower oil export Financial tensions mounted early this revenues. Inflation rates in Latin Ameriyear as foreign investors have reacted can countries were little changed in with concern to the failure of the 1998 and ranged from 1 percent in Guangdong International Trust and Argentina and 3 percent in Brazil to Investment Corporation. Chinese growth 31 percent in Venezuela. remained fairly strong throughout The dollar's value, measured on a 1998, despite a dramatic slowdown in trade-weighted basis against the curthe growth of exports. rencies of a broad group of important Inflation in the Asian developing U.S. trading partners, rose almost 7 pereconomies rose only moderately on cent during the first eight months of average in 1998, as the inflationary 1998, but it then fell, by December effects of currency depreciations in the reaching a level about 2 percent above region were largely offset by the defla- its year-earlier level. (When adjusted for tionary influence of very weak domestic changes in U.S. and foreign consumer activity. The current account balances of price levels, the real value of the dollar the Asian crisis countries swung into in December 1998 was about 1 percent substantial surplus last year, reflecting a below its level in December 1997.) sharp drop in imports resulting from the Before the Russian default, the dollar falloff in domestic demand as well as was supported by the robust pace of U.S. improvement in the countries' competi- economic activity, which at times genertive positions associated with the sub- ated expectations that monetary policy stantial depreciations of their currencies would be tightened and which conin late 1997 and early 1998. trasted with weakening economic activ- In Russia, economic activity declined ity abroad, especially in Japan. Occalast year as interest rates were pushed up sionally, however, the positive influence in an attempt to fend off pressure on the of the strong economy was countered by ruble. After the August debt moratorium worries about growing U.S. external and ruble devaluation, output dropped deficits. From August through October, sharply, ending the year down about in the aftermath of the Russian finan- 10 percent from its year-earlier level. cial meltdown, concerns that increased The ruble collapse triggered a surge in difficulties in Latin America might affect inflation to a triple-digit annual rate dur- the U.S. economy disproportionately, as ing the latter part of the year. well as expectations of lower U.S. inter- In Latin America, the pace of eco- est rates, weighed on the value of the nomic activity slowed only moderately dollar, and it fell sharply. The broad in the first half of 1998, as the spillover index of the dollar's exchange value Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

64 86th Annual Report, 1999 eased a bit further during the fourth the yen in 1998, reversing most of its quarter of the year. So far in 1999, the net gain during 1997. It depreciated furdollar has gained nearly 3 percent in ther against the yen in early 1999, hitterms of the broad index. ting a two-year low on January 11, but it Against the currencies of the major then rebounded somewhat amid reports foreign industrial countries, the dollar of intervention purchases of dollars by declined 2 percent in nominal terms over the Bank of Japan. More recently, the 1998, on balance, reversing some of Bank of Japan has eased monetary polits 10 percent appreciation the preced- icy further, and the dollar has strengthing year. Among these currencies, the ened against the yen. So far this year, dollar's value fluctuated most widely the dollar has gained about 7 percent against the Japanese yen. The dollar rose against the yen. against the yen during the first half Japanese economic activity conof the year as a result of concerns about tracted in 1998, as the country remained the effects of the Asian crisis on the in its most protracted recession of the already-weak Japanese economy and postwar era. Business and residential further signs of deepening recession and investment plunged, and private conpersistent banking system problems in sumption stagnated, more than offsetthat country. It reached a level of almost ting positive contributions from govern- 147 yen per dollar in mid-June, prompt- ment spending and net exports. Core ing coordinated intervention by U.S. and consumer prices declined slightly, while Japanese authorities in foreign exchange wholesale prices fell almost 4Vz permarkets that helped to contain further cent. In April, the Japanese government downward pressure on the yen. The dol- announced a large fiscal stimulus packlar resumed its appreciation against the age. During the final two months of the yen, albeit at a slower pace, in July and year, the government announced another early August. set of fiscal measures slated for imple- The turning point in the dollar-yen mentation during 1999, which included rate came after the Russian collapse, permanent personal and corporate amid the global flight from risk that income tax cuts, various incentives for caused liquidity to dry up in the markets investment, and further increases in pubfor many assets. During the first week lic expenditures. of October, the dollar dropped nearly Against the German mark, the dollar 14 percent against the yen in extremely depreciated about 6 percent, on net, durilliquid trading conditions. Although ing 1998. Late in the year the dollar fundamental factors in Japan, such as moved up against the mark, as evidence progress on bank reform, fiscal stimu- of a European growth slowdown raised lus, and the widening trade surplus may expectations of easier monetary condihave helped boost the yen against the tions in Europe. In the event, monetary dollar, market commentary at the time policy was eased sooner than market focused on reports that some interna- participants had expected, with a coorditional investors were buying large nated European interest rate cut coming amounts of yen. These large purchases in early December. reportedly were needed to unwind posi- A major event at the turn of the year tions in which investors had used yen was the birth of the euro, which marked loans to finance a variety of speculative the beginning of Stage Three of Euroinvestments. On balance, the dollar pean Economic and Monetary Union depreciated almost 10 percent against (EMU). On December 31, the rates Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 65 locking the euro with the eleven legacy year. The deceleration was sharper in currencies were determined; based the United Kingdom than in Canada. on these rates, the value of the euro at U.K. inflation eased slightly to near the moment of its creation was its target rate, while Canadian inflation $1.16675. Trading in the euro opened remained near the bottom of its target on January 4, with the first trades range. In response to weaker economic reflecting a significant premium for activity as well as to the expected effects the euro over its initial value. As the of the global financial turmoil, both first week of trading progressed, how- the Bank of Canada and the Bank of ever, the initial euphoria wore off, and England have lowered official interest so far this year the dollar has strength- rates since September. ened more than 5 percent against The general trend toward easier the euro, partly reflecting better-than- monetary conditions was reflected in expected economic data in the United declines in short-term interest rates in States, contrasted with weaker-than- almost all the G-10 countries during expected data in the euro area. the year. Interest rates in the euro area In the eleven European countries converged to relatively low German whose currencies are now fixed against levels in anticipation of the launch of the euro, output growth slowed moder- the third stage of EMU. Yields on tenately over the course of 1998, as net year government bonds in the major exports weakened and business senti- foreign industrial countries declined ment worsened. Unemployment rates significantly over the course of the year, came down slightly, but the average of as economic activity slowed, inflation these rates remained in the double-digit continued to moderate, and investors range. Consumer price inflation contin- sought safer assets. Between December ued to slow, helped by lower oil prices. 1997 and December 1998, ten-year In December, the harmonized CPI for interest rates fell 180 basis points in the the eleven countries stood 3A percent United Kingdom and 150 basis points above its year-earlier level, meeting the in Germany. The ten-year rate fell only European Central Bank's primary objec- 30 basis points in Japan, on balance, tive of inflation below 2 percent. declining about 90 basis points over the Between December 1997 and Decem- first ten months of the year but backing ber 1998, the average value of the dollar up in November and December. Market changed little against the British pound participants attributed the increase to but rose 8 percent against the Canadian concerns that the demand for bonds dollar. Weakness in primary commodity would be insufficient to meet the surge prices, including oil, likely depressed in debt issuance associated with the latthe value of the Canadian dollar. The est fiscal stimulus package. Bank of Canada raised official rates in Share prices on European stock January 1998 and again in August, in exchanges posted another round of response to currency market pressures. strong advances last year, with price The Bank of England raised official indexes rising 8 percent in the United rates in June 1998 to counter inflation Kingdom, about 15 percent in Germany, pressures. Tighter monetary conditions nearly 29 percent in France, and 41 perin both countries, as well as a decline cent in Italy. In contrast, Japanese equity in net exports associated with global prices fell more than 9 percent in 1998, difficulties, contributed to a slowing of and Canadian share prices decreased output growth in the second half of the 4 percent. After a considerable run-up Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 86th Annual Report, 1999 earlier in the year, share prices around gies at increasingly attractive prices, the globe fell sharply in August and firms have been investing heavily in September, but they rebounded in subse- new capital equipment; this investment quent months as the Federal Reserve has boosted productivity and living and central banks in many other indus- standards while holding down the rise trial countries eased monetary policy. in costs and prices. On November 17, the FOMC voted Two of the major threats faced by unanimously to reauthorize Federal the economy in late 1998—economic Reserve participation in the North downturns in many foreign nations American Framework Agreement and turmoil in financial markets around (NAFA), established in 1994, and in the the world—receded over the first half associated bilateral reciprocal currency of this year. Economic conditions overswap arrangements with the Bank of seas improved on a broad front. In Asia, Canada and the Bank of Mexico. On activity picked up in the emerging- December 7, the Secretary of the Trea- market economies that had been batsury authorized renewal of the Trea- tered by the financial crises of 1997. sury's participation in the NAFA and of The Brazilian economy—Latin Amerithe associated Exchange Stabilization ca's largest—exhibited a great deal of Agreement with Mexico. Other bilateral resilience with support from the interswap arrangements with the Federal national community, in the wake of the Reserve—those with the Bank for Inter- devaluation and subsequent floating of national Settlements, the Bank of Japan, the real in January. These developments, and many European central banks— along with the considerable easing of were allowed to lapse in light of their monetary policy in late 1998 and early disuse over the past fifteen years and 1999 in a number of regions, including in the presence of other well-established Europe, Japan, and the United States, arrangements for international mone- fostered a markedly better tone in the tary cooperation. The swap arrangement world's financial markets. On balance, between the Treasury's Exchange Stabi- U.S. equity prices rose substantially, and lization Fund and the German Bundes- in credit markets, risk spreads receded bank was also allowed to lapse. toward more typical levels. Issuance of private debt securities ballooned in late 1998 and early 1999, in part making up for borrowing that was postponed when Report on July 22, 1999 markets were disrupted. As these potentially contractionary forces dissipated, the risk of higher Monetary Policy and the inflation in the United States resurfaced Economic Outlook as the greatest concern for monetary The U.S. economy has continued to per- policy. Although underlying inflation form well in 1999. The ongoing eco- trends generally remained quiescent, oil nomic expansion has moved into a near- prices rose sharply, other commodity record ninth year, with real output prices trended up, and prices of non-oil expanding vigorously, the unemploy- imports fell less rapidly, raising overall ment rate hovering around lows last inflation rates. Despite improvements in seen in 1970, and underlying trends in technology and business processes that inflation remaining subdued. Respond- have yielded striking gains in efficiency, ing to the availability of new technolo- the robust growth of aggregate demand, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 67 fueled by rising equity wealth and had been impaired as investors cut readily available credit, produced even back sharply their credit risk exposures tighter labor markets in the first half and market liquidity dried up. The of 1999 than in the second half of 1998. Federal Reserve responded to these If this trend were to continue, labor developments by trimming its target compensation would begin climbing for the overnight federal funds rate increasingly faster than warranted by by 75 basis points in three steps. In productivity growth and put upward early 1999, the devaluation and subsepressure on prices. Moreover, the Fed- quent floating of the Brazilian real in eral Open Market Committee (FOMC) mid-January heightened concerns for a was concerned that as economic activity while, but market conditions overall abroad strengthened, the firming of improved considerably. commodity and other prices might also At its February and March meetings, foster a less favorable inflation environ- the FOMC left the stance of monement. To gain some greater assurance tary policy unchanged. The Committee that the good inflation performance of expected that the growth of output might the economy would continue, the Com- well slow sufficiently to bring producmittee decided at its June meeting to tion into close enough alignment with reverse a portion of the easing under- the economy's enhanced potential to taken last fall when global financial mar- forestall the emergence of a trend of kets were disrupted; the Committee's rising inflation. Although domestic target for the overnight federal funds demand was still increasing rapidly, it rate, a key indicator of money market was anticipated to moderate over time conditions, was raised from 43A percent in response to the buildup of large to 5 percent. stocks of business equipment, housing units, and durable goods and more restrained expansion in wealth in the Monetary Policy, Financial absence of appreciable further increases Markets, and the Economy in equity prices. Furthermore, the over the First Half of 1999 FOMC, after taking account of the near- The FOMC met in February and March term effects of the rise in crude oil against the backdrop of continued rapid prices, saw few signs that cost and price expansion of the U.S. economy. Demand inflation was in the process of picking was strong, employment growth was up. The unusual combination of very brisk, and labor markets were tight. high labor resource utilization and sus- Nonetheless, price inflation was still tained low inflation suggested considerlow, held in check by a substantial gain able uncertainty about the relationship in productivity, ample manufacturing between output and prices. In this envicapacity, and low inflation expectations. ronment, the Committee concluded that Activity was supported by a further it could wait for additional information settling down of financial markets in about the balance of risks to the ecothe first quarter after a period of consid- nomic expansion. erable turmoil in the late summer By the time of the May FOMC meetand fall of 1998. In that earlier period, ing, demand was still showing considerwhich followed Russia's moratorium able forward momentum, and growth on a substantial portion of its debt in economic activity still appeared to payments in mid-August, the normal be running in excess of the rate of functioning of U.S. financial markets increase of the economy's long-run Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 86th Annual Report, 1999 capacity to expand output. Borrowers' In the time leading up to the FOMC's heavy demands for credit were being June meeting, economic activity in the met on relatively favorable terms, and United States continued to move forwealth was further boosted by rapidly ward at a brisk pace, and prospects in a rising equity prices. Also, the eco- number of foreign economies showed nomic and financial outlook for many additional improvement. Labor markets emerging-market countries was brighter. tightened slightly further. The federal Trends in inflation were still subdued, funds rate, however, remained at the although consumer prices—even apart lower level established in November from a big jump in energy prices—were 1998, when the Committee took its last reported to have registered a sizable rise of three steps to counter severe finanin April. cial market strains. With those strains At its May meeting, the FOMC largely gone, the Committee believed believed that these developments tilted that the time had come to reverse some the risks toward further robust growth of that accommodation, and it raised that would exert additional pressure the targeted overnight federal funds rate on already taut labor markets and ulti- 25 basis points, to 5 percent. Looking mately show through to inflation. More- ahead, the Committee expected demand over, a turnaround in oil and other to remain strong, but it also noted the commodity markets meant that prices possibility that a further pickup in proof these goods would no longer be hold- ductivity could allow the economy to ing down inflation, as they had over the accommodate this demand for some past year. Yet, the economy to date had time without added inflationary presshown a remarkable ability to accommo- sure. In light of these conflicting forces date increases in demand without gener- in the economy, the FOMC returned to ating greater underlying inflation trends, a symmetric directive. Nonetheless, with as the continued growth of labor produc- labor markets already tight, the Comtivity had helped to contain cost pres- mittee recognized that it needed to stay sures. The uncertainty about the pros- especially alert to signs that inflationary pects for prices, demand pressures, and forces were emerging that could prove productivity was large, and the Commit- inimical to the economic expansion. tee decided to defer any policy action. However, in light of its increased con- Economic Projections cern about the outlook for inflation, for 1999 and 2000 the Committee adopted an asymmetric directive tilted toward a possible firming The members of the Board of Governors of policy. The Committee also wanted and the Federal Reserve Bank presito inform the public of this significant dents see good prospects for sustained, revision in its view, and it announced solid economic expansion through next a change in the directive immediately year. For this year, the central tendency after the meeting. The announcement of their forecasts of growth of real gross was thef irst under the Committee's pol- domestic product is 3l/z percent to icy of announcing changes in the tilt of 33/4 percent, measured as the change the domestic directive when it wants to between the fourth quarters of 1998 and communicate a major shift in its view 1999. For 2000, the forecasts of real about the balance of risks to the econ- GDP are mainly in the 2Vi percent to omy or the likely direction of its future 3 percent range. With this pace of actions. expansion, the civilian unemployment Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 69 rate is expected to remain close to the rates should help to damp spending as recent 4lA percent level over the next well. And unless the extraordinary gains six quarters. in equity prices of the past few years are The increases in income and wealth extended, the impetus to spending from that have bolstered consumer demand increases in wealth will diminish. over the first half of this year and the Federal Reserve policymakers believe desire to invest in new high-technology that this year's rise in the consumer equipment that has boosted business price index (CPI) will be larger than that demand during the same period should in 1998, largely because of the rebound continue to stimulate spending over the in retail energy prices that has already quarters ahead. However, several factors occurred. Crude oil prices have moved are expected to exert some restraint on up sharply, reversing the decline posted the economy's momentum by next year. in 1998 and leading to a jump in the CPI With purchases of durable goods by this spring. For next year, the FOMC both consumers and businesses having participants expect the increase in the risen still further and running at high CPI to remain around this year's pace, levels, the stocks of such goods prob- with a central tendency of 2 percent to ably are rising more rapidly than is 2V2 percent. Futures market quotes suglikely to be desired in the longer run, gest that the prevailing expectation is and the growth of spending should mod- that the rebound in oil prices has run its erate. The increase in market interest course now, and ample industrial capac- Economic Projections for 1999 and 2000 Percent Federal Reserve governors and Reserve Bank presidents Indicator Administration1 Central Range tendency 1999 Change, fourth quarter to fourth quarter2 Nominal GDP 43/4-5V£ 5-5'/2 4.8 Real GDP 3V4-4 3^-33/4 3.2 Consumer price index 3 13/4-21/J 21/4-21/2 2.4 Average level fourth quarter Civilian unemployment rate 4-4»/2 4-4Vi 4.3 2000 Change, fourth quarter to fourth quarter2 Nominal GDP 4-5 lA 4-5 4.2 Real GDP 2-3V2 2V2-3 2.1 Consumer price index3 l»/2-23/4 2-2»/2 2.4 Average level, fourth quarter Civilian unemployment rate 4-4V2 41/4-41/2 4.7 1. From the Mid-Session Review of the budget. 3. All urban consumers. 2. Change from average for fourth quarter of previous year to average for fourth quarter of year indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 86th Annual Report, 1999 ity and productivity gains may help limit establish, with any confidence, specific inflationary pressures in coming months target ranges for expected money as well. With labor utilization very high, growth for a given year that will be though, and demand still strong, signifi- consistent with the economic perforcant risks remain even after the recent mance that it desires. However, persispolicy firming that economic and finan- tently fast or slow money growth can cial conditions may turn out to be incon- accompany, or even precede, deviations sistent with keeping costs and prices from desirable economic outcomes. from escalating. Thus, the behavior of the monetary Although interest rates currently are a aggregates, evaluated in the context of bit higher than anticipated in the eco- other financial and nonfinancial indicanomic assumptions underlying the bud- tors, will continue to be of interest get projections in the Administration's to Committee members in their policy Mid-Session Review, there is no appar- deliberations. ent tension between the Administra- The velocities of M2 and M3 declined tion's plans and the Federal Reserve again in the first half of this year, albeit policymakers' views. In fact, Federal more slowly than in 1998. The Commit- Reserve officials project somewhat tee's easing of monetary policy in the faster growth in real GDP and slightly fall of 1998 contributed to the decline, lower unemployment rates into 2000 but only to a modest extent. It is not than the Administration does, while the clear what other factors led to the drop, Administration's projections for infla- although the considerable increase in tion are within the Federal Reserve's wealth relative to income resulting from central tendencies. the substantial gains in equity prices over the past few years may have played a role. Investors could be rebalancing Money and Debt Ranges their portfolios, which have become for 1999 and 2000 skewed toward equities, by reallocating At its meeting in late June, the FOMC some wealth to other assets, including reaffirmed the ranges for 1999 growth those in M2. of money and debt that it had estab- Even if the velocities of M2 and M3 lished in February: 1 percent to 5 per- were to return to their historically typicent for M2, 2 percent to 6 percent for cal patterns over the balance of 1999 M3, and 3 percent to 7 percent for debt and in 2000, M2 and M3 likely would of the domestic nonfinancial sectors. be at the upper bounds of, or above, The FOMC set the same ranges for 2000 on a provisional basis. Ranges for Growth of Monetary As has been the case since the mid- and Debt Aggregates 1990s, the FOMC views the ranges Percent for money growth as benchmarks for growth under conditions of price stability and the historically typical relationship between money and nominal income. The disruption of the historically typical pattern of the velocities of M2 and M3 (the ratio of nominal GDP to the aggregates) during the 1990s NOTE. Change from average for fourth quarter of preceding year to average for fourth quarter of year implies that the Committee cannot indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 71 their longer-term price-stability ranges stantial growth of employment and a in both years, given the Committee's reduction in the unemployment rate to projections of nominal GDP growth. 4Vi percent. Growth in output has been This relatively rapid expansion in nomi- driven by strong domestic demand, nal income reflects faster expected which in turn has been supported by growth in productivity than when the further increases in equity prices, by the price-stability ranges were established continuing salutary effects of governin the mid-1990s and inflation that is ment saving and inflows of foreign still in excess of price stability. The investment on the cost of capital, and more rapid increase in productivity, if it by more smoothly functioning finanpersists for a while and is sufficiently cial markets as the turbulence that large, might in the future suggest an marked the latter part of 1998 subsided. upward adjustment to the money ranges Against the background of the easing consistent with price stability. However, of monetary policy last fall and continuconsiderable uncertainty attends the ing robust economic activity, investors trend in productivity, and the Committee became more willing to advance funds chose not to adjust the ranges at its most to businesses; risk spreads have receded recent meeting. and corporate debt issuance has been Debt of the nonfinancial sectors has brisk. expanded at roughly the same pace as Inflation developments were mixed nominal income this year—its typical over the first half of the year. The conpattern. Given the stability of this rela- sumer price index increased more raptionship, the Committee selected a idly owing to a sharp rebound in energy growth range for the debt aggregate that prices. Nevertheless, price inflation encompasses its expectations for debt outside of the energy area generally growth in both years. The Committee remained subdued despite the slight furexpects growth in nominal income to ther tightening of labor markets, as sizslow in 2000, and with it, debt growth. able gains in labor productivity and Nonetheless, growth of this aggregate ample industrial capacity held down is projected to remain within the range price increases. of 3 percent to 7 percent. The Household Sector Economic and Financial Developments in 1999 Consumer Spending The economy has continued to grow Real personal consumption expenditures rapidly so far this year. Real gross surged 63A percent at an annual rate in domestic product rose more than 4 per- the first quarter, and more recent data cent at an annual rate in the first quarter point to a sizable further advance in the of 1999, and available data point to second quarter. The underlying fundaanother significant gain in the second mentals for the household sector have quarter.2 The rise in activity has been remained extremely favorable. Real brisk enough to produce further sub- incomes have continued to rise briskly with strong growth of employment and real wages, and consumers have 2. All figures from the national income and benefited from substantial gains in product accounts cited here are subject to change wealth. Not surprisingly, consumer in the quinquennial benchmark revisions slated for this fall. confidence—as measured, for example, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

72 86th Annual Report, 1999 by the University of Michigan Survey current incomes would otherwise allow. Research Center (SRC) and Conference As share values moved up further in the Board surveys—has remained quite first half of this year, the wealth-toupbeat in this environment. income ratio continued to edge higher Growth of consumer spending in the despite the absence of saving out of first quarter was strong in all expendi- disposable income. ture categories. Outlays for durable goods rose sharply, reflecting sizable Residential Investment increases in spending on electronic equipment (especially computers) and Housing activity remained robust in the on a wide range of other goods, includ- first half of this year. In the singleing household furnishings. Purchases of family sector, positive fundamentals and cars and light trucks remained at a high unseasonably good weather helped level, supported by declining relative boost starts to a pace of 1.39 million prices as well as by the fundamentals units in the first quarter—the highest that have buoyed consumer spending level of activity in twenty years. This more generally. Outlays for nondurable extremely strong level of building activgoods were also robust, reflecting in ity strained the availability of labor and part a sharp increase in expenditures for some materials; as a result, builders had apparel. Finally, spending on services trouble achieving the usual seasonal climbed steeply as well early this year, increase in the second quarter, and starts paced by sizable increases in spending edged off to a still-high pace of 1.31 milon recreation and brokerage services. In lion units. Home sales moderated in the the second quarter, consumers appar- spring: Sales of both new and existing ently boosted their purchases of motor homes were off some in May from their vehicles further. In all, real personal earlier peaks, and consumers' percepconsumption expenditures rose at more tions of homebuying conditions as meathan a 4 percent annual rate in April and sured by the Michigan SRC survey have May, an increase that is below the first- declined from the very high marks quarter pace but is still quite rapid by recorded in late 1998 and early this year. historical standards. Nonetheless, demand has remained quite Real disposable income increased at robust, even in the face of a backup in an annual rate of 3V2 percent in the first mortgage interest rates: Builders' evaluquarter, with the strong labor market ations of new home sales remained very generating marked increases in wages high at midyear, and mortgage applicaand salaries. Even so, income grew less tions for home purchases showed rapidly than expenditures, and the per- strength into July. sonal saving rate declined further; With strong demand pushing up indeed, by May the saving rate had against limited capacity, home prices moved below negative 1 percent. Much have risen substantially, although eviof the decline in the saving rate in recent dence is mixed as to whether the rate years can be explained by the sharp rise of increase is picking up. The qualityin household net worth relative to dis- adjusted price of new homes rose 5 perposable income that is associated with cent over the four quarters ended in the the appreciation of households' stock first quarter of 1999, up from 3V4 permarket assets since 1995. This rise in cent over the preceding four-quarter wealth has given households the where- period. The repeat sales index of existwithal to spend at levels beyond what ing home prices also rose about 5 per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 73 cent between the first quarter of 1998 Consumer credit growth accelerated and the first quarter of 1999, but this in the first half of 1999. It expanded at series posted even larger increases in the about an 8 percent annual rate compared year-earlier period. On the cost side, with SVi percent for all of 1998. The tight supplies have led to rising prices growth of nonrevolving credit picked for some building materials; prices of up, reflecting brisk sales and attractive plywood, lumber, gypsum wallboard, financing rates for automobiles and and insulation have all moved up other consumer durable goods. The sharply over the past twelve months. In expansion of revolving credit, which addition, hourly compensation costs includes credit card loans, slowed a bit have been rising relatively rapidly in the from its pace in 1998. construction sector. Households apparently have not Starts of multifamily units surged to encountered added difficulties meeting 384,000 at an annual rate in the first the payments associated with their quarter and ran at a pace a bit under greater indebtedness, as measures of 300,000 units in the second quarter. As household financial stress improved a in the single-family sector, demand has bit on balance in the first quarter. Perbeen supported by strong fundamentals, sonal bankruptcies dropped off conbuilders have been faced with tight sup- siderably, although part of the decline plies of some materials, and prices have may reflect the aftermath of a surge been rising briskly: Indeed, apartment in filings in late 1998 that occurred property values have been increasing at in response to pending legislation that around a 10 percent annual rate for three would limit the ability of certain debtors years now. to obtain forgiveness of their obligations. Delinquency rates on several types of household loans edged lower. Household Finance Delinquency and charge-off rates on In addition to rising wealth and rapid credit card debt moved down from income growth, the strong expenditures their 1997 peaks but remained at historiof households on housing and consumer cally high rates. A number of banks goods over the first half of 1999 were continued to tighten credit card lending encouraged by the decline in interest standards this year, as indicated by rates in the latter part of 1998. House- banks' responses to Federal Reserve holds borrowed heavily to finance surveys. spending. Their debt expanded at a 9Vi percent annual rate in the first quar- The Business Sector ter, up from the 83A percent pace over 1998, and preliminary data for the sec- Fixed Investment ond quarter indicate continued robust growth. Mortgage borrowing, fueled by Real business fixed investment appears the vigorous housing market and favor- to have posted another huge increase able mortgage interest rates, was par- over the first half of 1999. Investment ticularly brisk in the first quarter, with spending continued to be driven by mortgage debt rising at an annual rate of buoyant expectations of sales prospects 10 percent. In the second quarter, mort- as well as by rapidly declining prices gage rates moved up considerably, but of computers and other high-tech equippreliminary data indicate that borrowing ment. In recent quarters, spending also was still substantial. may have been boosted by the desire to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 86th Annual Report, 1999 upgrade computer equipment in advance increasing impressively, while spending of the rollover to the year 2000. Real on institutional and industrial structures investment has been rising rapidly for has been declining—the last reflecting several years now; indeed, the average ample capacity in the manufacturing increase of 10 percent annually over the sector. In the first quarter of this year, past five years represents the most rapid overall spending on structures was sustained expansion of investment in reported in the national income and more than thirty years. Although a product accounts to have moved up at a growing portion of this investment has solid 53/4 percent annual rate, reflecting gone to cover depreciation on purchases a further sharp increase in spending on of short-lived equipment, the investment office buildings and lodging facilities. boom has led to a notable upgrading However, revised source data indicate a and expansion of the capital stock and somewhat smaller first-quarter increase in many cases has embodied new tech- in nonresidential construction and also nologies. These factors likely have been point to a slowing in activity in April important in the nation's improved pro- and May from the first-quarter pace. ductivity performance over the past few years. Inventory Investment Real outlays for producers' durable equipment increased at an annual rate of Inventory-sales ratios in many indus- 9J/2 percent in the first quarter of the tries dropped considerably early this year, after having surged nearly 17 per- year, as the pace of stockbuilding by cent last year, and may well have nonfarm businesses, which had slowed re-accelerated in the second quarter. notably over 1998, remained well below Outlays on communications equipment the surge of consumer and business were especially robust in the first quar- spending in the first quarter. Although ter, driven by the ongoing effort by tele- production picked up some in the spring, communications companies to upgrade final demand remained quite strong, and their networks to provide a full range of available monthly data suggest that busivoice and data transmission services. nesses accumulated inventories in April Purchases of computers and other infor- and May at a rate not much different mation processing equipment were also from the modest first-quarter pace. up notably in the first quarter, albeit In the motor vehicle sector, makers below last year's phenomenal spending geared up production in the latter part pace, and shipments of computers of 1998 to boost inventories from their surged again in April and May. Ship- low levels after last summer's strikes. ments of aircraft to domestic carriers Nevertheless, as with the business sector apparently soared in the second quarter, overall, motor vehicle inventories and business spending on motor vehi- remained on the lean side by historical cles, including medium and heavy standards in the early part of this year trucks as well as light vehicles, has as a result of surprisingly strong vehicle remained extremely strong as well. sales. As a consequence, manufacturers Real business spending for nonresi- boosted the pace of assemblies in the dential structures has been much less second quarter to the highest level in robust than for equipment, and spending twenty years. With no noticeable signs trends have varied greatly across sectors of a slowing in demand, producers have of the market. Real spending on office scheduled third-quarter output to remain buildings and lodging facilities has been at the lofty heights of the second quarter. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 75 Corporate Profits and investment-grade corporate bond yields Business Finance was restrained by investors' apparently increased willingness to hold such The economic profits of nonfinancial debt, as growing optimism about the U.S. corporations rose considerably in economy and favorable earnings reports the first quarter, even after allowing for gave investors more confidence about the depressing effect in the fourth quar- the prospective financial health of priter of payments associated with the vate borrowers. Yield spreads on belowsettlement between the tobacco compa- investment-grade corporate debt over nies and the states. Despite the growth comparable Treasury securities, which of profits, capital expenditures by nonfi- had risen considerably in the latter part nancial businesses continued to outstrip of 1998, also retreated. But in mid-July, internal cash flow. Moreover, borrowing these spreads were still well above the requirements were enlarged by the net thin levels prevailing before the period reduction in equity outstanding, as the of financial turmoil but in line with their substantial volume of retirements from historical averages. merger activity and share repurchase In contrast to securities market parprograms exceeded the considerable ticipants, banks' attitudes toward busivolume of gross issuance of both initial ness lending apparently became someand seasoned public equities. As a what more cautious over the first half of result, businesses continued to borrow at the year, according to Federal Reserve a brisk pace: Aggregate debt of the non- surveys. The average spread of bank financial business sector expanded at a lending rates over the FOMC's target 9V2 percent annual rate in the first quar- federal funds rate remained elevated. On ter. As financial market conditions net, banks continued to tighten lending improved after the turmoil of the fall, terms and standards this year, although businesses returned to the corporate the percentage that reported tightening bond and commercial paper markets for was much smaller than in the fall. funding, and corporate bond issuance The overall financial condition of reached a record high in March. Some nonfinancial businesses was strong over of the proceeds were used to pay off the first half of the year, although a few bank loans, which had soared in the indicators suggested a slight deteriorafall, and these repayments curbed the tion. In the first quarter, the ratio of net expansion of business loans at banks. interest payments to corporate cash flow Partial data for the second quarter indi- remained close to the modest levels of cate that borrowing by nonfinancial 1998, as low interest rates continued to businesses slowed somewhat. hold down interest payments. Delin- Risk spreads have receded on balance quency rates for commercial and industhis year from their elevated levels in trial loans from banks ticked up, but the latter part of 1998. From the end they were still modest by historical of December 1998 through mid-July, standards. Similarly, over the first half investment-grade corporate bond yields of the year, business failures—measured moved up from historically low levels, as the ratio of liabilities of failed busibut by less than yields on comparable nesses to total liabilities—stepped up Treasury securities, and the spread from the record low in 1998. The default between these yields narrowed to a rate on below-investment-grade bonds level somewhat above that prevailing rose to its highest level in several years, before the Russian crisis. The rise in an increase stemming in part from Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 86th Annual Report, 1999 defaults by companies whose earnings a modest increase in outlays. Federal were impaired by the drop in oil and receipts were 5 percent higher in the other commodity prices last year. The first eight months of fiscal 1999 than total volume of business debt that was in the year-earlier period. With profits downgraded exceeded slightly the vol- leveling off from last year, receipts of ume of debt that was upgraded. corporate taxes have stagnated so far this fiscal year. However, individual income tax payments are up apprecia- The Government Sector bly, reflecting the solid gains in household incomes and perhaps also a rise Federal Government in capital gains realizations large The incoming news on the federal enough to offset last year's reduction budget continues to be quite favorable. in capital gains tax rates. At the same Over the first eight months of fiscal time, federal outlays increased only year 1999—the period from October 2V2 percent in nominal terms and barely through May—the unified budget regis- at all in real terms during the first eight tered a surplus of about $41 billion, months of the fiscal year, relative to compared with $16 billion during the the comparable year-earlier period. comparable period of fiscal 1998. If Spending growth has been restrained the latest projections from the Office of in major portions of both the discre- Management and Budget and the Con- tionary (notably, defense) and nondisgressional Budget Office are realized, cretionary (notably, net interest, social the unified budget for fiscal 1999 as a security, and Medicare) categories— whole will show a surplus of around although this year's emergency supple- $100 billion to $120 billion, or more mental spending bill, at about $14 bilthan 1 percent of GDP—a striking turn- lion, was somewhat larger than similar around from the outsized budget deficits bills in recent years. of previous years, which approached As for the part of federal spending 5 percent of GDP in the early 1990s. that is counted in GDP, real federal out- As a result of this turnaround, the lays for consumption and gross investfederal government is now contributing ment, which had changed little over the positively to the pool of national saving. past few years, declined at a 2 percent In fact, despite the recent drop in the annual rate in the first quarter of 1999. personal saving rate, gross saving by A drop in real defense outlays more than households, businesses, and govern- offset a rise in nondefense expenditures ments has remained above 17 percent of in the first quarter. And despite the mili- GDP in recent quarters—up from the tary action in the Balkans and the recent 14 percent range that prevailed in the emergency spending bill, defense spendearly 1990s. This well-maintained pool ing appears to have declined in the secof national savings, together with the ond quarter as well. continued willingness of foreigners to The budget surpluses of the past two finance our current account deficits, has years have led to a notable decline in helped hold down the cost of capital, the stock of federal debt held by private thus contributing to our nation's invest- investors as a share of GDP. Since its ment boom. peak in March 1997, the total volume This year's increase in the federal of Treasury debt held by private invessurplus has reflected continued rapid tors has fallen by nearly $130 billion. growth of receipts in combination with The Treasury has reduced its issuance Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 11 of interest-bearing marketable debt in first quarter. The low interest rate envifiscal 1999. The decrease has been con- ronment and strong economy encourcentrated in nominal coupon issues; in aged the financing of new projects and 1998, by contrast, the Treasury retired the refunding of outstanding higher-rate both bill and coupon issues in roughly debt. Borrowing slowed to a more modequal measure. Offerings of inflation- est pace in the second quarter, as yields indexed securities have remained an on long-dated municipal bonds moved important part of the Treasury's over- up, but by less than those on comparable all borrowing program: Since the Treasury securities. The credit quality of beginning of fiscal 1999, the Treasury municipal securities improved further has sold nearly $31 billion of such over the first half of the year, with more securities. issues being upgraded than downgraded. State and Local Governments External Sector The fiscal condition of state and local Trade and the Current Account governments has remained quite positive as well. Revenues have been The current account deficit reached boosted by increases in tax collections $274 billion at an annual rate in the first due to strong growth of private-sector quarter of 1999, a bit more than 3 perincomes and expenditures—increases cent of GDP, compared with $221 bilthat were enough to offset an ongoing lion and 2Vi percent of GDP for 1998. A trend of tax cuts. Meanwhile, outlays widening of the deficit on trade in goods have continued to be restrained. In all, and services, to $215 billion at an annual at the state level, fiscal 1999 looks to rate in the first quarter from $173 billion have been the seventh consecutive year in the fourth quarter of 1998, accounted of improving fiscal positions; of the for the deterioration in the current forty-six states whose fiscal years ended account balance. Data for April and May on June 30, all appear to have run sur- indicate that the trade deficit increased pluses in their general funds. further in the second quarter. Real expenditures for consumption The quantity of imports of goods and and gross investment by states and services again grew vigorously in the localities, which had been rising only first quarter. The annual rate of growth moderately through most of 1998, of imports, at l3Vz percent, continued jumped at a 13A percent annual rate in the rapid pace seen over 1998 and the first quarter of this year. This reflected the strength of U.S. domestic increase was driven by a surge in con- demand and the effects of past dollar struction expenditures that was helped appreciation. Imports of consumer along by unseasonably favorable goods, automotive products, computers, weather, and spending data for April and and semiconductors were particularly May suggest that much of this rise in robust. Preliminary data for April and construction spending was offset in the May suggest that real import growth second quarter. As for employment, remained strong, as nominal imports state and local governments added jobs rose steadily and non-oil import prices over the first half of the year at about the posted a moderate decline. same pace as they did last year. The volume of exports of goods and Debt of state and local governments services declined at an annual rate of expanded at a SVi percent rate in the 5 percent in the first quarter. The decline Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 86th Annual Report, 1999 partially reversed the strong increase in roll employment increased about the fourth quarter of last year. The weak- 200,000 per month on average, ness of economic activity in a number which, although less rapid than the of U.S. trading partners and the strength 244,000 pace registered over 1998, of the dollar damped demand for U.S. is faster than the growth of the workingexports. Declines were registered in air- age population. With the labor force craft, machinery, industrial supplies, and participation rate remaining about flat agricultural products. Exports to Asia at just over 67 percent, the unemploygenerally turned down in the first quar- ment rate edged down further from ter from the elevated levels recorded an average of AV2 percent in 1998 to in the fourth quarter, when they were 4lA percent in the first half of this year— boosted by record deliveries of aircraft the lowest unemployment rate seen in to the region. Preliminary data for April the United States in almost thirty years. and May suggest that real exports Furthermore, the pool of potential workadvanced slightly. ers, including not just the unemployed but also individuals who are out of the Capital Account labor force but report that they want a job, declined late last year to the lowest Foreign direct investment in the United share of the labor force since collection States and U.S. direct investment abroad of these data began in 1970—and it has remained robust in the first quarter, remained near that low this year. Not reflecting brisk cross-border merger surprisingly, businesses in many parts of and acquisition activity. On balance, net the country have perceived workers to capital flows through direct investment be in very short supply, as evidenced by registered a modest outflow in the first high levels of help-wanted advertising quarter compared with a huge net inflow and surveys showing substantial diffiin the fourth quarter. Fourth-quarter culties in filling job openings. inflows were swollen by several large Employment gains in the private mergers. Net foreign purchases of U.S. service-producing sector remained sizsecurities also continued to be quite sizable in the first six months of the year able but again were well below the and more than accounted for the rise in extraordinary pace of the fourth quarter. nonfarm payrolls over this period. Pay- Most of the slowdown in the first quarrolls continued to rise briskly in the ter is attributable to a reduced demand services industry, with firms providing for Treasury securities on the part of business services (such as help supply private investors abroad. But capital services and computer services) adding inflows from foreign official sources jobs especially rapidly. Job gains were also slowed in the first quarter. U.S. resiquite sizable in retail trade as well. dents on net sold foreign securities in Within the service-producing sector, the first quarter, but at a slower rate than only the finance, insurance, and real in the previous quarter. estate industry has slowed the pace of net hiring from last year's rate, reflecting, in part, a slower rate of job gains in The Labor Market the mortgage banking industry as the refinancing wave has ebbed. Employment and Labor Supply Within the goods-producing sector, Labor demand remained very strong the boom in construction activity pushed during the first half of 1999. Pay- payrolls in that industry higher in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 79 the first six months of this year. But no further slowing, of wage growth: in manufacturing, where employment This series was up at about a 4 percent began declining more than a year ago in annual rate over the first six months of the wake of a drop in export demand, this year, about the same as the increase payrolls continued to fall in the first half over 1998. Growth in the benefits comof 1999; in all, nearly half a million ponent of the ECI slowed somewhat factory jobs have been shed since March as well in the year ended in March, to a 1998. Despite these job losses, manufac- 2VA percent increase. However, employturing output continued to rise in the ers' costs for health insurance are one first half of this year, reflecting large component of benefits that has been risgains in labor productivity. ing more rapidly of late. After showing essentially no change from 1994 through 1996, the ECI for health insurance Labor Costs and Productivity accelerated to a 33A percent pace over Growth in hourly compensation, which the twelve months ended in March. had been on an upward trend since A second measure of hourly 1995, appears to have leveled off and, compensation—the Bureau of Labor by some measures, has slowed in the Statistics' measure of compensation past year. According to the employment per hour in the nonfarm business seccost index (ECI), hourly compensation tor, which is derived from compensacosts increased 3 percent over the twelve tion information from the national months ended in March, down from accounts—has been rising more rapidly 3V2 percent over the preceding twelve- than the ECI in the past few years month period. Part of both the earlier and has also decelerated less so far this acceleration and more recent decelera- year. Nonfarm compensation per hour tion in the ECI apparently reflected increased 4 percent over the four quarswings in commissions, bonuses, and ters ended in the first quarter of 1999, other types of "variable" compensation, 1 percentage point more than the rise in especially in the finance, insurance, and the ECI over this period. One reason real estate industry. But in addition, part these two compensation measures may of the recent deceleration probably diverge is that the ECI does not capture reflects the influence of restrained price certain forms of compensation, such as inflation in tempering nominal wage stock options and hiring, retention, and increases. Although down from earlier referral bonuses, whereas nonfarm comincreases, the 3 percent rise in the ECI pensation per hour does measure these over the twelve months ended in March payments.3 Although the two compensawas well above the rise in prices over tion measures differ in numerous other this period and therefore was enough to respects as well, the series' divergence generate solid gains in workers' real may lend support to anecdotal evidence pay. that these alternative forms of compen- The deceleration in the ECI through sation have been increasing especially March has been most pronounced in the rapidly in recent years. However, wages and salaries component, whose twelve-month change slowed 3A percentage point from a year earlier. More 3. However, nonfarm compensation per hour recently, data on average hourly earn- captures the gains from the actual exercise of stock options, whereas for analyzing compensaings of production or nonsupervisory tion trends, one might prefer to measure the value workers may point to a leveling off, but of the options at the time they are granted. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 86th Annual Report, 1999 because nonfarm compensation per hour in business investment and the accompacan be revised substantially, one must nying introduction of newer technolobe cautious in putting much weight on gies that have occurred over the past the most recent quarterly figures from several years. this series. Even these impressive gains in labor Rapid productivity growth has made productivity may not have kept up fully it possible to sustain these increases in with increases in firms' real compensaworkers' compensation without placing tion costs of late. Over the past two great pressure on businesses' costs. years, real compensation, measured by Labor productivity in the nonfarm busi- the ECI relative to the price of nonfarm ness sector posted another sizable gain business output, has increased the same in the first quarter of 1999, and the hefty 2Vi percent per year as labor proincrease over the four quarters ended ductivity; however, measured instead in the first quarter of 1999 was 2Vi per- using nonfarm compensation per hour, cent. Indeed, productivity has increased real compensation has increased someat a 2 percent pace since 1995—well what more than productivity over this above the trend of roughly 1 percent per period, implying a rising share of comyear that had prevailed over the pre- pensation in total national income. A ceding two decades.4 This recent pro- persistent period of real compensation ductivity performance is all the more increases in excess of productivity impressive given that businesses are growth would reduce firms' capacity reported to have had to divert consider- to absorb further wage gains without able resources toward avoiding com- putting upward pressure on prices. puter problems associated with the century date change, and given as well that businesses may have had to hire less- Prices skilled workers than were available earlier in the expansion when the pool of Price inflation moved up in early potential workers was not so shallow. 1999 from a level in 1998 that was Part of the strength in productivity depressed by a transitory drop in energy growth over the past few years may and other commodity prices. After have been a cyclical response to the increasing only about IVi percent over rapid growth of output over this period. 1998, the consumer price index rose at But productivity may also be reaping a 2x/4 percent annual rate over the first a more persistent payoff from the boom six months of this year, driven by a sharp turnaround in prices of gasoline and heating oil. However, the so-called 4. About VA percentage point of the improve- "core" CPI, which excludes food and ment in productivity growth since 1995 can be energy items, rose at an annual rate of attributed to changes in price measurement. The only 1.6 percent over this period—a measure of real output underlying the productivity somewhat smaller increase than that regfigures since 1995 is deflated using CPI components that have been constructed using a istered over 1998 once adjustment is geometric-means formula; these components tend made for the effects of changes in CPI to rise less rapidly than the CPI components that methodology: According to a new rehad been used in the output and productivity data search series from the Bureau of Labor before 1995. These smaller CPI increases translate Statistics (BLS), the core CPI would into more rapid growth of output and productivity in the later period. have increased 2.2 percent over 1998 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 81 had 1999 methods been in place in that SRC survey, the median of one yearyear.5 ahead inflation expectations, which was The moderation of the core CPI in about 2V2 percent late last year, averrecent years has reflected a variety of aged 23/4 percent in the first half of this factors that have helped hold inflation in year. check despite what has been by all The quiescence of inflation expectaaccounts a very tight labor market. Price tions, at least through the early part of increases have been damped by substan- this year, in turn may have come in part tial growth in manufacturing capacity, from the downward movement in overwhich has held plant utilization rates all inflation last year resulting from in most industries at moderate (and in declines in prices of imports and of oil some cases subpar) levels, thereby rein- and other commodities. These price forcing competitive pressures in product declines have not been repeated more markets. Furthermore, rapid productiv- recently. This year's rise in energy ity growth helped hold increases in unit prices is the clearest example, but comlabor costs to low levels even as com- modity prices more generally have been pensation growth was picking up last turning up of late. The Journal of Comyear. The rise in compensation itself has merce industrial price index has moved been constrained by moderate expecta- up about 6 percent so far this year after tions of inflation, which have been rela- having declined about 10 percent last tively stable. According to the Michigan year, with especially large increases posted for prices of lumber, plywood, 5. The most important change this year was the and steel. These price movements are introduction of the geometric-means formula to starting to be seen at later stages of aggregate price quotes within most of the detailed processing as well: The producer price item categories. (The Laspeyres formula continues index for intermediate materials excludto be used in constructing higher-level aggregates.) Although these geometric-means CPIs ing food and energy, which gradually were introduced into the official CPI only in Janu- declined about 2 percent over the fifteen ary of this year, the BLS generated the series on an months through February 1999, retraced experimental basis going back several years, about half of that decrease by June. allowing them to be built into the national income and product accounts back to 1995. Furthermore, non-oil import prices, Alternative Measures of Price Change Percent, annual rate 1996:Q4 1997:Q4 1998:Q4 Price measure to to to 1997:Q4 1998:Q4 1999:Q1 Fixed-weight Consumer price index 1.9 1.5 1.5 Excluding food and energy 2.2 2.4 1.6 Chain-type Gross domestic product 1.7 .9 1.6 Gross domestic purchases 1.3 .4 1.2 Personal consumption expenditures 1.5 .7 1.2 Excluding food and energy 1.6 1.2 1.3 NOTE. A fixed-weight index uses quantity weights age of two fixed-weight indexes and allows the weights from the base year to aggregate prices from each distinct to change each year. Changes are based on quarterly item category. A chain-type index is the geometric aver- averages. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 86th Annual Report, 1999 although continuing to fall this year, spring reflected movements in the price have moved down at a slower rate than of crude oil. The spot price of West that of the past couple of years when the Texas intermediate (WTI) crude oil, dollar was rising sharply in foreign which had stood at about $20 per barrel exchange markets. Non-oil import prices through most of 1997, dropped sharply declined at a 1V4 percent annual rate over 1998 and reached $11 per barrel by over the first half of 1999, after having the end of the year, reflecting in part a fallen at a 3 percent rate, on average, weakening in demand for oil from the over 1997 and 1998. distressed Asian nations and increases Some other broad measures of prices in supply from Iraq and other countries. also showed evidence of acceleration But oil prices jumped this year as the early this year. The chain-type price OPEC nations agreed on production index for GDP—which covers prices of restraints aimed at firming prices, and all goods and services produced in the the WTI spot price reached $18 per United States—rose at about a Wi per- barrel in April and has moved still cent annual rate in the first quarter, up higher more recently. As a result, gasofrom an increase of about 1 percent last line prices, which dropped 15 percent year. A portion of this acceleration over 1998, reversed almost all of that reflected movements in the chain-type decline over the first six months of price index for personal consumption this year. Prices of heating fuel also expenditures (PCE) that differed from rebounded after dropping in 1998. In all, movements in the CPI. the CPI for energy rose at a 10 percent Although the components of the CPI annual rate over the December-to-June are key inputs into the PCE price index, period. the two price measures differ in a vari- Consumer food prices increased modety of respects: They use different aggre- erately over the first six months of the gation formulas; the weights are derived year, rising at a l3/4 percent annual rate. from different sources; the PCE measure Despite the upturn in commodity prices does not utilize all components of the generally, farm prices have remained CPI; and the PCE measure is broader quite low and have helped to hold down in scope, including not just the out-of- food price increases. Spot prices of pocket expenditures by households that wheat, soybeans, and sugar have moved are captured by the CPI, but also the down further this year from already portion of expenditures on items such as depressed levels at the end of 1998, and medical care and education that are paid prices of corn and coffee have remained by insurers or governments, consump- low as well. tion of items such as banks' checking The CPI for goods other than food services that are provided without and energy declined at about a Vi perexplicit charge, and expenditures made cent annual rate over the first six months by nonprofit institutions. Although PCE of 1999, after having risen \lA percent prices typically rise a bit less rapidly over 1998. The 1998 increase reflected a than the CPI, the PCE price measure sharp rise in tobacco prices in December was unusually restrained relative to the associated with the settlement of litiga- CPI in the few years through 1998, tion between the tobacco companies and reflecting a combination of the above the states; excluding tobacco, the CPI factors. for core goods was about flat last year. Last year's sharp drop in retail energy The decline in the first half of this year prices and the subsequent rebound this was concentrated in durable goods, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 83 where prices softened for a wide range private debt instruments in volume, of items, including motor vehicles. The as their yields evidently rose relative CPI for non-energy services increased to depository funding costs. As finanabout 2V2 percent at an annual rate in cial stresses unwound, securitization the first half, down a little from the resumed, business borrowers returned to increase over 1998. Increases in the CPI securities markets, and net purchases for rent of shelter have slowed thus far of securities slowed. From the fourth in 1999, rising at a 2V2 percent annual quarter of 1998 through June, bank rate versus a 314 percent rise last year. credit rose at a 3 percent annualized However, airfares and prices of medical pace, after adjusting for the estimated services have been rising more rapidly effects of mark-to-market accounting so far this year. rules. Debt and the Monetary Aggregates Monetary Aggregates The growth of M3, the broadest mone- Debt and Depository Intermediation tary aggregate, slowed appreciably over The total debt of the U.S. household, the first half of 1999. M3 expanded at a government, and nonfinancial business 6 percent annual pace from the fourth sectors increased at about a 6 percent quarter of 1998 through June of this annual rate from the fourth quarter of year, placing this aggregate at the top 1998 through May, a little above the of the 2 percent to 6 percent pricemidpoint of its growth range of 3 per- stability growth range set by the FOMC cent to 7 percent. Nonfederal debt at its February meeting. With depository expanded briskly at about a 9 percent credit growing modestly, depository annual pace, in association with contin- institutions trimmed the managed liabiliued strong private domestic spending on ties included in M3, such as large time consumer durable goods, housing, and deposits. Growth of institutional money business investment. By contrast, fed- market mutual funds also moderated eral debt contracted at a 3 percent annual from its rapid pace in 1998. Rates on rate, as budget surpluses reined in fed- money market funds tend to lag the eral government financing needs. movements in market rates because the Credit extended by depository institu- average rate of return on the portfolio tions slumped over the first half of of securities held by the fund changes 1999, after having expanded quite more slowly than market rates. In the briskly in 1998. A fair-sized portion of fall, rates on institutional money market the expansion in 1998 came in the fourth funds did not decline as fast as market quarter and stemmed from the turmoil rates after the Federal Reserve eased in financial markets. In that turbulent monetary policy, and the growth of these environment, depository institutions funds soared. As rates on these funds postponed securitization of mortgages, moved back into alignment with market and businesses shifted their funding rates this year, growth of these funds demand from securities markets to ebbed. depository institutions, where borrow- M2 advanced at a 614 percent annual ing costs in some cases were governed rate from the fourth quarter of 1998 by pre-existing lending commitments. through June. M2 growth had been Depository institutions also acquired elevated in late 1998 by unsettled finanmortgage-backed securities and other cial conditions, which raised the demand Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 86th Annual Report, 1999 Growth of Money and Debt velocity—the ratio of nominal income to M2—was at a slower rate than in Percent 1998. The decline this year reflected in Domestic part a continuing lagged response to the non- Period Ml M2 M3 financial policy easing in the fall; however, the debt drop in M2 velocity was again larger than predicted on the basis of the his- Annual1 1989 .6 5.2 4.1 7.5 torical relationship between the velocity 1990 4.2 4.2 1.9 6.7 of M2 and the opportunity costs of hold- 1991 8.0 3.1 1.2 4.5 ing M2—measured as the difference 1992 14.3 1.8 .6 4.5 between the rate on three-month Trea- 1993 10.6 1.3 1.0 4.9 1994 2.5 .6 1.7 4.9 sury bills and the average return on M2 1995 -1.6 3.9 6.1 5.4 assets. The reasons for the decline of 1996 -4.5 4.6 6.8 5.1 M2 velocity this year are not clear; the 1997 -1.2 5.8 8.8 4.8 1998 1.8 8.5 10.9 6.1 drop extends a trend in velocity evident since mid-1997 and may in part owe to Quarterly (annual rate)2 households' efforts to allocate some 1999:Q1 2.8 7.2 7.3 5.9 wealth to the assets included in M2, Q2 3.4 5.7 5.0 n.a. such as deposits and money market Year-to-date3 mutual fund shares, after several years 1999 2.0 6.2 6.0 6.1 of substantial gains in equity prices that NOTE. Ml consists of currency, travelers checks, greatly raised the share of wealth held in demand deposits, and other checkable deposits. M2 con- equities. sists of Ml plus savings deposits (including money market deposit accounts), small-denomination time deposits, Ml increased at a 2 percent annualand balances in retail money market funds. M3 consists ized pace from the fourth quarter of of M2 plus large-denomination time deposits, balances in institutional money market funds, RP liabilities (over- 1998 through June, in line with its night and term), and Eurodollars (overnight and term). advance in 1998. The currency compo- Debt consists of the outstanding credit market debt of the nent of Ml expanded quite rapidly. The U.S. government, state and local governments, households and nonprofit organizations, nonfinancial busi- strength appeared to stem from domesnesses, and farms. tic, rather than foreign, demand, perhaps 1. From average for fourth quarter of preceding year to average for fourth quarter of year indicated. reflecting vigorous consumer spending, 2. From average for preceding quarter to average for although currency growth was more quarter indicated. robust than might be expected for the 3. From average for fourth quarter of 1998 to average for June (May in the case of domestic nonfinancial debt). rise in spending. The deposits in Ml— n.a. Not available. demand deposits and other checkable deposits—contracted further, as retail for liquid money balances, and by the sweep programs continued to be introeasing of monetary policy, which duced. These programs, which first reduced the opportunity costs of holding began in 1994, shift funds from a the assets included in the monetary depositor's checking account, which aggregates. M2 growth moderated over is subject to reserve requirements, to a the first half of 1999, as the heightened special-purpose money market deposit demand for money waned; in June this account, which is not. Funds are then aggregate was above its 1 percent to shifted back to the checking account 5 percent price-stability growth range. when the depositor's account balance The growth in M2 over the first half of falls below a given level. The depository the year again outpaced that of nominal institution benefits from a retail sweep income, although the decline in M2 program because the program cuts its Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 85 reserve requirement and thus the amount mature the next business day to better of non-interest-bearing reserve balances align daily supply with demand. Nonethat it must hold at its Federal Reserve theless, required balances at the Federal Bank. New sweep programs depressed Reserve could drop to levels at which the growth of Ml by about 5V4 per- the volatility of the funds rate becomes centage points over the first half of pronounced. One way to address the 1999, somewhat less than in previous problem of declining required balances years because most of the depository would be to permit the Federal Reserve institutions that would benefit from such to pay interest on the reserve balances programs had already implemented that depository institutions hold. Paying them. interest on reserve balances would As a consequence of retail sweep reduce considerably the incentives of programs, the balances that depository depository institutions to develop institutions are required to hold at the reserve-avoidance practices that may Federal Reserve have fallen about complicate the implementation of mone- 60 percent since 1994. This develop- tary policy. ment has the potential to complicate reserve management by the Federal U.S. Financial Markets Reserve and depository institutions and thus raise the volatility of the federal Yields on Treasury securities have risen funds rate. It would do so by making the this year in response to the ebbing of demand for balances at the Federal the financial market strains of late Reserve more variable and less predict- 1998, surprisingly strong economic able. Before the introduction of sweeps, activity, concerns about the potential the demand for balances was high and for increasing inflation, and the consestable because reserve balance require- quent anticipation of tighter monetary ments were large, and the requirements policy. In January, yields on Treasury were satisfied by the average of daily securities moved in a narrow range, as balances held over a maintenance lingering safe-haven demands for dollarperiod. With sweep programs reducing denominated assets, owing in part to the required balances to low levels, deposi- devaluation and subsequent floating of tory institutions have found that they the Brazilian real, about offset the effect target balances in excess of their on yields of stronger-than-expected ecorequired balances in order to gain suffi- nomic data. Over subsequent months, cient protection against unanticipated however, yields on Treasury securities, debits that could leave their accounts especially at intermediate and long overdrawn at the end of the day. This maturities, moved up substantially. The payment-related demand for balances demand for the safest and most liquid varies more from day to day than the assets, which had pulled down Treasury requirement-related demand. Thus far, yields in the fall, abated as the strength the greater variation in the demand for in economic activity and favorable earnbalances has not made the federal funds ings reports engendered optimism about rate appreciably more volatile, in part the financial condition of private borreflecting the successful efforts of rowers and encouraged investors to buy depository institutions and the Federal private securities. In addition, rising Reserve to adapt to lower balances. For commodity prices, tight labor markets, its part, the Federal Reserve has con- and robust economic activity led market ducted more open market operations that participants to conclude that monetary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86 86th Annual Report, 1999 policy would need to be tightened, per- nominal counterparts, in part because haps in a series of steps. This view, these securities were not perceived as accentuated by the FOMC's announce- being as liquid as nominal Treasury ment after its May meeting that it had securities. Thus, as the safe-haven adopted a directive tilted toward tighten- demand for nominal Treasury securities ing policy, also boosted yields. Between unwound and nominal yields rose, the end of 1998 and mid-July, Treasury yields on inflation-indexed securities yields added about 80 basis points to did not move up concomitantly. More- 110 basis points, on balance, with the over, these yields were held down by larger increases in the intermediate some improvement in the liquidity maturities. The rise in Treasury bill of the market for inflation-indexed rates, anchored by the modest upward securities, as suggested by reports of move in the FOMC's target federal narrower bid-asked spreads, which profunds rate, was much less, about vided additional impetus for investors 10 basis points to 40 basis points. to acquire these securities. Because of The recovery in fixed-income mar- such considerations, the value of the kets over the first half of the year was yield spread between nominal and evident in a number of indicators of inflation-indexed Treasury securities as market conditions. Market liquidity an indicator of inflation expectations is was generally better, and volatility was limited. Nonetheless, the widening of lower. The relative demand for the most the spread this year may have reflected liquid Treasury securities—the most some rise in inflation expectations. recently auctioned security at each Equity prices have climbed this year. maturity—was not so acute, and yields Major equity price indexes posted gains on these securities were in somewhat of 10 percent to 31 percent, on balance, closer alignment with yields on issues between the end of 1998 and July 16, that had been outstanding longer. Deal- when most of them established record ers were more willing to put capital at highs. The lift to prices from strongerrisk to make markets, and bid-asked than-anticipated economic activity and spreads in Treasury securities narrowed corporate profits apparently has offset somewhat, though, in June they were the damping effect of rising bond still a bit wider than had been typical. yields. Prices of technology issues, espe- Market expectations of asset price vola- cially Internet stocks, have risen considtility, as reflected in prices on Treasury erably on net, despite some wide swings bond options contracts, receded on bal- in sentiment. Share prices of firms ance. The implied volatility of bond producing primary commodities, which prices dropped off until April and then tumbled in the fall, rebounded to post turned back up, as uncertainty about the large price gains, perhaps because of the timing and extent of a possible tighten- firming of commodity prices amid pering of monetary policy increased. ceptions that Asian economies were Yields on inflation-indexed Treasury improving. Consensus estimates of earnsecurities have only edged up this year, ings over the coming twelve months and the spreads between yields on nomi- have strengthened, but in June the ratio nal Treasury securities and those on of these estimates to prices, as measured comparable inflation-indexed securities by the S&P 500 index, was near the have widened considerably. Yields on record low established in May. Meaninflation-indexed securities did not while, real interest rates, measured as decline in late 1998 like those of their the difference between the yield on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 87 the nominal ten-year Treasury note and eral Reserve's May 1999 Senior Loan a survey-based measure of inflation Officer Opinion Survey, a substantial expectations, moved up. Consequently, majority of the respondent banks have the risk premium for holding equities largely completed year 2000 preparedremained quite small by historical ness reviews of their material customstandards. ers. Most banks reported that only a small portion of their customers have not made satisfactory progress. Year 2000 Preparedness Banks in the Federal Reserve's sur- The Federal Reserve and the banking vey reported little demand from their system have largely completed prepar- clients for special contingency lines of ing technical systems to ensure that they credit related to the century date change, will function at the century date change although many expect demand for such and are taking steps to deal with poten- lines to increase somewhat as the year tial contingencies. The Federal Reserve progresses. Almost all domestic responsuccessfully completed testing all of its dents reported that they are willing to mission-critical computer systems for extend such credit lines, although in year 2000 compliance, including its some cases with tighter standards or securities and funds transfer systems. As terms. a precaution to assure the public that sufficient cash will be available in the International Developments event that demand for U.S. currency rises in advance of the century date Global economic prospects look considchange, the Federal Reserve will erably brighter than they did only a few increase considerably its inventory of months ago. To an important degree, currency by late 1999. In addition, the this improvement owes to the rebound Federal Reserve established a Century in the Brazilian economy from the tur- Date Change Special Liquidity Facility moil experienced in January and Februto supply collateralized credit freely to ary and to the fact that the fallout from depository institutions at a modest pen- Brazil on other countries was much less alty to market interest rates in the than it might have been. The fear was months surrounding the rollover. This that the collapse of the Brazilian real funding should help financially sound last January would unleash a spiral of depository institutions commit more inflation and further devaluation and confidently to supplying loans to other lead to a default on government domesfinancial institutions and businesses in tic debt, destabilizing financial markets the closing months of 1999 and early and triggering an intensified flight of months of 2000. capital from Brazil. In light of events All depository institutions have been following the Russian debt moratorium subject to special year 2000 examina- and collapse of the ruble last year, contions by their banking supervisors to cern existed that a collapse of the real ensure their readiness. Banks, in turn, could also have negative repercussions have worked with their customers to in Latin America more broadly, and posencourage year 2000 preparedness by sibly even in global financial markets. including a review of a customer's year Developments in Brazil turned out 2000 preparedness in their under- better than expected over the weeks after writing or loan-review standards and the floating of the real in January. documentation. According to the Fed- Between mid-January and early March, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

88 86th Annual Report, 1999 the real lost 45 percent of its value improve the government's fiscal balance against the dollar, reaching a low of by about 1 percent of GDP. In May, 2.2 per dollar, but then started to recover the rise in U.S. interest rates associated after the Brazilian central bank raised with the anticipated tightening in the the overnight interest rate from 39 per- stance of U.S. monetary policy helped cent to 45 percent and made clear that push Brady bond yield spreads up more it gave a high priority to fighting infla- than 200 basis points. Although they tion. By mid-May, the real had strength- narrowed some in June, they widened ened to 1.65 per dollar, even while the recently on concerns about Argentina's overnight rate had been cut, in steps, economic situation. from its March high. The overnight The Brazilian crisis did trigger rate was reduced further, to 21 percent renewed financial stress throughout by the end of June, but the real fell back Latin America, as domestic interest only modestly and stood at about rates and Brady bond yield spreads 1.80 per dollar in mid-July. Brazil's increased sharply in January from levstock market also rose sharply and was els that had already been elevated by up by about 65 percent in the year to the Russian crisis. Nonetheless, these date. increases were generally smaller than Several favorable developments have those that had followed the Russian worked to support the real and equity crisis, and as developments in Brazil prices over the past few months. Infla- proved more positive than expected, tion has been lower than expected, with financial conditions in the rest of the consumer price inflation at an annual region stabilized rapidly. Even so, the rate of around 8 percent for the first half combination of elevated risk premiums of the year. Greater-than-expected real and diminished access to international GDP growth in the first quarter, though credit markets, as well as sharp declines attributable in part to temporary factors, in the prices of commodity exports, provided some evidence of a bottoming had significant consequences for GDP out, and possible recovery, in economic growth, which began to slow or turn activity over the first part of this year. negative throughout the region in late And in the fiscal arena, the government 1998 and early 1999. posted a primary surplus of more than Mexico appears to have experienced 4 percent of GDP in the first quarter— the least diminution in economic well above the goal in the International growth, likely because of its strong trade Monetary Fund program. The positive links with the United States, where turn of events has facilitated a return of growth has been robust. A flattening in the Brazilian government and private- Mexican GDP in the final quarter of sector borrowers to international bond 1998 has given way to renewed, but markets, albeit on more restrictive terms moderate, growth more recently, and the than those of a year ago. Mexican peso has appreciated by about Since the middle of May, however, 5V2 percent relative to the dollar since the road to recovery in Brazil has the start of the year. By contrast, ecobecome bumpier. The central govern- nomic activity in Argentina declined ment posted a fiscal deficit in May that sharply in the first quarter, in part was bigger than had been expected. In because of the devaluation and relaaddition, court challenges have called tively weak economic activity in Brazil, into question fiscal reforms enacted Argentina's major trading partner. earlier this year that were expected to More recently the earlier recovery in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 89 Argentina's financial markets appears past year, with exchange rates stabilizto have backtracked as concern has ing and stock prices moving higher. increased about the medium- to long- Financial conditions have been weakest run viability of the currency peg to the in Indonesia, in large part a result of dollar. Several countries in the region, political uncertainty; but even so, including Venezuela, Chile, and Colom- domestic interest rates have dropped bia, also experienced sharp declines in sharply, and the stock market has staged output in the first quarter, stemming in an impressive rebound since April. The part from earlier declines in oil and other recovery of economic activity in these commodity prices. countries has been slower and less In emerging Asia, signs of recovery robust than in Korea, possibly reflecting in financial markets and in real activity slower progress in addressing structural are visible in most of the countries that weaknesses in the financial and corpoexperienced financial crises in late 1997. rate sectors. However, activity appears However, the pace and extent of recov- to have bottomed out and has recently ery is uneven across countries. The shown signs of starting to move up in strongest recovery has been in Korea. these countries. In 1998, the Korean won reversed nearly Financial markets in China and Hong half of its sharp depreciation of late Kong experienced some turbulence at 1997. It has been little changed on bal- the start of the year when Chinese ance this year, as Korean monetary authorities put the Guangdong Internaauthorities have intervened to moderate tional Trust and Investment Corporation its further appreciation. Korean stock (GITIC) into bankruptcy, leading to prices have also staged an impressive rating downgrades for some Chinese recovery—moving up about 75 percent financial institutions, including the so far in 1999. In the wake of its finan- major state commercial banks. The cial crisis, output in Korea fell sharply, GITIC bankruptcy also raised concerns with industrial production down about about Hong Kong financial institutions, 15 percent by the middle of last year. which are heavy creditors to Chinese Since then, however, production has entities. These concerns contributed to a bounced back. With the pace of the substantial increase in yield spreads recovery accelerating this year, all of between Hong Kong government debt the post-crisis drop in production has and U.S. Treasury securities and to a fall been reversed. This turnaround reflects in the Hong Kong stock market of about both the improvement in Korea's exter- 15 percent. Spreads have narrowed nal position, as the trade balance has since, falling from about 330 basis swung into substantial surplus, and the points on one-year debt in late January government's progress in addressing to about 80 basis points by mid-May, the structural problems in the financial and have remained relatively stable and corporate sectors that contributed to since then. Equity prices also rebounded the crisis. sharply, rising nearly 50 percent Financial markets in the Southeast between mid-February and early May. Asian countries that experienced crises Despite sizable volatility in May and in 1997 (Thailand, Singapore, Malaysia, June, they are now roughly unchanged Indonesia, and the Philippines) appar- from early May levels. ently were little affected by spillover In Japan, a few indicators suggest that from Brazil's troubles earlier this year recovery from a prolonged recession and have recovered on balance over the may be occurring. Principally, first- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

90 86th Annual Report, 1999 quarter GDP growth at an annual rate addressing persistent problems in the of 7.9 percent was recorded—the first financial sector. In March the authorities positive growth in six quarters. This injected IV2 trillion yen of public funds improvement reflects in part a shift into large financial institutions and toward more stimulative fiscal and began to require increased provisioning monetary policies. On the fiscal front, against bad loans as well as improved the government announced a set of mea- financial disclosure. Although much sures at the end of last year that were remains to be done, these actions appear slated for implementation during 1999 to have stabilized conditions, at least and included permanent cuts in personal temporarily, in the banking system, and and corporate income taxes, various the premium on borrowing rates paid by investment incentives, and increases in leading Japanese banks declined to zero public expenditures. The large-scale by March. fiscal expansion and concern about The yen strengthened in early Januincreases in the supply of government ary, supported by the runup in longbonds caused bond yields to more than term Japanese interest rates, reaching double late last year and early this year, about 110 per dollar—its highest level to a level of about 2 percent on the in more than two years. However, amid ten-year bond. apparent intervention by the Japanese In mid-February, primarily because authorities, the yen retreated to a level of concern about the prolonged weak- above 116 per dollar, and it remained ness in economic activity and pro- near that level until the mid-February nounced deflationary pressures but also easing of monetary policy and the subsein response to the rising bond yields, quent decline of interest rates when it the Bank of Japan announced a reduc- depreciated to about 120 per dollar. In tion in the target for the overnight mid-June, the Japanese authorities intercall-money rate and subsequently vened in the foreign exchange market in guided the rate to its present level of an effort to limit appreciation of the yen 3 basis points by early March. This after the surprisingly strong first-quarter easing of monetary policy had a stimula- GDP release increased market enthusitive effect on Japanese financial mar- asm for that currency. The authorities kets, with the yield on the ten-year noted that a premature strengthening government bond falling more than of the yen was undesirable and would 75 basis points, to 1.25 percent by weigh adversely on economic recovery. mid-May. More recently, the yield has In the other major industrial counrisen to about 1.8 percent, partially in tries, the pace of economic growth this response to the release of unexpectedly year has been mixed. Economic develstrong first-quarter GDP growth. Sup- opments in Canada have been quite portive monetary conditions, coupled favorable. GDP rose 414 percent at an with restructuring announcements from annual rate in the first quarter after a a number of large Japanese firms and fourth-quarter gain of 43A percent, with growing optimism about the economic production fueled by strong demand for outlook, have fueled a rise in the Nikkei Canadian products from the United from around 14,400 over the first two States. Core inflation remains low, near months of the year to over 18,500 in the lower end of the Bank of Canada's mid-July. target range of 1 percent to 3 percent, The improved economic performance although overall inflation rose some in in Japan also reflects some progress on April and May. Oil prices and other Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 91 commodity prices have risen, and the Asia and eastern Europe appears to have current account deficit has narrowed lifted a bit in the past few months, considerably. These factors have helped although the signs of a pickup in growth the Canadian dollar appreciate relative were both tentative and uneven across to the U.S. dollar by about 4 percent this the euro area. In Germany, industrial year and have facilitated a cut in short- production was higher in April and May term interest rates of 50 basis points by than in the preceding two months, and the Bank of Canada. Along with rising export orders were markedly higher in long-term interest rates elsewhere, long those months than they had been at any rates have increased in Canada by about time since the spring of 1998. But in 30 basis points over the course of this France, which had been the strongest of year. Even so, equity prices have risen the three largest euro-area economies about 12 percent since the start of the in 1998, GDP growth was a meager year, although the rise in long-term rates WA percent at an annual rate in the has undercut some of the momentum in first quarter, and industrial production the stock market. slipped in April. In the United Kingdom, output was On average in the euro area, inflation flat in the first quarter, coming off a has remained quite tame, even as rising year in which GDP growth had already oil prices, a declining euro, and, at least slowed markedly. However, the effects in Germany, an acceleration in wage of aggressive interest rate reductions rates have raised inflationary pressures undertaken by the Bank of England in this year. The low average rate of inflalate 1998 and earlier this year appear tion as well as the still sluggish pace to have emerged in the second quarter, of real activity in some of the euro-area with gains in industrial production, retail countries led the European Central Bank sales volume, and business confidence. to lower the overnight policy rate by Inflationary pressures have been well 50 basis points in April, on top of cuts contained, benefiting in part from the in short-term policy rates made by the continued strength in sterling; the Bank national central banks late last year that, of England cut interest rates, most on average, were worth about 60 basis recently in June, to reduce the likelihood points. of inflation undershooting its target of Notwithstanding the easing of the 2!/2 percent. Consistent with expecta- policy stance, long-term government tions of an upturn in growth, equity bond yields have risen substantially prices have risen more than 15 percent, from their January lows in the largest and long-term bond yields have climbed economies of the euro area. Ten-year nearly 80 basis points since the end of rates spiked in early March along with last year. U.S. rates, fell back some through mid- First-quarter growth in the European May, and then resumed an upward countries that have adopted a common course around the time the FOMC currency (euro area) regained some adopted a tightening bias in mid-May. momentum from its slow pace in late Since the middle of June, a relatively 1998 but was nevertheless below poten- sharp increase in yields has pushed them tial, as production continued to react to to about 100 basis points above their the decline in export orders registered values at the start of the year and has over the course of 1998 and in early narrowed what had been a growing 1999. Still, the drag on overall produc- interest rate differential between U.S. tion from weak export demand from and European bonds. In addition to the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

92 86th Annual Report, 1999 pressure provided by the increase in U.S. $1.16675. Trading in the euro opened rates, the runup in European yields on January 4, and after jumping on the likely reflects the belief that short-term first trading day, its value has declined rates have troughed, as the incipient relative to the dollar almost steadily recovery in Asia not only reduces the and is now about 13 percent below its drag on European exports but also initial value. The course of the euroattenuates deflationary pressures on dollar exchange rate likely has reflected European import prices. Concern about in part the growing divergence in both the fall in the exchange value of the the cyclical positions and, until recently, euro may also have contributed to an long-term bond yields of the euroassessment that the next move in short- area economies and the United States. term rates would be up. Gains in equity Concerns about fiscal discipline in prices so far this year—averaging about Italy—the government raised its 1999 12V2 percent—are also suggestive of deficit-to-GDP target from 2.0 percent the belief that economic activity may to 2.4 percent—and about progress on be picking up, although the range in structural reforms in Germany and share price movements is fairly broad, France have also been cited as contributeven considering only the largest econo- ing to weakness in the euro, with the mies: French equity prices have risen European Central Bank recently characabout 20 percent, German prices are up terizing national governments' fiscal 13 percent, and Italian prices are up policy plans as "unambitious." only 5 percent. On balance the dollar has appreciated The new European currency, the more than AVi percent against an index euro, came into operation at the start of the major currencies since the end of of the year, marking the beginning of last year, owing mainly to its strengthen- Stage Three of European Economic and ing relative to the euro. Nevertheless, it Monetary Union. The rates of exchange remains below its recent peak in August between the euro and the currencies of of last year when the Russian debt morathe eleven countries adopting the euro torium and subsequent financial market were set on December 31; based on turmoil sent the dollar on a two-month these rates, the value of the euro at downward slide. • the moment of its creation was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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

95 Consumer and Community Affairs The consumer and community affairs scope. This organizational structure supfunction of the Board of Governors ports a program that is both cohesive focused on activities in two key areas and diverse. in 1999—providing information to a During 1999, the Board adopted a variety of audiences, including consum- strategic plan and a revised mission ers, community groups, financial institu- statement for the community affairs tions, and the small business commu- function to take account of the signifinity; and improving the process for cant changes occurring in the banking supervising state member banks for and community development induscompliance with federal consumer bank- tries. With an updated focus, the Feding and civil rights laws. The Board eral Reserve System is positioned to also reviewed several large bank hold- apply its resources and expertise to ing company applications; strengthened projects promoting community-based regulatory guidance on disclosures and economic development efforts throughother matters; referred two cases reflect- out the country. In working toward this ing possible patterns or practices of dis- objective, the Reserve Banks hosted crimination to the U.S. Department of 284 conferences, conducted 1,689 out- Justice; and investigated and responded reach meetings, provided technical asto issues raised in consumer complaints. sistance on 878 occasions, delivered 280 speeches, and distributed 170,000 copies of newsletters during 1999. These Community Development activities are featured in Capital Con- The Federal Reserve promotes the eco- nections, a newsletter begun in 1999 by nomic viability of underserved popula- the Board that highlights innovative and tions and markets through its commu- important projects undertaken by the nity affairs program, which provides Reserve Banks. technical assistance and conducts out- Many of the Division's community reach to advise lenders, community affairs efforts during 1999 were underdevelopers, and government officials taken in cooperation with the Reserve on innovative approaches for funding Banks. For example, the Board and the community-based economic develop- Reserve Banks cosponsored a major ment activities. Capitalizing on their research conference on small-business access to information on financial inter- financing and development (see box). mediaries, the Community Affairs Offi- The Federal Reserve assisted the cers at the twelve Reserve Banks design U.S. Small Business Administration programs tailored to the information and (SBA) in its effort to increase awareness development needs of their Districts. of the venture capital available to entre- The Board's Division of Consumer and preneurs through its small-business Community Affairs offers a national per- investment company (SBIC) program, a spective and provides oversight and funding resource that leverages private guidance, engaging in projects that have investment with SBA guarantees. The broad implications for public policy or Board coordinated the sponsorship of that present issues industrywide in six seminars on SBICs by the Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 86th Annual Report, 1999 The Business of Small Business Access to Capital and Credit The availability of business capital and credit is an essential component of healthy communities. Research on the relationship between small business and credit providers can provide information that is critical for dynamic markets. Alan Greenspan, Chairman, Board of Governors Small business is often referred to as the erate more than half the nation's sales and "engine of our economy/' Accordingly, the private gross domestic product. More agile Federal Reserve System has a keen interest than their "big business" counterparts, in its significance in financial markets. small firms can react quickly to customer In 1999, the System's community affairs demands and market changes. It is freofficers demonstrated this interest by part- quently because of their size, rather than in nering with their research colleagues to spite of it, that these small businesses are sponsor an academic conference on the successful and often lead their industries in availability of funding resources for small innovation. However, these entrepreneurial businesses. firms typically lack sufficient business The two-day conference, '*Business experience and capital—factors that rep- Access to Capital and Credit," was the first resent credit risk to lenders. This risk, national research conference of its kind for whether perceived or real has been cited as the Federal Reserve System. It provided a the reason small businesses, particularly forum for economists, scholars, and advo- those owned by minorities or located in cates to present research findings, and low-income neighborhoods, have historiit served as a foundation for continued cally found it difficult to obtain the funding research and discussion. Topics addressed vital to their operation and growth. included lending relationships, access to credit for minority-owned businesses, microenterprise lending, and credit scor- Small Business and ing. The conference drew nearly 400 lend- Community Development ers, community developers, researchers, and government officials. In the course of their outreach and technical assistance activities, the System's community affairs officers have over the years gathered anecdotal evidence of the credit Small Business as an Economic Force gap that small enterprises continually Small businesses provide jobs to more than struggle with. The lack of access to capital half the private-sector workforce and gen- is viewed as particularly detrimental to the Banks of New York, Atlanta, Chicago, U.S. Department of the Treasury that Kansas City, Dallas, and San Francisco seeks to stimulate business-to-business for a target audience of bankers, inves- relationships, with larger companies tors, and small-business developers. mentoring small firms. Among other The Board also played a role in the things, the Board assisted in the devel- BusinessLINC Initiative, an interagency opment of a national conference promotproject headed by the SBA and the ing BusinessLINC. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 97 revitalization of low-income areas, given The Research thai these communities rely heavily on The conference focused on six topics: small firms for the economic stability and • CRA data on small-business lending— services that are critical to initiating and The flow of credit to small businesses in sustaining redevelopment. Without suffilow- and moderate-income communities, cient funding, these firms have difficulty and ways to finance the operation of remaining in business. small farms • Access to credit for minority-owned businesses—Differences in credit exten- Small-business owners must contend sions to businesses owned by African with lenders with varying underwriting Americans standards, varying appetites for risk • The smalt business-small lender relaand varying expected rates or return for tionship—The effect of banking consoliloans they may approve. The vagaries dation and bank size on the relationship of local economies may also influence between business owners and lenders the likelihood that a small firm gets • Microenterprise lending—Increasing the approved for credit. probability of repayment of micro-loans, Edward M. Grarnlich. Member and the efficacy of such programs in Board of Governors promoting self-sufficiency, providing training, and predicting success • Credit scoring and securitization of in 1998. Board and Reserve Bank com- small-business loans—The effect of munity affairs and research officers con- credit scoring and securitization of small cluded that a research conference would business loans on the availability of foster better understanding of small busi- credit to small businesses in general ness lending and credit issues and would and in low- and moderate-income encourage ongoing research and discus- communities. sion. Scholars, practitioners, and policy- Conference proceedings arc available at makers nationwide responded to the call www.federalreserve.gov/community.htm. for papers. Seventeen studies identified as the most germane to the conference's The success of the conference gave eviobjectives provided the framework for the dence of a desire for continued research conference, which was held in Arlington. on community economic development Virginia, on March 8-9, 1999. Remarks issues. System community affairs officers by Federal Reserve Board Chairman Alan and their research colleagues are now col- Greenspan and Governor Edward Gram- laborating on a second conference, to be lich reinforced the importance of under- held in spring 2001. This one will focus on standing the challenges and opportunities the effect of changing financial markets on involved in funding small businesses. community development. To support a presidential initiative on tralized, Internet-based database of microenterprise development, the Board resources available to these businesses. helped compile and disseminate infor- In 1999 the Federal Reserve System mation on existing federal programs dedicated resources to several national that provide funding and technical sup- home ownership initiatives. One was port to very small firms. It also helped an interagency effort to increase home design and develop content for a cen- ownership in rural America; the commu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 86th Annual Report, 1999 nity affairs function supported the Rural sponsored conferences on new commu- Home Loan Partnership by promoting nity development funding strategies the availability of a new financing vehi- and resources. The Federal Reserve cle offered by the U.S. Department of Bank of New York sponsored a three- Agriculture, the Federal Home Loan part series on innovative financing Bank System, and the Rural Local mechanisms for preserving low- and Initiatives Support Corporation. The moderate-income communities. The Reserve Banks of Boston, Richmond, series, which targeted community devel- St. Louis, and San Francisco convened opers and investors, included sembankers and community developers in inars on real estate investment trusts, their Districts to discuss the program venture capital, and the securitizaand the availability of mortgage guaran- tion of community development loans. tees. The community affairs function The San Francisco Reserve Bank also also provided leadership and technical hosted a conference on the securitizaexpertise in connection with the One- tion of small-business and commu- Stop Mortgage Initiative, a project initi- nity development loans. Securitization ated by the White House to create home could lead to the creation of a secownership opportunities among Native ondary market for these loans, which Americans residing in Indian country. A would, in turn, expand creditors' lendwork group for this initiative—made up ing capacity. of representatives of numerous other The Community Affairs Offices also government agencies and the Minneapo- stressed the mutual benefits that can be lis, Kansas City, and San Francisco achieved through creative partnerships Reserve Banks—identified specific among community stakeholders. The actions needed to improve financial Federal Reserve Bank of Boston sponliteracy and homebuyer preparation sored a conference highlighting the speamong the target market, critical ele- cial resources that local universities can ments in ensuring the success of any provide and the leadership and funding affordable housing program. roles they can play in community devel- The Board and the Federal Reserve opment collaborations. The New York Bank of Richmond worked to promote Reserve Bank spearheaded efforts to economic development in the District of promote school-to-work programs and Columbia through a partnership among other work-training initiatives for lowcommunity groups, government agen- income youth as qualified community cies, financial institutions, and corporate reinvestment activities for financial businesses. Key representatives of these institutions. groups addressed issues that hamper To give the public ready access to growth, and proposed remedial actions community development information, at meetings convened by the Federal the Federal Reserve launched two web- Reserve. Expertise in structuring and based databases in 1999. The Federal facilitating this partnership was pro- Reserve Bank of Kansas City unveiled vided by the Cleveland Reserve Bank, 1st Source, an interactive database of which offered recommendations on the government funding and other commubasis of its experiences with a similar nity development support programs initiative. available through federal agencies. In addition to participating directly in The Chicago Reserve Bank posted the such collaborative efforts, the Federal Consumer and Economic Development Reserve's Community Affairs Offices Research and Information Center, a one- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 99 stop site for research and information on sumer privacy protections. In June, the upcoming events related to community group reviewed the growing number of development. privacy initiatives and expressed general support for a uniform approach to privacy to avoid proliferation of rules by Consumer Advisory Council state courts and regulators. The Board's Consumer Advisory Coun- Electronic disclosures were a key cil convened in March, June, and Octo- topic at the June and October meetber 1999 to advise the Board on matters ings. Council members discussed proconcerning laws that the Board adminis- posed rules for providing electronic ters and on other issues related to con- disclosures under five of the Board's sumer financial services. The council's consumer protection regulations: thirty members come from consumer B (Equal Credit Opportunity), E (Elecand community organizations, the finan- tronic Fund Transfers), M (Concial services industry, academic institu- sumer Leasing), Z (Truth in Lending), tions, and state agencies. Council meet- and DD (Truth in Savings). Although ings are open to the public. members had differing views on sug- During the year, the council focused gested changes to the content and foron numerous issues, including the Com- mat of the proposed disclosure forms, munity Reinvestment Act (CRA), finan- they supported adding more consumer cial privacy, electronic disclosures, and protections to the proposals, at least subprime lending. Council members' initially. diverse views provided valuable insight In October, the council discussed proon consumer issues. Highlights of a few posed changes to Regulation B concernof the discussion topics follow. ing the removal of the general prohibi- The CRA was a major topic at the tion against noting information about an March and June meetings. Issues dis- applicant's race, color, religion, national cussed included the banking agencies' origin, and sex in transactions for noncollection and use of data related to mortgage credit. Members generally small-business lending, the limitations favored the removal of the prohibition, of these data, and the feasibility of but opinions differed on whether data conducting a comprehensive study of collection should be voluntary (as prosmall-business lending. Also discussed posed) or mandatory. were lending agreements between finan- In October, the council also addressed cial institutions and community groups subprime lending—the extension of and the ways these agreements facilitate "nonconforming" loans to borrowers successful partnerships. who may not qualify for conventional Privacy issues were another topic at rates. Although subprime lending in the March and June meetings. In March, many instances meets the credit needs council members provided views on of individuals who have impaired credit appropriate privacy protections for con- histories, some borrowers are subject sumers and discussed the use of either to predatory, or abusive, practices by mandatory directives or voluntary prin- lenders. Council members emphasized ciples to address privacy concerns. the need to strengthen education, par- Although they held differing views on ticularly for the most vulnerable popuwhether mandatory or voluntary privacy lation of borrowers, so that they do not protections would work best, council become victims of abusive lending members agreed on the need for con- practices. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 86th Annual Report, 1999 Fair Lending minority and nonminority applicants; it then subjects the banks' records to a In 1999 the Board implemented new, supplemental analysis that is based on risk-based procedures for examinations additional information from a sample of to ensure compliance with the federal the banks' loan files. In 1999, the Board fair lending laws and regulations. These issued updated guidance to examiners procedures were also adopted by other on the use of the regression program in member agencies of the Federal Finan- conjunction with the new fair lending cial Institutions Examination Council. examination procedures. The Board also The new examination procedures are hosted a conference at which Reserve intended to facilitate more sophisticated Banks discussed their program-related analysis than was previously reflected experiences. A number of program imin agency procedures and to give exam- provements were adopted, including iners the flexibility to tailor the fair lend- several that will help in the identificaing focus of an examination to the insti- tion of banks that merit more intensive tution being reviewed. review. To educate examiners about the new In accordance with the Equal Credit procedures, the Federal Reserve carried Opportunity Act, the Board refers violaout an extensive training program. In tions of Regulation B that it has reason 1999, a comprehensive two-week course to believe constitute a "pattern or pracfor less-experienced examiners was con- tice" of discrimination to the U.S. ducted on four occasions and an inten- Department of Justice. During 1999 the sive one-week course for experienced Board reviewed nineteen potential referexaminers was conducted on six occa- rals, including four carried over from sions. The two-week course will be 1998. All had been detected during offered on each ongoing basis three Reserve Bank compliance examinations. times a year. Of the nineteen cases, fourteen involved Training in the fair lending examina- possible discrimination in underwriting tion procedures was also offered out- and the remaining five involved potenside the Federal Reserve System. The tial discrimination in pricing, including Reserve Banks developed and presented three instances of possible violations in outreach programs to bankers during the setting prices of "indirect," or brokered, first half of 1999. And at the request loans. of bank trade associations, federal and The Board referred two of the ninestate banking and law enforcement teen cases to the Justice Department, agencies, and other interested parties, and three matters were still under review the Board gave fifteen presentations on at year's end. One of the two referred the new procedures in ten cities during cases involved discrimination on the the year. prohibited basis of marital status; the Since 1994, the Federal Reserve has bank combined the incomes of married used a two-stage statistical regression joint applicants for purposes of evaluatprogram in its assessment of fair lending ing the applications, but did not do so compliance by large-volume mortgage for unmarried joint applicants. The seclenders. The program identifies—on the ond referral involved allegations that basis of an initial analysis of reported female and minority applicants had been HMDA (Home Mortgage Disclosure charged higher rates on direct and indi- Act) data—banks that show significant rect loans than had white and male disparities in rates of loan denial for applicants and that bank personnel had Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 101 full knowledge of the discriminatory emphasis on those reflecting the highest pricing. risk. The program also has outreach and During 1999, certain lending prac- monitoring components. tices described as abusive, or "preda- Both the risk-focused compliance extory," came under increasing criticism amination procedures and the fair lendby private and government organiza- ing examination procedures, described tions and by the media. Predatory lend- in the preceding section, rely heavily on ing generally targets—for high-cost examiner judgment about the approprimortgage loans—financially unsophisti- ate level of review and supervision for a cated elderly, minority, and lower- particular bank. To determine the extent income homeowners who have substan- of implementation of these procedures tial equity in their property and possibly Systemwide, and to identify best prachave experienced some credit imperfec- tices for implementing the risk-focused tions. The practices may involve fair program, teams of Reserve Bank and lending violations as well as violations Board staff members in 1999 conducted of the Truth in Lending Act, the Real a review of each Reserve Bank. The Estate Settlement Procedures Act, and findings helped in refining the examinastate and federal laws prohibiting fraud tion procedures and the overall riskand deceptive practices. In October focused supervision process. 1999 the Federal Reserve and representatives of nine federal agencies estab- The Gramm-Leach-Bliley Act lished a working group to define practices that constitute predatory lending On November 12, 1999, President and to propose steps that the agencies Clinton signed the Gramm-Leachcould take to address the practices. Bliley Act into law. Two areas covered by the act—CRA examinations and the creation of "financial holding Risk-Focused companies"—have implications for Compliance Examinations both the Board's compliance examina- In January 1999 the Board implemented tion function and its applications proa risk-focused supervision program that cessing function. Among other things, represents a fundamental change in the the act extends the length of time way the Federal Reserve System con- between CRA examinations for finanducts examinations for compliance with cial institutions that have assets of not the consumer banking laws and regula- more than $250 million and a CRA tions. The program tailors the examina- rating of "satisfactory" or "outstandtion to the individual bank under review. ing." With few exceptions, banks rated To focus examination resources on the satisfactory for CRA performance are to areas of greatest risk to banks and their be examined no more than once every customers, the program requires an in- forty-eight months and banks rated outdepth preliminary review of such things standing, no more than once every sixty as the bank's compliance history, new months. Previously, state member banks products, and management changes. rated satisfactory or outstanding for Using the results of this review, the CRA and with satisfactory compliance examining Reserve Bank identifies the ratings were examined once every areas of highest risk and develops an twenty-four or thirty-six months. examination plan that covers all con- The act also repeals those provisions sumer compliance areas, with special of the Glass-Steagall Act of 1933 and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 86th Annual Report, 1999 the Bank Holding Company Act of 1956 sumers about the institution's privacy that restricted the affiliation of bank policies and must give consumers a holding companies with securities firms means of "opting out" of disclosures to and insurance companies. The legisla- nonaffiliated third parties. The Board tion creates "financial holding compa- is working with the other agencies to nies," which may conduct a broad range develop substantially similar regulations of financial activities, including insur- implementing these privacy requireance and securities underwriting, and ments. The agencies are also working merchant banking. It also bars a bank together to develop regulations impleholding company from becoming a menting the act's "sunshine" provisions financial holding company if any of its applicable to CRA-related agreements depository subsidiaries received a rating between insured depository institutions lower than satisfactory at its most recent or their affiliates and nongovernmental CRA examination, and bars an existing entities or persons. The act requires that financial holding company from taking the agencies draft rules for disclosing on additional powers or making acqui- the agreements and rules requiring the sitions if the CRA rating of one of parties to the agreements to report on its depository subsidiaries falls below them annually. satisfactory. In addition, the act requires the fed- Consumer Policies eral banking agencies to issue customerprotection regulations governing the sale Through its consumer policies proand marketing of insurance products by gram, the Board conducts research and depository institutions. These regula- explores ways other than by regulation tions are to prohibit depository institu- to protect consumers in the area of retail tions from engaging in coercive sales financial services. In 1999 the Board practices, such as conditioning the worked with other agencies, as well as extension of credit on the purchase of an with public- and private-sector organiinsurance product from the institution or zations, to develop consumer-related one of its affiliates. They are also to educational materials. ensure that consumers are given disclo- Two significant interagency educasures clarifying that insurance products tion efforts involved electronic bank sold by a depository institution involve accounts and mortgage shopping. New an investment risk and are not insured fact sheets for low- and moderateby the Federal Deposit Insurance Corpo- income households on managing elecration. In addition, the act requires the tronic bank accounts (scheduled for pubfederal banking agencies to establish a lication in March 2000) were developed mechanism for addressing consumer to complement the U.S. Department of complaints that allege violations of the the Treasury's initiatives to provide govregulations. ernment payments electronically. Also, Privacy issues are also part of the the consumer brochure Looking for the act's provisions. For example, the act Best Mortgage: Shop, Compare, Negotirequires the federal regulatory agencies ate, developd by an interagency fair to establish standards for the security, lending task force, was released. By the confidentiality, and integrity of customer end of 1999, more than 380,000 copies records and information, including pro- of the brochure, which identifies key tection against unauthorized access. considerations for persons shopping for Financial institutions must notify con- a mortgage, had been distributed; infor- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 103 mation from the brochure is also time the Board has imposed a monetary available on the Board's public web penalty for flood insurance violations. site. Working with a broad-based coali- Regulatory Matters tion of agencies and organizations from the private and public sectors, the The Board has responsibility for imple- Board also continued its initiative on menting a wide range of federal laws vehicle leasing education. Materials concerning consumer financial services developed by the leasing education team and fair lending. In August 1999, the include a comprehensive computer- Board took the following actions: based program entitled Keys to Vehicle Leasing—A Consumer Resource, which • Published proposed rules and official is scheduled for release in early 2000, staff commentary as part of a comand a Spanish-language version of the prehensive review of Regulation B brochure Keys to Vehicle Leasing—A (Equal Credit Opportunity). The Consumer Guide. During 1999, the Fed- Board proposed removing the general eral Reserve distributed more than prohibition against creditors' noting 800,000 copies of the brochure and characteristics such as the race, sex, received approximately 190,000 visits and national origin of applicants for to the Board's public web site. nonmortgage credit; requiring credi- Electronic banking and leasing were tors to retain certain records in also the topics of research projects. connection with preapproved credit Using data from the University of solicitations; and expanding the Michigan Survey Research Center's record-retention period for most busimonthly Surveys of Consumers, for ness credit applications from twelve example, the Board analyzed consum- to twenty-five months. The Board is ers' credit shopping practices, leasing reviewing more than 700 letters from experiences, and attitudes toward the members of Congress, local govuse of electronic banking services. ernments, community organizations, Results of the research were shared with businesses, and consumers in response other agencies and the public through to the proposal. meetings, conferences, and journal • Issued revised proposals to permit articles. the electronic delivery of federally mandated disclosures under five consumer protection regulations: Reg- Civil Money Penalty for ulations B, E (Electronic Fund Flood Insurance Violations Transfers), M (Consumer Leasing), In June 1999 the Board assessed a civil Z (Truth in Lending), and DD (Truth money penalty against a state member in Savings). The Board had received bank for flood insurance violations. and considered more than 200 letters Without admitting to any of the allega- responding to earlier proposals issued tions, the bank consented to the Board's in 1998. The revised proposals generorder in connection with an alleged ally allow delivery of disclosures by pattern or practice of violations of the electronic mail or other means, such Board's regulations implementing the as posting them on a web site, if the National Flood Insurance Act. The order consumer consents. They also specify required the bank to pay a civil money what information must be given to penalty of $10,000. This was the first consumers before they consent; this Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 86th Annual Report, 1999 information would be provided on a • Increased to $30 million the exempstandardized form. The Board has tion threshold for depository institureceived letters from more than tions required to report data under the 100 commenters and also obtained the Home Mortgage Disclosure Act. views of individual consumers by conducting focus group interviews. Testimony and Legislative • Issued an interim rule for deposit Recommendations accounts that allows institutions to deliver Regulation DD disclosures In March 1999 the Board testified before for periodic statements electronically the Senate Committee on Banking, if the consumer agrees. The Regula- Housing, and Urban Affairs on contion DD rule is consistent with an sumer protection issues raised by the interim rule issued in 1998 under conference report on H.R. 3150, the Regulation E, and makes it possible Bankruptcy Reform Act of 1998. The for institutions to deliver deposit Board's testimony centered on proposed account statements electronically legislation in two areas—amendments under a single set of procedures. to the Truth in Lending Act and requirements that the Board conduct three In addition, the Board took the fol- consumer-related studies. In general, the lowing regulatory actions during the proposed TILA amendments involved year: new disclosures describing the effect of making only minimum payments on • Revised the official staff commentary open-end credit plans. The proposed to Regulation Z to give guidance on studies concerned the adequacy of the rules prohibiting the issuance of existing disclosures and protections for unsolicited credit cards; calculating debit cards that can be used without payment schedules for loans involv- personal identification numbers; certain ing mortgage insurance; and disclos- home-secured loans for which the total ing credit sale transactions for which amount of the credit extended exceeds the down payment includes cash and the fair market value of the dwellproperty used as a trade-in ing; and specific consumer borrowing • Adopted revisions to the official staff practices. commentary to Regulation M to pro- In July the Board testified on convide guidance on disclosures for lease sumer financial privacy before the Subrenegotiations and extensions, official committee on Financial Institutions and fees and taxes, multiple-item leases, Consumer Credit of the House Commitand advertisements tee on Banking and Financial Services. • Proposed revisions to the official The Board's testimony focused on prostaff commentary to Regulation Z to posed legislation to place additional clarify that those cash advances com- limitations on financial institutions' dismonly called "payday loans" are closure of customer information and credit transactions covered by the stressed the need for Congress to balregulation ance personal privacy concerns with • Adjusted the dollar amount that trig- economic efficiency. In addition, the gers additional disclosure require- testimony emphasized the need for ments for certain mortgage loans consistency across markets to ensure under the Home Ownership and that any limitations imposed on one Equity Protection Act of 1994 industry, such as financial services, do Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 105 not place that industry at a competitive from about 150 million a month in 1998 disadvantage. to 202.3 million a month in 1999, and the number of POS terminals rose 38 percent, to 2.35 million. Economic Effects of the The incremental costs associated Electronic Fund Transfer Act with the EFTA are difficult to quantify because no one knows how industry As required by statute, the Board moni- practices would have evolved in the tors the effects of the Electronic Fund absence of statutory requirements. The Transfer Act (EFTA) on the compliance benefits of the EFTA are also difficult to costs and consumer benefits related to measure, as they cannot be isolated from electronic fund transfer (EFT) services. consumer protections that would have The economic effects of the EFTA likely been provided in the absence of regulacontinued to increase in 1999 because of tion. The available evidence suggests no the continued growth of EFT services. serious consumer problems with EFT at Results of consumer surveys indicate present. (See "Agency Reports on Comthat during this decade the proportion pliance with Consumer Regulations.") of U.S. households using EFT services grew at an annual rate of about 2 percent. Approximately 85 percent of Compliance Activities households have one or more EFT features on their accounts at financial insti- The Federal Reserve System's complitutions. Automated teller machines ance activities in 1999 included con- (ATMs) remain the most widely used ducting and overseeing examinations of EFT service. During 1999, the number state member banks, training System of ATM transactions decreased some- compliance examiners, and participatwhat, to about 907 million a month from ing in the compliance activities of the 930 million a month in 1998, probably Federal Financial Institutions Examinain part because of higher average ATM tion Council (FFIEC). As noted in earfees. Over the same period, the number lier sections, the System also worked of installed ATMs rose more than to develop and implement new risk- 20 percent, to 227,000. Direct deposit is focused examination procedures. another widely used EFT service: More than half of U.S. households have funds deposited directly into their accounts. Compliance Examinations Use of the service is particularly common in the public sector, accounting for Since 1977 the Federal Reserve Sys- 76 percent of social security payments tem's compliance examination program and 91 percent of federal salary and has ensured that state member banks retirement payments. About one-third of and foreign banking organizations sub- U.S. households have debit cards, which ject to Federal Reserve examination consumers use at merchant terminals comply with federal laws protecting to debit their transaction accounts. consumers in the provision of financial Although these point-of-sale (POS) sys- services. During the 1999 reporting tems still account for a fairly small share period (July 1, 1998, through June 30, of electronic transactions, their use con- 1999), the Federal Reserve conducted tinued to grow rapidly in 1999. The 487 examinations for compliance with number of POS transactions rose a third, consumer protection laws: 344 examina- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 86th Annual Report, 1999 tions of state member banks and 143 of standards, and report forms. In 1999 the foreign banking organizations.1 member agencies continued working to improve coordination of consumer com- Examiner Training pliance and CRA examination activities. Actions to promote uniformity among Examiners well versed in the consumer the federal supervisors of financial instiprotection laws, fair lending laws, and tutions included issuing new interagency the Community Reinvestment Act fair lending examination procedures; (CRA) are essential to the Board's com- amending Interagency Questions and pliance program. Therefore, the type and Answers for the CRA; revising the timeliness of training opportunities are Interagency Questions and Answers on important. New Reserve Bank examin- the Policy Guide on Administrative ers attend a two-week basic compliance Enforcement of the Truth in Lending course; and examiners with six to twelve Act; and approving interagency examimonths of field experience attend a nation procedures for the Fair Credit two-week advanced course, a two-week Reporting Act. The FFIEC is currently course in techniques for fair lending developing interagency examination examinations, and a one-week course in procedures for the Homeowners Pro- CRA examination techniques. During tection Act of 1998, which requires the 1999 reporting period, eleven ses- that lenders or servicers provide inforsions attended by a total of 197 indi- mation on private mortgage insurance viduals were held—two sessions of the on loans secured by the consumer's pribasic compliance course, two of the mary residence. advanced compliance course, four in fair lending examination techniques, and Agency Reports on Compliance three in CRA examination techniques. with Consumer Regulations Participation in FFIEC Activities The Board is required to report annually on compliance with Regulation B Through the cooperation of its five (which implements the Equal Credit member agencies—the Federal Reserve Opportunity Act, ECOA); Regulation E Board, the Office of the Comptroller (Electronic Fund Transfer Act, EFTA); of the Currency (OCC), the Federal Regulation M (Consumer Leasing Act, Deposit Insurance Corporation (FDIC), CLA); Regulation Z (Truth in Lending the Office of Thrift Supervision (OTS), Act, TILA); Regulation CC (Expedited and the National Credit Union Adminis- Funds Availability Act, EFTA); Regulatration (NCUA)—the Federal Financial tion DD (Truth in Savings Act, TISA); Institutions Examination Council develand Regulation AA (Unfair or Decepops uniform examination principles, tive Acts or Practices Act). The Board assembles compliance data from the 1. The foreign banking organizations examined Reserve Banks and also collects data by the Federal Reserve are organizations operating from the FFIEC agencies and from other under section 25 or 25(a) of the Federal Reserve federal supervisory agencies.2 Act (Edge Act and agreement corporations) and state-chartered commercial lending companies owned or controlled by foreign banks. These insti- 2. The agencies use different methods to comtutions are not subject to the Community Reinvest- pile compliance data. Accordingly, the data— ment Act, and typically, compared with state mem- which are presented here in terms of percentages ber banks, they engage in relatively few activities of financial institutions supervised or examined— that are covered by consumer protection laws. support only general conclusions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 107 A summary of the reported compli- • Refrain from requesting the race, ance data for the 1999 reporting period color, religion, national origin, or (July 1, 1998, through June 30, 1999) sex of an applicant in transactions follows. In general, the overall level of not covered by the data collection compliance in 1999 was similar to that requirements. in 1998. As in past years, the level of compliance varied considerably from The OTS issued three formal enforceregulation to regulation. ment actions that contained provisions relating to Regulation B. The Federal Trade Commission Regulation B (FTC) obtained consent decrees against (Equal Credit Opportunity) two vehicle finance companies for violations of the ECOA. The violations The FFIEC agencies reported that included, among others, providing inad- 78 percent of the institutions examined equate notices of adverse action to loan during the 1999 reporting period were applicants and discriminating against in compliance with Regulation B, com- applicants on the basis of sex, marital pared with 79 percent for the 1998 status, or the fact that an applicant's reporting period. Of the institutions not income derived from public assistance in compliance, 68 percent had one to sources. Under the consent decrees, the five violations. The most frequent viola- defendants agreed to civil money pentions involved the failure to take one or alties and to the entry of a permanent more of the following actions: injunction. The FTC also continued litigation • Provide a written notice of credit against a mortgage lender for violations denial or other adverse action contain- of the ECOA. The allegations included, ing a statement of the action taken, among others, failing to take written the name and address of the creditor, a applications for mortgage loans, failing notice of rights under Regulation B, to collect monitoring information on and the name and address of the fed- mortgage loan applicants, and providing eral agency that enforces compliance inadequate notices of adverse action to • Collect information for monitoring loan applicants. The FTC is seeking purposes about the race or national civil money penalties and injunctive origin, sex, marital status, and age of relief in connection with the case. applicants seeking credit primarily for The FTC is continuing its work with the purchase or refinancing of a prin- other government agencies and with cipal residence creditor and consumer organizations to • Notify the credit applicant of the increase awareness of and compliance action taken within the time frames with the ECOA. specified in the regulation The other agencies that enforce the • Provide a statement of reasons for ECOA—the Farm Credit Administracredit denial or other adverse action tion (FCA), the Department of Transthat is specific and indicates the prin- portation (DOT), the Securities and cipal reasons for the credit denial or Exchange Commission (SEC), the Small other adverse action Business Administration, and the Grain • Take a written credit application for Inspection, Packers and Stockyards the purchase or refinancing of a prin- Administration of the Department of cipal residence Agriculture—reported substantial com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 86th Annual Report, 1999 pliance among the entities they super- Regulation M vise. The FCA's examination and (Consumer Leasing) enforcement activities revealed certain violations of the ECOA, most of them The FFIEC agencies reported substandue to creditors' failure to collect infor- tial compliance with Regulation M for mation for monitoring purposes and the 1999 reporting period. As in 1998, to comply with rules regarding adverse more than 99 percent of the instituaction notices; however, no formal tions examined were in compliance. actions were initiated. The few violations noted involved failure to adhere to specific disclosure requirements. The FTC issued one consent decree Regulation E against a vehicle manufacturer and one (Electronic Fund Transfers) consent decree against two related vehicle dealerships and their owner. These The FFIEC agencies reported that decrees, which provided for civil penalapproximately 95 percent of the instituties and other relief for allegedly deceptions examined during the 1999 reporttive lease or credit advertising, involved ing period were in compliance with the failure to disclose important lease Regulation E, compared with 96 peror credit terms clearly and conspicucent for the 1998 reporting period. ously, in violation of the CLA or the Financial institutions most frequently TDLA. The FCA reported that it identifailed to comply with the following fied no violations of the CLA during requirements: its examinations. • Investigate an alleged error promptly after receiving a notice of error Regulation Z • Determine whether an error was actu- (Truth in Lending) ally made, and transmit the results of the investigation and determination to The FFIEC agencies reported that the consumer within ten business days 74 percent of the institutions examined • Provide customers with a periodic during the 1999 reporting period were in statement of all required information compliance with Regulation Z, the same at least quarterly (or monthly, if an percentage as in 1998. The Board and electronic funds transfer occurred). the FDIC reported an increase in compliance, the OTS and the NCUA reported a decrease, and the OCC reported The OTS issued two formal enforcean unchanged level of compliance. The ment actions that contained provisions FFIEC agencies indicated that of the relating to Regulation E. institutions not in compliance, 63 per- The FTC issued a brochure, "Guide cent were in the lowest-frequency cateto Online Payments," that gives congory (one to five violations), compared sumers information about different types with 62 percent in 1998. The violations of online payment systems and security of Regulation Z most often observed features. The SEC reported that no viowere failure to take these actions: lations of Regulation E were detected in examinations of registered broker- • Accurately disclose the finance dealers conducted by self-regulatory charge, payment schedule, annual perorganizations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 109 centage rate, security interest in collat- In response to concerns about home eral, and amount financed equity fraud, the FTC issued "Need a • Accurately itemize the amount Loan? Think Twice about Using Your financed upon request Home as Collateral," a consumer publi- • Provide disclosures within three cation that provides information to conbusiness days of application for sumers considering home equity loans. RESPA-related residential mortgage In addition, the FTC continued to parapplications ticipate in interagency efforts to educate • Redisclose the annual percentage consumers. rate when a change occurred before The DOT continued to prosecute a consummation or settlement cease-and-desist consent order issued in • Withhold loan funds until the end of 1993 against a travel agency and a charthe rescission period ter operator. The complaint alleged that • Ensure that disclosures reflect the the two organizations violated Regulaterms of the legal obligation between tion Z by routinely failing to send credit the parties. statements for refund requests to credit card issuers within seven days of receiv- The OTS issued three formal enforce- ing fully documented credit refund ment actions subject to provisions of requests from customers. The DOT is Regulation Z. Altogether, a total of currently in negotiations to settle this 342 institutions supervised by the Fed- litigation. eral Reserve, the FDIC, or the OTS were required, under the Interagency Enforce- Regulation AA ment Policy on Regulation Z, to refund (Unfair or Deceptive $2.1 million to consumers in 1999 Acts or Practices) because of improper disclosures. The FTC obtained consent judgments The three bank regulators with responsiagainst seven subprime lenders and their bility for enforcing Regulation AA's owners for alleged violations of the Credit Practices Rule—the Federal Home Ownership and Equity Protection Reserve, the OCC, and the FDIC— Act and the TILA. That agency also reported that 98 percent of the instituissued a final decision and order against tions examined during the 1999 reporta nationwide mortgage company for vio- ing period were in compliance. The lating the TILA. This judgment involved most frequent violation was failure to allegedly deceptive cost information and provide a clear, conspicuous disclosure practices. In addition, the FTC contin- regarding a cosigner's liability for a ued to litigate a complaint it had filed in debt. No formal enforcement actions for violations of the regulation were issued federal district court in 1998. The comduring the period. plaint charged a mortgage lender in the Washington, D.C., area and its owner with violating the TILA in connection Regulation CC with alleged deceptive and unfair prac- (Availability of Funds tices in home mortgage lending. As pre- and Collection of Checks) viously discussed under Regulation M, The FFIEC agencies reported that the FTC also issued a consent decree 91 percent of institutions examined duragainst two vehicle dealerships and their ing the 1999 reporting period were in owner for violation of the CLA and the compliance with Regulation CC, com- TILA. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 86th Annual Report, 1999 pared with 89 percent for the 1998 Community Reinvestment Act reporting period. Of the institutions not The Federal Reserve assesses the Comin compliance, 66 percent had one to munity Reinvestment Act (CRA) perforfive violations. Institutions most fremance of state member banks during quently failed to comply with the folregular compliance examinations. In lowing requirements: addition, the Board considers CRA ratings (as well as other factors) when act- • Follow special procedures for large- ing on applications from state member dollar deposits banks and bank holding companies for • Provide immediate availability of mergers, acquisitions, and certain other amounts up to $100, for deposits not actions. The Federal Reserve has a subject to next-day availability three-faceted program for fostering bet- • Make funds from certain checks, both ter bank performance under the CRA. local and nonlocal, available for with- The program includes the following: drawal within the times prescribed by the regulation • Examining institutions to assess com- • Provide exception notices about funds pliance with the CRA availability, including all required • Disseminating information on cominformation. munity development techniques to bankers and the public through Com- The OTS issued two formal enforce- munity Affairs Offices at the Reserve ment actions that contained provisions Banks relating to Regulation CC. • Performing CRA analyses in connection with applications from banks and bank holding companies. Regulation DD During the 1999 reporting period, the (Truth in Savings) Federal Reserve conducted 338 CRA examinations. Of the banks examined, The FFBEC agencies reported that 63 were rated outstanding in meeting 87 percent of institutions examined community credit needs, 269 were rated during the 1999 reporting period satisfactory, 4 were rated needs to were in full compliance with Regulaimprove, and 2 were rated as being in tion DD. Institutions most frequently substantial noncompliance. failed to comply with the following requirements: Applications • State the rate of return as an annual During 1999, the number of megamergpercentage yield in an advertisement ers declined considerably from the pre- • Provide appropriate maturity notices vious year. Still, the Board of Governors for certificates of deposit maturing in considered applications for several very more than one year large banking mergers. • State required additional information in advertisements containing the • In May the Board approved the appliannual percentage yield cation by Deutsche Bank, Frankfurt, • Provide all applicable information Germany, to acquire Bankers Trust on account disclosures. Community Corporation, New York, New York, a Reinvestment Act transaction creating the largest com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 111 mercial banking organization in the tory institutions having less than satworld. isfactory CRA ratings. The Federal • In September the Board approved the Reserve reviewed another twenty-nine application by Fleet Financial Group, applications involving fair lending and Inc., to acquire BankBoston Corpora- other issues related to compliance with tion, both of Boston, Massachusetts. consumer protection laws.3 Because of the considerable public interest in the proposal, the Board HMDA Data and held a public meeting to give inter- Mortgage Lending Patterns ested persons a chance to present oral testimony. The Home Mortgage Disclosure Act • In December the Board approved the requires mortgage lenders covered by application by HSBC Holdings pic, the act to collect and make public cer- London, England, to acquire Republic tain data about their home purchase, New York Corporation, New York, home improvement, and refinancing New York. HSBC was the eighth larg- loan transactions. Depository instituest banking organization in the world tions generally are covered if they were and Republic was the nineteenth larg- located in metropolitan areas and met est commercial banking organization the asset threshold at the end of the in the United States at the time of the preceding year; the asset threshold for application. the data reported in 1999 was $29 mil- • Also in December the Board approved lion. Mortgage companies are covered the application by First Security Cor- if they were located in or made loans in poration to acquire Zions Bancorpora- metropolitan areas and had assets of tion, both of Salt Lake City, Utah. more than $10 million (when combined Had the transaction been consum- with the assets of any parent company) mated, it would have created the at the end of the preceding year. These twenty-fourth largest commercial entities are also covered, regardless of banking organization in the nation. asset size, if they originated 100 or more home purchase loans in the preceding In each of these applications, the year. Board found that the CRA records of the In 1999, 6,707 depository institutions organizations involved were consistent and affiliated mortgage companies and with approval. In two of the three cases 1,130 independent mortgage companies involving anticipated branch closures reported to their supervisory agencies (Fleet and First Security), the Board HMDA data for calendar year 1998. required that the merged organizations These lenders submitted information report, for a two-year period, all branch about the geographic location of the closings and consolidations occurring properties related to their loans and as a result of the mergers. applications, the disposition of loan In addition to these large transactions, applications, and, in most cases, the the Federal Reserve System in 1999 race or national origin, income, and sex acted on ten bank and bank holding of applicants and borrowers. The Fedcompany applications that involved pro- eral Financial Institutions Examination tests by members of the public concern- Council processed the data and proing insured depository institutions' performance under the CRA and acted on 3. In addition, one application (involving a two applications that involved deposi- CRA protest) was withdrawn in 1999. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

112 86th Annual Report, 1999 duced disclosure statements on behalf cent for Asians, 72 percent for blacks, of the U.S. Department of Housing and 87 percent for Hispanics, 52 percent for Urban Development and the FFIEC Native Americans, and 31 percent for member agencies. whites. Individual disclosure statements are The number of home purchase loans prepared for each lender that reported extended to applicants in all income data—one statement for each metropoli- categories increased in 1998 compared tan area in which the lender had offices with the preceding year. The number of and reported loan activity; in 1999 the such loans extended to lower-income FFIEC prepared 57,294 statements applicants increased 19 percent, and the based on the 1998 data. In July, each number extended to upper-income appliinstitution made its disclosure statement cants increased 14 percent. Over the six public, and reports containing aggregate years 1993 through 1998, the number of data for all lenders in a given metropoli- home purchase loans extended to lowertan area were made available at central income and upper-income applicants depositories in the nation's approxi- increased 64 percent and 45 percent mately 330 metropolitan areas. These respectively. data are used not only by the FFIEC In 1998, 31 percent of Hispanic member agencies, the reporting institu- applicants and 23 percent of black tions, and the public, but also by HUD applicants for home purchase loans in its oversight of Fannie Mae and Fred- sought government-backed mortgages; die Mac and by HUD and the Depart- the comparable figures for white, Asian, ment of Justice as one component of and Native American applicants were fair lending reviews. The data also assist 14 percent, 10 percent, and 12 percent HUD, the Department of Justice, and respectively. Twenty-four percent of state and local agencies in responding lower-income applicants for home purto allegations of lending discrimina- chase loans, compared with 10 percent tion and in targeting lenders for further of upper-income applicants, applied for inquiry.4 government-backed loans in 1998. The data reported in 1999 for the Denial rates for conventional (nonpreceding year covered 24.7 million government-backed) home purchase loans and applications, an increase of loans in 1998 were 12 percent for Asian about 51 percent over 1998 that was due applicants, 54 percent for black appliprimarily to increased refinancing activ- cants, 39 percent for Hispanic appliity. The number of home purchase loans cants, 53 percent for Native American extended in 1998 compared with 1997 applicants, and 26 percent for white increased 13 percent for Asians and applicants. Except for Asian applicants, whites, 9 percent for blacks, 16 percent each of these rates exceeded, by a small for Hispanics, and 21 percent for Native measure, the comparable rate for 1997. Americans. Over the six years 1993 Overall, the denial rate for conventhrough 1998, the number of home pur- tional loans was 29 percent in 1998. chase loans extended increased 46 per- This rate has increased in each of the past several years, reflecting in part the increasing share of applications for con- 4. On behalf of the nation's eight active private mortgage insurance (PMI) companies, the FFIEC ventional loans filed by lower-income also compiles information on applications for PMI applicants. The increase in denial rates similar to the information on home mortgage lend- also reflects the growing share of appliing collected under HMDA. Lenders typically cations reported under HMDA that are require PMI for conventional mortgages that Digitizedi nfovor lFvRe AsmSaEllR d own payments. filed with lenders that specialize in http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 113 manufactured home and subprime lend- and Reports). For both the Board and ing.5 In 1998, these 260 lenders denied the Reserve Banks, CAESAR facilitates 55 percent of all applications for con- access to information on the status and ventional home purchase loans they re- resolution of complaints and inquiries ceived, compared with 16 percent for as well as any supervisory actions taken other lenders. If the activities of these as a result of complaint investigations. specialty lenders are excluded from the It also facilitates analysis of the type of calculations, denial rates for the remain- discrimination complaints received, and ing institutions show little change since produces reports used to identify pat- 1993. terns and trends in complaints and inquiries. Consumer Complaints During 1999, the Board also revised its Consumer Complaint Manual. The The Federal Reserve investigates comrevised manual includes updated poliplaints against state member banks and cies and procedures for the Systemwide forwards to the appropriate enforcement consumer complaint program, a new agencies complaints that involve other chapter on Board evaluation of Reserve creditors and businesses (see table). The Bank complaint program performance, a Federal Reserve also monitors and anachecklist for Reserve Banks to use when lyzes complaints about unregulated investigating complaints alleging illegal practices. credit discrimination, and information In 1999 the Board implemented a new about CAESAR. PC-based database system, CAESAR (Complaint Analysis Evaluation System Complaints against State Member Banks 5- See Glenn B. Conner and Wayne Passmore, "The Role of Specialized Lenders in Extending In 1999 the Federal Reserve received Mortgages to Lower-Income and Minority Homea total of 4,697 complaints—3,782 buyers," Federal Reserve Bulletin, vol. 85 (November 1999), pp. 709-23. by mail, 885 by telephone, and 30 in Consumer Complaints against State Member Banks and Other Institutions Received by the Federal Reserve System, 1999 State member Other Subject Total banks institutions' Regulation B (Equal Credit Opportunity) 70 43 113 Regulation E (Electronic Fund Transfers) 34 69 103 Regulation M (Consumer Leasing) 23 22 45 Regulation Q (Payment of Interest) 1 0 1 Regulation Z (Truth in Lending) 375 531 906 Regulation BB (Community Reinvestment) 3 3 6 Regulation CC (Expedited Funds Availability) 19 47 66 Regulation DD (Truth in Savings) 48 54 102 Fair Credit Reporting Act 110 314 424 Fair Debt Collection Practices Act 10 21 31 Fair Housing Act 0 0 0 Flood insurance 2 3 5 Regulations T, U, and X 0 1 1 Real Estate Settlement Procedures Act 6 45 51 Unregulated practices 1,278 1,565 2,843 Tbtal 1,979 2,718 4,697 1. Complaints against these institutions were referred Digitizedt of othr eF aRppAroSpEriaRte regulatory agencies. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 86th Annual Report, 1999 Consumer Complaints Received by the Federal Reserve System, by Subject of Complaint, 1999 Complaints against state member banks Total Not investigated Investigated Bank legally correct Subject of complaint Unable to obtain Explanation Goodwill Number Percent in s f u o f r f m ici a e t n io t n pr o o f v l i a d w ed b N ur o s e re m im en - t re m im en b t u r o s r efrom to consumer or other other consumer accommo- accommodation dation Loans Discrimination alleged Real estate loans 18 1 0 18 0 Credit cards 31 1 3 2 8 4 Other loans 21 1 1 3 8 1 Other type of complaint Real estate loans 153 8 4 26 39 25 Credit cards 996 50 27 81 173 475 Other loans 214 11 7 57 69 25 Deposits 394 20 11 101 94 65 Electronic fund transfers 34 2 0 6 8 2 Trust services . 22 1 3 6 7 1 Other 96 5 15 10 11 15 Total 1,979 100 71 293 425 613 person. Of the complaints, 1,979 were that in the vast majority of the cases, the against state member banks (see tables). banks were legally correct. Notwith- Of the complaints against state member standing, in nearly half of these cases banks, about 75 percent involved loan the banks chose to reimburse or otherfunctions: 3 percent alleged discrimina- wise accommodate the consumer. Only tion on a prohibited basis, and 69 per- two of these complaints concerned viocent addressed a variety of other prac- lations of regulations. tices, such as credit denial on a basis The Federal Reserve also received not prohibited by law (credit history or more than 2,000 inquiries about conlength of residence, for example) and sumer credit and banking policies and miscellaneous other practices (release practices. In responding to these inquiror use of credit information, for exam- ies, the Board and the Federal Reserve ple). Another 20 percent of the com- Banks gave specific explanations of plaints involved disputes about inter- laws, regulations, and banking practices est on deposits and general deposit and provided relevant printed materials account practices; the remaining 8 per- on consumer issues. cent concerned disputes about electronic fund transfers, trust services, or other Unregulated Practices practices. During 1999, investigations were also As required by section 18(f) of the Fedcompleted in connection with 159 state eral Trade Commission Act, the Board member bank complaints pending at continued to monitor complaints about year-end 1998. Investigations revealed banking practices that are not subject Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 115 Consumer Complaints Received—Continued Complaints against state member banks Investigated Referred to Total Factual or Possible other complaints contractual bank Pending, agencies 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 28 46 0 1 1 0 1 11 9 40 0 0 1 0 0 7 6 27 4 36 10 1 0 8 383 536 3 121 16 1 0 99 953 1,949 0 36 2 1 3 14 283 497 3 64 13 0 13 30 621 1,015 0 6 3 1 1 7 69 103 0 1 1 0 0 3 30 52 1 21 4 0 1 18 336 432 11 286 51 4 19 206 2,718 a 4,697 to existing regulations and to focus on of liens. Each of these five complaint those that concern possibly unfair or categories accounted for a small portion deceptive practices. Of the 2,843 com- (5 percent or less) of all consumer complaints about unregulated practices plaints received. received in 1999, four of the five categories that received the most com- Complaint Referrals to HUD plaints involved credit cards: miscellaneous problems involving credit cards The Federal Reserve in 1999 continued (216 complaints); penalty charges on to refer to the Department of Housing accounts (159); customer service prob- and Urban Development complaints lems (115); and interest rates and terms alleging violations of the Fair Housing (113). Among the issues raised by the Act, in accordance with a memorancustomer service complaints were the dum of understanding between HUD failure to close accounts as requested; and the federal bank regulatory agenthe failure to provide account informa- cies. Nine such complaints about state tion; and the imposition of an annual member banks were referred during the fee after an account was closed. The year. Investigations of seven of the nine remaining category, miscellaneous revealed no evidence of illegal discrimiunregulated practices (167 complaints), nation; the remaining complaints were covered a wide range of issues, includ- pending at year-end. • ing check-cashing problems and release Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

117 Banking Supervision and Regulation The U.S. banking system reported strong These trends prompted the issuance of performance in 1999, as earnings con- guidance to Federal Reserve examiners tinued to set new records, capital ratios and the industry regarding the potential rose, and problem assets increased only consequences of banks departing from moderately from below-average levels. accepted sound lending standards. The That performance was achieved as the rise in adverse examiner classifications U.S. economy continued to expand at over the year provided some evidence a strong pace and emerging-market that such weakening standards were economies that had experienced consid- affecting credit-quality conditions and erable turmoil in the preceding year sta- raised questions about the greater vulbilized. Fee and other noninterest reve- nerability of weakly underwritten crednues grew at a faster pace than bank its if economic conditions were to balance sheets, with banks relying to a deteriorate. greater extent on revenues from trust, The final year of the 1990s witnessed securitization, loan servicing, asset man- two significant legislative and regulaagement, trading, venture capital, and tory events: (1) modernization of the other activities. Growth of noninterest U.S. financial system through the revenues made up for flat, and in some Gramm-Leach-Bliley Act, which recases narrowing, interest margins that pealed depression-era banking laws and reflected the industry's growing reliance provides for the affiliation of banks with on wholesale sources of funds as well as securities and insurance firms within the gradual decline of lower-cost, retail financial holding companies, and (2) the deposits. At the same time, provision- first steps toward a comprehensive reviing for credit losses declined and non- sion of the 1988 Basel Capital Accord. interest expenses moderated, resulting Under the financial modernization act, in stronger operating earnings. the Federal Reserve will play an impor- The rapid pace of industry consolida- tant role as umbrella supervisor of finantion among the largest firms subsided cial holding companies. To a great somewhat during 1999 as many firms extent, the Federal Reserve will rely on prepared for the century date change information and analysis provided by and worked to digest the significant functional regulators of the bank and mergers already undertaken. Competi- securities or insurance firms. The focus tion among banking firms remained of the Federal Reserve's review will be intense, amid signs that loan terms and the holding company's risk profile and conditions were continuing to weaken managerial strength on a fully consoliand that banking organizations were dated basis, with emphasis on whether extending credit to some borrowers any weaknesses might adversely affect largely on the expectation that the bor- the insured depository institution. rower's current strong financial perfor- While U.S. lawmakers were modernmance would continue indefinitely. Fed- izing banking laws, the Basel Commiteral Reserve supervisory staff identified tee on Banking Supervision announced several instances in which meaningful that it would modernize international stress-testing had not been performed. capital standards by undertaking the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 86th Annual Report, 1999 The Implications of Financial Modernization Legislation for Bank Supervision Now the financial services industry-faces the challenge of how best to take advantage of the new opportunities provided by the financial modernization law, and their regulators face the challenge of implementing the framework for regulating and supervising the more diversified financial holding companies allowed under the new legislation. Laurence H. Meyer. Member, Board of Governors The Grainm-Leach-Bliley Act, signed by associated supervisory policies, promises the President in November 1999, provides to transform the U.S. financial system. By long-needed reform of the U.S. financial validating affiliations between banks and regulatory system. It permits traditional diversified financial services firms, through bank holding companies and foreign banks ''financial holding companies," the legislato expand into new insurance and securities tion should improve the competitiveness activities, and insurance and securities and efficiency of financial markets and firms to enter commercial banking. More- provide a broader array of financial prodover, it does so in a relatively expeditious ucts to consumers. With the flexibility it way, avoiding many regulatory procedures introduces—together with the workings of that would have been required in the past. time, technology, and innovation—world (For a description of the act's provisions. financial markets and institutions undoubtsee the section on the Bank Holding Com- edly will look much different a decade pany Act in this chapter and also the chap- from now than they do today. Whether the ter "Federal Legislative Developments.") new landscape will be fruitful for institu- The Gramm-Leach-Bliley Act, along tions and consumers depends a great deal with the implementing regulations and on how well government develops rcgulafirst wholesale review of the Basel Federal Reserve staff members are Capital Accord. The committee's con- involved in this review. In particular, sultative document called for comment they are exploring the use of bank interon a revised capital framework that nal risk grades in setting minimum would rely on three pillars: (1) capital requirements for credit risk. Staff are standards that better align minimum also exploring techniques for applying requirements with the actual level of capital charges for operating risk and for bank risk-taking, (2) supervisory review interest rate risk when institutions take of a banking organization's positions on significantly high levels of interest and risk management capabilities as rate risk, so called "outliers." Work is well as their effect on capital adequacy, also under way in connection with the and (3) improved market discipline of supervisory component of the framebank risk-taking activities through work (the second pillar) as well as the greater disclosure of risk positions and disclosure elements of the third pillar. capital. Development and implementation of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 119 lions and industry defines new strategies more complex, fn fulfilling its role as umfor competing effectively in the years brella supervisor, the Federal Reserve must ahead. look across the entire financial holding The Federal Reserve's challenge will be company to adequately assess its riskto avoid extending the federal safety net to management process and its financial conmore institutions as it constructs super- dition. Fortunately, the diversification that visory and regulatory policies under finan- comes with the greater size and range of cial reform. The federal safety net gives activities of today's large financial institubanks the special benefits of access to fed- tions has improved these firms' ability to eral deposit insurance and to the Federal withstand shocks and has probably reduced Reserve's clearing process and discount the likelihood that one or more of them window. Extending that access could result will fail. At the same time, the larger size in relaxed market discipline and could of these institutions means greater damage thereby expose U.S. taxpayers to the kind to the entire financial system should just of dangers experienced more than a decade one of them fail. ago during the savings and loan crisis. Financial institutions and their regula- The Federal Reserve has sought to tors must remain flexible and innovative in address the risks associated with any exten- dealing with rapidly changing markets and sion of the safety net by separating the financial products. Large banking organizaconduct of new activities as much as rea- tions and financial holding companies, in sonably possible from insured depositories particular, must be willing to meet high and by providing a framework for adequate standards of soundness and disclosure and supervision of financial holding com- improve their ability to assess risk in step panies. Such efforts will contribute to the with the burgeoning complexity of the marmarket discipline necessary to make super- ketplace. The potential benefits from finanvision most effective. cial reform should be substantial, but they Determining the right mix of active gov- will be so only if both government and ernment oversight and market discipline industry work together to keep the system has become more difficult as financial mar- sound. kets and institutions have grown larger and this challenging initiative is expected to guidance to larger institutions with comtake a considerable amount of time. plex risk profiles enumerated the funda- To ensure that its supervisory pro- mental elements of a sound internal gram adequately takes account of the capital-adequacy analysis and encourrisks assumed by more complex organi- aged the institutions to strengthen their zations that undertake innovative activi- risk-measurement capabilities as well as ties, the Federal Reserve has increas- to integrate these capabilities more fully ingly relied on information and into evaluations of their own capital analysis provided by banks' own risk- adequacy. management systems for evaluating The Federal Reserve's approach to capital adequacy. After identifying areas assessing capital adequacy is an imporin which the organizations' practices tant aspect of a program for large, comcould be improved, the Federal Reserve plex banking organizations (LCBOs) has issued guidance on sound practices that was formalized during 1999. That for evaluating capital adequacy. The program involves more continuous, risk- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 86th Annual Report, 1999 focused supervisory oversight of these banks that are members of the Federal institutions as well as greater use of Reserve System. In overseeing these horizontal comparative analysis of these organizations, the Federal Reserve seeks companies' business lines and other primarily to promote their safe and activities. This approach to supervision sound operation and their compliance is intended not only to improve the Fed- with laws and regulations, including the eral Reserve's hands-on knowledge of Bank Secrecy Act, certain securities law these organizations but also to improve provisions applicable to banks, and conits ability to identify sound practices. sumer and civil rights laws.1 In examin- The program will be supported by ing these activities it relies to the greatimproved information technology that est extent possible on reports and will provide supervisory staff and exam- information provided by the functional iners with more up-to-date information regulator of the activities, if other than on and analysis of banking organiza- the Federal Reserve. tions and will facilitate the sharing and The Federal Reserve also has responcoordination of information among the sibility for the supervision of all Edge banking agencies and other authorities. Act and agreement corporations; the The Federal Reserve's approach to international operations of state member LCBOs and the supporting technology banks and U.S. bank holding companies; will be a solid foundation for efforts to and the operations of foreign banking supervise financial holding companies, organizations in the United States. which require more continuous informa- The Federal Reserve exercises importion and greater collaboration among tant regulatory influence over the entry authorities. into, and the structure of, the U.S. bank- Another area of note during 1999 was ing system through its administration of the culmination of the Federal Reserve's the Bank Holding Company Act; the multiyear effort to ensure that U.S. banks Bank Merger Act, for state member recognized their responsibility to be pre- banks; the Change in Bank Control Act, pared for the century date change. Dur- for bank holding companies and state ing the rollover period, only minor prob- member banks; and the International lems were reported domestically and Banking Act. The Federal Reserve is abroad. Potentially large costs to the also responsible for imposing margin financial system and the public were requirements on securities transactions. avoided because of these efforts and the In carrying out these responsibilities, the work of domestic and international Federal Reserve coordinates its superbanking regulators, and the banks them- visory activities with other federal and selves, to ensure a smooth transition to state regulatory agencies and with the the year 2000. bank regulatory agencies of other nations. Scope of Responsibilities for 1. The Board's Division of Consumer and Supervision and Regulation Community Affairs is responsible for coordinating the Federal Reserve's supervisory activities with The Federal Reserve is the federal regard to the compliance of banking organizations supervisor and regulator of all U.S. bank with consumer and civil rights laws. To carry out holding companies (including financial this responsibility, the Federal Reserve trains a number of its bank examiners to evaluate instituholding companies formed under the tions with regard to such compliance. The chapter authority of the Gramm-Leach-Bliley of this REPORT covering consumer and community Act) and of state-chartered commercial affairs describes these regulatory responsibilities. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 121 Supervision for Safety 11.8 percent of all insured U.S. commerand Soundness cial banks and held about 23.5 percent of all insured commercial bank assets in To ensure the safety and soundness the United States. of banking organizations, the Federal The guidelines for Federal Reserve Reserve conducts on-site examinations examinations of state member banks are and inspections and off-site surveillance fully consistent with section 10 of the and monitoring. It also undertakes Federal Deposit Insurance Act, as enforcement and other supervisory amended by section 111 of the Federal actions. Deposit Insurance Corporation Improvement Act of 1991 and by the Riegle Community Development and Regula- Examinations and Inspections tory Improvement Act of 1994. For most The Federal Reserve conducts examina- of these banks, a full-scope, on-site tions of state member banks, branches examination is required at least once and agencies of foreign banks, Edge Act a year; certain well-capitalized, wellcorporations, and agreement corpora- managed institutions having assets of tions; it conducts inspections of holding less than $250 million may be examined companies and their nonbank subsidi- every eighteen months. aries, as many aspects of the reviews at During 1999, the Federal Reserve bank holding companies and their non- Banks conducted 517 examinations of bank subsidiaries differ from bank state member banks (some of them examinations. Pre-examination planning jointly with the state agencies), and and on-site review of operations are state banking departments conducted integral parts of ensuring the safety and 248 independent examinations of state soundness of financial institutions. In member banks. both examinations and inspections, the review entails (1) an assessment of the Bank Holding Companies quality of the processes in place to identify, measure, monitor, and control risks, At year-end 1999, the number of U.S. (2) an appraisal of the quality of the bank holding companies totaled 5,941. institution's assets, (3) an evaluation of These organizations controlled 6,774 management, including an assessment insured commercial banks and held of internal policies, procedures, con- approximately 95 percent of all insured trols, and operations, (4) an assessment commercial bank assets. of the key financial factors of capital, Federal Reserve guidelines call for earnings, liquidity, and sensitivity to annual inspection of large bank holding market risk, and (5) a review for companies as well as smaller companies compliance with applicable laws and that have significant nonbank assets. regulations. In judging the financial condition of subsidiary banks, Federal Reserve examiners consult the examination reports State Member Banks of the federal and state banking authori- At the end of 1999,1,010 state-chartered ties that have primary responsibility for banks (excluding nondepository trust the supervision of these banks, thereby companies and private banks) were minimizing duplication of effort and members of the Federal Reserve Sys- reducing the burden on banking organitem. These banks represented about zations. In 1999, Federal Reserve exam- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 86th Annual Report, 1999 iners conducted 1,427 bank hold- cies of foreign banks, Edge Act and ing company inspections, of which agreement corporations, and indepen- 980 were on site and 447 were off site, dent data centers that provide electronic and state examiners conducted 70 inde- data processing services to these institupendent inspections. These inspections tions. These examinations are conducted were conducted at 1,218 bank holding in recognition of the importance of companies. information technology to the financial Small, noncomplex bank holding services industry and help ensure that companies—those that have less than banking organizations conduct their $1 billion in consolidated assets, do operations in a safe and sound manner. not have debt outstanding to the public, During 1999, the Federal Reserve conand do not engage in significant non- ducted 178 examinations that focused bank activities—are subject to a special on the safety and soundness of informasupervisory program that became effec- tion technology and electronic data protive in 1997. The program permits a cessing systems. The Federal Reserve more flexible approach to supervising was also the lead agency in four examithose entities in a risk-focused environ- nations of large, multiregional data proment and is designed to improve the cessing servicers examined in cooperaoverall effectiveness and efficiency of tion with the other federal banking the Federal Reserve's bank supervisory agencies. efforts. Each such holding company is subject to off-site review once during Year 2000 Compliance each supervisory cycle, which corre- The Federal Reserve conducted reviews sponds to the mandated examination of the Year 2000 readiness of supervised cycle for the company's lead bank. In institutions. These focused on the suc- 1999, the Federal Reserve conducted cessful completion of testing and imple- 2,058 reviews of these companies. mentation of mission-critical systems by June 30, 1999, and the progress being Specialized Examinations made by those that were unable to meet that target. In much of the second half of The Federal Reserve conducts specialthe year, the focus was on the compleized examinations of banking organization of contingency plans for business tions in the areas of information technolresumption and event management at ogy; fiduciary activities; transfer agent the century rollover. activities; government and municipal When necessary, supervisors initiated securities broker and dealer activities; enforcement actions against individual and securities underwriting and dealing institutions. The severity of the actions through so-called section 20 subsidiwas scaled to the severity of the aries of bank holding companies. As Year 2000 problems faced by the instipart of the technology review, examintution. In the most serious cases, the ers in 1999 also conducted targeted actions were made public so that reviews of preparedness for the century affected consumers and counterparties date change. could evaluate their own actions relative to the institution's problems. Information Technology Fiduciary Activities The Federal Reserve examines the information technology activities of state The Federal Reserve has supervisory member banks, U.S. branches and agen- responsibility for institutions that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 123 together hold more than $12 trillion of member banks and foreign banks for assets in various fiduciary capacities. compliance with the Government Secu- During on-site examination of an institu- rities Act of 1986 and with Department tion's fiduciary activities, examiners of the Treasury regulations. Thirty-eight evaluate the institution's management state member banks and eight state and operations, including its asset and branches of foreign banks have notified account management, risk management, the Board that they are government and audit and control procedures, and securities dealers or brokers not exempt review its compliance with laws, regula- from Treasury's regulations. During tions, general fiduciary principles, and 1999 the Federal Reserve conducted potential conflicts of interest. In 1999, twelve examinations of broker-dealer Federal Reserve examiners conducted activities in government securities at 191 on-site examinations of fiduciary these institutions. activities. Under the Securities Act Amendments of 1975, the Federal Reserve is Transfer Agents and also responsible for the supervision of Securities Clearing Agencies state member banks and bank holding companies that act as municipal securi- As directed by the Securities Exchange ties dealers. The Federal Reserve super- Act of 1934, the Federal Reserve convises thirty-two banks that act as ducts specialized examinations of those municipal securities dealers. In 1999, state member banks and bank holding ten of these institutions were examined. companies that are registered with the Board as transfer agents. Among other things, transfer agents countersign and Securities Subsidiaries of monitor the issuance of securities, Bank Holding Companies register the transfer of securities, and Before enactment of the Grammexchange or convert securities. On-site Leach-Bliley Act, all subsidiaries of examinations focus on the effectiveness bank holding companies established of transfer agent operations and complipursuant to section 20 of the Banking ance with relevant securities regulations. Act of 1933 (so-called section 20 firms During 1999 Federal Reserve examiners or subsidiaries) were required to conconducted on-site examinations at 44 of duct business subject to uniform operatthe 127 state member banks and bank ing standards, consistent with safe and holding companies that were registered sound operations. To ensure that secas transfer agents. tion 20 firms were not engaged princi- Also during the year the Federal pally in underwriting and dealing in Reserve examined one state-member securities, the Board limited revenues limited-purpose trust company that derived from such activities to less than acted as a national securities depository 25 percent of the total revenues of the to ensure the safety and soundness of its section 20 subsidiary. operations and its compliance with At year-end 1999, forty-five bank applicable laws and regulations. holding companies and foreign banking organizations owned a total of fifty-two Government and Municipal section 20 subsidiaries authorized to Securities Dealers and Brokers underwrite and deal in ineligible securi- The Federal Reserve is responsible for ties; largely because of mergers and examining the government securities acquisitions, seven of these institutions Digitized d f e o a r l F e R r AS an E d R broker activities of state owned more than one section 20 subsidhttp://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 86th Annual Report, 1999 iary. Of the fifty-two authorized sec- Risk-Focused Supervision tion 20 subsidiaries, forty-four were per- Over the past several years the Federal mitted to underwrite any debt or equity Reserve has initiated a number of prosecurity, three were permitted to undergrams aimed at enhancing the effectivewrite any debt security, and five were ness of the supervisory process. The permitted to underwrite only the limited main objective of these initiatives has types of debt securities first approved by been to sharpen the focus on (1) those the Board in 1987. The Federal Reserve business activities posing the greatest follows specialized inspection procerisk to banking organizations and (2) the dures to review the operations of these organizations' management processes securities subsidiaries; it conducted for identifying, measuring, monitoring, fifty such inspections in 1999. and controlling their risks. The section 20 inspection program is currently being revised in light of the provisions of the Gramm-Leach-Bliley Risk-Focused Supervision of Act. Community Banks The risk-focused supervision program Enforcement Actions, for community banks emphasizes that certain elements are key to the risk- Civil Money Penalties, and focused supervision process. These ele- Suspicious Activity Reporting ments include adequate planning time, In 1999 the Federal Reserve Banks completion of a pre-examination visit, recommended, and members of the preparation of a detailed scope-of- Board's staff initiated and worked on, examination memorandum, thorough twenty-seven enforcement cases involv- documentation of the work done, and ing fifty-one separate actions, such as preparation of an examination report cease-and-desist orders, written agree- tailored to the scope of the examination. ments, removal and prohibition orders, and civil money penalties. Risk-Focused Supervision of Large, In other significant matters, the Board Complex Banking Organizations of Governors assessed civil money penalties totaling more than $595,000. Large, complex banking organizations The Board also terminated all outstand- are supervised under the Federal Reing enforcement actions related to serve's Framework for Risk-Focused Year 2000 deficiencies because the Supervision of Large, Complex Finanaffected organizations had taken cial Institutions. In 1999, more-specific appropriate actions to address the guidance on the applicability of this prodeficiencies. gram to the larger and more complex All final enforcement orders issued banking organizations was developed. by the Board of Governors and all writ- The key features of the LCBO superten agreements executed by the Federal vision program are (1) identifying those Reserve Banks in 1999 are available to LCBOs that, based on their shared risk the public and can be accessed from the characteristics, present the highest level Board's public web site. of supervisory risk to the Federal In addition to formal enforcement Reserve System, (2) maintaining conactions, the Federal Reserve Banks in tinual supervision of these institutions 1999 completed 107 informal enforce- to keep current the Federal Reserve's ment actions, such as memorandums of assessment of each organization's con- Digitizedu fnord FerRsAtaSnEdRi ng and board resolutions. dition, (3) instituting a defined, stable http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 125 team to supervise each LCBO, a team factory, a full-scope, on-site inspection composed of Reserve Bank staff who is expected to be performed. New comhave skills appropriate for the organi- panies are subject to a full-scope, on-site zation's unique risk profile, led by a inspection within the first twelve to Reserve Bank central point of contact eighteen months of operation. who has responsibility for only one LCBO, and supported by specialists Technology Initiatives for the skilled in evaluating the risks of highly Risk-Focused Supervision Program complex LCBO business activities and functions, and (4) promoting System- Work continued during 1999 toward wide and interagency information- the implementation of phase I of the sharing through an automated system. Banking Organization National Desktop An important element of the program (BOND) application, which is schedis the sharing of resources across the uled for release in 2000. This informa- System. Several initiatives are under tion technology initiative is designed to way to better utilize supervisory facilitate the high degree of informationresources Systemwide in order to facili- sharing and collaboration necessary to tate comprehensive reviews of institu- support risk-focused supervision of the tions and to assist in horizontal risk largest, most complex U.S and foreign assessments across groups of institu- banking organizations by providing tions to identify emerging trends. immediate, user-friendly access to a full range of internal and third-party information. It will also facilitate the analysis Risk-Focused Supervision of Small of trends across similar organizations Shell Bank Holding Companies and improve the Federal Reserve's ability to identify and manage the risks The Federal Reserve uses automated posed by these diversified banking screening systems for small shell bank organizations. holding companies to identify trends that may adversely affect individual companies. These screens support the Surveillance and Risk Assessment risk-focused supervision program for these companies, which tailors super- To supplement on-site examinations, the visory activities to an assessment of Federal Reserve routinely monitors the each company's reported condition and financial condition and performance of activities and the condition of its subsid- banking organizations using automated iary banks. Under the program, Reserve screening systems. In these surveillance Banks are expected to perform a risk systems, data from regulatory financial assessment of each small shell bank reports are analyzed to identify comholding company at least once during panies that appear to be deteriorating or each supervisory cycle, which depends to be weaker than current supervisory on the examination frequency for the ratings suggest. The analysis helps to holding company's lead bank. If a direct examination resources to potenpreliminary assessment identifies no tially troubled institutions. Surveillance unusual supervisory issues or concerns, systems also identify companies that are no special follow-up with the company engaging in new or complex activities is necessary. However, if it supports the to assist in planning examinations. Curassignment of a supervisory rating (that rently, separate surveillance programs is, a BOPEC rating) of 3 or worse or are run quarterly for state member a management rating of less than satis- banks; large, complex bank holding Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 86th Annual Report, 1999 companies; and small shell bank hold- Act corporations and agreement corpoing companies. The Federal Reserve rations, and bank holding companies; also produces and distributes the quar- and investments by bank holding comterly Bank Holding Company Perfor- panies in export trading companies. It mance Report (BHCPR) to assist super- also supervises the U.S. activities of visory staff in evaluating individual foreign banking organizations, includbank holding companies. ing U.S. branches, agencies, and repre- During 1999 the Federal Reserve ini- sentative offices, U.S. bank subsidiaries, tiated development of surveillance pro- and commercial lending company subgrams for U.S. branches and agencies of sidiaries and nonbanking subsidiaries. foreign banking organizations and for changes in cross-border exposures of Foreign Office Operations banking holding companies. Staff memof U.S. Banking Organizations bers also adapted a number of surveillance screens to be used in the BOND The Federal Reserve examines the interapplication. national operations of state member To facilitate access to data from banks, Edge Act corporations, and bank regulatory reports and to surveillance holding companies, principally at the program results, the Federal Reserve U.S. head offices of these organizations, maintains a PC-based application that where the ultimate responsibility for accesses data housed in the National their foreign offices lies. In 1999 the Information Center (NIC) and electroni- Federal Reserve conducted examinacally distributes surveillance screen tions of five foreign branches of state results. During the year, staff mem- member banks and twenty foreign subbers expanded the capabilities of this sidiaries of Edge Act corporations and application—the Performance Report bank holding companies. The examina- Information and Surveillance Monitor- tions abroad were conducted with the ing application (PRISM)—to include cooperation of the supervisory authorifinancial information on U.S. nonbank ties of the countries in which they took subsidiaries and data on institution place; when appropriate, the examinastructure. tions were coordinated with the Office The Federal Reserve works with of the Comptroller of the Currency. the other federal banking agencies to Also, examiners made three visits to the enhance and coordinate surveillance overseas offices of U.S. banks to obtain activities through representation on the financial and operating information and, Federal Financial Institutions Examina- in some instances, to evaluate their comtion Council's Task Force on Surveil- pliance with corrective measures or to lance Systems. test their adherence to safe and sound banking practices. International Activities Foreign Branches of Member Banks The Federal Reserve plays a critical role in the supervision of the international At the end of 1999, eighty-two memactivities of U.S. banking organizations ber banks were operating 921 branches and the U.S. activities of foreign bank- in foreign countries and overseas areas ing organizations. It supervises foreign of the United States; fifty-one national branches of member banks; overseas banks were operating 717 of these investments by member banks, Edge branches, and thirty-one state member Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 127 banks were operating the remaining U.S. banking system. As of year-end 204 branches. In addition, twenty 1999, 230 foreign banks from 58 counnonmember banks were operating tries operated 317 state-licensed 45 branches in foreign countries and branches and agencies (of which overseas areas of the United States. 15 were insured by the Federal Deposit Insurance Corporation) as well as 57 branches licensed by the Office of the Edge Act and Agreement Corporations Comptroller of the Currency (of which Edge Act corporations are international 6 had FDIC insurance). These foreign banking organizations chartered by the banks also directly owned 17 Edge Act Board. Agreement corporations are corporations and 3 commercial lending similar organizations, state chartered or companies; in addition, they held an federally chartered, that enter into agree- equity interest of at least 25 percent ments with the Board not to exercise in 82 U.S. commercial banks. Altoany power that is not permissible for an gether, these U.S. offices of foreign Edge Act corporation. banks at the end of 1999 controlled Under sections 25 and 25 (A) of the approximately 19 percent of U.S. com- Federal Reserve Act, Edge Act and mercial banking assets. These foreign agreement corporations may engage in banks also operated 115 representative international banking and foreign finan- offices; an additional 84 foreign banks cial transactions. These corporations, operated in the United States solely which in most cases are subsidiaries through a representative office. of member banks, may (1) conduct a The Federal Reserve has acted to deposit and loan business in states other ensure that all state-licensed and federthan that of the parent, provided that the ally licensed branches and agencies are business is strictly related to interna- examined on site at least once every tional transactions, and (2) make foreign eighteen months, either by the Federal investments in companies such as Reserve or by a state or other federal finance and leasing companies, as well regulator; in most cases, on-site examias in foreign banks. nations are conducted at least once every At year-end 1999, there were eighty- twelve months, but the period may be three Edge Act and agreement corpora- extended to eighteen months if the tions with twenty-nine branches. During branch or agency meets certain criteria. the year, the Federal Reserve examined The Federal Reserve conducted or parall of these corporations. ticipated with state and federal regulatory authorities in 274 examinations during 1999. U.S. Activities of Foreign Banks The Federal Reserve has broad authority Joint Program for to supervise and regulate the U.S. activi- Supervising the U.S. Operations of ties of foreign banks that engage in Foreign Banking Organizations banking and related activities in the United States through branches, agen- In 1995 the Federal Reserve, in cooperacies, representative offices, commercial tion with the other federal and state lending companies, Edge Act corpora- banking supervisory agencies, formally tions, commercial banks, and certain adopted a joint program for supervising nonbank companies. Foreign banks con- the U.S. operations of foreign banking tinue to be significant participants in the organizations (FBOs). The program has Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 86th Annual Report, 1999 two main parts. One part focuses on the technical assistance and training misexamination process for those FBOs that sions led by the International Monetary have multiple U.S. operations and is Fund, the World Bank, the Interintended to improve coordination among American Development Bank, the Asian the various U.S. supervisory agencies. Development Bank, and the Basel Com- The other part is a review of the finan- mittee on Banking Supervision. cial and operational profile of each FBO to assess its general ability to support its Supervisory Policy U.S. operations and to determine what risks, if any, the FBO poses through its Within the supervisory policy function, U.S. operations. Together, these two pro- the Federal Reserve develops guidance cesses provide critical information to for examiners and financial institutions U.S. supervisors in a logical, uniform, as well as regulations for financial instiand timely manner. During 1999 the tutions under the supervision of the Fed- Federal Reserve continued to implement eral Reserve. Staff members also participrogram goals through coordination pate in international supervisory forums with other supervisory agencies and and provide support for the work of the the development of financial and risk FFIEC. assessments of foreign banking organizations and their U.S. operations. Capital Adequacy Standards During 1999 the Federal Reserve, Technical Assistance together with the other federal banking In 1999 the Federal Reserve System agencies, issued two final rules that continued to provide staff for techni- amended their capital standards for marcal assistance missions covering bank ket risk and implemented technical supervisory matters to an increasing modifications. number of central banks and supervisory authorities around the world. Tech- Market Risk/Specific Risk nical assistance takes a variety of forms On April 19 the Federal Reserve, ranging from official visits by foreign together with the FDIC and the OCC, supervisors to the Board and Reserve issued a final rule amending their re- Banks for the purpose of learning spective risk-based capital standards for about U.S. supervisory practices and market risk applicable to certain instituprocedures to secondments of Federal tions having significant trading activi- Reserve System staff to overseas superties. The final rule permits institutions visory authorities for the purpose of to use qualifying internal models to advising on strengthening the bank determine their capital requirements in supervisory process in a foreign country. relation to specific risk (an element of In 1999, technical assistance was conmarket risk) without comparing the centrated in Latin America, the Far East, requirements generated by their internal and former Soviet bloc countries. Durmodels with the so-called standardized ing the year, the Federal Reserve offered specific-risk capital requirement. supervision training courses in Washington, D.C., and on site in a number of Technical Modifications foreign jurisdictions exclusively for the staff of foreign supervisory authorities. On March 2 the federal banking agen- System staff members also took part in cies issued a final rule amending their Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 129 capital adequacy standards to eliminate kets and trading activities at financial differences among the agencies. The institutions of all types and sizes. The final rule revises and makes consistent manual discusses the risks involved in among the agencies the risk-based capi- various activities, risk-management and tal treatment of construction loans for risk-measurement techniques, appropripresold one- to four-family residential ate internal controls, and examination properties, junior liens on one- to four- objectives and procedures. It takes a family residential properties, and invest- functional approach to activities, as ments in mutual funds and simplifies opposed to a legal-entity approach. In the agencies' leverage capital rules for the 1999 update, chapters on counterbanks and thrift institutions. party credit risk, capital adequacy, and The final rule permits a 50 percent accounting were revised to reflect new risk weight for all qualifying construc- regulatory guidance and best practices. tion loans on presold one- to four-family residential properties. It also requires that a lending institution holding the Recourse first and junior liens on a one- to four- During 1999 the Federal Financial family residential property, with no Institution Examination Council recomother intervening liens, treat the loans mended that the Federal Reserve, toon a combined basis as a single extengether with the OCC, FDIC, and OTS sion of credit for loan-to-value and risk- (Office of Thrift Supervision), adopt the weighting purposes. The institution's interagency proposal that would amend combined loan amount is then assigned the risk-based capital standards to in its entirety to either the 50 percent or address the regulatory capital treatment 100 percent risk category, depending on of recourse obligations and direct credit underwriting and performance criteria. substitutes that expose banks, bank In addition, the final rule gives instituholding companies, and thrift institutions the option of assigning a mutual tions to credit risk. The proposed revifund investment on a pro rata basis sions would use credit ratings to match among the risk categories according to the risk-based capital assessment more the investment limits in the mutual fund closely to an institution's relative risk of prospectus. Finally, with regard to the loss in certain asset securitizations. It is leverage capital standards, the final rule expected that the proposal will be issued clarifies that certain institutions having for public comment in the first quarter the highest supervisory rating must have of 2000. a minimum leverage ratio of 3.0 percent; all other banks and thrift institutions must have a minimum leverage Assessing Capital Adequacy ratio of 4.0 percent. in Relation to Risk at Large Banking Organizations Trading and In July the Federal Reserve issued Capital Markets Activities supervisory guidance that emphasizes In 1999 the Board's Division of Bank- the growing need for banking organizaing Supervision and Regulation updated tions to ensure that their capital not only its Trading and Capital Markets Activi- is adequate to meet formal regulatory ties Manual, which provides examiners standards but also is sufficient to support with guidance for reviewing capital mar- their underlying risk positions. The Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 86th Annual Report, 1999 guidance suggests that internal capital high LTV lending and the controls that management processes at several large, institutions should have in place to mancomplex banking organizations could age these risks. It also reminds institube improved and better integrated with tions about the 100 percent capital limiinternal risk measurement and analysis. tations on this type of lending. In coming months, the Federal Reserve will evaluate internal capital manage- Synthetic Securitizations ment processes to judge whether they meaningfully tie the identification, On November 17 the Federal Reserve, monitoring, and evaluation of risk to the together with the OCC, issued guidance determination of an institution's capital on the way synthetic securitizations needs. should be treated under the current leverage and risk-based capital guidelines. The guidance permits a banking Loan Write-Up Standards organization sponsoring a leveraged The Federal Reserve amended its loan synthetic securitization to reduce its write-up standards for criticized assets capital requirement against certain in 1999 to bring them into conformity retained exposures if the institution has with the risk-focused examination eliminated virtually all of its credit risk approach. In the case of a majority of exposure to the specified portfolio being adversely classified assets, the new stan- synthetically securitized. The guidance dards allow the examiner to omit details specifies minimum requirements that that are of little benefit to the bank- the sponsoring institution must meet to ing organization and supervision staff. ensure that it has eliminated virtually all The new approach, which uses asset- of its credit exposure; it also specifies classification write-ups to illustrate loan disclosure requirements regarding the administration weaknesses, encourages transaction. a cooperative effort between examiners and bank management. Full loan write- Retained Interests ups are still required for certain criticized assets in situations in which bank On December 13 the Federal Reserve, management disagrees with the disposi- together with the OCC, FDIC and the tion accorded by the examiner and when OTS, issued guidance emphasizing the institution is viewed as a problem the importance of fundamental riskbank. Abbreviated write-ups are appro- management practices in connection priate to formalize certain decisions and with securitization activities. The guidto clarify actions by management. ance stresses the specific expectation that any securitization-related retained interest claimed and booked by a finan- Real Estate Lending Standards cial institution should be supported by In October the Federal Reserve, together documentation of the interest's fair with the other federal banking agencies, value, determined by using reasonable, issued guidance on high loan-to-value conservative valuation assumptions that (LTV) residential real estate loans as a can be objectively verified. Retained clarification of the agencies' real estate interests that lack such objectively verilending regulations. The guidance de- fiable support or that fail to meet the scribes some of the risks inherent in supervisory standards set forth in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 131 guidance are to be classified as a loss Guide to the Interagency Country and disallowed as assets of the institu- Exposure Review Committee tion for regulatory capital purposes. (ICERC) Process In November the Federal Reserve, Examination-Frequency Guidelines together with the OCC and the FDIC, In October the Federal Reserve and the issued a document, "Guide to the Interother federal banking agencies issued agency Country Exposure Review Coma final rule revising their examination- mittee Process," that clarifies and makes frequency guidelines to address provi- more transparent for financial institusions in the Riegle Community Devel- tions and examiners the ICERC's funcopment and Regulatory Improvement tions and operating procedures. The Act of 1994 and the Economic Growth ICERC is responsible for assessing the and Regulatory Paperwork Reduction degree of transfer risk (that is, the possi- Act of 1996. As a result of the revision, bility that an asset cannot be serviced in certain U.S. branches and agencies of the currency of payment because of a foreign banking organizations may lack of, or restraints on the availability qualify for an eighteen-month examina- of, needed foreign exchange in the countion cycle rather than a twelve-month try of the obligor) inherent in the crosscycle. border and cross-currency exposures of To qualify for consideration for less- U.S. banks. frequent examination, a U.S. branch or agency must have total assets of $250 million or less, must have received Interagency Guidance on a composite supervisory rating of 1 or Subprime Lending 2 at its most recent examination, and must not be subject to a formal enforce- In March the Federal Reserve, together ment action. In addition, the U.S. branch with the other federal banking agencies, or agency must have satisfied the issued interagency guidance on subrequirements that either (1) the foreign prime lending. The guidance was develbank's most recently reported capital oped to bring greater attention to the adequacy position consists of, or is supervisory issues related to banks' and equivalent to, tier 1 and total risk-based thrifts' involvement in subprime lending capital ratios of at least 6 percent and and to how these institutions should 10 percent respectively, on a consoli- manage the unique risks associated with dated basis, or (2) the office has main- this activity. The guidance notes that the tained, on a daily basis over the past agencies consider subprime lending to three quarters, eligible assets (deter- be a high-risk activity that is unsafe and mined in accordance with applicable unsound if the risks associated with federal and state laws) in an amount not subprime loans are not properly conless than 108 percent of the preceding trolled. It advances sound practices for quarter's average third-party liabilities managing the risks involved in suband sufficient liquidity is currently avail- prime lending. Institutions are expected able to meet its obligations to third par- to have policies and procedures in place ties. Finally, the foreign bank must not to measure, monitor, and control the have experienced a change in control additional risks associated with this during the preceding twelve months. activity. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 86th Annual Report, 1999 Joint Policy Statement Regarding should be considered when establishing Branch Closings by Insured appropriate allowance levels, consistent Depository Institutions with the May Federal Reserve guidance. As part of an interagency statement also On June 29 the federal banking agencies issued in July, the SEC agreed to consult issued a revised joint policy statement with the banking regulators when deterregarding branch closings by insured mining whether to take a significant depository institutions. The statement action against financial institutions with incorporates changes in the underlying respect to their loan loss allowance. statute made by section 106 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and Interagency Policy Statement on section 2213 of the Economic Growth External Auditing Programs of and Regulatory Paperwork Reduction Banks and Savings Associations Act of 1996. It clarifies the steps that interstate banks should take regarding In September the Federal Reserve and notice and consultation for proposed the other federal banking agencies branch closings in low- or moderate- issued a joint policy statement regarding income areas. It also clarifies the status the external auditing programs of banks of automated teller machines, reloca- and savings associations. The statement tions and consolidations, and branch encourages banks and savings associaclosings in connection with emergency tions with less than $500 million in total acquisitions or assistance by the FDIC. assets to adopt an external auditing program as a part of their overall riskmanagement process. It reflects the Interagency Guidance on the agencies' view that higher-risk areas of Allowance for Loan Losses an institution's business should be subjected to regular independent testing and During 1999 the Federal Reserve, the evaluation to ensure that the institu- Securities and Exchange Commission, tion's financial statements and regulaand the other federal banking agencies tory reports are accurately and reliably continued to develop guidance regardprepared. The statement also encourages ing the allowance for loan losses. In the board of directors of each institution March the agencies issued a joint stateto establish an audit committee made up ment outlining initiatives the agencies entirely of outside directors. The stateand the accounting profession are underment is effective for fiscal years begintaking to develop enhanced guidance on ning on or after January 1, 2000. appropriate methodologies, disclosures, and supporting documentation for loan loss allowances and other issues. In May International Guidance on the Federal Reserve issued guidance Internal Control, Accounting, addressing the need for banking organiand Disclosure zations to maintain conservative allowances for loan losses in the context of As a member of the Basel Committee existing accounting standards; the guid- on Banking Supervision, the Federal ance is now a part of generally accepted Reserve plays a key role in the developaccounting principles (GAAP). In July ment of supervisory guidance on interthe agencies issued a joint statement nal control, accounting, and reporting emphasizing a number of factors that practices among banking organizations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 133 The objectives of this guidance are to disclosures by large, internationally promote market discipline through active banks and securities firms. greater transparency in financial state- • "Trading and Derivatives Disclosures ments, to encourage sound risk manage- of Banks and Securities Firms: ment, and to improve disclosures of Results of the Survey of Public Disqualitative and quantitative information closures in 1998 Annual Reports" on bank risk exposures and risk- (December) is a report of the fifth management policies and practices. Dur- annual joint survey by the Basel Coming 1999 the Federal Reserve contrib- mittee and the IOSCO on the public uted to several papers and reports that disclosure of trading and derivatives were issued by the Basel Committee, activities of banks and securities firms including the following: worldwide. The report provides an overview and analysis of the disclo- • "Sound Practices for Loan Account- sures about trading and derivatives acing and Disclosure" (July) provides tivities presented in the 1998 annual guidance to banks, banking super- reports of a sample of the largest intervisors, and those who set accounting nationally active banks and securities standards on recognition and measure- firms in the G-10 countries and notes ment of loans, establishment of loan improvements since 1993. loss allowances, disclosure of credit • "Working Paper on Capital Requirerisk, and related matters. The paper ments and Bank Behavior: The Impact sets out banking supervisors' views of the Basel Accord" (April) reviews on sound loan accounting and loan- the empirical evidence on the effect of disclosure practices for banks. It also the 1988 Basel Accord on banks. The serves as a framework for supervisory paper addresses whether the adoption evaluation of banks' policies and of fixed minimum capital requirepractices in these areas. ments led some banks to maintain • "Best Practices for Credit Risk Dis- higher capital ratios than they would closure" (July) provides guidance on have otherwise and whether these rebest practices in public disclosure of quirements have been successful in credit risk by banking institutions. limiting risk-taking by banks. Banks are encouraged to provide mar- • "Working Paper on Supervisory Lesket participants and the public with sons to be Drawn from the Asian the information they need to make Crisis" (June) makes recommendameaningful assessments of their credit tions for G-10 creditor banks and risk profile. The paper is part of the their supervisors in the wake of the Basel Committee's ongoing efforts to 1997-98 Asian financial crisis. Recpromote transparency and effective ommendations address revisions to the market discipline. Basel Accord and the use of rating- • "Recommendations for Public Dis- agency ratings, large-exposure guidclosure of Trading and Derivatives ance, country-risk assessments, and Activities of Banks and Securities country-risk-management practices. Firms" (October) presents recommen- • "Banks' Interactions with Highly dations for public disclosure of the Leveraged Institutions and Sound trading and derivatives activities of Practices for Banks' Interactions with banks and securities firms. The recom- Highly Leveraged Institutions" (Janumendations complement the annual ary) evaluates the potential risks survey of trading and derivatives resulting from banks' interactions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 86th Annual Report, 1999 with highly leveraged institutions, as- Bank Holding Company Reports sesses the deficiencies in banks' riskmanagement practices, and evaluates As the federal supervisor and regulator alternative policy responses, includ- of U.S. bank holding companies, the ing encouraging the use of sound Federal Reserve requires periodic regupractices by banks. It sets forth sound latory reports from these organizations. practices standards for the manage- These reports, which are revised periment of counterparty credit risk in odically, provide essential information banks' trading and derivatives activi- to assist the Federal Reserve in the suties with highly leveraged institutions. pervision of these banking organizations • "Performance of Models-Based and in the formulation of regulations Capital Charges for Market Risk: and supervisory policies. The reports are 1 July-31 December 1998" (Septem- also used by the Federal Reserve to reber) reports on a survey of more than spond to requests from the Congress and forty banks in nine countries subject the public for information on bank holdto the market-risk amendment to the ing companies and their nonbank sub- Basel Accord during the third and sidiaries. The FR Y-9 series of reports fourth quarters of 1998, a period of (FR Y-9C, FR Y-9LP, and FR Y-9SP) high market volatility. The survey provides standardized financial statefound that the capital charge for mar- ments for the consolidated bank holding ket risk under the internal-models company and its parent. The Federal approach provided an adequate buffer Reserve uses these reports to detect against trading losses at the surveyed emerging financial problems, to review institutions over the period reviewed. performance and conduct pre-inspection The survey encouraged banks to con- analysis, to monitor and evaluate risk tinue to reassess the performance of profiles and capital adequacy, to evaluinternal models and to complement ate proposals for bank holding company those models with robust stress- mergers and acquisitions, and to analyze testing. a bank holding company's overall financial condition to ensure safe and sound In addition to serving on the Basel operations. The FR Y-l 1 series of re- Committee on Banking Supervision, ports aids the Federal Reserve in deter- Federal Reserve staff members partici- mining the condition of bank holding pate in meetings of the Financial companies that are engaged in nonbank- Accounting Standards Board's (FASB) ing activities and in monitoring the vol- Financial Instruments Task Force. The ume, nature, and condition of their nontask force was created to help the FASB banking subsidiaries. address issues related to the accounting Most of the revisions made to the and disclosure standards for financial FR Y-9C during 1999 paralleled reviinstruments. Staff members also par- sions made to the FFEEC 031 Call Reticipate in meetings of the Interna- port. They included the elimination of tional Accounting Standards Committee detailed items for "high-risk mortgage (IASC) on behalf of the Basel Commit- securities;" implementation of the distee's Task Force on Accounting Issues. closure requirements of Statement of The IASC's objectives are to formulate Financial Accounting Standard No. 133 and publish international accounting (FAS 133), Accounting for Derivative standards and to promote their world- Instruments and Hedging Activities, for wide acceptance and observance. cash-flow hedges; and implementation Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 135 of items for monitoring risk-based capi- instructions for reporting securities actal. The revisions to the other FR Y-9 tivities, risk-based capital, and intanreports and to the FR Y-l 1 series con- gible assets were clarified. The FFIEC sisted primarily of implementation of also revised the Report of Assets and the FAS 133 disclosure requirements for Liabilities of U.S. Branches and Agencash-flow hedges. A section for "Notes cies of Foreign Banks (FFIEC 002), to the Financial Statements" was also effective with the March 1999 report, added to the FR Y-l 1 reports, but other- to maintain consistency with the bank wise there were no substantive revisions Call Reports. In September, the FFIEC to the FR Y-l 1 series. announced that no new items would be added to the Call Report for the March 31, 2000 report. Federal Financial Institutions Examination Council Year 2000 Supervision Program Uniform Retail Credit Classification Throughout 1999 the FFIEC agencies and Account Management Policy continued their efforts to ensure the readiness of supervised financial insti- On February 10, the FFIEC issued tutions' automated information systems, the Uniform Retail Credit Classification and those of their customers, for the and Account Management Policy, which century date change. The final phase of updates and expands the guidelines for the supervisory program undertaken by classifying consumer loans that were the agencies was extensive and included first issued in 1980. The policy, among the issuance of additional policy guidother things, adds guidance on the treatance, the conduct of on-site examment of loans to bankrupt borrowers, inations and intensive monitoring of fraudulent loans, loans to deceased borfinancial institutions and markets, conrowers, and delinquent residential real tingency planning to respond to disestate and home equity loans and on the ruptions that could occur, and event treatment of partial payments. It also sets forth the criteria that must be satis- management for the year-end rollover fied before a depository institution may period. The program focused on promotconsider a delinquent account current. ing industry and consumer awareness; The policy statement becomes effective establishing targets for completion of on December 31, 2000. testing; developing implementation and contingency plans; and providing feedback, in part through examinations, to Revisions to the Call Report institutions in their attempts to assess The FFIEC implemented a few changes their progress and to identify outstandto the bank Reports of Condition and ing issues. Income (Call Reports), effective with The FFIEC worked rigorously to the March 1999 report, to improve the ensure broad awareness of the imporbanking agencies' ability to monitor the tance and scope of the problem, both safety and soundness of financial insti- domestically and internationally, and tutions. The changes included new items joined with the private sector in a coorto conform with GAAP, specifically, dinated effort to successfully address the items necessary to implement FAS 133. Year 2000. The agencies made signifi- Certain detailed items on bank invest- cant contributions to the financial indusment portfolios were eliminated, and try's successful transition into the new Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 86th Annual Report, 1999 millennium without serious disruption Community Bank Supervision to the financial services provided to the industry and the public. For several years the Federal Reserve has worked closely with the FDIC, the Conference of State Bank Supervisors, Supervisory Information and several state banking authorities to Technology automate the examination process for The Supervisory Information Technol- community banks. The agencies now ogy (SIT) function within the Board's have a common set of automated exami- Division of Banking Supervision and nation tools that support the risk-focused Regulation facilitates management supervision process (ED), loan analyof the diverse information technology sis (ALERT), and report preparation requirements of the Federal Reserve's (GENESYS). These tools are continusupervision function. Its goals are to ally evaluated and enhanced. A major ensure that rewrite of the GENESYS application that will enable broader implementation • IT initiatives support a broad range of among the agencies is scheduled for supervisory activities without duplica- completion in June 2000. tion or overlap • The underlying IT architecture fully supports those initiatives National Information Center • The supervision function's use of technology takes advantage of the sys- The National Information Center tems and expertise available more (NIC) is the Federal Reserve's comprebroadly within the Federal Reserve hensive repository for supervisory, System. financial, and banking structure data. Also included under the NIC manage- The SIT function works through ment structure is the National Examinaassigned staff at the Board of Governors tion Database (NED), a major applicaand the Reserve Banks and through a tion that gives supervisory personnel committee structure that ensures that throughout the Federal Reserve System, key staff members actively participate as well as state banking authorities and in identifying requirements and setting the other federal regulators, access to priorities for IT initiatives. NIC data. Several enhancements to the NIC and NED are under way. The NED system was enhanced in Large Bank Supervision February to capture large banking orga- During 1999 significant progress was nization risk-assessment information. A made in developing a new information web-enabled user access interface is besystem to support the supervision of ing developed, and the application will large, complex banking organizations. be enhanced to reflect further changes Known as BOND (Banking Organiza- in the supervision business model to tion National Desktop), the system, address a continuous supervisory prowhich is scheduled for implement- gram and financial modernization. ation in 2000, will provide collabora- In June the final phase of the NIC tion, messaging, and document- banking structure updating system was management capabilities as well as implemented. Completion of the final access to regulatory and market data. phase brings all structure-updating func- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 137 tions to the client/server platform. This Strategic Planning new architecture for processing and ana- With Board and Reserve Bank particilyzing NIC data ensures easier access to pation, SIT is developing a vision statebanking structure data as well as a more ment and a multiyear strategic plan to cost-effective approach to applying sysguide the information technology directem modifications. Work is also contion and investments of the supervision tinuing on a project for the electronic and regulation function. A work group submission of data on changes in investis developing a current-period operating ments and activities of bank holding plan that emphasizes national projects, companies. The web-based application supporting budgets, and appropriate will offer respondents the same level of documentation for senior level review. state-of-the-art tools used by NIC's Each of these endeavors will use a structure-updating functions in order to "repeatable process" to outline the enhance the respondent's ability to subapproach for future efforts. The work mit data more quickly and with greater group is also evaluating alternatives to accuracy. track national IT development and In conjunction with the BOND projects costs for the supervision and project, the NIC is being enhanced to regulation function. include a repository for supervisory documents. Called the Central Document and Text Repository (CDTR), the S&R Enterprise Information repository will initially house those Architecture (EIA) supervisory products that are associated with the framework for risk-focused SIT established a work group of Reserve supervision of large, complex banking Bank and Board staff to begin the proorganizations. Broad categories of docu- cess of documenting the Systemwide ments to be housed in the CDTR are enterprise information architecture examination and inspection documents, (EIA) for the supervision and regulation enforcement-event documents, and other function. Using a business-centered, products associated with a region of the top-down approach, the work group is United States or a Federal Reserve Dis- defining the business processes, infortrict (for domestic bank holding compa- mation, data, applications/information nies), a country (for foreign banking systems, and systems infrastructure that organizations), or risk profiles. In addi- make up the EIA. It will prepare a techtion, staff members are exploring the nical reference manual that documents the EIA and describes maintenance proexpansion of the CDTR to serve broader cedures. Documentation will enhance document-management needs within the the effectiveness of the supervision and supervision function and with other regulation function, help guide IT develregulatory agencies. opment and acquisition efforts, and The NIC public web site was also increase return on information technolenhanced during the year. The site ogy investments by improving inter- (http://www.ffiec.gov/nic/) makes availoperability between systems. able bank holding company performance ratios, NIC banking structure and financial data, and, since Decem- IT Project Management ber 1999, all consolidated and large parent financial statement schedules for To draw on the best practices for managbank holding companies. ing IT projects in private industry and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 86th Annual Report, 1999 Number of Sessions of Training Programs for Banking Supervision and Regulation, 1999 Program Total Regional Schools or seminars conducted by the Federal Reserve Core schools Banking and supervision elements 10 Operations and analysis 6 3 Bank management 4 1 Report writing 17 17 Management skills 11 9 Conducting meetings with management 15 15 Other schools Loan analysis 5 Examination management 1 Real estate lending seminar 4 Specialized lending seminar 3 Senior forum for current banking and regulatory issues 2 Banking applications 1 Basic entry-level trust 2 Advanced trust 1 Consumer compliance examinations I 2 Consumer compliance examinations II 2 1 CRA examination techniques 3 3 Fair lending examination techniques 4 2 Foreign banking organizations 3 3 Information systems and emerging technology risk management 5 5 Information systems continuing education 2 Intermediate information systems examination 1 1 Capital markets seminars 18 12 Section 20 securities seminar 3 1 Internal controls 1 Leadership dynamics 7 Seminar for senior supervisors of foreign central banks * 1 Other agencies conducting courses 2 Federal Financial Institutions Examination Council 45 The Options Institute 2 1. Conducted jointly with the World Bank. ... Not applicable. 2. Open to Federal Reserve employees. the government, SIT is studying those visory or regulatory responsibilities at practices and developing a project man- the Reserve Banks, at the Board of Govager's handbook. The handbook will be ernors, and at state banking departments. included in the EIA technical reference Students from supervisory counterparts manual and will be available to project in foreign countries attend the training managers, team members, and stake- sessions on a space-available basis. The holders. In addition to producing the program provides training at the basic, handbook, SIT is working to identify intermediate, and advanced levels for project management training opportuni- the four disciplines of bank supervision: ties for Reserve Bank and Board staff bank examinations, bank holding comand will propose a project management pany inspections, surveillance and training curriculum and certification monitoring, and applications analysis. program. Classes are conducted in Washington, D.C., or at regional locations and may be held jointly with regulators of other Staff Training financial institutions. The program is The Supervisory Education Program designed to increase a student's knowltrains staff members that have super- edge of the entire supervisory and regu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 139 Status of Students Registered for the Core Proficiency Examination, 1999 Specialty area1 Core Student status examination Safety and Consumer Trust Information soundness affairs technology In queue, year-end 1998 33 22 10 1 0 Test taken, 1999 108 63 38 1 0 Passed 94 55 24 1 0 Failed 14 8 14 0 0 In queue, year-end 1999 15 9 6 0 0 1. Students are examined in one specialty area of their choice. latory process and thereby provide a Reserve and FFIEC schools. Through higher degree of cross-training among this program 451 state examiners were staff members. trained—247 in Federal Reserve The Federal Reserve System also par- courses, 196 in FFIEC programs, and ticipates in training offered by the Fed- 8 in other courses. eral Financial Institutions Examination The Federal Reserve System contin- Council and by certain other regulatory ued in 1999 to make revisions initiated agencies. The System's involvement in 1997 to the core training program that includes developing and implementing leads to the commissioning of assistant basic and advanced training in various examiners. The project was undertaken emerging issues as well as in such spe- to give assistant examiners a greater cialized areas as trust activities, interna- understanding of risk-focused examinational banking, information technology, tion concepts, the components of sound municipal securities dealer activities, internal controls, the importance of capital markets, payment systems risk, management information systems, the white collar crime, and real estate lend- concept of risk as it applies to banking, ing. In addition, the System co-hosts the and the key supervisory issues related to World Bank Seminar for students from integrated supervision. These changes, developing countries. which resulted in a new curriculum, will In 1999 the Federal Reserve con- be completed by the end of 2000. ducted numerous schools and seminars, Depending on their hire date, staff and staff members participated in sev- members seeking an examiner's comeral courses offered by or cosponsored mission follow one of two training with other agencies, as shown in the tracks. One track is for examiners hired accompanying table. Over the year the before February 28, 1998, who must Federal Reserve trained 2,719 students take the "core proficiency examination" in System schools, 856 in schools spon- as well as an examination in a specialty sored by the FFIEC, and 42 in other area of the student's choice—safety and schools, for a total of 3,617 students, soundness, consumer affairs, trust, or including 290 representatives from for- information technology. Examiners on eign central banks. The number of train- this track should complete their coming days in 1999 totaled 18,729. missioning requirements by the end of The Federal Reserve System also 2001. In 1999, 108 examiners comgave scholarship assistance to the states pleted the core proficiency examination for training their examiners in Federal (see table). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 86th Annual Report, 1999 Status of Students Registered for the First Reserve's approval before forming a Proficiency Examination, 1999 bank holding company by acquiring control of one or more banks in the First Specialty Student status examination area1 United States. Once formed, a bank holding company must receive Federal Test taken 205 1 Reserve approval before acquiring or Passed 204 1 Failed 1 0 establishing additional banks. The act In queue, year-end 1999 ... 9 0 also identifies other activities permissible for a bank holding company, which 1. As is the case for the core proficiency examination, students will be examined in one of four specialty areas depending on the circumstances may or of their choice. In 1999, the only specialty examination may not be commenced without prior available was for the consumer affairs area. Federal Reserve approval. The Bank Holding Company Act and The other track is for examiners hired various related statutes were signifiafter February 28, 1998, who must take cantly amended in November 1999 by the "first proficiency examination" as passage of the Gramm-Leach-Bliley well as a "specialty proficiency exami- Act. Title I of the latter act, which nation" in one of the four specialty becomes effective in March 2000, areas. By the end of 1999, 205 examin- authorizes those bank holding compaers had completed the first proficiency nies that meet applicable statutory examination. The only specialty exami- requirements to become financial holdnation available in 1999 was for con- ing companies and to engage without sumer affairs (see table); the other spe- prior Federal Reserve approval in a cialty examinations will be developed in broad array of financially related activithe first quarter of 2000. ties, including securities underwriting and dealing, insurance agency and insurance underwriting, and merchant bank- Regulation of the ing. All bank holding companies will U.S. Banking Structure continue to need prior Federal Reserve The Board of Governors administers the approval to acquire or establish addi- Bank Holding Company Act, the Bank tional banks. Merger Act, the Change in Bank Con- Bank holding companies that do not trol Act, and the International Banking become financial holding companies Act in relation to bank holding com- will be more restricted in the types of panies, member banks, and foreign nonbank activities in which they may banking organizations. In doing so, the engage, and they may need prior Federal Federal Reserve acts on a variety of Reserve approval to conduct those proposals that directly or indirectly activities. However, various streamlined affect the structure of U.S. banking at application processes remain available the local, regional, and national levels; to these companies. Since 1996, the act the international operations of domestic has permitted well-run bank holding banking organizations; and the US. companies that satisfy certain criteria to banking operations of foreign banks. commence certain nonbank activities on a de novo basis without prior Federal Reserve approval and has provided an Bank Holding Company Act expedited prior-notice procedure for Under the Bank Holding Company Act, other nonbank activities and for small a company must obtain the Federal bank and nonbank acquisitions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 141 When reviewing an application or companies to become bank holding notice that requires prior approval, the companies, 98 proposals by existing Federal Reserve must consider several bank holding companies to merge with factors, including the financial and other bank holding companies, 231 promanagerial resources of the applicant, posals by existing bank holding compathe future prospects of both the appli- nies to acquire or retain banks, 450 recant and the firm to be acquired, the quests by existing bank holding comconvenience and needs of the commu- panies to acquire or establish nonbank nity to be served, the potential public firms engaged in activities closely rebenefits, the competitive effects of the lated to banking, and 173 other bank proposal, and the applicant's ability to holding company-related applications or make available to the Board information notices. Data on these and all other decideemed necessary to ensure compliance sions are shown in the accompanying with applicable law. In the case of a table. foreign banking organization seeking to acquire control of a U.S. bank, the Fed- Bank Merger Act eral Reserve also considers whether the foreign bank is subject to comprehen- The Bank Merger Act requires that all sive supervision or regulation on a con- proposed mergers of insured depository solidated basis by its home country institutions be acted on by the approprisupervisor. ate federal banking agency. If the insti- In 1999 the Federal Reserve approved tution surviving the merger is a state 302 proposals by foreign or domestic member bank, the Federal Reserve has Decisions by the Federal Reserve on Domestic and International Applications, 1999 Action under authority delegated by the Board of Governors Direct action Proposal Board o b f y G th o e vernors Div D is ir io ec n t o o r f o B f a t n h k e ing O of f f t i h ce e Federal Total Supervision and Secretary Reserve Banks Regulation Approved Denied Permitted Approved Denied Approved Approved Permitted Formation of bank holding company 15 0 0 0 0 1 218 68 302 Merger of bank holding company 11 0 0 0 0 8 47 32 98 Acquisition or retention of bank 21 0 0 0 0 6 134 70 231 Acquisition of nonbank 0 0 146 0 0 26 0 278 450 Merger of bank 34 0 0 0 0 16 122 0 172 Change in control 0 1 2 0 0 0 0 138 141 Establishment of a branch, agency, or representative office by a foreign bank .... 17 0 0 00 0 90 26 Other 508 0 41 29 0 600 1,123 153 2,454 Total 606 1 189 29 0 657 1,653 739 3,874 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 86th Annual Report, 1999 primary jurisdiction. Before acting on a bank holding company to be acquired; proposed merger, the Federal Reserve determines the effect of the proposal on considers factors relating to the financial competition in any relevant market; asand managerial resources of the appli- sesses the completeness of information cant, the future prospects of the existing submitted by the acquiring person; and and combined institutions, the conve- considers whether the proposal would nience and needs of the community to have an adverse effect on the federal be served, and the competitive effects of deposit insurance funds. As part of this the proposal. It also considers the views process, the Federal Reserve may conof certain other agencies regarding the duct name checks on each acquiring competitive factors involved in the person. transaction. The appropriate federal banking agen- During 1999 the Federal Reserve cies are required to publish notice of approved 172 merger applications. As each proposed change in control and to required by law, each merger is invite public comment, particularly from described in this REPORT (in table 15 of persons located in the markets served by the "Statistical Tables" section). the institution to be acquired. When the FDIC, the OCC, or the In 1999 the Federal Reserve approved OTS has jurisdiction over a merger, the 140 proposed changes in control of state Federal Reserve is asked to comment on member banks and bank holding compathe competitive factors to ensure com- nies and denied 1. parable enforcement of the antitrust provisions of the Bank Merger Act. International Banking Act The Federal Reserve and those agencies have adopted standard terminology for The International Banking Act, as assessing competitive factors in merger amended by the Foreign Bank Supervicases to ensure consistency in adminis- sion Enhancement Act of 1991, requires tering the act. The Federal Reserve Federal Reserve approval for the estabsubmitted 635 reports on competitive lishment in the United States of factors to the other federal banking branches, agencies, commercial lending agencies in 1999. company subsidiaries, and representative offices by foreign banks. In reviewing proposals, the Federal Change in Bank Control Act Reserve generally considers whether the The Change in Bank Control Act re- foreign bank is subject to comprehenquires persons seeking control of a U.S. sive supervision or regulation on a conbank or bank holding company to obtain solidated basis by its home country approval from the appropriate federal supervisor. The System may also take banking agency before completing the into account whether the home country transaction. The Federal Reserve is re- supervisor has consented to the estabsponsible for reviewing changes in the lishment of the U.S. office; the financial control of state member banks and of condition and resources of the foreign bank holding companies. In doing so, bank and its existing U.S. operations; the Federal Reserve reviews the finan- the managerial resources of the foreign cial position, competence, experience, bank; whether the home country superand integrity of the acquiring person; visor shares information regarding the considers the effect of the proposal on operations of the foreign bank with other the financial condition of the bank or supervisory authorities; whether the for- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 143 eign bank has provided adequate assur- application to establish a new agreement ances that information concerning its corporation. operations and activities will be made available to the Board, if deemed neces- Applications by Member Banks sary to determine and enforce compliance with applicable law; and the record State member banks must obtain Fedof the foreign bank with respect to com- eral Reserve approval to establish pliance with U.S. law. domestic branches, and member banks In 1999 the Federal Reserve approved (including national banks) must obtain applications by nineteen foreign banks Federal Reserve approval to establish from thirteen foreign countries to estab- foreign branches. When reviewing prolish branches, agencies, and representa- posals for domestic branches, the Fedtive offices in the United States. eral Reserve considers the scope and character of the proposed banking activities to be conducted. When reviewing proposals for foreign branches, the Overseas Investments by Federal Reserve considers, among other U.S. Banking Organizations things, the condition of the bank and the U.S. banking organizations, with the bank's experience in international bankauthorization of the Federal Reserve, ing. Once a member bank has received may engage in a broad range of activi- authority to open a branch in a particular ties overseas. Most foreign investments foreign country, the member bank may may be made under general consent pro- open additional branches in that country cedures that involve only an after-the- without prior Federal Reserve approval. fact notification to the Board; significant In 1999 the Federal Reserve acted on investments must be reviewed in new and merger-related branch proposadvance by the Board. In 1999 the als for 2,042 domestic branches and Board approved fifty-eight proposals granted prior approval for the establish- (excluding those relating to recent large ment of 12 foreign branches (excluding domestic mergers) by U.S. banking those relating to recent large domestic organizations to make significant invest- mergers). ments overseas. The Federal Reserve also has author- Stock Repurchases by ity to act on proposals involving Edge Bank Holding Companies Act and agreement corporations, which are established by banking organiza- A bank holding company may repurtions to provide a means of engaging in chase its own shares from its shareholdinternational business. In 1999 the Fed- ers. When the company borrows money eral Reserve approved two applications to buy the shares, the transaction to establish new Edge corporations (one increases its debt and decreases its of which proposed to engage in foreign equity. Relatively larger repurchases exchange settlement activities) and one may undermine the financial condition application by a member bank to in- of a bank holding company and its bank crease its total investment in its Edge subsidiaries. The Federal Reserve may corporation subsidiaries to more than object to stock repurchases by holding 10 percent, but less than 20 percent, of companies that fail to meet certain stanthe bank's capital and surplus. In addi- dards, including the Board's capital tion, the Federal Reserve approved one guidelines. In 1999 the Federal Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 86th Annual Report, 1999 reviewed eighteen proposed stock repur- 1999, 82 percent of decisions met this chases by bank holding companies, all standard.2 of which were approved, under delegated authority, by either a Reserve Delegation of Applications Bank or the Secretary of the Board. Historically, the Board of Governors has delegated certain regulatory functions, including the authority to approve, but Public Notice of not to deny, certain types of appli- Federal Reserve Decisions cations, to the Reserve Banks, to the Director of the Board's Division of Most decisions by the Federal Reserve Banking Supervision and Regulation, that involve a bank holding company, a and to the Secretary of the Board. In bank merger, a change in control, or the 1999, 79 percent of the applications establishment of a new U.S. banking processed were acted on under delegated presence by a foreign bank are effected authority. by an order or an announcement. Orders state the decision, the essential facts of the application or notice, and the basis Banking and Nonbanking Proposals for the decision; announcements state Some of the largest U.S. banking organionly the decision. All orders and anzations were party to significant banking nouncements are made public immediproposals in 1999. The Board approved ately; they are subsequently reported two proposals by foreign banking orgain the Board's weekly H.2 statistical nizations to acquire large U.S. banking release and in the monthly Federal organizations. It also approved one Reserve Bulletin. The H.2 release also merger proposal by two bank holding contains announcements of applications companies operating in the same marand notices received by the Federal kets that required the largest level of Reserve but not yet acted on. For each branch divestitures ever considered by pending application and notice, the the Board. As with other large banking related H.2A contains the deadline for proposals, the Board received many comments. In 1999 the Board's public comments, particularly with respect to web site was expanded to include more Community Reinvestment Act, fair information relevant to the applications lending, and competitive issues. The process. Federal Reserve also continued to act on proposals involving mutual bank holding companies. Timely Processing of Applications The Board approved two proposals involving new nonbank activities during The Federal Reserve maintains internal the year. One proposal was by two institarget dates and procedures for the pro- tutions to own and operate an electronic cessing of applications. The setting of securities exchange. The other was by a target dates promotes efficiency at the group of foreign and domestic bank Board and the Reserve Banks and reduces the burden on applicants. The 2. If the data were adjusted for multiple related time frame for final action ranges from applications filed in connection with several larger twelve to sixty days, depending on merger proposals, the percentage would be the type of application or notice. In 94 percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 145 holding companies that sought to engage as credit obtained from foreign lenders in digital certification activities. The by U.S. citizens. Federal Reserve also approved various Several regulatory agencies enforce other securities-related proposals in- compliance with the Board's securities volving section 20 companies. credit regulations. The Securities and Exchange Commission, the National Association of Securities Dealers, and Enforcement of Other Laws the national securities exchanges examand Regulations ine brokers and dealers for compliance with Regulation T. The federal banking Financial Disclosure by agencies examine banks under their State Member Banks respective jurisdictions for compliance with Regulation U. The Farm Credit State member banks that issue securities Administration, the National Credit registered under the Securities Exchange Union Administration, and the Office of Act of 1934 must disclose certain infor- Thrift Supervision examine lenders unmation of interest to investors, including der their respective jurisdictions for financial reports and proxy statements. compliance with Regulation U; the Fed- By statute, the Board's financial disclo- eral Reserve examines other Regulasure rules must be substantially similar tion U lenders. to those of the Securities and Exchange Since 1990 the Board has published a Commission. At the end of 1999, twenty list of foreign stocks that are eligible for state member banks, most of them small margin treatment at broker-dealers on or medium size, were registered with the the same basis as domestic margin secu- Board under the Securities Exchange rities. In 1999, the foreign list was Act. revised in March and September. At the end of 1999, 839 lenders other than banks, brokers, or dealers were Securities Credit registered with the Federal Reserve; Under the Securities Exchange Act of of these, 577 were under the Federal 1934, the Board is responsible for regu- Reserve's supervision. The Federal lating credit in certain transactions Reserve regularly inspects 262 of these involving the purchase or carrying of lenders either biennially or triennially, securities. The Board's Regulation T according to the type of credit they limits the amount of credit that may be extend; 70 of the 262 were inspected in provided by securities brokers and deal- 1999 for compliance with Regulation U. ers when the credit is used to trade debt The remaining 315 lenders were exempt and equity securities. The Board's from periodic on-site inspections by the Regulation U limits the amount of credit Federal Reserve but were monitored that may be provided by lenders other through the filing of periodic regulatory than brokers and dealers when the credit reports. is used to purchase or carry publicly held equity securities if the loan is Bank Secrecy Act/ secured by those or other publicly held Anti-Money Laundering equity securities. The Board's Regulation X applies these credit limitations, or The regulation (31 CFR Part 103) implemargin requirements, to certain borrow- menting the Currency and Foreign ers and to certain credit extensions, such Transactions Reporting Act, also known Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 86th Annual Report, 1999 as the Bank Secrecy Act, requires banks money laundering as announced by the and other types of financial institutions Department of the Treasury in the to file certain reports and maintain cer- National Money Laundering Strategy tain records. These reports and records for 1999. The Federal Reserve also led include information concerning persons an interagency group that revised the involved in large currency transactions Suspicious Activity Report to make it as well as suspicious activity related less burdensome for filers, more useful to possible violations of federal law, to law enforcement, and Year 2000 including money laundering and other compliant. An interim form that is financial crimes. The act is regarded as a Year 2000 compliant was released midprimary tool in the fight against money year, and a new form incorporating all laundering, and its requirements deter the enhancements will be released in the money laundering by creating a paper first quarter of 2000. trail of financial transactions that helps In December 1998 the Federal law enforcement and regulators identify Reserve, along with the Office of the and trace the proceeds of illegal activity. Comptroller of the Currency, the Fed- In addition, pursuant to Regulation H, eral Deposit Insurance Corporation, and section 208.63, each banking organiza- the Office of Thrift Supervision, issued tion supervised by the Federal Reserve proposed rules that would have required must develop a written Bank Secrecy domestic and foreign banking organiza- Act compliance program that is for- tions to develop and maintain Know mally approved by the institution's Your Customer programs. The proposed board of directors. The compliance pro- rules were intended to provide guidance gram must (1) establish a system of to banks to facilitate and ensure their internal controls to ensure compliance compliance with existing federal reportwith the act, (2) provide for independent ing and recordkeeping requirements, compliance testing, (3) identify indi- such as those found in the Bank Secrecy viduals responsible for coordinating and Act. It was intended to help protect the monitoring day-to-day compliance, and integrity and reputation of the financial (4) provide training for appropriate per- services industry and assist the governsonnel. Through its examination pro- ment in its efforts to combat money cess, training, and other off-site mea- laundering and other illegal activities sures, the Federal Reserve monitors that might be occurring through financompliance with the Bank Secrecy Act cial institutions. After receiving more and Regulation H by the banking organi- than 15,000 comments from commuzations under its supervision. nity, regional and multinational banks, In 1999 the Federal Reserve contin- members of Congress, trade and indusued to provide expertise and guidance to try groups, and the public that viewed the Bank Secrecy Act Advisory Group, the proposed regulations as an invasion a committee established at the Depart- of personal privacy, among other issues, ment of the Treasury by congressional the Federal Reserve, along with the mandate to seek measures to reduce other agencies, withdrew the proposal. unnecessary Bank Secrecy Act burdens Through the Special Investigations and to increase the utility of data gath- Section of the Division of Banking ered under the act to regulators and law Supervision and Regulation, the Federal enforcement. In addition, the Federal Reserve has assisted in the investi- Reserve is continuing to participate in gation of money laundering activities, the governmentwide effort to deter including Operation Casablanca, which Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 147 Loans by State Member Banks tctheir Executive Officers, 1998 and 1999 Range of interest Period Number Amount (dollars) rates charged (percent) 1998 October 1-December 31 753 45,385,000 4.0-19.8 1999 January 1-March 31 764 51,396,000 4.0-18.0 April 1-June 30 752 63,852,000 4.9-19.8 July 1-September 30 722 157,568,000 2.0-18.0 SOURCE. Call Reports. involved a number of foreign banking Loans to Executive Officers organizations. The section has also Under section 22(g) of the Federal provided anti-money-laundering train- Reserve Act, a state member bank must ing to designated staff members at each include in its quarterly Call Report Reserve Bank, to the domestic banking information on all extensions of credit sector through trade association conferby the bank to its executive officers ences and seminars, and to representasince the date of the preceding report. tives of law enforcement agencies. The accompanying table summarizes Internationally, the section has this information. assisted the State Department by providing anti-money-laundering training and technical assistance to countries in Asia, Federal Reserve Membership eastern Europe and the newly independent states, South and Central America, At the end of 1999, 3,478 banks were and the Caribbean. Federal Reserve staff members of the Federal Reserve Sysmembers have also participated in tem. At that time, member banks were numerous multilateral international anti- operating 47,673 branches and acmoney-laundering initiatives sponsored counted for 41 percent of all commerby such groups as the G-7, the Financial cial banks in the United States and for Action Task Force, and the Asia Pacific 74 percent of all commercial banking Working Group on Money Laundering. offices. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

149 Federal Reserve Banks The Federal Reserve Banks devoted sig- Bank for International Settlements, the nificant attention in 1999 to preparing International Association of Insurance for the century date change. Efforts in Supervisors, and the International Orgathat area as well as other activities nization of Securities Commissions and affecting the Reserve Banks are de- chaired by Federal Reserve Vice Chairscribed in this chapter. man Roger Ferguson, served as the key forum for Y2K communications among financial market authorities around the Century Date Change globe. Representatives from more than The Federal Reserve was fully prepared 100 countries participated in the counfor the year 2000 rollover and on cil's activities, including developing the days before, during, and after the guidance papers to assist regulators, event experienced only minor problems issuing bulletins to share information, related to the date change. The extensive and attending regional meetings work of testing and preparing the criti- throughout the world. cal components and operational entities In 1999, the Federal Reserve focused that took place prior to the rollover on event management and continprevented major disruptions in Federal gency planning for the Y2K rollover. Reserve services to the nation's bank- System Communication Centers were ing and financial markets. All mission- established at the Federal Reserve Bank critical components were tested for of Boston and the Board of Governors, year 2000 compliance and put into with supporting Local Communication production during 1999. The Reserve Centers in each Reserve Bank to man- Banks continued to support extensive age information concerning the status of year 2000 testing by depository institu- Federal Reserve systems during the rolltions throughout the year. The Federal over event. The Federal Reserve tested Reserve also took steps to ensure an contingency scenarios to exercise all adequate supply of currency for the lines of communication and tested century rollover. responses to the scenarios to prepare By year-end 1999, more than 9,000 for the event. As the year came to an financial institutions had tested the ser- end, the Federal Reserve met increased vices they use with the Federal Reserve. demands for currency. These institutions included all of the As in 1998, the Federal Reserve con- System's major customers in terms of tinued to inform the public about plans volume and dollar amount of the trans- for addressing the year 2000 problem actions processed through the Fed- and continued to advise depository instieral Reserve. The Federal Reserve also tutions of the Federal Reserve's plans tested the automated payment services and schedules. The Federal Reserve proit provides to federal agencies, such as vided extensive information concerning the Social Security Administration, to its year 2000 activities to government ensure that banks could receive gov- oversight organizations, including the ernment payments. In 1999, the Joint U.S. General Accounting Office, the Year 2000 Council, sponsored by the House and Senate Banking Committees, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 86th Annual Report, 1999 The Benefits of the Federal Reserve's Year 2000 Preparations As a result of Y2K preparations, we have vividly seen how complex and interdependent our economic affairs have become, and this new awareness is already beginning to pay off in higher levels of efficiency and effectiveness. Edward W. Kelley, Jr.. Member, Board of Governors In the three years leading to the rollover tivity, better management of information to the new century, U.S. banking organiza- technology, and enhanced communication tions devoted considerable time, talent, and with and services to customers. Productivmoney to protecting their computer sys- ity improvements include the elimination tems from date-related glitches. They also of redundant applications, the standardizameasured and managed potential customer tion of operating environments, and the and counterparty risk and planned their adoption of better security procedures and responses to possible internal and external belter processes for implementing system disruptions or other unexpected events. upgrades. Improved processes for adopting Was the enormous effort worth it? U.S. changes ensure that changes are well tested Representative James Leach, chairman of and that controls provide assurance that the the House Committee on Banking and compiled application and source code are Financial Services, answered that ques- the same. Applications are running with tion with a definite "yes." In a letter to fewer bugs and fewer end-of-year or other Board Chairman Alan Greenspan, Leach operating problems. expressed Congress's gratitude to the Fed- Senior managers involved in the develeral Reserve for its leadership, both domes- opment of year 2000 programs for informatically and internationally, in preparing tion systems now better understand the the banking industry and financial system critical roles automated systems play in the for the century date change. Now, having success of business lines. And line managcome smoothly through the date change, ers, because they had to become more both the Federal Reserve and private-sector involved in meeting the technology needs banking organizations are finding that of their operations, now more fully appretheir preparations are yielding benefits that ciate the use of information technology as extend far beyond the absence of disrup- a business opportunity rather than a cost. tion on New Year's Day. This knowledge will be used to further improve services. For example, century change preparations improved risk-management structures Greater Efficiency and that can be used to monitor and control Better Management operational risk in the future. Similarly, For the Federal Reserve System, Y2K experience in monitoring risks to custompreparations have yielded greater produc- ers and counterparties and in assessing and the Office of Management and Bud- participated in the President's Y2K get. The Federal Reserve provided lead- Council activities. ership to the financial community, The Federal Reserve undertook three domestically and internationally, and major initiatives to prepare for cash Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 151 interdependcncics with sen- ice pro\ idcrs of disaster recovery plans will continue and will yield incremental efficiencies and that recovery of services to the central bank improved reliability. Finally, review and will remain a high priority for suppliers. extensive testing of business-resumption contingency plans resulted in contingency procedures that are more comprehensive, Plans for Technology more up-to-date, and more effective. The improvements that resulted from year 2000 preparations—improved risk assessment and contingency procedures, Other Long-Term Benefits better management of information technol- Federal Reserve customers, counterparties, ogy for efficiencies and customer service, and the public also benefited from year and enhanced communication—will also 2000 preparations. Communication efforts prove useful as the Federal Reserve broadto ease the public's concern about potential ens its use of information technology problems contributed to responsible public across business lines in order to identify behavior during the century rollover. And opportunities and control activities more close collaboration with banking organi- closely. Internet and e-commerce activities zations ensured that cash supplies were will expand significantly in the future; adequate to meet customer demand and emphasis will shift away from the simple that liquidity needs could be met quickly on-line delivery of existing services and through discount window operations. As a toward redefining business lines to take result, the public and the financial commu- full advantage of technology. Strengthennity retained a high level of confidence in ing lines of communication internally and the banking system, and there was neither with the banking community, with a spean abnormal demand for cash nor volatility cial focus on enhancing customer service, in payment systems. A spirit of coopera- will be an important part of the Federal tion and the ability to develop an effective Reserve's business strategy. communication strategy will be crucial Overall, preparations for the century date tools for future initiatives. change enhanced the Federal Reserve's Because of the close coordination with ability to respond to the needs of the banksuppliers and service providers during ing community and the public and to year 2000 preparations, technology ven- deliver new services. The greater public dors and telecommunications, electric util- trust in the banking system and in the fedity, and city services providers have a better eral Reserve's ability to manage the cenunderstanding of their critical role in main- tury rollover and continue operations sugtaining the continuity of central bank gests confidence that future challenges will operations. The stronger relationships with be met with a similar level of expertise. these firms should ensure that coordination demand associated with the year 2000 Y2K problems. Second, in an effort rollover. First, the fiscal year 1999 new- to address the possibility that remote currency print order was larger and more locations might need extra currency concentrated in the higher denomina- quickly, the Federal Reserve established tions than usual, so that there would be strategic inventory locations. The Fedample cash if the public chose to with- eral Reserve contracted with depository draw more currency in anticipation of institutions and armored carriers in loca- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 86th Annual Report, 1999 tions far from Reserve Bank offices to related to priced services were hold Federal Reserve notes for potential $775.7 million, including costs other emergency cash orders. Finally, the Fed- than profit imputed in the PSAF, resulteral Reserve increased its communica- ing in net income of $92.0 million. tion with several industries on the Y2K Priced services recovered 104.2 percent problem. Meetings, conference calls, of total costs, including $57.2 million surveys, and general exchanges of infor- of targeted return on equity associated mation were common between the Fed- with the PSAF. Over the past ten years, eral Reserve and depository institutions, the Reserve Banks have recovered foreign central banks, armored carriers, 101.1 percent of their priced services retail industries, and the public. costs, including the PSAF (table).3 Developments in Check Collection Federal Reserve Priced Services Federal Reserve Bank operating ex- The Monetary Control Act of 1980 penses and imputed costs for commerrequires that the Federal Reserve set cial check services in 1999 totaled fees for providing "priced services" to $649.8 million. Revenue from check depository institutions that, over the operations totaled $681.0 million, and long run, recover all the direct and indi- other income amounted to $26.3 milrect costs of providing the services as lion, resulting in net income of well as the imputed costs, such as the $57.5 million. income taxes that would have been The Reserve Banks handled 17.1 bilpaid and the pretax return on equity lion checks in 1999, an increase of that would have been earned had the 3.0 percent from 1998 (see table). The services been provided by a private volume of fine-sort checks, which are firm. The imputed costs and imputed presorted by the depositing banks profit are collectively referred to as according to paying bank, declined the private-sector adjustment factor 6.8 percent, compared with a 3.6 per- (PSAF).1 cent decrease in 1998. The volume of Overall, fees charged in 1999 for checks deposited that required processpriced services were lowered approxi- ing by the Reserve Banks increased mately 1.2 percent from 1998.2 Revenue 4.4 percent. from priced services was $835.9 mil- The Reserve Banks continued to lion, other income related to priced encourage electronic innovations that services was $31.7 million, and costs make the collection system more effi- 1. In addition to income taxes and targeted 3. Financial data reported throughout this return on equity, the PSAF is made up of three chapter—revenue, other income, cost, net income, imputed costs: interest on debt, sales taxes, and and targeted return on equity—can be linked to assessments for deposit insurance from the Fed- the pro forma statements at the end of this chapter. eral Deposit Insurance Corporation. Also allocated Other income is revenue from investment of clearto priced services are assets and personnel costs of ing balances, net of earnings credits, an amount the Board of Governors that are related to priced termed net income on clearing balances. Total cost services; in the pro forma statements at the end of is the sum of operating expenses, imputed costs this chapter, Board expenses are included in oper- (interest on debt, interest on float, sales taxes, and ating expenses and Board assets are part of long- the Federal Deposit Insurance Corporation assessterm assets. ment), imputed income taxes, and the targeted 2. Based on a chained Fisher ideal price index return on equity. Net income is revenue plus net not adjusted for quality changes. income on clearing balances minus total cost. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 153 Priced Services Cost Recovery, 1990-99 Millions of dollars, except as noted Operating Revenue from Targeted return Total Cost recovery Year servicesx im ex p p u e t n e s d e s c o a s n t d s2 on equity expenses (percent) 1990 746.5 684.3 33.6 717.9 104.0 1991 750.2 692.0 32.5 724.5 103.5 1992 760.8 710.7 24.9 735.6 103.4 1993 774.5 820.4 17.5 837.9 92.4 1994 767.2 760.2 21.0 781.2 98.2 1995 765.2 752.7 31.5 784.2 97.6 1996 815.9 746.4 42.9 789.3 103.4 1997 818.8 752.8 54.3 807.1 101.5 1998 839.8 743.2 66.8 809.9 103.7 1999 867.6 775.7 57.2 832.9 104.2 1990-99 7,906.5 7,438.2 382.2 7,820.4 101.1 1. Includes revenue from services of $7,684.8 million taxes of $249.3 million for the ten-year period. Also, and other income and expense (net) of $221.7 million for the effect of one-time accounting changes of $74.1 milthe ten-year period. lion and $19.4 million is included for 1993 and 1995 2. Includes operating expenses of $6,539.0 million, respectively. imputed costs of $556.4 million, and imputed income cient. In 1999,26.9 percent of all checks began evaluating the efficiency of the presented by the Reserve Banks to pay- environments for image-enhanced check ing banks were presented electronically processing. (approximately 3.2 billion), an increase In 1999, the Reserve Banks decided of 13.4 percent from 1998. Images of to standardize their check-processing 5.2 percent of checks presented by platforms across all forty-five check- Reserve Banks were captured, compared processing offices. The Reserve Banks with 3.9 percent in 1998. Check- believe that, over the long run, standardimaging pilot programs at the Utica, ized platforms will enable them to New York, and Helena, Montana, offices increase operating efficiency, reduce Activity in Federal Reserve Priced Services, 1999, 1998, and 1997 Thousands of items Percent change Service 1999 1998 1997 1998 to 1999 1997 to 1998 Commercial checks 17,075,008 16,573,463 15,949,152 3.0 3.9 Funds transfers 105,408 100,609 91,800 4.8 9.6 Securities transfers 5,147 5,115 4,136 .6 23.7 Commercial ACH 3,343,615 2,965,739 2,602,892 12.7 13.9 Noncash collection 613 755 887 -18.8 -14.8 Cash transportation 18 18 271 1.0 -32.6 NOTE. Components may not yield percentages shown of commercial items processed; in noncash collection, the because of rounding. Activity in commercial checks is the number of items on which fees are assessed; and in cash total number of commercial checks collected, including transportation, the number of registered mail shipments processed and fine-sort items; in funds transfers and and FRB-arranged armored carrier stops. securities transfers, the number of transactions originated 1. Restatement resulting from a change in definition or on line and off line; in commercial ACH, the total number to correct a previously reported error. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 86th Annual Report, 1999 costs, and improve the quality of service Depository institutions that do not provided to depository institutions. The have an electronic connection to the Reserve Banks' Retail Payments Prod- Fedwire funds transfer system can origiuct Office will continue to manage this nate transfers via "off-line" telephone long-term initiative. instructions. The volume of off-line Fedwire funds transfers has been declining substantially in recent years. Because of Fedwire Funds Transfer and the decline and the small percentage Net Settlement of transfers that are originated off line Reserve Bank operating expenses and (0.03 percent in 1999), the Federal imputed costs for Fedwire funds transfer Reserve began in 1998 to consolidate its and net settlement services totaled Fedwire off-line funds transfer opera- $61.3 million in 1999. Revenue from tions at the Federal Reserve Banks of these operations totaled $66.8 mil- Boston and Kansas City. The consolilion, and other income amounted to dation, completed in March 1999, has $2.3 million, resulting in net income of made it possible to streamline service $7.8 million. and ensures uniform service nationwide. To reflect more fully the costs of processing off-line transfers and to encour- Funds Transfer age off-line customers having higher The number of Fedwire funds transfers transfer volume to install electronic conoriginated by depository institutions nections, the off-line transaction surincreased 4.8 percent in 1999, to charge was increased in February from 105.4 million. $12.00 to $13.00. Fees for Fedwire funds transfers have declined nearly 50 percent since 1996. Net Settlement In January 1999, the Reserve Banks reduced the basic transfer fee from The Reserve Banks provide settlement $0.40 to $0.34. In February, the Banks services to approximately 100 local introduced a volume-based pricing and national private-sector clearing structure for the funds transfer service and settlement arrangements. In 1999, that takes into account the scale econo- the Reserve Banks processed about mies achieved by centralized processing 361,000 settlement entries for these and recognizes differences in demand arrangements. for large-value transfers. The pricing The Federal Reserve offers three structure is similar to those used by types of settlement services. In the other domestic and international large- "settlement sheet" service, the settlevalue transfer systems. In 1999, the ment agent for a clearinghouse provides basic per-transfer fee of $0.34 was a settlement sheet to a Reserve Bank. charged for the first 2,500 funds trans- The Reserve Bank posts net debit and fers originated and received by a deposi- credit entries to the accounts of the settory institution each month; a per- tling participants. The entries are provitransfer fee of $0.27 was charged for sional until the banking day after settleadditional transactions up to 80,000 ment. In the Fedwire-based settlement transfers each month; and a per-transfer service, the clearinghouse uses a zerofee of $0.21 was assessed for every balance settlement account to receive transaction after 80,000 transfers each and send Fedwire funds transfers to month. settle participants' obligations. Fedwire Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 155 funds transfers are final and irrevoca- The Reserve Banks processed ble when processed. In March 1999, 5.1 million transfers of government the Reserve Banks implemented an agency securities on the Fedwire bookenhanced settlement service that offers entry securities transfer system during finality characteristics similar to those the year, an increase of 1.2 percent from of the Fedwire funds transfer service 1998.4 and provides settlement arrangements In February, the Reserve Banks that include an automated mechanism implemented a fee structure for the for submitting settlement files to the book-entry service that splits the basic Reserve Banks. This enhanced settle- transfer fee equally between the originament service improves operational effi- tor and the receiver of a securities transciency and reduces settlement risk to fer (rather than charge the entire transparticipants by granting settlement final- fer fee to the originator). The fee for an ity on the settlement day. It also enables on-line Fedwire book-entry securities the Reserve Banks to manage and limit transfer was reduced to $0.85, a 24 perrisk by incorporating risk controls that cent reduction from 1998. Changing the are as robust as those used in the Fed- on-line transfer fee to a fee assessed wire funds transfer service. The Reserve on both senders and receivers more Banks will continue to offer the accurately aligns the costs and benefits Fedwire-based settlement service. The to participants in a transfer. In July, settlement sheet service, however, will the Reserve Banks began applying be phased out gradually, and all partici- an account-maintenance fee of $15 to pating arrangements will need to move each joint-custody securities account to the enhanced service by year-end held by a customer, rather than to just 2001. the customer's master account.5 In 1999, the fees and fee structure for the settlement sheet and the enhanced settlement services were revised by low- 4. The revenues, expenses, and volumes reported here are for transfers of securities issued ering the per-entry fee from $1.00 to by federal government agencies, government- $0.95, introducing a settlement file fee sponsored enterprises, and international instituof $12.00, increasing both the off-line tions such as the World Bank. The Fedwire booksurcharge and the telephone notification entry securities service also provides custody, transfer, and settlement services for US Treasury surcharge from $10.00 to $13.00, and securities. The Reserve Banks act as fiscal agents introducing a minimum monthly fee of of the United States when they provide transfer $60. Fees for the Fedwire-based settle- and safekeeping of U.S. Treasury securities, and ment service were not changed. the Treasury Department assesses fees on depository institutions for some of these services. For more details, see the section "Fiscal Agency Services" later in this chapter. Fedwire Book-Entry Securities 5. Before the conversion of all Reserve Banks to the National Book-Entry System (NBES), Reserve Bank operating expenses account maintenance fees for joint custody securities accounts were different across the Reserve and imputed costs for the Fedwire Banks. During the transition to NBES, the interim book-entry securities service totaled pricing practice for these accounts was standard- $13.9 million in 1999. Revenue from ized to charge one account-maintenance fee per these operations totaled $16.7 mil- customer regardless of the number of pledgees. This interim practice achieved consistency and lion, and other income amounted to minimized the effect on customers converting to $0.6 million, resulting in net income of the new system but resulted in reduced revenue $3.4 million. and incomplete recovery of processing costs. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 86th Annual Report, 1999 Depository institutions that do not In May, the Board requested comhave an electronic connection to the ments on the effect of modifying the Fedwire securities transfer system can Reserve Banks' pricing practices and originate transfers via "off-line" tele- deposit deadlines for ACH transactions phone instructions. The volume of off- they exchange with private-sector operaline Fedwire securities transfers has tors. Board staff members met with been declining substantially in recent commenters in December to further disyears. Because of the decline and the cuss private-sector-operator issues. small percentage of transfers that are In November, the Board approved originated off line (0.19 percent in modifications to the settlement finality 1999), the Federal Reserve began in for ACH credit transactions processed 1998 to consolidate its Fedwire off-line by the Reserve Banks. This approval, securities transfer operations at the which will become effective in early Federal Reserve Banks of Boston and 2001, makes settlement final when Kansas City. The consolidation, com- posted to depository institutions' acpleted in March 1999, has made it pos- counts. To lower settlement risk, presible to streamline service and ensures funding will be required for those ACH uniform service nationwide. In 1999, the credit transactions that are settled $10 off-line securities transfer fee was through a Federal Reserve account that converted to an off-line surcharge and is monitored in real time. was increased to $13 to be consistent with the off-line surcharge in the Fed- Noncash Collection wire funds transfer and net settlement services. Reserve Bank operating expenses and imputed costs for noncash collection services totaled $2.0 million in 1999. Automated Clearinghouse Revenue from noncash operations totaled $2.9 million, and other income Reserve Bank operating expenses and amounted to $0.1 million, resulting in imputed costs for commercial automated net income of $1.0 million. The Jackclearinghouse (ACH) services totaled sonville Branch of the Federal Reserve $55.9 million in 1999. Revenue from Bank of Atlanta, which is the Reserve ACH operations totaled $65.5 mil- Banks' centralized processing site for lion, and other income amounted to this service, processed 613,000 noncash $2.3 million, resulting in net income of collection items (coupons and bonds), a $11.9 million. The Reserve Banks prodecrease of 18.8 percent from 1998. cessed 3.3 billion ACH transactions, an increase of 12.7 percent from 1998. Fees for originating ACH transactions Cash Services were reduced $0.0005 per transaction in Because providing high-quality cur- August. The reduction amounted to a rency and coin is a basic responsibility decrease of 8.5 percent for originating a of the Federal Reserve, the Reserve large file and 7.1 percent for originating Banks charge fees only for special cash a small file. services and nonstandard access.6 Spe- The Reserve Banks continued to cial cash services represent a very small encourage the growth of electronic payments by participating during 1999 in 6. Nonstandard access is not treated as a priced an ACH cross-border pilot program service; instead, fees for nonstandard access are between the United States and Canada. treated as a recovery of expenses. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 157 portion (less than 1 percent) of the cost Developments in of overall cash services provided by the Currency and Coin Reserve Banks to depository institutions; these services include the provi- The Federal Reserve experienced sion of wrapped coin, packaging of non- unprecedented demand for coin in 1999, standard cufrency orders and deposits as when the Mint and the Federal Reserve well as coin deposits, and shipping of paid out more than $5.8 billion in coin, currency and coin by registered mail. an 8.1 percent increase from 1998 and The Cleveland District and the Helena a 20.0 percent increase from 1997. The Branch of the Minneapolis Reserve Federal Reserve worked closely with the Bank provide wrapped coin as a priced Mint to move coin inventories around service. The Chicago District provides the System, replenishing low stocks at currency in nonstandard packages, the certain Reserve Bank offices. Rather Helena Branch provides coin in non- than have each office maintain its own standard packages, and the El Paso coin inventories, the Reserve Banks' Branch provides nonstandard packag- Cash Fiscal Product Office, located at ing of same-day express cash orders. the Federal Reserve Bank of Philadel- In addition, five Districts provide phia, began the centralized management cash transportation by registered mail. of coin. This effort will ensure an equi- Reserve Bank operating expenses and table supply of coin among the twelve imputed costs for special cash services Reserve Banks. totaled $2.8 million in 1999. Revenue Contributing to the greater demand from cash operations totaled $2.9 mil- for coin in 1999 was the beginning of lion, and other income amounted to the Mint's 50 State Quarters program. $0.1 million, resulting in net income of The Mint produced five different quar- $0.2 million. ters in 1999, and the quarters were very popular with the public. Historically, the Float Mint produces about 1.5 billion quarters every year. The original forecast of need Federal Reserve float decreased in 1999 in 1999 was 3.5 billion, but the Mint to a daily average of $584.4 million, had to increase production to 5 billion from a daily average of $632.7 million because of the extraordinarily high in 1998.7 The Federal Reserve recovers demand. the cost of float associated with priced Strong economic growth and robust services as part of the fees for those retail sales in 1999 were probably also services. factors in the increase in demand for all denominations of coin. Because of continued prosperity, consumers may not 7. The measure of Federal Reserve float used here is different from that used in previous years; feel the need to spend the extra coin it has been changed to make the figures more they hold, thus reducing the amount of comparable to those reported in the Board's coin in circulation. weekly statistical releases. In previous years, daily In fiscal year 1999, the Federal average float was shown net of float recovered through deposit adjustments; if the data here were Reserve directed the Bureau of Engravcalculated as in previous years, the figures for float ing and Printing to print 11.4 billion in 1999 and 1998 would be $199.1 million and notes, an increase of nearly 24 percent $323.6 million respectively. See footnote 6 of the from its fiscal 1998 order. As part of the pro forma financial statements at the end of this Federal Reserve's preparations for the chapter for detailed information on Federal Reserve float. century date change, each Reserve Bank Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 86th Annual Report, 1999 office increased its volume of currency The Reserve Banks establish uniform available for potential increased pay- and consistent practices for accountments to depository institutions. ing for, reporting of, and billing for the full costs of providing fiscal agency and depository services to the U.S. gov- Developments in ernment. In 1999, the Reserve Banks Fiscal Agency and requested reimbursement by the Trea- Government Depository Services sury and other government agencies The Federal Reserve Act provides that of $294.8 million in fiscal agency and when required by the Secretary of the depository expenses, a decrease of Treasury, Reserve Banks will act as fis- $2.7 million from 1998. cal agents and depositories of the United The Reserve Banks also worked with States. As fiscal agents, Reserve Banks federal agencies to restructure certain provide the Department of the Treasury Federal Reserve services. The objecwith services related to the federal tive was to assess services that are debt. For example, they issue, transfer, conducted at more than one location, reissue, exchange, and redeem market- such as the redemption of Treasury and able Treasury securities and savings agency interest coupons, and to centralbonds; they also process secondary mar- ize these operations to reduce expenses. ket transfers initiated by depository Some of these projects will be impleinstitutions. As depositories, Reserve mented in 2000. Banks collect and disburse funds on behalf of the federal government. They also provide fiscal agency services on Fiscal Agency Services behalf of several domestic and interna- The Reserve Banks handle marketable tional government agencies. Treasury securities and savings bonds The Reserve Banks spent much of and monitor the collateral pledged by 1999 preparing for a smooth transition depository institutions to the federal into the year 2000. They worked with government. the Treasury and other government agencies, including the Department of Marketable Treasury Securities Defense, the Social Security Administration, and the Department of Veterans Reserve Bank 1999 operating expenses Affairs, to ensure the payment of gov- for activities related to marketable Treaernment benefits into the new year sury securities totaled $74.8 million, a and to support the Treasury's debt- 2.5 percent increase from 1998. The management program. These efforts Banks processed nearly 253,000 comwere part of the extensive planning pro- mercial tenders for government securicess that contributed to the successful ties in Treasury auctions, a 20.1 percent transition into the new century. decline from 1998. Commercial tenders The total cost of providing fiscal are processed at the New York, Chicago, agency and depository services to the and San Francisco Reserve Banks using Treasury in 1999 amounted to $255.6 a common automated application known million, compared with $250.9 million as the Treasury Automated Auction Proin 1998 (table). The cost of providing cessing System. services to other government agencies The Reserve Banks operate two bookwas $39.3 million, compared with entry securities systems for Treasury $46.6 million in 1998. securities: the Fedwire book-entry secu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 159 Expenses of Federal Reserve Banks for Fiscal Agency and Depository Services, 1999, 1998, and 1997 Thousands of dollars Agency and service 1999 1998 1997 DEPARTMENT OF THE TREASURY Bureau of the Public Debt Savings bonds 70,285.8 71,401.8 70,340.4 Treasury Direct 40,446.2 35,859.1 35,440.4 Commercial book entry 15,744.2 17,880.4 26,809.4 Marketable Treasury issues 13,715.1 15,530.5 14,855.4 Definitive securities and Treasury coupons 4,886.7 3,734.2 3,618.9 Other services 100.4 83.7 n.a. Total 145,178.4 144,489.7 151,064.5 Financial Management Service Treasury tax and loan and Treasury general account 34,971.0 35,428.2 35,265.9 Government check processing 33,365.4 34,096.4 26,548.0 Automated clearinghouse 11,263.4 11,716.0 14,477.3 Government agency check deposits 2,422.7 2,731.0 2,795.3 Fedwire funds transfers 187.7 186.3 422.0 Other services 20,423.5 16,045.2 20,994.2 Total 102,633.7 100,203.1 100,502.7 Other Treasury Total ...' 7,786.8 6,237.6 3,840.0 Total, Treasury 255,598.9 250,930.4 255,407.2 OTHER FEDERAL AGENCIES Department of Agriculture Food coupons 18,643.9 24,452.4 25,495.7 U.S. Postal Service Postal money orders 6,623.3 5,275.3 6,108.7 Miscellaneous agencies Other services 13,983.0 16,850.6 17,042.1 Total, other agencies 39,250.2 46,578.3 48,646.5 Total reimbursable expenses 294,849.1 297,508.7 304,053.7 n.a. Not available. rities system, which provides custody decline from 1998. They also processed and transfer, and Treasury Direct, which 26.6 million interest and principal payprovides custody services only.8 Almost ments for Treasury and government all book-entry Treasury securities, agency securities, a decrease of 0.2 per- 97.4 percent of the total par value out- cent from 1998. standing at year-end 1999, were main- Treasury Direct, operated by the tained on Fedwire; the remainder were Philadelphia Reserve Bank, is a system maintained on Treasury Direct. of book-entry securities accounts for The Reserve Banks in 1999 pro- institutions and individuals planning to cessed 8.1 million Fedwire transfers hold their Treasury securities to matuof Treasury securities, a 9.0 percent rity. The Treasury Direct system holds more than 721,000 accounts. During 1999, the Reserve Banks processed 8. The Fedwire book-entry securities mechanism is also used for safekeeping and transfer of nearly 239,000 tenders for Treasury securities issued by federal government agencies, Direct customers seeking to purchase government-sponsored enterprises, and interna- Treasury securities at Treasury auctions tional institutions. For more details, see the section and handled 0.6 million reinvestment "Fedwire Book-Entry Securities" earlier in this chapter. requests; the number of tenders was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 86th Annual Report, 1999 22.7 percent lower than in 1998, and tion. In 1998, the Treasury started to the number of reinvestment requests expand the services offered to investors was 45.5 percent lower. The Philadel- electronically; for example, individuals phia Reserve Bank issued 6.4 million can purchase Treasury securities and payments for discounts, interest, and savings bonds on the Treasury's web redemption proceeds; the Treasury site, and investors can use a touch-tone Direct facility was also used to origi- telephone to reinvest their maturing nate 2.8 million payments for savings Treasury securities or to request statebonds and more than 41,000 interest ments of account. Throughout the sumpayments for definitive (paper) Treasury mer, the Reserve Banks conducted an issues. extensive information program to reduce In May, the Reserve Banks started the effect on walk-in customers. working with Treasury to reduce the As a service to Treasury Direct invesnumber of sites that provide Treasury tors, the Chicago Reserve Bank, through Direct customer service from thirty- the Sell Direct program, continued seven to three—Boston, Minneapolis, to sell investors' Treasury securities and Dallas—and to enhance customer on the secondary market for a fee. service for Treasury Direct investors. In Sell Direct's second full year, the A few Treasury Direct offices moved Bank sold nearly 16,000 securities their investors' accounts to new ser- worth $581.2 million, compared with vicing locations in 1999, but the more than 16,000 securities worth majority will move sometime in 2000. $510.6 million in 1998. The Bank By 2001, all applications to purchase, collected almost $535,000 in fees on reinvest, and redeem Treasury securities behalf of the Treasury, a decrease of will go to one of the three consolidated 2.7 percent from the $550,000 in fees sites, where they will receive the same collected in 1998. quality and type of service as before. The Philadelphia Reserve Bank will Savings Bonds continue to operate the Treasury Direct application. Reserve Bank operating expenses for As part of the Treasury Direct con- savings bond activities totaled $70.3 solidation, the Reserve Banks began to million in 1999, a decrease of 1.5 perdesign automation support for a toll-free cent from 1998. The Banks printed and customer contact center for Treasury mailed 40.5 million savings bonds on Direct customers. The center will route behalf of the Treasury's Bureau of the calls to a variety of electronic services Public Debt, a 10.3 percent decline available from the Treasury or connect from 1998. In the first full year that the investor to the next available agent the inflation-indexed Series I savings at one of the three Reserve Banks, bond was offered, the Reserve Banks regardless of the caller's location. processed nearly 160,000 original-issue At the Treasury's direction, the transactions for the Series I savings Reserve Banks eliminated walk-in ser- bond and 7.0 million original-issue vices for Treasury securities and savings transactions for the Series EE savings bond investors in September. Only a few bond. They also processed approxicustomers were using this costly ser- mately 550,000 redemption, reissue, and vice, and the number of Federal Reserve exchange transactions, a 9.0 percent offices that processed these transactions decrease from 1998. The Reserve Banks was declining as a result of consolida- responded to 1.6 million service calls Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 161 from owners of savings bonds, approxi- 1998 to 1999, and the volume of mately the same number as in 1998. tax payments submitted electronically The Reserve Banks continued to decreased 4.0 percent. The Reserve enhance the automation aspects of Banks also received a small number of savings bond processing. Following a tax payments directly. successful pilot program in 1998, all Depository institutions that receive savings bond processing sites imple- tax payments may either place the funds mented digital scanning software, in a Treasury tax and loan (TT&L) which converts paper applications sub- account or remit the funds to a Reserve mitted by banks across the country into Bank. The Federal Reserve controls the an electronic medium. Work also contin- collateral pledged to secure federal tax ued on a distributed processing auto- payment deposits held by depository mation platform for savings bonds institutions. The Minneapolis Reserve to replace several current mainframe Bank operates an automated system applications. through which businesses pay taxes that Savings bond operations are con- are due on the same day the tax liability ducted at five Reserve Bank offices: is determined. These electronic tax pay- Buffalo, Pittsburgh, Richmond, Minne- ments, a part of the Treasury's Elecapolis, and Kansas City. All five offices tronic Federal Tax Payment System process transactions, but only the Pitts- (EFTPS), are invested in depository burgh and Kansas City offices print and institutions' TT&L balances via the mail savings bonds. Federal Reserve's TT&L mechanism. In 1999, this electronic tax application processed approximately 164,000 tax Depository Services payments from 7.8 million taxpayers totaling $201.0 billion. Approximately The Reserve Banks maintain the Trea- 93.6 percent of business taxes are colsury's funds account, accept deposits lected electronically. Most EFTPS payof federal taxes and fees, pay checks ments are made via ACH to accounts drawn on the Treasury's account, and maintained by two commercial banks as make electronic payments on behalf of Treasury's financial agents. the Treasury. In 1999, work continued on a new automated program to be implemented in mid-2000, the Treasury Investment Federal Tax Payments Program (TIP), which will replace the Reserve Bank operating expenses re- twelve existing TT&L applications lated to federal tax payment activities in with a single application and database. 1999 totaled $35.0 million. The Banks Besides centralizing this function, TIP processed approximately 44,000 paper also provides the Treasury with investand 4.8 million electronic advices ment capabilities. The new program will of credit from depository institutions process only electronic tax payments, handling tax payments for businesses which constitute most business tax payand individuals. Advices of credit are ments today. A separate application, notices from depository institutions to called Patax (paper tax processing the Federal Reserve and the Treasury system), will automate the handling that summarize taxes collected on a of paper tax payments. The St. Louis given day. The volume of paper advices Reserve Bank, acting on behalf of all of credit declined 80.9 percent from the Reserve Banks, will truncate paper Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

162 86th Annual Report, 1999 tax coupons when the TIP application is time purchasers of government securiimplemented. ties through Treasury Direct. In 1999, the Reserve Banks continued to operate the check-imaging system, Payments Processed for the Treasury implemented in 1998, that captures and Reserve Bank operating expenses re- stores digital images of all U.S. governlated to government payment operations ment checks for the Treasury's Finanin 1999 amounted to $47.2 million. The cial Management Service. This service Treasury continued to encourage elec- improves processing efficiency for the tronic payments: ACH transactions pro- U.S. Treasury and lowers its operatcessed for the Treasury amounted to ing costs. In 1999, the Reserve Banks 823.6 million, an increase of 9.4 per- imaged 80.1 percent of all the U.S. govcent from 1998. Most government pay- ernment checks they processed, comments made via the ACH are social pared with 42.3 percent in 1998. security, pension, and salary payments; some are payments to vendors. All Services Provided to Other Entities recurring Treasury Direct payments and many definitive securities interest pay- The Reserve Banks provide fiscal ments are made via the ACH. agency and depository services to other In support of the Treasury's effort domestic and international agencies to make payments electronically, the when they are required to do so by the Federal Reserve Bank of Dallas imple- Secretary of the Treasury or when they mented Electronic Transfer Accounts in are required or permitted to do so by 1999. The accounts give beneficiaries of federal statute. Depending on the federal payments who do not have bank authority under which the services are accounts access to low-cost transaction provided, the Reserve Banks may accounts at federally insured depository (1) maintain book-entry accounts of institutions. The Dallas Bank will man- government agency securities and age enrollment of depository institutions handle their transfer,9 (2) provide custhat want to provide these accounts and tody for the stock of unissued definitive will help payment recipients and others securities, (3) maintain and update ballocate institutions that are authorized to ances of outstanding book-entry and offer the accounts. definitive securities for issuers, (4) per- The Treasury continues to reduce the form various other securities-servicing number of payments it makes by paper activities, (5) maintain funds accounts check. The Reserve Banks processed for some government agencies, and 288.2 million paper government checks (6) provide various payments services. in 1999, a decrease of 10.3 percent One such service is the provision from 1998. The Banks also issued of food coupon services for the U.S. nearly 609,000 paper fiscal agency Department of Agriculture. Reserve checks, a decrease of 22.5 percent from Bank operating expenses for food cou- 1998. Fiscal agency checks were used pon services in 1999 totaled $18.6 milprimarily to pay semiannual interest on lion, 24.1 percent lower than in 1998. registered, definitive Treasury notes and bonds and on Series H and HH savings 9. The Federal Reserve tracks the transfer and bonds; some were used to pay the prin- account maintenance of agency securities as a priced service to depository institutions. No cipal of matured securities and coupons expenses of providing these services to depository and to make discount payments to first- institutions are charged to the agencies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 163 The Banks redeemed 1.2 billion food The new network will improve the coupons, a decrease of 33.3 percent speed, reliability, and performance of from 1998. As a result of the Depart- depository institutions' electronic conment of Agriculture's program to pro- nections during contingencies and will vide benefits electronically, the volume provide the capacity and flexibility to of paper food coupons redeemed by support new electronic services that will the Reserve Banks is expected to con- use web-based technologies. The new tinue to decline. In 1999, the Richmond network will also enable the Federal Reserve Bank helped facilitate the elimi- Reserve to introduce efficiencies into nation of paper food coupons through its its internal IT operations by facilitating Account Management Agent software, further standardization and consolidawhich monitors funding requests for tion of processing resources. electronic benefit transfer and reports In 1999, the Federal Reserve compayment activity. pleted installation of Triple DES, As fiscal agents of the United States, an advanced application of the Data the Reserve Banks also process all Encryption Standard (DES), on its interpostal money orders deposited by banks nal network and deployed Triple DES for collection. The Reserve Banks to approximately 12,000 Fedline conprocessed 225.9 million postal money nections, which give depository instiorders in 1999, 6.2 percent more than in tutions access to a variety of Federal 1998. Much of this work is centralized Reserve services. The Federal Reserve at the St. Louis Reserve Bank. In 1999, adopted Triple DES as its encryption that Bank worked with the U.S. Postal method in 1998 to strengthen protection Service to design an image-capture ser- of information transmitted electronically vice for postal money orders, similar among Reserve Banks and to depository to the service provided for Treasury institutions. As part of the frame relay checks. When the Bank implements this network conversion, those depository service in 2000, the digital files of paid institutions that connect to the Federal money orders will facilitate the Postal Reserve via computer interface will be Service's accounting, reconcilement, converted to Triple DES. and claims processes. During 1999, several depository institutions participated in a successful pilot program of Fedline for Windows Information Technology (FLW). Concurrent with application Although year 2000 preparations domi- testing, a significant effort was undernated Federal Reserve information tech- taken to improve the security of the new nology activities in 1999, a number of FLW platform. The security enhancestrategic initiatives were undertaken to ments are directed at authenticating improve the IT infrastructure over the FLW operators, encrypting informanext several years. In 1999, the Federal tion, and interconnecting FLW with the Reserve initiated a plan to modernize administrative systems of depository the current telecommunications net- institutions. Conversion of dial customwork, Fednet, that supports both exter- ers from the Federal Reserve's current nal electronic connections between the DOS Fedline platform to the new FLW Federal Reserve and depository insti- platform is expected to begin in late tutions and internal communications 2000. Deployment of FLW will also among Reserve Banks: Fednet will be enable the Federal Reserve to complete upgraded with frame relay technology. its Triple DES initiative. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

164 86th Annual Report, 1999 Reserve Banks continue to make In 1999, the division's attentions at significant progress in using the World the Reserve Banks focused on rendering Wide Web as a service-delivery chan- an opinion, using a format consistent nel. The Federal Reserve is develop- with the integrated COSO framework, ing an overall strategy for providing on each District's internal control sysaccess to services through web browser tem. The scope of these examinations interfaces. In 1999, the Federal Reserve included comprehensive reviews of each planned the implementation of a public Bank's internal control system in terms key infrastructure strategy to secure of the five COSO control components: external access to its services. Deposi- control environment, risk assessment, tory institutions are currently con- control activities, information and comducting pilot programs of check- munication, and monitoring. imaging, cash services, Treasury auc- Each year, to assess compliance with tion, and statistical-reporting web-based the policies established by the Federal applications. Reserve's Federal Open Market Committee (FOMC), the division examines the accounts and holdings of the System Financial Examinations of Open Market Account at the Federal Federal Reserve Banks Reserve Bank of New York and the Section 21 of the Federal Reserve Act foreign currency operations conducted requires the Board of Governors to order by that Bank. In addition, a public an examination of each Federal Reserve accounting firm certifies the schedule of Bank at least once a year; the Board participated asset and liability accounts assigns this responsibility to its Division and the related schedule of participated of Reserve Bank Operations and Pay- income accounts at year-end. Division ment Systems. The Board engages a personnel follow up on the results of public accounting firm to perform an these audits. The FOMC receives the annual audit of the combined financial external audit reports and the report on statements of the Reserve Banks (see the division's follow-up. the section "Federal Reserve Banks Combined Financial Statements"). The Income and Expenses public accounting firm also audits the annual financial statements of each of The accompanying table summarizes the the twelve Banks. The Reserve Banks income, expenses, and distribution of use the framework established by the net earnings of the Federal Reserve Committee of Sponsoring Organizations Banks for 1998 and 1999. of the Treadway Commission (COSO) Total income in 1999 was in assessing their internal controls over $29,347 million, compared with financial reporting, including the safe- $28,149 million in 1998. In 1999, total guarding of assets. Within this frame- income included revenue from fees work, each Reserve Bank annually pro- for the provision of priced services of vides an assertion letter to its board of $836 million. Total expenses were directors confirming adherence to the $2,552 million ($1,532 million in oper- COSO standards, and a public account- ating expenses, $321 million in earnings ing firm certifies management's asser- credits granted to depository institutions, tion and issues an attestation report to $485 million in assessments for the cost the Bank's board of directors and to the of new currency, and $214 million in Board of Governors. assessments for other expenditures by Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 165 Income, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 1999 and 1998 Millions of dollars Item 1999 1998 Current income 29,347 28,149 Current expenses 1,852 1,833 Operating expenses! 1,532 1,487 Earnings credits granted 321 346 Current net income 27,495 26,316 Net additions to (deductions from, - ) current net income -526 1,914 Cost of unreimbursed services to Treasury 8 8 Assessments by the Board of Governors 699 587 For expenditures of Board 214 178 For cost of currency 485 409 Net income before payments to Treasury 26,262 27,636 Dividends paid 374 343 Transferred to surplus 479 732 Payments to Treasury2 25,410 26,561 NOTE. In this and the following table, components 1. Includes a net periodic credit for pension costs of may not sum to totals because of rounding. $367 million in 1999 and $288 million in 1998. 2. Interest on Federal Reserve notes. the Board of Governors). Unreimbursed tion of dividends paid and of the amount expenses for services provided to the necessary to bring the surplus of the Treasury and other government entities Reserve Banks to the level of capital amounted to $8 million.10 paid in. The profit and loss account showed In the "Statistical Tables" section of a net loss of $526 million. The loss was this REPORT, table 5 details the income due primarily to unrealized losses on and expenses of each Reserve Bank for assets denominated in foreign curren- 1999, and table 6 shows a condensed cies revalued to reflect current market statement for each Bank for 1914-99. A exchange rates. Statutory dividends paid detailed account of the assessments and to member banks totaled $374 million, expenditures of the Board of Governors $31 million more than in 1998; the appears in the section "Board of Goverincrease reflects an increase in the capi- nors Financial Statements." tal and surplus of member banks and a consequent increase in the paid-in capital stock of the Reserve Banks. Holdings of Securities Payments to the Treasury in the form and Loans of interest on Federal Reserve notes The Reserve Banks average daily holdtotaled $25,410 million in 1999, down ings of securities and loans during 1999 from $26,561 million in 1998; the payamounted to $495,606 million, an ments equal net income after the deducincrease of $48,511 million from 1998 (see table). Holdings of U.S. govern- 10. The Reserve Banks bill the Treasury and ment securities increased $48,451 milother government entities for the cost of certain lion, and holdings of loans increased services, and the portions of the bills that are not paid are reported as unreimbursed expenses. $60 million. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 86th Annual Report, 1999 Securities and Loans of Federal Reserve Banks, 1997-99 Millions of dollars, except as noted U.S. Item and year Total government Loans 2 securities1 Average daily holdings3 1997 417,805 417,529 277 1998 447,095 446,933 161 1999 495,606 495,384 221 Earnings 1997 25,714 25,699 15 1998 26,851 26,842 9 1999 28,227 28,216 11 Average interest rate (percent) 1997 6.15 6.16 5.27 1998 6.01 6.01 5.44 1999 5.70 5.70 5.02 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. The average rate of interest earned Salt Lake City Branches. Other multion the Reserve Banks' holdings of gov- year renovation programs continued at ernment securities declined to 5.70 per- the New York Bank's headquarters cent from 6.01 percent in 1998, and building and the San Francisco Bank's the average rate of interest earned on Seattle Branch. loans declined to 5.02 percent from The multiyear leasehold improve- 5.44 percent. ments program continued for the New York Reserve Bank's new leased office facility in New York City, and some Volume of Operations staff members have moved into the new Table 8 in the "Statistical Tables" sec- offices. The Kansas City Bank contintion shows the volume of operations in ued to analyze options for expanding its the principal departments of the Federal headquarters parking facility. Reserve Banks for the years 1995 The Board of Governors approved the through 1999. installation of exterior security enhancements for the Richmond Reserve Bank's headquarters building. It also approved Federal Reserve Bank Premises the selection of the site for the San Fran- In 1999, the design of the Atlanta cisco Bank's new currency-processing Reserve Bank's new headquarters build- facility in Phoenix; the facility's design ing was completed and construction was completed, and construction is began, and construction of the Bank's planned to begin in 2000. Finally, new Birmingham Branch building con- the Board approved the Dallas Bank's tinued. Multiyear renovation programs request to begin a new building program were completed at the Kansas City for its Houston Branch and approved the Bank's Oklahoma City Branch and at selection of a site. Analysis of options the San Francisco Bank's Portland and for developing the site is continuing. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 167 Pro Forma Financial Statements for Federal Reserve Priced Services Pro Forma Balance Sheet for Priced Services, December 31, 1999 and 1998 Millions of dollars Item 1999 1998 Short-term assets (Note 1) Imputed reserve requirements on clearing balances 777.2 725.3 Investment in marketable securities ... 6,994.8 6,527.7 Receivables 78.2 76.8 Materials and supplies 4.2 4.4 Prepaid expenses 24.4 20.4 Items in process of collection 3,747.8 4,272.5 Total short-term assets 11,626.5 11,626.9 Long-term assets (Note 2) Premises 431.7 398.6 Furniture and equipment 146.5 127.6 Leases and leasehold improvements .. 59.5 26.8 Prepaid pension costs 542.8 437.3 Total long-term assets 1,180.5 990.4 Total assets 12,807.0 12,617.3 Short-term liabilities Clearing balances and balances arising from early credit of uncollected items 7,996.3 8,011.8 Deferred-availability items 3,523.5 3,513.7 Short-term debt 106.7 101.5 Total short-term liabilities 11,626.5 11,626.9 Long-term liabilities Obligations under capital leases .0 .0 Long-term debt 237.2 193.6 Postretirement/postemployment benefits obligation 231.2 217.4 Total long-term liabilities 468.5 411.0 Total liabilities 12,095.0 12,037.9 Equity 712.0 579.4 Total liabilities and equity (Note 3).. 12,807.0 12,617.3 NOTE. Components may not sum to totals because of The accompanying notes are an integral part of these rounding. pro forma priced services financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 86th Annual Report, 1999 Pro Forma Income Statement for Federal Reserve Priced Services, 1999 and 1998 Millions of dollars Item 1999 1998 Revenue from services provided to depository institutions (Note 4) 835.9 816.0 Operating expenses (Note 5) 692.7 654.1 Income from operations 143.2 161.9 Imputed costs (Note 6) Interest on float 8.7 16.2 Interest on debt 18.5 17.0 Sales taxes 9.8 8.7 FDIC insurance 2.7 39.7 1.4 43.4 Income from operations after imputed costs 103.5 118.5 Other income and expenses (Note 7) Investment income 337.3 352.0 Earnings credits -305.5 31.7 -328.2 23.7 Income before income taxes 135.3 142.3 Imputed income taxes (Note 8) 43.3 45.7 Net income (Note 9) 92.0 96.6 MEMO: Targeted return on equity (Note 10) . 57.2 66.8 NOTE. Components may not sum to totals because of The accompanying notes are an integral part of these rounding. pro forma priced services financial statements. Pro Forma Income Statement for Federal Reserve Priced Services, by Service, 1999 Millions of dollars Com- Funds Book- Commercial transfer Noncash Cash Item Total entry mercial check and net collection securities ACH collection settlement Revenue from services (Note 4) 835.9 681.0 66.8 16.7 65.5 2.9 2.9 Operating expenses (Note 5) 692.7 589.2 54.8 11.8 47.8 1.4 2/7 Income from operations 143.2 91.7 12.1 5.0 17.7 1.5 .2 Imputed costs (Note 6) 39.7 33.5 2.9 .6 2.5 _A_ .0 Income from operations after imputed costs 103.5 58.2 9.2 4.4 15.2 1.4 Other income and expenses, net (Note 7) 31.7 26.3 2.3 .6 2.3 Income before income taxes . 135.3 84.6 11.5 5.0 17.4 1.5 .2 Imputed income taxes (Note 8) 43.3 27.1 3.7 1.6 5.6 .A _A Net income (Note 9) 92.0 57.5 7.8 3.4 11.9 1.0 .2 MEMO: Targeted return on equity (Note 10) 57.2 46.1 5.3 1.0 4.6 .1 .1 NOTE. Components may not sum to totals because of The accompanying notes are an integral part of these rounding. pro forma priced services financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 169 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 priced services and (2) the share of suspense-account and (5) OPERATING EXPENSES 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 $3.4 million in 1999 and cash items in process of collection (CIPC) stated on a $2.8 million in 1998. The credit to expenses under basis comparable to that of a commercial bank. It reflects SFAS 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. Certain corporate balance sheet; adjustments for items associated with non- overhead costs not closely related to any particular priced priced items, such as those collected for government service are allocated to priced services in total based on agencies; and adjustments for items associated with an expense-ratio method, but are allocated among priced providing fixed availability or credit before items are services based on management decision. Corporate overreceived and processed. Among the costs to be recovered head was allocated among the priced services during under the Monetary Control Act is the cost of float, or net 1999 and 1998 as follows (in millions): CIPC during the period (the difference between gross CIPC and deferred-availability items, which is the portion 1999 1998 of gross CIPC that involves a financing cost), valued at the federal funds rate. Check 0 27.1 ACH 0 .0 Funds transfer 1.7 19.6 (2) LONG-TERM ASSETS Book entry .0 .0 Consists of long-term assets used solely in priced ser- Noncash collection .0 .1 vices, the priced-services portion of long-term assets Special cash services .0 .1 shared with nonpriced services, and an estimate of the Total 1.7 46.9 assets of the Board of Governors used in the development of priced services. Effective Jan. 1, 1987, the Reserve Banks implemented the Financial Accounting Standards Total operating expense on the income statement by Board's Statement of Financial Accounting Standards service does not equal the sum of operating expenses for No. 87, Employers' Accounting for Pensions (SFAS 87). each service because of the effect of SFAS 87. Although Accordingly, the Reserve Banks recognized credits to the portion of the SFAS 87 credit related to the current year is allocated to individual services, the amortization expenses of $105.5 million in 1999 and $87.1 million in of the initial effect of implementation is reflected only at 1998 and corresponding increases in this asset account. the System level. (3) LIABILITIES AND EQUITY (6) IMPUTED COSTS Under the matched-book capital structure for assets that Imputed costs consist of interest on float, interest on debt, are not "self-financing," short-term assets are financed sales taxes, and the FDIC assessment. Interest on float is with short-term debt. Long-term assets are financed with derived from the value of float to be recovered, either long-term debt and equity in a proportion equal to the explicitly or through per-item fees, during the period. ratio of long-term debt to equity for the fifty largest bank Float costs include costs for checks, book-entry securiholding companies, which are used in the model for the ties, noncash collection, ACH, and funds transfers. Interest is imputed on the debt assumed necessary to private-sector adjustment factor (PSAF). The PSAF confinance priced-service assets. The sales taxes and FDIC sists of the taxes that would have been paid and the return assessment that the Federal Reserve would have paid had on capital that would have been provided had priced it been a private-sector firm are among the components of services been furnished by a private-sector firm. Other the PSAF (see note 3). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 86th Annual Report, 1999 Float costs are based on the actual float incurred for Because clearing balances relate directly to the Federal each priced service. Other imputed costs are allocated Reserve's offering of priced services, the income and cost among priced services according to the ratio of operating associated with these balances are allocated to each serexpenses less shipping expenses for each service to the vice based on each service's ratio of income to total total expenses for all services less the total shipping expenses for all services. The following list shows the daily average recovery of (8) INCOME TAXES actual float by the Reserve Banks for 1999 in millions of dollars: Imputed income taxes are calculated at the effective tax rate derived from the PSAF model (see note 3). Total float 584.4 Unrecovered float 21.3 (9) ADJUSTMENTS TO NET INCOME FOR PRICE SETTING Float subject to recovery 563.1 In setting fees, certain costs are excluded in accordance Sources of recovery of float with the System's overage and shortfalls policy and its Income on clearing balances 56.2 automation consolidation policy. Accordingly, to com- As-of adjustments 385.3 pare the financial results reported in this table with the Direct charges 209.5 projections used to set prices, adjust net income as fol- Per-item fees (87.9) lows (amounts shown are net of tax): Unrecovered float includes float generated by services to government agencies and by other central bank ser- 1999 1998 vices. Float recovered through income on clearing bal- Net income 91.8 96.6 ances is the result of the increase in investable clearing Amortization of the initial balances; the increase is produced by a deduction for float effect of implementing for cash items in process of collection, which reduces SFAS87 -10.2 -10.2 imputed reserve requirements. The income on clearing Deferred costs of automation balances reduces the float to be recovered through other consolidation -1.2 -14.5 means. As-of adjustments and direct charges refer to float that is created by interterritory check transportation and Adjusted net income 80.4 71.9 the observance of non-standard holidays by some depository institutions. Such float may be recovered from the depository institutions through adjustments to institution (10) RETURN ON EQUITY reserve or clearing balances or by billing institutions The after-tax rate of return on equity that the Federal directly. Float recovered through direct charges and per- Reserve would have earned had it been a private business item fees is valued at the federal funds rate; float recov- firm, as derived from the PSAF model (see note 3). This ered through per-item fees has been added to the cost amount is adjusted to reflect the recovery of $1.2 million base subject to recovery in 1999. of automation consolidation costs for 1999 and $14.5 million for 1998. The Reserve Banks recovered these (7) OTHER INCOME AND EXPENSES amounts, along with a finance charge, by the end of 1999. 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. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

171 The Board of Governors and the Government Performance and Results Act Under the Government Performance and specific targets for some of the perfor- Results Act of 1993, federal agencies mance measures identified in the strateare required, in consultation with the gic plan. It also described the operational Congress and outside stakeholders, to processes and resources needed to meet prepare a strategic plan covering a those targets and discussed validation multiyear period and to submit annual and verification of results. performance plans and performance The strategic and performance plans reports. Though not required to do so, are available on the Board's public the Board of Governors is voluntarily web site (www.federalreserve.gov/ complying with the act's requirements. boarddocs/rptcongress). A summary of the goals and objectives set forth in those plans is given in the next section. Strategic and Performance Plans The Board sent its strategic plan for the Goals and Objectives period 1997-2002 to the Congress in October 1997. The document states the The Federal Reserve has three interre- Board's mission, articulates major goals lated and mutually reinforcing goals, for the period, outlines strategies for with supporting objectives: achieving those goals, and discusses the environment and other factors that Goal could affect their achievement. It also To conduct monetary policy toward the addresses issues that cut across agency achievement of maximum sustainable jurisdictional lines, identifies key quantilong-term growth and stable prices tative measures of performance, and discusses performance evaluation. The strategic plan for the period 2000-05 is Objectives being prepared; the mission, goals, and • Stay abreast of recent developments other elements of the plan will remain and prospects in the U.S. economy essentially unchanged. and financial markets and in those- In September 1998, the Board sent to abroad, so that monetary policy decithe Congress a performance plan for its sions will be well informed 1998-99 budget.1 Except for the mone- • Enhance our knowledge of the structary policy function, the plan set forth tural and behavioral relationships in the macroeconomic and financial markets, and improve the quality of 1. The act requires that a performance plan be submitted for each fiscal year beginning with the data used to gauge economic fiscal 1999. The Board budgets over a calendar performance, through developmental year, and its budget covers a two-year period. The research activities budget for 200O-01 was approved in September 1999. The performance plan for the 2000-01 budget is being prepared for publication in the second mance plan for the 1998-99 budget is being prehalf of 2000. A report on the results of the perfor- pared for release at about the same time. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 86th Annual Report, 1999 • Implement monetary policy effec- • Promote sound banking and effective tively in rapidly changing economic supervisory practices among develcircumstances and in an evolving oped and emerging countries through financial market structure ongoing coordination with interna- • Contribute to the development of U.S. tional supervisory bodies and through international policies and procedures, training programs for international in cooperation with the Department of supervisors and bankers the Treasury and other agencies • Heighten the positive effect of market • Promote understanding of Federal discipline on banking organizations by Reserve policy among other govern- encouraging improved disclosures, ment policy officials and the general accounting standards, risk measurepublic. ment, and overall market transparency • Harness benefits of technology in carrying out responsibilities to improve Goal supervisory efficiency and to reduce To promote a safe, sound, competitive, burden on banking organizations and accessible banking system and • Maintain an understanding of the stable financial markets through effect of financial innovation and techsupervision and regulation of the na- nology (for example, new powers and tion's banking and financial systems, products, new risk management and through its function as the lender of last measurement methodologies, and resort, and through effective implemen- electronic banking) on the operations tation of statutes designed to inform and and risk profile of banking organizaprotect the consumer tions and the payment system; ensure that supervisory programs accommodate prudent advances that benefit Objectives consumers and businesses or improve • Maintain ability and capacity as a risk management bank supervisor and central bank to • Remove unnecessary banking restricensure that emerging financial threats tions, consistent with safety and can be identified early and success- soundness. Refine or eliminate unnecfully resolved essary or ineffective policies, pro- • Provide comprehensive and effective cedures, regulations, or restrictions supervision of U.S. banks, bank hold- to ensure that reforms are effecing companies, U.S. operations of tively implemented, consistent with foreign banking organizations, and safety and soundness of banking related entities by focusing super- organizations visory efforts and resources on areas • Assure fair access to financial services of highest risk to individual organi- for all Americans through vigorous zations and the financial system as a enforcement of the Equal Credit whole, and by developing effective Opportunity, Fair Housing, Commuregulations to promote a safe and nity Reinvestment, and Home Mortsound banking environment gage Disclosure Acts and by encour- • Promote sound practices for manag- aging state member bank involvement ing risk at banking organizations in in community development activities order to provide for strong internal • Administer and ensure compliance controls, active boards of directors, with consumer protection statutes and senior management oversight and relating to consumer financial transacaccountability tions (such as the Truth in Lending, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Board of Governors and the Government Performance and Results Act 173 Truth in Savings, Consumer Leasing, lower costs. As required by the Governand Electronic Fund Transfer Acts) to ment Performance and Results Act and carry out congressional intent, striking in conformance with past practice, the the proper balance between protection Board has worked closely with other of consumers and regulatory burden federal agencies to consider plans and to the industry. strategies for programs, such as bank Implement appropriate rules, regula- supervision, that cross jurisdictional tions, and policies to comply with the lines. In particular, coordination with the Gramm-Leach-Bliley Act, which was Department of the Treasury and other enacted in November 1999. agencies is evident throughout both the strategic and performance plans. Much of the Board's formal effort to Goal plan jointly has been made through the Federal Financial Institutions Examina- To foster the integrity, efficiency, and tion Council (FFIEC), a group made up accessibility of U.S. dollar payment and of the five federal agencies that regulate settlement systems, issue currency, and depository institutions.2 In addition, a act as the fiscal agent and depository of coordinating committee of the chief the U.S. government financial officers of the five agencies has been created to address and report on strategic planning issues of mutual con- Objectives cern. This working group has been meeting since June 1997 and has estab- • Provide Federal Reserve Bank priced lished four subgroups to focus on exampayment services that maintain and inations, outreach, performance planimprove the efficiency and integrity of ning, and planning/budget linkage. the U.S. dollar payment mechanism These and similar planning efforts can • Meet public demand for U.S. currency significantly lower data processing and in the United States and abroad, work other costs for the government and the with Treasury to implement effective costs for depository institutions of comcounterfeit-deterrence and detection pliance with federal regulations. • features in U.S. currency, and provide for the smooth introduction of newdesign currency • Provide efficient and effective fiscal 2. The FFIEC member agencies are the Board agency and depository services on of Governors, the Federal Deposit Insurance Corbehalf of Treasury and other govern- poration, the National Credit Union Administration, the Office of the Comptroller of the Curment agencies rency, and the Office of Thrift Supervision. It was • Study and monitor U.S. dollar payestablished in 1979 pursuant to title X of the ment, clearing, and settlement sys- Financial Institutions Regulatory and Interest tems and the risk issues pertaining to Rate Control Act of 1978. The FFIEC is a formal these systems to facilitate sound pol- interagency body empowered to prescribe uniform principles, standards, and report forms for the icy decisions that foster the integrity federal examination of financial institutions and to of the nation's payment systems. make recommendations to promote uniformity in the supervision of financial institutions. The FFIEC also provides uniform examiner training and has taken a lead in developing standardized Interagency Coordination software needed for major data collection programs to support the requirements of the Home Interagency coordination helps focus Mortgage Disclosure Act and the Community Digitizede ffofro FrtRs AStEo R eliminate redundancy and Reinvestment Act. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

175 Federal Legislative Developments The following federal legislation en- trol a subsidiary engaged in activities acted during 1999 significantly affects that the parent bank is not allowed to the Federal Reserve System and the conduct directly. It also makes other institutions it supervises: the Gramm- revisions to the BHC Act and other fed- Leach-Bliley Act; the Federal Reserve eral banking laws. Retirement Portability Act; the consolidated appropriation for fiscal year 2000; Expanded Activities for and an amendment to the Federal Financial Holding Companies Reserve Act to broaden the range of discount window loans. Title I repeals the provisions of the Glass-Steagall Act and the BHC Act that restricted the affiliation of bank Gramm-Leach-Bliley Act holding companies with securities firms The Gramm-Leach-Bliley Act (GLB and insurance companies and agents. It Act), Public Law 106-102, enacted on also authorizes bank holding companies November 12, 1999, amends the Bank that qualify as financial holding com- Holding Company Act of 1956 (BHC panies (FHCs) to engage in, or affiliate Act), the Federal Reserve Act, and other with companies engaged in, a wide array federal banking laws. It allows banks to of financial activities, including securiaffiliate with securities broker-dealers, ties underwriting and dealing; insurance insurance companies and agents, and agency and underwriting activities; merother entities engaged in a wide range of chant banking activities; and any other financial activities and establishes a pru- activity that the Federal Reserve Board, dential framework for the supervision of in conjunction with the Secretary of the holding companies engaged in banking Treasury, determines to be financial in and other financial activities. The fol- nature or incidental to financial activilowing sections summarize the GLB ties. FHCs may also engage in non- Act's seven titles and describe the por- financial activities that the Board detertions that bear significantly on the Fed- mines are complementary to a financial eral Reserve System and the institutions activity and do not pose a substantial it supervises. risk to the safety or soundness of depository institutions or the financial system generally. Title I To become an FHC, a bank holding Title I revises the BHC Act to expand company must file a declaration with the the ability of qualifying bank holding Board certifying that all of its deposicompanies to engage in, or affiliate with tory institution subsidiaries are well companies engaged in, financial activi- managed and well capitalized. Title I ties; establishes a prudential framework provides that a bank holding company's for the Board's supervision of bank certification is not effective if any holding companies and their subsidi- of the company's insured depository aries; and establishes the conditions institution subsidiaries received less under which an insured bank may con- than a "satisfactory" rating at its most Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 86th Annual Report, 1999 recent examination under the Commu- their subsidiaries, between depository nity Reinvestment Act of 1977. It also institutions and their holding company requires that the Board establish compa- affiliates, and between the U.S. branches, rable capital and managerial standards agencies, and commercial lending subfor foreign banks that seek to become sidiaries of foreign banks and their U.S. anFHC. affiliates. Umbrella Supervision and Financial Subsidiaries of Banks Functional Regulation Title I establishes the criteria under Title I preserves the Board's role as the which a national bank may own or conumbrella supervisor for all bank holding trol a subsidiary engaged in activities companies, including FHCs, and the that national banks are not allowed to Board's ability to establish consolidated conduct directly (a "financial subsidicapital requirements for bank holding ary") and establishes prudential requirecompanies and to obtain reports from ments for national banks that have and examine any bank holding company financial subsidiaries. A financial subor subsidiary. In exercising its super- sidiary does not include a subsidiary visory authority, the Board must rely, that national banks are expressly authoto the fullest extent possible, on pub- rized by federal law (other than the GLB licly available information, externally Act) to own or control, such as an Edge audited financial statements, and reports or agreement subsidiary controlled purthat a bank holding company or subsidi- suant to sections 25 or 25A of the Fedary is required to provide to other super- eral Reserve Act. visory authorities. In addition, the Board Title I provides that financial submust focus its examination efforts, to sidiaries of national banks may engage the maximum extent possible, on bank only in those activities that are deterholding companies and on those of the mined to be financial in nature (or incicompanies' subsidiaries that may have a dental to such activities) and other materially adverse effect on an affiliated activities permissible for national banks depository institution. to conduct directly. They are prohibited To reduce unnecessary regulatory from engaging as principal in underwritburden and enhance functional regula- ing insurance (other than credit-related tion, Title I places certain additional insurance); providing or issuing annulimits on the Board's ability to obtain ities; real estate investment or developreports from, examine, establish capital ment activities (unless expressly authorequirements for, require a capital trans- rized by law); and merchant banking fer from, or take enforcement action activities. The Board and the Secretary against a "functionally regulated subsid- of the Treasury may jointly remove the iary" of a bank holding company. The restrictions on the conduct of merchant GLB Act places similar limits on the banking activities by financial subsidisupervisory authority of the other fed- aries, but no earlier than five years after eral banking agencies with respect to a the date of enactment of the GLB Act. functionally regulated subsidiary of an Insured state banks may own or coninsured depository institution. trol a subsidiary that engages as princi- Title I authorizes the Board to adopt pal in activities that national banks may rules governing relationships and trans- conduct only through a financial subsidactions between state member banks and iary (for example, securities underwrit- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Legislative Developments 111 ing and dealing) only if the state bank banks engaged in traditional bank secucomplies with many of the same require- rities activities. Under Title II, a bank ments applicable to national banks that may avoid registering as a broker or have a financial subsidiary. dealer with the SEC only if it limits its securities activities to those specifically exempted by the GLB Act. Derivatives Transactions and The specific exemptions would, Intra-Day Credit under Section 23A among other things, allow banks to do the following subject to restrictions Title I amends section 23A of the Fedspecified in the GLB Act: effect securieral Reserve Act to require that the ties transactions in connection with their Board promulgate rules to address as trust, custody, and safekeeping opera- "covered transactions" (1) the credit tions; privately place securities; purexposure arising from derivatives transchase and sell traditional banking proactions between banks and their affiliducts, such as certificates of deposit, ates and (2) intra-day extensions of loan participations, and interest rate, credit by banks to their affiliates. currency, credit and equity swaps; and broker securities in up to 500 transactions per year that are not otherwise Title II exempt. Title II also allows banks to offer and Title II addresses the regulation of sell, without registering as a broker or the securities, investment advisory, dealer, any financial product developed and investment company activities of in the future unless the SEC determines, banks and requires the Securities and through a formal rulemaking process, Exchange Commission (SEC) to consult that the new product is a security and with the appropriate federal banking that the registration of banks selling agency before taking any action with such products is in the public interest respect to the loan loss reserves of an and necessary or appropriate to protect insured depository institution or the investors. In making this determination, holding company of an insured deposithe SEC is required to consider the tory institution. It also permits compaviews of the Board and the regulation of nies that control a registered brokerthe product under the federal banking dealer (but do not control an insured laws. The Board may challenge a deterdepository institution other than limitedmination by the SEC on a newly develpurpose institutions) to voluntarily elect oped product area in federal court. to be supervised by the SEC on a consolidated basis and establishes the framework for SEC supervision. Consultation Concerning Loan Loss Reserves Title II requires the SEC to consult Bank Securities Activities with the appropriate federal banking Title II amends the Securities Exchange agency before taking any action or ren- Act of 1934, effective in May 2001, to dering an opinion on the manner in repeal the blanket exemption for banks which an insured depository institution from the definitions of "broker" and or a depository institution holding com- "dealer." It replaces those exemptions pany reports its loan loss reserves in its with a set of specific exemptions for financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 86th Annual Report, 1999 Title III tection regulations governing the retail sale of insurance products by, or on the Title III addresses insurance-related premises of, insured depository instituissues, including the ability of national tions and their subsidiaries. The regulabanks (and their subsidiaries) to provide tions must prohibit the illegal tying of insurance as principal and the regulabank and insurance products; require tion of the retail sale of insurance prodcertain disclosures; prohibit misleading ucts by, or on the premises of, insured advertising; require, to the extent practidepository institutions. It also addresses cable, the separation of insurance sales the circumstances under which a mutual and deposit-taking activities; and estabinsurance company may change its state lish a process for receiving and processof incorporation for the purpose of reoring consumer complaints alleging a vioganizing into a stock insurer controlled lation of the regulations. by a mutual holding company. In addition, Title III authorizes the creation of a new self-regulatory organization—the Title IV National Association of Registered Title IV amends the Home Owners' Agents and Brokers—to establish uni- Loan Act to close the unitary thrift loopform criteria for the qualification, trainhole, which allowed commercial firms ing, and continuing education of insurto control a federally insured savings ance agents and brokers. association. It prohibits any company that acquired control of a savings asso- Insurance Underwriting Activities ciation after May 4, 1999, from engagof National Banks ing in commercial activities. Companies that controlled only a single savings Title III generally prohibits national association before May 4, 1999 (or purbanks and their subsidiaries from undersuant to an application filed before that writing insurance and providing or issudate), may continue to engage in any ing annuities. National banks and their type of financial or commercial activity. subsidiaries may continue to underwrite only those types of insurance that national banks were permitted to under- Title V write as of January 1, 1999. Title III Title V requires that financial instituestablishes a procedure for determining whether financial products first offered tions (as defined in the GLB Act) disafter January 1, 1999, are banking pro- close to their customers, at the time a ducts that national banks may provide customer relationship is established, the as principal or are insurance products institution's policies regarding the disthat they may not provide as principal. closure of confidential customer infor- Special rules govern the ability of na- mation to affiliates and third parties. It tional banks (and their subsidiaries) to also generally prohibits a financial instiunderwrite and sell title insurance. tution from disclosing any nonpublic personal information about a consumer to an unaffiliated third party unless the Consumer Protection Regulations institution informs the consumer that for Retail Insurance Sales such information may be shared with Title III amends the Federal Deposit third parties and allows the consumer Insurance Act to require the federal to "opt out" of such sharing arrangebanking agencies to issue (to the extent ments. In addition, Title V prohibits Digitizedt hfoery F RdAeSemER appropriate) consumer pro- financial institutions from disclosing a http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Legislative Developments 179 customer's account number or access ments made or actions taken pursuant to code for a deposit, transaction, or credit the agreement. It exempts certain types card account to unaffiliated third parties of agreements from coverage as a CRAfor use in marketing programs. related agreement, including individual Title V also prohibits persons, with mortgage loans and agreements entered certain exceptions, from obtaining into by an insured depository institution customer information from a financial (or affiliate) with an entity or person that institution (as defined in the GLB has not commented or testified on the Act), or from a customer of a finan- CRA or discussed or contacted the insticial institution, through the use of false, tution or affiliate concerning the CRA. fictitious, or fraudulent statements or representations. Small Bank CRA Examination Cycle Title VII establishes a four-year CRA Title VI examination cycle for small insured depository institutions ($250 million or Title VI effects a number of changes less in total assets) that received a "satin the organization, membership, and isfactory" rating at their most recent powers of the Federal Home Loan Bank CRA examination, and a five-year cycle (FHLB) System. For example, Title VI for small institutions that received an amends the Federal Home Loan Act "outstanding" rating at their most recent to permit insured depository instituexamination. However, the Board and tions having less than $500 million in the other federal banking agencies may assets to become a member of the FHLB conduct a CRA examination of a small System without satisfying the qualiinsured depository institution at any fied thrift lender test. It also amends time for reasonable cause or in connecthat act to allow the FHLB System to tion with an application by the institumake long-term advances to insured tion to establish a deposit facility. depository institutions having less than $500 million in assets for purposes of Federal Reserve CRA Study funding small businesses, small farms, and small agribusinesses. Title VII directs the Board to conduct a comprehensive study of the Community Reinvestment Act, focusing on the Title VII default, delinquency, and profitability Title VII makes a number of miscella- of loans made in conformity with that neous amendments to the federal bank- act. In conducting the study, the Board ing laws and mandates a number of must consult with the chairmen of and studies. ranking members of the House Committee on Banking and Financial Services CRA Sunshine Provisions and the Senate Committee on Banking, Housing, and Urban Affairs. Title VII amends the Federal Deposit Insurance Act to require that the parties ATM Fee Disclosure to certain agreements related to the Community Reinvestment Act (CRA) Title VII amends the Electronic Funds disclose the agreement to the public and Transfer Act to require that automatic the appropriate federal banking agency, teller machine (ATM) operators imposand report annually to the appropriate ing an ATM surcharge prominently post Digitizedf feodr eFrRalA SbEaRn king agency on any pay- a notice to that effect on or at the ATM http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 86th Annual Report, 1999 and inform consumers (through an Employees of the Federal Reserve Syson-screen message or paper receipt) of tem may transfer retirement credit for the surcharge amount before the con- this service to the Federal Employees sumer is irrevocably committed to com- Retirement System if they later work for pleting the transaction. Issuers of ATM a federal government agency. The act cards must also inform consumers at the also allows employees transferring to time a card is issued that a surcharge the Board from other federal agencies to may be imposed by a third party. withdraw their funds from the Federal Thrift Savings Plan and roll the funds Plain Language Requirement over to the Board's Thrift Plan. Title VII requires that the federal banking agencies use "plain language" in Consolidated Appropriation drafting all proposed and final rules to for Fiscal Year 2000 be published in the Federal Register . The Consolidated Appropriation for Fiscal Year 2000, Public Law 106-168, Audits of the Federal Reserve was enacted on December 12, 1999. Banks and the Board A section of the act amends the Federal Reserve Act to require the Fed- Title VII amends the Federal Reserve eral Reserve Banks to transfer Act to require that the Board obtain an $3,752,000,000 from their surplus funds annual independent audit of the finanto the Board for transfer to the general cial statements of the Board and each fund of the Treasury. The amendment Federal Reserve Bank. authorizes the Board to determine the amount that each Federal Reserve Bank Authorization to Release Reports must pay in fiscal year 2000. It also Title VII amends the Federal Reserve prohibits any Federal Reserve Bank Act to allow the Board to release confi- from replenishing its surplus fund by the dential supervisory information con- amount of any transfer it makes under cerning any entity subject to examina- this section. tion by the Board to any other federal or state agency with supervisory authority Act to Amend the over the entity; any officer, director or Federal Reserve Act receiver of the entity; and any other person that the Board determines to be On December 6, 1999, the President proper. signed Public Law 106-122, which amends the Federal Reserve Act to expand the types of instruments a Fed- Federal Reserve eral Reserve Bank may tender as collat- Retirement Portability Act eral security to obtain Federal Reserve On December 12, 1999, the President notes. Under this amendment, acceptsigned the Federal Reserve Retirement able forms of collateral are expanded to Portability Act, Public Law 106-168, include loans made under section 10B which amends the Federal Employee of the Federal Reserve Act. This amend- Retirement System Act of 1986. Under ment increases the Federal Reserve Systhe amendment, employees who worked tem's flexibility in providing discount for the Board of Governors after 1988 window credit while continuing to meet and participated in the "Bank" Benefit its obligations to collateralize Federal DigitizedS fotrru FcRtuArSeE Ro f the Retirement Plan for Reserve notes. • http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

181 Regulatory Simplification In 1978 the Board of Governors estab- The act makes it unlawful for creditors lished a program of regulatory review to to discriminate against applicants on the help minimize the burden of regulation basis of race, color, religion, national on banking organizations. The objec- origin, marital status, sex, age, and other tives of the program are to ensure that specified bases. The Board began the all regulations, existing and proposed, process of reviewing the regulation by represent the best course of action; to issuing an advance notice of proposed afford interested parties the opportunity rulemaking in March 1998; the proto participate in the design of regula- posed revisions take into account comtions and to comment on them; and to ments received at that time. ensure that regulations are written in The proposed revisions would remove simple, clear language. Staff members the general prohibition against creditors regularly review Federal Reserve regu- noting characteristics of applicants for lations for their adherence to these ob- nonmortgage credit such as race, sex, jectives and their consistency with the and national origin; they would not Regulatory Flexibility Act, which also remove the prohibition against taking requires that consideration be given to such information into account when the economic consequences of regula- extending credit. Creditors that choose tion on small business. In its review to collect such information would be process, the Board also follows the man- required to disclose that fact to applidates of section 303 of the Riegle Com- cants, and the proposal includes a model munity Development and Regulatory disclosure form. The revisions would Improvement Act. require creditors to retain certain records In 1999 the Board, as part of this concerning preapproved credit solicitareview process, proposed revisions to tions and would lengthen from twelve Regulation B. It also proposed revisions to twenty-five months the recordto several consumer protection regula- retention period for most applications tions to permit the electronic delivery of for business credit. disclosures that are required to be given in writing. In addition, it amended Regulation A to establish a special lending Other Regulatory Activity program to accommodate liquidity needs during the century data change Electronic Disclosure period. In August the Board issued for comment proposals that would permit financial Comprehensive Revisions institutions and others to provide feder- Proposed ally mandated disclosures to consumers by electronic communication if the consumer consents. The proposals are Regulation B modified from proposed rules (and an In August the Board published proposed interim rule under Regulation E) issued revisions to Regulation B, which imple- in March 1998. They would authorize Digitizedm foer nFtRs AthSeE ER qual Credit Opportunity Act. the electronic delivery of disclosures http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 86th Annual Report, 1999 that under Regulations B (Equal Credit necessary to receive and retain elec- Opportunity), E (Electronic Fund Trans- tronic disclosures. fers), M (Consumer Leasing), Z (Truth in Lending), and DD (Truth in Savings) Century Date Change must be given in writing. Special Liquidity Facility The proposals are an outgrowth of the 1996 comprehensive review of Reg- In July the Board amended Regulaulation E, during which the Board deter- tion A (Extensions of Credit by Federal mined that electronic communication Reserve Banks) to establish a special of information required by federal lending program to be in effect from laws governing financial services could October 1, 1999, through April 7, 2000. reduce compliance costs without ad- Under the program, Federal Reserve versely affecting consumer protections. Banks could extend credit at a rate With some exceptions, before obtain- 150 basis points above the Federal ing a consumer's consent, financial Open Market Committee's targeted fedinstitutions and others would have to eral funds rate to eligible depository provide to the consumer—through a institutions to accommodate liquidity standardized disclosure statement— needs during the century date change certain information about electronic dis- period. closures, including what type of disclo- The special credit facility was desures would be provided electronically signed to ensure that depository instituand how the consumer could receive tions would have adequate liquidity to and retain the disclosures. meet any unusual demands during the Electronic disclosures could be deliv- period around the century date change. ered to a consumer's e-mail address or Among other things, it was intended to made available at another location such increase institutions' confidence in comas an institution's web site. If an institu- mitting to supplying loans to other tion chooses to make disclosures avail- financial institutions and businesses able at a web site, it must notify a con- through the rollover period. sumer when the information has been In setting the interest rate on the loans posted. at 150 basis points above the federal The proposals generally would re- funds rate target, the Board judged that quire that when business is transacted in the spread was high enough to ensure person, as is typical for mortgage loan that depository institutions would still closings, automobile loans and leases, have an incentive to seek funds in the and door-to-door sales involving credit, private sector but low enough to provide disclosures be made on paper. Most a reasonable backstop should strains other disclosures could be delivered develop in funding and credit markets. electronically, if the institution provides The Board imposed no restrictions on the disclosure statement about electronic the use and duration of the loans and delivery and obtains both the consum- applied the same collateral requirements er's consent and the consumer's confir- as those for regular discount window mation that his or her computer equip- loans. • ment meets the technical requirements Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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

185 Record of Policy Actions of the Board of Governors Regulation A accounts at depository institutions to Extensions of Credit by which a lower reserve requirement Federal Reserve Banks applies and to increase the amount of reservable liabilities that is exempt July 20, 1999—Amendments from reserve requirements for 2000, effective for the reserve computation The Board amended Regulation A to period beginning November 30, 1999, create a Century Date Change Special for institutions reporting weekly. Liquidity Facility, a program for lending to depository institutions from Octo- Votes for this action: Messrs. Greenspan, ber 1, 1999, through April 7, 2000. Kelley, Meyer, Ferguson, and Gramlich.1 Votes for this action: Messrs. Greenspan, Kelley, Meyer, Ferguson, and Gramlich.1 Under the Monetary Control Act of 1980, depository institutions, Edge Act corporations, agreement corporations, The Board established the facility to and U.S. agencies and branches of forhelp ensure that depository institutions have adequate liquidity to meet any eign banks are subject to reserve unusual demands in the period around requirements set by the Board. The act the century date change. The interest directs the Board to adjust annually the rate charged on loans from the special amount subject to the lower reserve facility is 150 basis points higher than requirement to reflect changes in net the Federal Open Market Committee's transaction accounts at depository institargeted federal funds rate. Although the tutions. Recent declines in net transaccollateral requirements are the same as tion accounts warranted a decrease to for regular discount window loans, there $44.3 million, and the Board amended are no restrictions on the use and dura- Regulation D accordingly. tion of loans from the special facility The Garn-St Germain Depository while it is in operation, and borrowers Institutions Act of 1982 establishes a are not required to seek funds elsewhere zero percent reserve requirement on the first. first $2 million of an institution's reservable liabilities. The act also provides for annual adjustments to that exemption Regulation D amount based on increases in reserv- Reserve Requirements able liabilities at depository institutions. of Depository Institutions Recent growth in reservable liabilities warranted an increase in the amount September 27, 1999—Amendments exempted from reserve requirements to The Board amended Regulation D to $5 million, and the Board amended decrease the amount of net transaction Regulation D accordingly. NOTE. In voting records throughout this chap- 1. Throughout this chapter, note 1 indicates that ter, Board members, except the Chairman and two vacancies existed on the Board when the Digitized Vfoicre F CRhAaSirEmRan , are listed in order of seniority. action was taken. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 86th Annual Report, 1999 For institutions reporting weekly, lishing Year 2000 Standards for Safety the amendments are effective with the and Soundness for insured depository reserve computation period beginning institutions that had been approved by November 30, 1999, and the corre- the agencies as interim guidelines, effecsponding reserve maintenance period tive October 15, 1998. The guidelines beginning December 30,1999. For insti- address project planning, renovation, tutions reporting quarterly, the amend- testing, contingency planning, the role ments are effective with the reserve of management, risk assessment, and computation period beginning Decem- essential steps in each phase of Year ber 21, 1999, and the corresponding 2000 readiness. The final guidelines reserve maintenance period beginning make clarifying changes to the interim January 20, 2000. guidelines. To reduce the reporting burden on small institutions, depository institutions Regulation H having total deposits below specified Membership of State Banking levels are required to report their depos- Institutions in the Federal its and reservable liabilities quarterly or Reserve System less frequently, while larger institutions must report weekly. To reflect increases in the growth rate of total deposits at Regulation K all depository institutions, the Board International Banking Operations increased the deposit cutoff levels used in determining the frequency and detail Regulation Y of depository reporting to $84.5 million Bank Holding Companies and for nonexempt depository institutions Change in Bank Control and to $54.3 million for exempt depository institutions, beginning in September March 23, 1999—Termination 2000. of Proposed Rulemaking The Board withdrew a proposed rule Regulation H that would have required the domestic Membership of State Banking and foreign banking organizations it Institutions in the Federal supervises to develop and maintain Reserve System "Know Your Customer" programs. October 21, 1999—Year 2000 Votes for this action: Mr. Greenspan, Standards for Safety and Soundness Ms. Rivlin, and Messrs. Kelley, Meyer, Ferguson, and Gramlich.2 The Board made final the interim guidelines establishing Year 2000 standards In December 1998, the Board and the for insured depository institutions, effec- other federal banking and thrift agencies tive November 29, 1999. requested comment on substantially similar "Know Your Customer" rules Votes for this action: Messrs. Greenspan, that would have required domestic and Ferguson, Kelley, Meyer, and Gramlich.1 foreign depository institutions to de- The Board, jointly with the other fed- 2. Throughout this chapter, note 2 indicates that eral banking and thrift agencies, made one vacancy existed on the Board when the action final the Interagency Guidelines Estab- was taken. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 187 velop policies and procedures designed internal models by eliminating the calto identify customers and their normal culation of a standard specific risk capiand expected transactions, to monitor tal charge. account activity, and to use this information to identify and report suspicious February 24, 1999—Amendments transactions. The Board and the other The Board amended Regulation H to agencies withdrew the proposal on the revise the risk-based and leverage capibasis of an analysis of the comments tal standards for banks to make the capireceived. tal treatment for certain transactions more consistent among the federal bank- Regulation H ing and thrift agencies and amended Membership of State Banking Regulation Y to apply the same stan- Institutions in the Federal dards to bank holding companies, effec- Reserve System tive April 1, 1999. Regulation Y Votes for this action: Mr. Greenspan, Bank Holding Companies and Ms. Rivlin, and Messrs. Kelley, Meyer, Ferguson, and Gramlich.2 Change in Bank Control The amendments, adopted by the February 17, 1999—Amendment Board jointly with the other federal The Board made final an interim rule banking and thrift agencies, revise the amending Regulations H and Y to re- risk-based and leverage capital standuce regulatory burden on certain bank- dards for state member banks, consising organizations having significant tent with provisions of the Riegle Comtrading activities under the risk-based munity Development and Regulatory capital standards, effective July 1, 1999. Improvement Act of 1994. The amendments conform the risk-based capital Votes for this action: Mr. Greenspan, treatments among the agencies for cer- Ms. Rivlin, and Messrs. Kelley, Meyer, tain construction and real estate loans Ferguson, and Gramlich.2 and investments in mutual funds, and simplify and make uniform the agen- The Board, jointly with the Office of cies' tier 1 leverage capital standards. the Comptroller of the Currency and the The amendments to Regulation Y apply Federal Deposit Insurance Corporation, the same revisions to the risk-based made final an interim rule adopted in capital standards for bank holding December 1997 by amending the riskcompanies. based capital standards for market risk applicable to certain banks and bank Regulation K holding companies that have significant International Banking Operations trading activities. If an institution's internal model adequately measures spe- May 17, 1999—Amendment cific risk, the amendment eliminates the requirement that when using an internal The Board approved an amendment model, the total capital charges for spe- to Regulation K that makes final an cific risk must equal at least 50 per- interim rule extending the examinationcent of the standard specific risk capital frequency cycle for certain U.S. charge. The rule reduces regulatory bur- branches and agencies of foreign banks, den for institutions having qualifying effective October 22, 1999. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 86th Annual Report, 1999 Votes for this action: Mr. Greenspan, ing organizations having total assets Ms. Rivlin, and Messrs. Kelley, Meyer, exceeding $2.5 billion and $1.5 billion Ferguson, and Gramlich.2 respectively; (2) permanently exempted management officials whose service The amendment, which was issued began before November 10, 1978; and jointly with the Office of the Comptrol- (3) authorized exemptions from the ler of the Currency and the Federal Interlocks Act by regulation if the inter- Deposit Insurance Corporation, implelocking service would not result in a ments provisions of the Economic monopoly or substantially lessen com- Growth and Regulatory Paperwork petition. The Board, jointly with the Reduction Act of 1996 by making U.S. other federal banking and thrift agenbranches and agencies of foreign banks cies, amended its management interhaving assets of $250 million or less locks rules to comply with the new eligible for an eighteen-month examinastatutory provisions and to make other tion cycle rather than a twelve-month changes to simplify compliance with the cycle if they meet the qualifying criteria rule's requirements. set out in the rule. Regulation L Regulation CC Management Official Interlocks Availability of Funds and Collection of Checks September 7, 1999—Amendments The Board amended Regulation L to March 17, 1999—Amendment conform with recent statutory changes and to simplify compliance with the The Board amended Regulation CC to rule's requirements, effective January 1, allow banks that consummate a merger 2000. on or after July 1, 1998, and before March 1, 2000, to treat themselves as Votes for this action: Messrs. Greenspan, separate banks for purposes of the regu- Kelley, Meyer, Ferguson, and Gramlich.1 lation until March 1, 2001, in order to provide them greater time to implement Regulation L implements the Deposisoftware changes related to the merger. tory Institution Management Interlocks Act by prohibiting management officials Votes for this action: Mr. Greenspan, from serving simultaneously with two Ms. Rivlin, and Messrs. Kelley, Meyer, unaffiliated depository institutions or Ferguson, and Gramlich.2 their holding companies based on the depository organizations' asset size and Under the amendment, banks that the location of their offices. The Eco- consummate a merger within the specinomic Growth and Regulatory Paper- fied time period will be treated as sepawork Reduction Act of 1996 amended rate banks until March 1, 2001. The three principal provisions of the Inter- amendment is designed to provide relief locks Act. It (1) increased the asset to banks that are dedicating their autothreshold for prohibiting management mation resources primarily to renovatofficial interlocks between two unaffili- ing and testing software and replacing ated depository organizations, regardless systems to address Year 2000 and leap of office location, to interlocks involv- year computer problems. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 189 June 28, 1999—Termination paying or returning banks may send of Proposed Rulemaking notices instead of returning the original checks, to consider whether more flex- The Board decided not to propose ibility would enable check system parregulatory changes at this time to reduce ticipants to experiment with methods to the availability schedule for nonlocal return checks electronically. Rather than checks. adopting any of the proposed options, the Board revised the Commentary to Votes for this action: Mr. Greenspan, Ms. Rivlin, and Messrs. Kelley, Meyer, Regulation CC to add examples of inter- Ferguson, and Gramlich.2 bank agreements on electronic presentment and return of checks. In December 1998, the Board requested comment on an advance notice of proposed rulemaking to modify the Regulation DD availability schedule in Regulation CC Truth in Savings for nonlocal checks. The proposal would have reduced the maximum hold for August 18, 1999—Interim nonlocal checks from five to four busi- Amendment ness days, except for subcategories of The Board approved an interim amendnonlocal checks for which a depositary ment to Regulation DD to permit bank certifies that it does not receive a depository institutions to provide certain sufficient proportion of returns within disclosures electronically if the cusfour business days. After further analytomer agrees, effective September 1, sis, the Board concluded that return 1999. times do not support a reduced availability schedule for nonlocal checks in the Votes for this action: Messrs. Greenspan, aggregate. The Board also determined Kelley, Meyer, Ferguson, and Gramlich.1 that the costs and potential risks would outweigh the likely benefits of establish- Regulation DD, which implements ing subcategories of nonlocal checks for the Truth in Savings Act, generally reavailability purposes. quires depository institutions to provide consumers with written disclosures of October 26, 1999—Amendments the yields, fees, and other terms for deposit accounts on request, when an The Board amended Regulation CC to account is opened, when changes in clarify the extent to which depository terms occur, and in periodic statements. institutions and others may vary the The interim amendment permits depositerms of the regulation by agreement for tory institutions to provide Regulathe purpose of instituting electronic tion DD's disclosures on periodic statereturn of checks, effective December 15, ments electronically if the customer 1999. agrees. The interim rule was adopted in Votes for this action: Messrs. Greenspan, response to comments received on a Ferguson, Kelley, Meyer, and Gramlich.1 proposed rule issued in March 1998. Along with the interim amendment, the In February 1999, the Board re- Board published for comment revised quested comment on options for amend- proposals to permit electronic discloing Regulation CC, which governs when sures under Regulations B (Equal Credit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 86th Annual Report, 1999 Opportunity), E (Electronic Fund Trans- Policy Statements and fers), M (Consumer Leasing), Z (Truth Other Actions in Lending), and DD (Truth in Savings). February 19, 1999—Policy Statement on Payments Miscellaneous Interpretations System Risk Regulation K The Board approved a modification to International Banking Operations the procedures for measuring daylight overdrafts to include the posting time October 25, 1999—Interpretation for settlement entries processed through The Board clarified that the scope of the enhanced settlement service. The permissible data processing activities modification became effective on under Regulation K encompasses all March 29, 1999, to coincide with the those activities permissible for bank implementation of the enhanced settleholding companies under Regulation Y ment service. (Bank Holding Companies and Change in Bank Control), effective November 1, Votes for this action: Mr. Greenspan, 1999. Ms. Rivlin, and Messrs. Kelley, Meyer, Ferguson, and Gramlich.2 Votes for this action: Messrs. Greenspan, Ferguson, Kelley, Meyer, and Gramlich.1 In 1998, the Board approved an Regulation K provides that a bank enhanced settlement service that comholding company or Edge Act corpora- bines and improves selected features tion may control a foreign company that of the Reserve Banks' existing net settlement services and may be used engages in activities that are usual in for either gross or net multilateral connection with the transaction of banksettlements. The service provides sameing or other financial operations abroad, day, intraday settlement finality to including data processing, but does not participants in clearing arrangements specify the scope of permissible data using the service. Settlement entries processing activities. Amendments to processed by the enhanced settlement Regulation Y have expanded the scope service will be posted on a flow basis as of permissible data processing activities they are processed and are final and for bank holding companies in the irrevocable. United States, and those activities are equal to, and in some respects broader than, the data processing activities that May 20, 1999—Delegation were authorized by the adoption of of Authority Regulation K in 1979. The interpretation clarifies that the data processing The Board delegated to its General provision of Regulation K encompasses Counsel the authority to return applicathe same data processing activities as tions filed under the International Bankdescribed in Regulation Y under the ing Act that are informationally incomsame limitations. Banking organizations plete, effective May 20, 1999. seeking to engage abroad in data processing or data transmission activities Votes for this action: Mr. Greenspan that are not authorized by Regulation Y and Messrs. Kelley, Meyer, Ferguson, and must apply for the Board's prior consent Gramlich. Absent and not voting: under Regulation K. Ms. Rivlin.2 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 191 Under the International Banking Act, types of relocations and consolidathe Board may not approve an appli- tions, and branches closed in connection cation by a foreign bank to establish with emergency acquisitions or assisa branch, agency, commercial lending tance by the Federal Deposit Insurance company, or representative office unless Corporation. the bank provides the Board with information needed to adequately evaluate July 14, 1999—Notice of the application. The Board delegated to Modification of Procedures for the General Counsel, with the concur- Deposit Reporting Frequency rence of the director of the Division of Banking Supervision and Regulation, The Board amended its requirements the authority to return an application if that depository institutions switch to material informational deficiencies are new reporting categories for September not corrected within a reasonable period 1999 in light of the century date change, of time. effective August 1, 1999. Votes for this action: Messrs. Greenspan, June 22, 1999—Policy Statement Kelley, Meyer, Ferguson, and Gramlich.1 Concerning Branch Closing Depository institutions may be re- Notices and Policies quired to switch to new reporting cate- The Board approved a revised policy gories each September. Assignment to statement on branch closings by insured these reporting categories determines depository institutions to incorporate the frequency and detail of depositchanges in the law, effective June 29, reporting over the subsequent year and 1999. depends on increases or decreases in the level of deposits and reservable liabili- Votes for this action: Mr. Greenspan, ties. The Board suspended some shifts Ms. Rivlin, and Messrs. Kelley, Meyer, in reporting categories for September Ferguson, and Gramlich.2 1999, thereby reducing the need for depository institutions to modify their The Board, jointly with the other data processing systems before the imfederal banking and thrift agencies, pending century date change. Normal approved a revised policy statement category shift procedures will apply in on branch closings by insured deposi- September 2000. tory institutions to incorporate changes enacted by the Riegle-Neal Interstate November 10, 1999—Settlement Banking and Branching Efficiency Act Day Finality for Automated of 1994 and the Economic Growth and Clearinghouse Credit Regulatory Paperwork Reduction Act Transactions of 1996. The policy statement gives guidance on the procedure for branch The Board approved modifications to closings in low- or moderate-income the time when settlement becomes final areas by an interstate bank and for con- for automated clearinghouse (ACH) vening a meeting with the appropriate credit transactions processed by Federal parties if requested by a person from the Reserve Banks and required prefunding affected area. The revised statement also for ACH credit transactions in certain provides that the prior-notice require- Federal Reserve accounts. The effective ments for branch closings do not apply date will be announced three months to automated teller machines, certain before implementation in 2001. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 86th Annual Report, 1999 Votes for this action Messrs. Greenspan, Basic Discount Rate Ferguson, Kelley, Meyer, and Gramlich.1 The Board's decisions on the basic dis- The Board made settlement for ACH count rate were made against the backcredit transactions processed by the ground of the policy actions of the Fed- Federal Reserve final when posted, cur- eral Open Market Committee (FOMC) rently 8:30 a.m. eastern time on the day and related economic and financial of settlement, and adopted a prefunding developments. These developments are requirement for any ACH credit origina- reviewed more fully in other parts of tions settled through a Federal Reserve this REPORT, including the minutes of account that is monitored in real time. the FOMC meetings in 1999, which also The modifications are designed to appear in this REPORT. reduce risk to receiving depository financial institutions in credit transactions and to manage settlement risks in January through Mid-August: credit originations in a manner compa- No Changes in the Basic Rate rable to other Federal Reserve services that have similar finality characteristics. Economic activity expanded at a vigor- To allow sufficient time for software ous pace during the early months of the modifications, the effective date for year, underpinned by notable further settlement-day finality for credit ACH strength in consumer spending, but the transactions will be announced three recovery of financial markets in the months before implementation in United States and abroad and of foreign 2001. economies from the severe disruptions of the fall of 1998 was still tentative. Moreover, in an environment of robust 1999 Discount Rates improvements in productivity, inflation During 1999, the Board of Governors trends remained generally subdued approved two increases of lA percentage despite very tight labor markets. Against point in the basic discount rate charged this background, a majority of the Fedby the Federal Reserve Banks. These eral Reserve Banks favored an unactions, taken in August and Novem- changed basic discount rate of 4Vi perber, raised the basic rate from AVi per- cent, its level since mid-November cent to 5 percent. The rates for seasonal 1998. However, two Banks particularly and extended credit, which are set on concerned about the mounting risks of the basis of market-related formulas, higher inflation requested an increase of were changed more frequently, and lA percentage point during March and they exceeded the basic rate by vary- April, and three other Banks joined them ing amounts during the year. In July, during the period from May through the Board announced the establishment July. The Board took no action on these of a temporary program, the Century requests, but the Board members recog- Date Change Special Liquidity Facil- nized the need to monitor carefully ity (SLF), whose purpose was to lend developments bearing on the outlook to depository institutions to help them for rising inflation, notably, evidence of meet any unusual liquidity needs in further tightening of labor markets in the period around the century date the context of continuing rapid growth change. of the economy. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 193 Mid-August and Mid-November: a pace that would exceed the growth Basic Rate Increased of potential output, with attendant risks of rising inflation over time. In light of In August a growing number of Federal market uncertainties associated with the Reserve Banks joined those requesting century date change, no further changes a lA percentage point increase in the in the discount rate were requested over basic rate—a total of ten by the third the balance of the year despite ongoing week of August—amid indications that concerns about the outlook for inflation. recent wage and price increases had been a little larger on balance, though price inflation was still subdued. On Structure of Discount Rates August 24, the Board approved these pending actions in concert with a similar The basic discount rate is the rate noraction by the FOMC to increase its mally charged on loans to depository intended level of the federal funds rate. institutions for short-term adjustment These policy actions took account of the credit, while flexible, market-related more normal functioning of the financial rates generally apply on seasonal and markets following the period of some extended credit. These flexible rates are unsettlement during the fall of 1998 calculated every two weeks in accorand of the ongoing strength in domestic dance with formulas that are approved demand augmented by rising exports at by the Board. The rate on loans from the a time when labor markets were already Special Liquidity Facility during the very tight. Against this background, the century date rollover period was set at Board and the FOMC concluded that the 150 basis points above the intended degree of monetary ease that had been federal funds rate established by the implemented during the autumn of 1998 FOMC. to address the domestic effects of global The objective of the seasonal profinancial turmoil was no longer consis- gram is to help smaller institutions meet tent with sustained, noninflationary eco- liquidity needs arising from a clear patnomic expansion. tern of intra-yearly movements in their In mid-October, two Federal Reserve deposits and loans. Funds may be pro- Banks requested a further increase of vided for periods longer than those per- XA percentage point in the basic rate, and mitted under adjustment credit. Since its by mid-November two additional Banks introduction in early 1992, the flexible had joined them. On November 16, rate charged on seasonal credit has been again in conjunction with a similar closely aligned with short-term market increase by the FOMC in the intended rates; it is never less than the basic rate federal funds rate, the Board approved applicable to adjustment credit. the pending actions, thereby raising the The purpose of extended credit is to basic discount rate to 5 percent. Both assist depository institutions that are actions reflected concerns that despite under sustained liquidity pressure and tentative evidence of some slowing in are not able to obtain funds from other certain interest-sensitive sectors of the sources. The rate for extended credit is economy and of accelerating produc- 50 basis points higher than the rate for tivity, prevailing conditions in financial seasonal credit and is at least 50 basis markets seemed likely to foster contin- points above the basic rate. In appropriued expansion in aggregate demand at ate circumstances, the basic rate may be Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 86th Annual Report, 1999 applied to extended-credit loans for up the formulas for calculating the rates to thirty days, but any further borrow- on seasonal, extended, and SLF credit. ings would be charged the flexible, Votes on the reestablishment of the formarket-related rate. mulas for these flexible rates are not The Special Liquidity Facility was shown in this summary. All votes taken established as a temporary program for by the Board of Governors during 1999 lending to depository institutions dur- were unanimous. ing the period October 1, 1999, through April 7, 2000. This facility was intended Votes on the Basic Discount Rate to help ensure that depository institu- August 24, 1999. Effective this date, the tions would have adequate liquidity in Board approved actions taken by the the period surrounding the century date directors of the Federal Reserve Banks change. of Boston, New York, Philadelphia, Exceptionally large adjustment-credit Cleveland, Richmond, Atlanta, Chicago, loans that arise from computer break- St. Louis, Kansas City, and San Frandowns or other operating problems not cisco to increase the basic discount rate clearly beyond the reasonable control of lA percentage point, to 43A percent. the borrowing institution are assessed the highest rate applicable to any credit Votes for this action: Messrs. Greenspan, extended to depository institutions; Kelley, Meyer, Ferguson, and Gramlich. under the current structure, that is the Votes against this action: None. rate on SLF credit. At the end of 1999, the structure of The Board subsequently approved discount rates was as follows: a basic similar actions taken by the directors rate of 5 percent for short-term adjustof the Federal Reserve Banks of Minnement credit and rates of 5.70 percent apolis and Dallas, effective August 25 for seasonal credit, 6.20 percent for and 26, 1999, respectively. extended credit, and 7 percent for credit from the Special Liquidity Facility. Dur- November 16, 1999. Effective this ing 1999, the rate for seasonal credit date, the Board approved actions taken ranged from a low of 4.75 percent to a by the directors of the Federal Reserve high of 5.75 percent, that for extended Banks of Boston, Cleveland, Richmond, credit from a low of 5.25 percent to a Kansas City, and San Francisco to high of 6.25 percent, and that for SLF increase the basic discount rate lA percredit from a low of 6.75 percent to a centage point, to 5 percent. high of 7 percent. Votes for this action: Messrs. Greenspan, Ferguson, Kelley, Meyer, and Gramlich. Board Votes Votes against this action: None. Under the Federal Reserve Act, the boards of directors of the Federal The Board subsequently approved Reserve Banks must establish rates on similar actions taken by the directors of loans to depository institutions at least the Federal Reserve Banks of Atlanta every fourteen days and must submit and Dallas, effective November 17, such rates to the Board of Governors for 1999, and by the directors of the Federal review and determination. The Reserve Reserve Banks of New York, Philadel- Banks are also required to submit re- phia, Chicago, St. Louis, and Minneapoquests on the same schedule to renew lis, effective November 18, 1999. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

195 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 operations, 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 Com- Act. That section provides that the mittee: an Authorization for Domestic Board shall keep a complete record of Open Market Operations and a Domesthe actions taken by the Board and by tic Policy Directive. (A new Domestic the Federal Open Market Committee on Policy Directive is adopted at each reguall questions of policy relating to open larly scheduled meeting.) In the foreign market operations, that it shall record currency area, the Committee operates therein the votes taken in connection under an Authorization for Foreign Curwith the determination of open market rency Operations, a Foreign Currency policies and the reasons underlying each Directive, and Procedural Instructions policy 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 1999. 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 Committee at the time of the meetings Open Market Operations rather than on data as they may have been revised later. In Effect January 1, 1999 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 votes; in such cases, the range of their policy 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 United States in the open market, from or to Federal Reserve Bank of New York as securities dealers and foreign and interthe 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

196 86th Annual Report, 1999 Reserve Bank of New York, on a cash, regu- the provision of short-term investments for lar, or deferred delivery basis, for the System foreign and international accounts main- Open Market Account at market prices, and, tained at the Federal Reserve Bank of for such Account, to exchange maturing U.S. New York, the Federal Open Market Com- Government and Federal agency securities mittee authorizes and directs the Federal with the Treasury or the individual agencies Reserve Bank of New York (a) for System or to allow them to mature without replace- Open Market Account, to sell U.S. Government; provided that the aggregate amount of ment securities to such foreign and inter- U.S. Government and Federal agency securi- national accounts on the bases set forth in ties held in such Account (including forward paragraph l(a) under agreements providing commitments) at the close of business on the for the resale by such accounts of those day of a meeting of the Committee at which securities within 60 calendar days on terms action is taken with respect to a domestic comparable to those available on such transpolicy directive shall not be increased or actions in the market; and (b) for New York decreased by more than $12.0 billion during Bank account, when appropriate, to underthe period commencing with the opening of take with dealers, subject to the conditions business on the day following such meeting imposed on purchases and sales of securities and ending with the close of business on the in paragraph l(b), repurchase agreements in day of the next such meeting; U.S. Government and agency securities, and to arrange corresponding sale and repurchase agreements between its own account and (b) To buy U.S. Government securities, foreign and international accounts mainobligations that are direct obligations of, or tained at the Bank. Transactions undertaken fully guaranteed as to principal and interest with such accounts under the provisions of by, any agency of the United States, from this paragraph may provide for a service fee dealers for the account of the Federal when appropriate. Reserve Bank of New York under agreements for repurchase of such securities or obligations in 60 calendar days or less, at rates that, unless otherwise expressly autho- Domestic Policy Directive rized by the Committee, shall be determined by competitive bidding, after applying rea- In Effect January 1, 19991 sonable limitations on the volume of agreements with individual dealers; provided that in the event Government securities or agency The information reviewed at this meeting suggests that the economy has continued to issues covered by any such agreement are expand at a brisk pace in recent months. not repurchased by the dealer pursuant to the Growth in nonfarm payroll employment was agreement or a renewal thereof, they shall be strong in November, after more moderate sold in the market or transferred to the Sysgains in September and October, and the tem Open Market Account. civilian unemployment rate fell to 4.4 percent. Total industrial production declined 2. In order to ensure the effective conduct somewhat in November, but manufacturing of open market operations, the Federal Open output was stable and up considerably from Market Committee authorizes and directs the third-quarter pace. Business inventory the Federal Reserve Banks to lend U.S. Gov- accumulation slowed appreciably in October ernment securities held in the System Open after a sizable rise in the third quarter. The Market Account to Government securities nominal deficit on U.S. trade in goods and services narrowed slightly in October from dealers and to banks participating in Govits third-quarter average. Total retail sales ernment securities clearing arrangements rose sharply in October and November, and conducted through a Federal Reserve Bank, housing starts were strong as well. Available under such instructions as the Committee indicators point to a considerable pickup in may specify from time to time. 3. In order to ensure the effective conduct 1. Adopted by the Committee at its meeting on of open market operations, while assisting in December 22, 1998. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings 197 business capital spending after a lull in the to warrant an increase or a decrease in the third quarter. Trends in various measures of federal funds rate operating objective during wages and prices have been mixed in recent the intermeeting period. months. Most short-term interest rates have changed little on balance since the meeting Authorization for Foreign on November 17, but longer-term rates have Currency Operations declined somewhat. Share prices in equity markets have remained volatile and have posted sizable gains on balance over the In Effect January 1, 1999 intermeeting period. In foreign exchange markets, the trade-weighted value of the 1. The Federal Open Market Committee dollar has declined slightly over the period authorizes and directs the Federal Reserve in relation to other major currencies and in Bank of New York, for System Open Market terms of an index of the currencies of other Account, to the extent necessary to carry out countries that are important trading partners the Committee's foreign currency directive of the United States. and express authorizations by the Commit- M2 and M3 have posted very large tee pursuant thereto, and in conformity with increases in recent months. For the year such procedural instructions as the Committhrough November, both aggregates rose at tee may issue from time to time: rates well above the Committee's annual ranges. Total domestic nonflnancial debt has A. To purchase and sell the following expanded in recent months at a pace some- foreign currencies in the form of cable transwhat above the middle of its range. fers through spot or forward transactions on The Federal Open Market Committee the open market at home and abroad, includseeks monetary and financial conditions ing transactions with the U.S. Treasury, with that will foster price stability and promote the U.S. Exchange Stabilization Fund estabsustainable growth in output. In further- lished by Section 10 of the Gold Reserve ance of these objectives, the Committee Act of 1934, with foreign monetary authorireaffirmed at its meeting on June 30-July 1 ties, with the Bank for International Settlethe ranges it had established in February ments, and with other international financial for growth of M2 and M3 of 1 to 5 percent institutions: and 2 to 6 percent respectively, measured from the fourth quarter of 1997 to the fourth Austrian schillings Italian lire quarter of 1998. The range for growth of Belgian francs Japanese yen total domestic nonflnancial debt was main- Canadian dollars Mexican pesos Danish kroner Netherlands guilders tained at 3 to 7 percent for the year. For euro Norwegian kroner 1999, the Committee agreed on a tentative Pounds sterling Swedish kronor basis to set the same ranges for growth of the French francs Swiss francs monetary aggregates and debt, measured German marks from the fourth quarter of 1998 to the fourth quarter of 1999. The behavior of the mone- B. To hold balances of, and to have tary aggregates will continue to be evaluated outstanding forward contracts to receive or in the light of progress toward price level to deliver, the foreign currencies listed in stability, movements in their velocities, and paragraph A above. developments in the economy and financial markets. C. To draw foreign currencies and to To promote the Committee's long-run permit foreign banks to draw dollars under objectives of price stability and sustainable the reciprocal currency arrangements listed economic growth, the Committee in the im- in paragraph 2 below, provided that drawmediate future seeks conditions in reserve ings by either party to any such arrangement markets consistent with maintaining the shall be fully liquidated within 12 months federal funds rate at an average of around after any amount outstanding at that time 43/4 percent. In view of the evidence cur- was first drawn, unless the Committee, rently available, the Committee believes that because of exceptional circumstances, speprospective developments are equally likely cifically authorizes a delay. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 86th Annual Report, 1999 D. To maintain an overall open posi- by the Committee, be at prevailing market tion in all foreign currencies not exceeding rates. For the purpose of providing an invest- $25.0 billion. For this purpose, the overall ment return on System holdings of foreign open position in all foreign currencies is currencies, or for the purpose of adjusting defined as the sum (disregarding signs) of interest rates paid or received in connection net positions in individual currencies. The with swap drawings, transactions with fornet position in a single foreign currency is eign central banks may be undertaken at defined as holdings of balances in that cur- non-market exchange rates. rency, plus outstanding contracts for future receipt, minus outstanding contracts for 4. It shall be the normal practice to arrange future delivery of that currency, i.e., as the with foreign central banks for the coordinasum of these elements with due regard to tion of foreign currency transactions. In maksign. ing operating arrangements with foreign central banks on System holdings of foreign 2. The Federal Open Market Commit- currencies, the Federal Reserve Bank of tee directs the Federal Reserve Bank of New York shall not commit itself to maintain New York to maintain reciprocal currency any specific balance, unless authorized by arrangements ("swap" arrangements) for the the Federal Open Market Committee. Any System Open Market Account for periods up agreements or understandings concerning the to a maximum of 12 months with the follow- administration of the accounts maintained by ing foreign banks, which are among those the Federal Reserve Bank of New York with designated by the Board of Governors of the the foreign banks designated by the Board Federal Reserve System under Section 214.5 of Governors under Section 214.5 of Reguof Regulation N, Relations with Foreign lation N shall be referred for review and Banks and Bankers, and with the approval of approval to the Committee. the Committee to renew such arrangements on maturity: 5. Foreign currency holdings shall be invested to ensure that adequate liquidity is Amount maintained to meet anticipated needs and so Foreign bank (millions of that each currency portfolio shall generally dollars equivalent) have an average duration of no more than 18 months (calculated as Macaulay dura- Austrian National Bank 250 tion). When appropriate in connection with National Bank of Belgium 1,000 Bank of Canada 2,000 arrangements to provide investment facilities National Bank of Denmark 250 for foreign currency holdings, U.S. Govern- Bank of England 3,000 ment securities may be purchased from for- Bank of France 2,000 eign central banks under agreements for German Federal Bank 6,000 Bank of Italy 3,000 repurchase of such securities within 30 cal- Bank of Japan 5,000 endar days. Bank of Mexico 3,000 Netherlands Bank 500 Bank of Norway 250 6. All operations undertaken pursuant to Bank of Sweden 300 Swiss National Bank 4,000 the preceding paragraphs shall be reported Bank for International Settlements promptly to the Foreign Currency Sub- Dollars against Swiss francs 600 committee and the Committee. The Foreign Dollars against authorized European Currency Subcommittee consists of the currencies other than Swiss francs 1,250 Chairman and Vice Chairman of the Committee, the Vice Chairman of the Board of Any changes in the terms of existing swap Governors, and such other member of the arrangements, and the proposed terms of any Board as the Chairman may designate (or in new arrangements that may be authorized, the absence of members of the Board serving shall be referred for review and approval to on the Subcommittee, other Board Members the Committee. designated by the Chairman as alternates, and in the absence of the Vice Chairman of 3. All transactions in foreign currencies the Committee, his alternate). Meetings of undertaken under paragraph 1(A) above the Subcommittee shall be called at the shall, unless otherwise expressly authorized request of any member, or at the request of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings 199 the Manager, System Open Market Account 2. To achieve this end the System shall: ("Manager"), for the purposes of reviewing recent or contemplated operations and of A. Undertake spot and forward purconsulting with the Manager on other mat- chases and sales of foreign exchange. ters relating to his responsibilities. At the B. Maintain reciprocal currency request of any member of the Subcommittee, ("swap") arrangements with selected forquestions arising from such reviews and coneign central banks and with the Bank for sultations shall be referred for determination International Settlements. to the Federal Open Market Committee. C. Cooperate in other respects with 7. The Chairman is authorized: central banks of other countries and with international monetary institutions. A. With the approval of the Committee, to enter into any needed agreement or understanding with the Secretary of the Trea- 3. Transactions may also be undertaken: sury about the division of responsibility for A. To adjust System balances in light foreign currency operations between the Sysof probable future needs for currencies. tem and the Treasury; B. To provide means for meeting Sys- B. To keep the Secretary of the Treatem and Treasury commitments in particular sury fully advised concerning System forcurrencies, and to facilitate operations of the eign currency operations, and to consult with Exchange Stabilization Fund. the Secretary on policy matters relating to foreign currency operations; C. For such other purposes as may be expressly authorized by the Committee. C. From time to time, to transmit appropriate reports and information to the 4. System foreign currency operations shall National Advisory Council on International be conducted: Monetary and Financial Policies. A. In close and continuous consultation and cooperation with the United States 8. Staff officers of the Committee are autho- Treasury; rized to transmit pertinent information on System foreign currency operations to appro- B. In cooperation, as appropriate, with priate officials of the Treasury Department. foreign monetary authorities; and 9. All Federal Reserve Banks shall partici- C. In a manner consistent with the oblipate in the foreign currency operations for gations of the United States in the Interna- System Account in accordance with para- tional Monetary Fund regarding exchange graph 3 G(l) of the Board of Governors' arrangements under the IMF Article IV. Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks Procedural Instructions with dated January 1, 1944. Respect to Foreign Currency Operations Foreign Currency Directive In Effect January 1, 1999 In conducting operations pursuant to the In Effect January 1, 1999 authorization and direction of the Federal Open Market Committee as set forth in the 1. System operations in foreign currencies Authorization for Foreign Currency Operashall generally be directed at countering dis- tions and the Foreign Currency Directive, orderly market conditions, provided that the Federal Reserve Bank of New York, market exchange rates for the U.S. dollar through the Manager, System Open Market reflect actions and behavior consistent with Account ("Manager"), shall be guided by the IMF Article IV, Section 1. the following procedural understandings Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 86th Annual Report, 1999 with respect to consultations and clearances 3. The Manager shall also consult with the with the Committee, the Foreign Currency Subcommittee or the Chairman about pro- Subcommittee, and the Chairman of the posed swap drawings by the System, and Committee. All operations undertaken pur- about any operations that are not of a routine suant to such clearances shall be reported character. promptly to the Committee. 1. The Manager shall clear with the Sub- Meeting Held on committee (or with the Chairman, if the February 2-3,1999 Chairman believes that consultation with the Subcommittee is not feasible in the time A meeting of the Federal Open Maravailable): ket Committee was held in the offices A. Any operation that would result in a of the Board of Governors of the Fedchange in the System's overall open position eral Reserve System in Washington, in foreign currencies exceeding $300 million D.C., on Tuesday, February 2, 1999, at on any day or $600 million since the most 2:30 p.m. and continued on Wednesday, recent regular meeting of the Committee. February 3, 1999, at 9:00 a.m. B. Any operation that would result in a Present: change on any day in the System's net posi- Mr. Greenspan, Chairman tion in a single foreign currency exceeding Mr. McDonough, Vice Chairman $150 million, or $300 million when the Mr. Boehn operation is associated with repayment of Mr. Ferguson swap drawings. Mr. Gramlich C. Any operation that might generate a Mr. Kelley substantial volume of trading in a particular Mr. McTeer currency by the System, even though the Mr. Meyer change in the System's net position in that Mr. Moskow currency might be less than the limits speci- Ms. Rivlin fied in l.B. Mr. Stern D. Any swap drawing proposed by a Messrs. Broaddus, Guynn, Jordan, foreign bank not exceeding the larger of and Parry, Alternate Members (i) $200 million or (ii) 15 percent of the size of the Federal Open Market of the swap arrangement. Committee 2. The Manager shall clear with the Com- Ms. Minehan, Messrs. Poole, and Hoenig, Presidents of the mittee (or with the Subcommittee, if the Federal Reserve Banks of Boston, Subcommittee believes that consultation St.Louis, and Kansas City with the full Committee is not feasible in the respectively time available, or with the Chairman, if the Chairman believes that consultation with the Subcommittee is not feasible in the time Mr. Kohn, Secretary and Economist available): Mr. Bernard, Deputy Secretary Ms. Fox, Assistant Secretary A. Any operation that would result in a Mr. Gillum, Assistant Secretary change in the System's overall open position Mr. Mattingly, General Counsel in foreign currencies exceeding $1.5 billion Mr. Baxter, Deputy General Counsel since the most recent regular meeting of the Mr. Prell, Economist Committee. Messrs. Alexander, Cecchetti, B. Any swap drawing proposed by Hooper, Hunter, Lang, a foreign bank exceeding the larger of Lindsey, Rolnick, Rosenblum, (i) $200 million or (ii) 15 percent of the Slifman, and Stockton, size of the swap arrangement. Associate Economists Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 201 Mr. Fisher, Manager, System Open Mr. Evans,3 Manager, Division Market Account of Reserve Bank Operations and Payment Systems, Board Mr. Ettin, Deputy Director, of Governors Division of Research and Statistics, Board of Governors Ms. Low, Open Market Secretariat Assistant, Division of Mr. Winn,2 Assistant to the Board, Monetary Affairs, Board Office of Board Members, of Governors Board of Governors Mr. Conrad, First Vice President, Messrs. Madigan and Simpson, Federal Reserve Bank of Associate Directors, Divisions Chicago of Monetary Affairs and Research and Statistics Messrs. Beebe, Eisenbeis, respectively, Board of Goodfriend, Hakkio, and Governors Rasche, Senior Vice Presidents, Federal Reserve Banks of Mr. Reinhart, Deputy Associate San Francisco, Atlanta, Director, Division of Richmond, Kansas City, Monetary Affairs, Board and St. Louis respectively of Governors Messrs. Altig, Bentley, and Mr. Dennis,3 Assistant Director, Rosengren, Vice Presidents, Division of Reserve Bank Federal Reserve Banks of Operations and Payment Cleveland, New York, and Systems, Board of Governors Boston respectively Messrs. ReifSchneider4 and Small,4 Section Chiefs, Divisions of In the agenda for this meeting, it was Research and Statistics and reported that advices of the election of Monetary Affairs respectively, the following members and alternate Board of Governors members of the Federal Open Market Ms. Kole,5 Messrs. English5 and Committee for the period commencing Rosine,5 Senior Economists, January 1, 1999, and ending Decem- Divisions of International ber 31, 1999, had been received and Finance, Monetary Affairs, that these individuals had executed and Research and Statistics their oaths of office. respectively The elected members and alternate Ms. Garrett, Economist, Division members were as follows: of Monetary Affairs, Board of Governors William J. McDonough, President of the Federal Reserve Bank of New York.6 Edward G. Boehne, President of the Federal 2. Attended Wednesday's session only. Reserve Bank of Philadelphia, with 3. Attended portions of meeting relating to the J. Alfred Broaddus, Jr., President of the examination of the System Open Market Account Federal Reserve Bank of Richmond, as and changes to the domestic securities lending alternate. program. 4. Attended portions of meeting relating to the discussion of the Committee's consideration of its monetary and debt ranges for 1999. 6. Mr. Jamie B. Stewart, Jr., incoming First 5. Attended portion of meeting relating to the Vice President of the Federal Reserve Bank Committee's review of the economic outlook and of New York, took his oath of office as alterconsideration of its monetary and debt ranges for nate member for Mr. McDonough on Feb- 1999. ruary 18, 1999. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 86th Annual Report, 1999 Michael H. Moskow, President of the Fed- By unanimous vote, the Federal eral Reserve Bank of Chicago, with Reserve Bank of New York was selected Jerry L. Jordan, President of the Fedto execute transactions for the System eral Reserve Bank of Cleveland, as Open Market Account until the adjournalternate. Robert D. McTeer, Jr., President of the Fed- ment of the first meeting of the Commiteral Reserve Bank of Dallas, with Jack tee after December 31, 1999. Guynn, President of the Federal By unanimous vote, Peter R. Fisher Reserve Bank of Atlanta, as alternate. was selected to serve at the pleasure of Gary H. Stern, President of the Federal the Committee as Manager, System Reserve Bank of Minneapolis, with Robert T. Parry, President of the Fed- Open Market Account, on the undereral Reserve Bank of San Francisco, as standing that his selection was subject to alternate. being satisfactory to the Federal Reserve Bank of New York. By unanimous vote, the following officers of the Federal Open Market Secretary's note: Advice subsequently was received that the selection of Mr. Fisher Committee were elected to serve until as Manager was satisfactory to the board of the election of their successors at the directors of the Federal Reserve Bank of first meeting of the Committee after New York. December 31, 1999, with the understanding that in the event of the discon- The Report of Examination of the tinuance of their official connection with System Open Market Account, conthe Board of Governors or with a Fed- ducted by the Board's Division of eral Reserve Bank, they would cease to Reserve Bank Operations and Payment have any official connection with the Systems as of the close of business on Federal Open Market Committee: November 5, 1998, was accepted. On the recommendation of the Alan Greenspan Chairman Manager of the System Open Market William J. McDonough Vice Chairman Account, the Committee amended paragraph 2 of the Authorization for Domes- Donald L. Kohn Secretary and Economist tic Open Market Operations relating to Normand R.V. Bernard Deputy Secretary the Treasury securities lending program. Lynn S. Fox Assistant The revised facility introduces the auc- Secretary tion technique for awarding borrowed Gary P. Gillum Assistant securities to dealer firms on a competi- Secretary tive basis. The new facility is designed J. Virgil Mattingly, Jr. General Counsel Thomas C. Baxter, Jr. Deputy General to implement more effectively the objec- Counsel tive of providing a short-term "last Michael J. Prell Economist resort" source of Treasury securities to Karen H. Johnson Economist the dealer market and thereby to facilitate the smooth clearing of Treasury Lewis S. Alexander, Stephen G. Cecchetti, securities and to ease liquidity strains Peter Hooper, III, William C. Hunter, in the market as they arise. The amended Richard W. Lang, David E. Lindsey, Arthur J. Rolnick, Harvey Rosenblum, Authorization for Domestic Open Mar- Larry Slifman, and David J. Stockton, ket Operations was approved unani- Associate Economists mously in the form shown below: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 203 Authorization for Domestic issues covered by any such agreement are Open Market Operations not repurchased by the dealer pursuant to the agreement or a renewal thereof, they shall be sold in the market or transferred to the Amended February 2, 7999 System Open Market Account. 1. The Federal Open Market Committee 2. In order to ensure the effective conduct authorizes and directs the Federal Reserve of open market operations, the Federal Open Bank of New York, to the extent neces- Market Committee authorizes the Federal sary to carry out the most recent domestic Reserve Ban1: of New York to lend on an policy directive adopted at a meeting of the overnight basis U.S. Government securities Committee: held in the System Open Market Account to (a) To buy or sell U.S. Government dealers at rates that shall be determined by securities, including securities of the Fed- competitive bidding but that in no event shall eral Financing Bank, and securities that are be less than 1.0 percent per annum of the direct obligations of, or fully guaranteed as market value of the securities lent. The Fedto principal and interest by, any agency of eral Reserve Bank of New York shall apply the United States in the open market, from reasonable limitations on the total amount of or to securities dealers and foreign and inter- a specific issue that may be auctioned and on national accounts maintained at the Federal the amount of securities that each dealer may Reserve Bank of New York, on a cash, regu- borrow. The Federal Reserve Bank of New lar, or deferred delivery basis, for the System York may reject bids which could facilitate a Open Market Account at market prices, and, dealer's ability to control a single issue as for such Account, to exchange maturing U.S. determined solely by the Federal Reserve Government and Federal agency securities Bank of New York. with the Treasury or the individual agencies 3. In order to ensure the effective conduct or to allow them to mature without replace- of open market operations, while assisting in ment; provided that the aggregate amount of the provision of short-term investments for U.S. Government and Federal agency securi- foreign and international accounts mainties held in such Account (including forward tained at the Federal Reserve Bank of New commitments) at the close of business on the York, the Federal Open Market Committee day of a meeting of the Committee at which authorizes and directs the Federal Reserve action is taken with respect to a domestic Bank of New York (a) for System Open policy directive shall not be increased or Market Account, to sell U.S. Government decreased by more than $12.0 billion during securities to such foreign and international the period commencing with the opening of accounts on the bases set forth in paragraph business on the day following such meeting l(a) under agreements providing for the and ending with the close of business on the resale by such accounts of those securities day of the next such meeting; within 60 calendar days on terms compa- (b) To buy U.S. Government securities rable to those available on such transactions and obligations that are direct obligations in the market; and (b) for New York Bank of, or fully guaranteed as to principal and account, when appropriate, to undertake with interest by, any agency of the United States, dealers, subject to the conditions imposed from dealers for the account of the Federal on purchases and sales of securities in para- Reserve Bank of New York under agree- graph l(b), repurchase agreements in U.S. ments for repurchase of such securities or Government and agency securities, and to obligations in 60 calendar days or less, at arrange corresponding sale and repurchase rates that, unless otherwise expressly autho- agreements between its own account and rized by the Committee, shall be determined foreign and international accounts mainby competitive bidding, after applying rea- tained at the Bank. Transactions undertaken sonable limitations on the volume of agree- with such accounts under the provisions of ments with individual dealers; provided that this paragraph may provide for a service fee in the event Government securities or agency when appropriate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 86th Annual Report, 1999 On the Manager's recommendation, A. To purchase and sell the following the Committee also amended the For- foreign currencies in the form of cable transfers through spot or forward transactions eign Currency Authorization and the on the open market at home and abroad, Foreign Currency Directive to reflect including transactions with the U.S. Treachanges triggered by the launch of the sury, with the U.S. Exchange Stabilization euro. Specifically, it dropped from the Fund established by Section 10 of the Gold Authorization those European curren- Reserve Act of 1934, with foreign monetary authorities, with the Bank for International cies that now exist as denominations of Settlements, and with other international the euro (Austrian schillings, Belgian financial institutions: francs, French francs, Italian lire, Netherlands guilders, and German marks). The amendments also removed Canadian dollars Mexican pesos Danish kroner Norwegian kroner the central banks of Austria, Belgium, Euro Swedish kronor Pounds sterling Swiss francs Denmark, England, France, Germany, Japanese yen Italy, Japan, Netherlands, Norway, Sweden, and Switzerland, and the Bank B. To hold balances of, and to have for International Settlements from the outstanding forward contracts to receive or list of institutions with which the Fed- to deliver, the foreign currencies listed in eral Reserve Bank of New York was paragraph A above. authorized to maintain reciprocal cur- C. To draw foreign currencies and to rency arrangements (swap facilities). permit foreign banks to draw dollars under the reciprocal currency arrangements listed In keeping with the Committee's deciin paragraph 2 below, provided that drawsion at the November 1998 meeting and ings by either party to any such arrangement after consultations with officials at the shall be fully liquidated within 12 months foreign institutions, the reciprocal cur- after any amount outstanding at that time rency arrangements in question were not was first drawn, unless the Committee, because of exceptional circumstances, sperenewed after they matured on various cifically authorizes a delay. dates in December. D. To maintain an overall open posi- Accordingly, the amended Authorization in all foreign currencies not exceeding tion for Foreign Currency Operations $25.0 billion. For this purpose, the overall and the Foreign Currency Directive open position in all foreign currencies is were unanimously approved in the defined as the sum (disregarding signs) of net positions in individual currencies. The forms shown below: net position in a single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for future Authorization for Foreign receipt, minus outstanding contracts for future delivery of that currency, i.e., as the Currency Operations sum of these elements with due regard to sign. Amended February 2, 1999 2. The Federal Open Market Committee directs the Federal Reserve Bank of New 1. The Federal Open Market Committee York to maintain reciprocal currency authorizes and directs the Federal Reserve arrangements ("swap" arrangements) for Bank of New York, for System Open Market the System Open Market Account for Account, to the extent necessary to carry out periods up to a maximum of 12 months with the Committee's foreign currency directive the following foreign banks, which are and express authorizations by the Committee among those designated by the Board of pursuant thereto, and in conformity with Governors of the Federal Reserve System such procedural instructions as the Commit- under Section 214.5 of Regulation N, Relatee may issue from time to time: tions with Foreign Banks and Bankers, and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 205 with the approval of the Committee to renew ments for repurchase of such securities such arrangements on maturity: within 30 calendar days. 6. All operations undertaken pursuant to the preceding paragraphs shall be reported Amount of promptly to the Foreign Currency Subcom- Foreign bank arrangement mittee and the Committee. The Foreign Cur- (millions of rency Subcommittee consists of the Chairdollars equivalent) man and Vice Chairman of the Committee, Bank of Canada ... 2,000 the Vice Chairman of the Board of Gover- Bank of Mexico ... 3,000 nors, and such other member of the Board as the Chairman may designate (or in the absence of members of the Board serving Any changes in the terms of existing swap on the Subcommittee, other Board members arrangements, and the proposed terms of any designated by the Chairman as alternates, new arrangements that may be authorized, and in the absence of the Vice Chairman of shall be referred for review and approval to the Committee, his alternate). Meetings of the Committee. the Subcommittee shall be called at the 3. All transactions in foreign currencies request of any member, or at the request of undertaken under paragraph 1 A. above shall, the Manager, System Open Market Account unless otherwise expressly authorized by the ("Manager"), for the purposes of review- Committee, be at prevailing market rates. ing recent or contemplated operations and For the purpose of providing an investment of consulting with the Manager on other return on System holdings of foreign curren- matters relating to his responsibilities. At cies, or for the purpose of adjusting interest the request of any member of the Subrates paid or received in connection with committee, questions arising from such swap drawings, transactions with foreign reviews and consultations shall be referred central banks may be undertaken at non- for determination to the Federal Open Marmarket exchange rates. ket Committee. 4. It shall be the normal practice to 7. The Chairman is authorized: arrange with foreign central banks for the A. With the approval of the Commitcoordination of foreign currency transac- tee, to enter into any needed agreement or tions. In making operating arrangements understanding with the Secretary of the Treawith foreign central banks on System hold- sury about the division of responsibility for ings of foreign currencies, the Federal foreign currency operations between the Sys- Reserve Bank of New York shall not com- tem and the Treasury; mit itself to maintain any specific balance, B. To keep the Secretary of the Treaunless authorized by the Federal Open Mar- sury fully advised concerning System forket Committee. Any agreements or under- eign currency operations, and to consult with standings concerning the administration of the Secretary on policy matters relating to the accounts maintained by the Federal foreign currency operations; Reserve Bank of New York with the foreign C. From time to time, to transmit banks designated by the Board of Governors appropriate reports and information to the under Section 214.5 of Regulation N shall National Advisory Council on International be referred for review and approval to the Monetary and Financial Policies. Committee. 8. Staff officers of the Committee are 5. Foreign currency holdings shall be authorized to transmit pertinent inforinvested to ensure that adequate liquidity mation on System foreign currency operais maintained to meet anticipated needs and tions to appropriate officials of the Treasury so that each currency portfolio shall gener- Department. ally have an average duration of no more 9. All Federal Reserve Banks shall parthan 18 months (calculated as Macaulay ticipate in the foreign currency operations duration). When appropriate in connection for System Account in accordance with parawith arrangements to provide investment graph 3 G(l) of the Board of Governors' facilities for foreign currency holdings, U.S. Statement of Procedure with Respect to For- Government securities may be purchased eign Relationships of Federal Reserve Banks from foreign central banks under agree- dated January 1, 1944. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 86th Annual Report, 1999 Foreign Currency Directive Authorization for Foreign Currency Operations and the Foreign Currency Directive, Amended February 2, 1999 the Federal Reserve Bank of New York, through the Manager, System Open Market 1. System operations in foreign curren- Account ("Manager"), shall be guided by cies shall generally be directed at countering the following procedural understandings disorderly market conditions, provided that with respect to consultations and clearances market exchange rates for the U.S. dollar with the Committee, the Foreign Currency reflect actions and behavior consistent with Subcommittee, and the Chairman of the the IMF Article IV, Section 1. Committee. All operations undertaken pur- 2. To achieve this end the System shall: suant to such clearances shall be reported A. Undertake spot and forward pur- promptly to the Committee. chases and sales of foreign exchange. 1. The Manager shall clear with the Sub- B. Maintain reciprocal currency committee (or with the Chairman, if the ("swap") arrangements with selected for- Chairman believes that consultation with the eign central banks. Subcommittee is not feasible in the time C. Cooperate in other respects with available): central banks of other countries and with A. Any operation that would result in a international monetary institutions. change in the System's overall open position 3. Transactions may also be undertaken: in foreign currencies exceeding $300 million A. To adjust System balances in light on any day or $600 million since the most of probable future needs for currencies. recent regular meeting of the Committee. B. To provide means for meeting Sys- B. Any operation that would result in tem and Treasury commitments in particular a change on any day in the System's net currencies and to facilitate operations of the position in a single foreign currency exceed- Exchange Stabilization Fund. ing $150 million, or $300 million when the C. For such other purposes as may be operation is associated with repayment of expressly authorized by the Committee. swap drawings. 4. System foreign currency operations C. Any operation that might generate a shall be conducted: substantial volume of trading in a particular A. In close and continuous consulta- currency by the System, even though the tion and cooperation with the United States change in the System's net position in that Treasury; currency might be less than the limits speci- B. In cooperation, as appropriate, with fied in I.B. foreign monetary authorities; and D. Any swap drawing proposed by a C. In a manner consistent with the obli- foreign 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 By unanimous vote, the Procedural the Subcommittee believes that consultation with the full Committee is not feasible Instructions with Respect to Foreign in the time available, or with the Chairman, Currency Operations shown below were if the Chairman believes that consultation reaffirmed. with the Subcommittee is not feasible in the time available): A. Any operation that would result in a Procedural Instructions with change in the System's overall open position in foreign currencies exceeding $1.5 billion Respect to Foreign Currency since the most recent regular meeting of the Operations Committee. B. Any swap drawing proposed by Reaffirmed February 2, 7999 a foreign bank exceeding the larger of (i) $200 million or (ii) 15 percent of the size In conducting operations pursuant to the of 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 207 proposed swap drawings by the System and ruary 2, 1999. By unanimous vote, the about any operations that are not of a routine Committee ratified these transactions. character. The Committee then turned to a discussion of the economic and financial On January 27, 1999, the continuing outlook and the implementation of rules, regulations, and other instruc- monetary policy over the intermeeting tions of the Committee had been distrib- period ahead. A summary of the ecouted with the advice that, in accordance nomic and financial information availwith procedures approved by the Com- able at the time of the meeting and of mittee, they were being called to the the Committee's discussion is provided Committee's attention before the below, followed by the domestic policy February 2-3 meeting to give mem- directive that was approved by the Combers an opportunity to raise any ques- mittee and issued to the Federal Reserve tions they might have concerning Bank of New York. them. Members were asked to indi- The information reviewed at this cate if they wished to have any of the meeting suggested that the economy instruments in question placed on the expanded rapidly in the closing months agenda for consideration at this meet- of 1998. Widespread strength in domesing, and no requests for consideration tic final demand and a diminished drag were received. Accordingly, all of from net exports underpinned further these instruments remained in effect solid gains in production, employment, in their existing form. The Committee and income. Inflation remained subdued discussed proposed changes to the despite very tight labor markets. Program for Security of FOMC Nonfarm payroll employment re- Information to update the document corded robust increases in November with regard to certain security classifica- and December. Although manufacturing tions and access to confidential FOMC experienced further sizable job losses information. The Committee decided over the two months, strong employto continue its discussion at a later ment gains were achieved in construcmeeting. tion, retail trade, and the services indus- By unanimous vote, the minutes of tries. The civilian unemployment rate the meeting of the Federal Open Market fell to 4.3 percent in December, and Committee held on December 22, 1998, other measures of labor conditions also were approved. indicated that labor markets remained The Manager of the System Open quite tight through year-end. Market Account reported on recent Industrial production rebounded in developments in foreign exchange mar- December from a small November kets. There were no open market opera- decline. Industrial output strengthened tions in foreign currencies for the Sys- for the fourth quarter as a whole, largely tem's account in the period since the reflecting a surge in the production of previous meeting, and thus no vote was motor vehicles and parts that more than required of the Committee. offset sizable reductions in mining and The Manager also reported on devel- utility output. The manufacture of highopments in domestic financial markets tech equipment surged further and the and on System open market trans- production of construction supplies actions in government securities and stayed on a brisk upward trend while federal agency obligations during the activity in other manufacturing categoperiod December 22, 1998 through Feb- ries remained weak. On balance, output Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 86th Annual Report, 1999 in manufacturing expanded at about the able to a pickup in purchases of motor same pace as capacity, leaving the fac- vehicles and aircraft. Elsewhere, investtory operating rate unchanged at a rela- ment in high-tech equipment expanded tively low level. rapidly further, while spending for other Consumer spending, supported by types of durable equipment decelerated further sizable gains in income and net somewhat. Nonresidential construction worth, remained robust through year- activity apparently rose moderately in end. Retail sales rose sharply in the the fourth quarter. Office construction fourth quarter. Expenditures for durable picked up further in an environment of goods, particularly motor vehicles, were falling vacancy rates and rising rental very strong. Outlays for nondurable costs, but other building activity goods were brisk despite sluggish remained sluggish. growth in spending for apparel. Unsea- The pace of business inventory sonably mild weather held down spend- investment in October and November ing for energy services in November was slightly above that of the third and December, but purchases of other quarter, but in comparison with strong types of services recorded moderate sales inventory positions were relatively increases. Surveys in early 1999 indi- lean in most industries. In manufacturcated buoyant consumer sentiment, ing, stocks increased moderately in the reflecting optimism about personal October-November period, and the finances and the employment outlook. aggregate stock-shipments ratio was Residential housing activity contin- in the middle of its narrow range for the ued to display substantial strength in the past year. Inventory investment in the fourth quarter. Single-family housing wholesale sector slowed considerably, starts remained at a very high level in but much of the swing reflected the December, and sales of new homes in unusually early harvest of farm prodthat month were only slightly below the ucts. The inventory-sales ratio for this record established in November. Sales sector was still at the top of its range of existing homes hit a record high for the last year, and inventory overin December. Unseasonably favorable hangs persisted in metals and minerals, weather extended the construction sea- machinery, and chemicals. Retailers son in some areas of the country, but stepped up their inventory accumulalow mortgage rates, rapid employment tion in the October-November period. growth, rising net worth, and special However, sales were robust and the financing programs designed to broaden inventory-sales ratio for this sector conopportunities for homeownership were tinued to trend downward. important factors in the strength of home The average deficit on U.S. trade sales. Multifamily housing starts edged in goods and services for October lower in the fourth quarter as a Decem- and November was a little smaller than ber increase partially reversed a Novem- the rate for the third quarter. The value ber decline; rents have continued to rise of exports for the two-month period in real terms over the last several years, rose considerably, with the largest but vacancy rates have changed little. gains occurring in automotive products Business fixed investment picked up shipped to Canada, aircraft, machinery, markedly in the fourth quarter after the agricultural products, and services. The small decline of the previous quarter. value of imports also moved up, but Much of the surge in spending on pro- by less than the value of exports. While ducers' durable equipment was attribut- the increases in imports were wide- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 209 spread across trade categories, particu- about 43/4 percent and that did not conlarly large advances were recorded for tain any bias with regard to the direction automotive products from Canada and of possible adjustments to policy during Mexico and for computers. The avail- the intermeeting period. In the Commitable data suggested a weaker economic tee's view, the stance of policy appeared performance in most of the major to be consistent with its objectives of foreign industrial countries in the fostering sustained low inflation and fourth quarter; economic activity likely high employment, and the risks to this fell further in Japan, and economic outlook were reasonably well balanced growth apparently slowed in most coun- over the near term. tries of the euro bloc. Activity in most Open market operations during the Asian developing countries remained intermeeting period were directed depressed, though some seemed to be toward maintaining the federal funds approaching a trough and Korea rate at the Committee's desired level. In appeared to be in the early stages of a the event, however, the rate averaged a recovery. Moreover, economic condi- little below its intended level, largely tions worsened in most Latin American reflecting the efforts of the Trading Desk economies. to keep reserve pressures around year- Inflation remained low in 1998. Con- end to a minimum. Other short-term sumer prices changed little in Decem- market rates declined somewhat on balber, reflecting a sizable drop in energy ance, partly owing to the disappearance prices that offset the large increase in of year-end pressures. Most long-term tobacco prices put in place after a settle- interest rates changed little over the ment was reached between states and intermeeting period, but Treasury bond the tobacco makers. For 1998 as a yields moved up slightly on balance, whole, CPI inflation was slightly lower apparently in response to incoming data than in 1997; a substantial decline in suggesting stronger-than-expected ecoenergy prices more than offset a sizable nomic growth. pickup in food inflation and a small In foreign exchange markets, the increase in core inflation. At the pro- trade-weighted value of the dollar ducer level, prices of finished goods appreciated slightly on balance over edged down in 1998 following an the period. A small decline in the dollar appreciable decline in 1997. While relative to other major currencies was finished energy prices fell by more in more than offset by the dollar's appre- 1998, finished food prices were down ciation in terms of the currencies of a only slightly and prices of core finished broader group of countries that also are goods turned up after having been important trading partners of the United unchanged in 1997. Growth of hourly States. The dollar appreciated against compensation of private industry work- the euro following the release of data ers slowed considerably in the fourth confirming a slowdown of economic quarter of 1998, and the increase in growth in much of the euro area and the hourly compensation for the year was absence of inflationary pressures, and it little changed from that of 1997. rose against the British pound after the At its meeting on December 22,1998, Bank of England unexpectedly cut its the Committee adopted a directive that repo rate. Moreover, the economic crisis called for maintaining conditions in in Brazil apparently contributed to an reserve markets that were consistent increase in the dollar relative to some with an unchanged federal funds rate of emerging market currencies. Against the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 86th Annual Report, 1999 yen, however, the dollar fell in early jected to rise somewhat over the projec- January to its lowest level in more than tion horizon, largely as a result of an two years, evidently in response to sharp expected upturn in energy prices. increases in yields on Japanese bonds, In the Committee's discussion of curbut the decline was partially reversed rent and prospective economic condisubsequently. tions, members referred to continuing M2 and M3 continued to expand rap- indications of an exceptional economic idly in December, with their liquid com- performance that was characterized by ponents, especially money market funds, the persistence of quite low inflation registering particularly large increases. despite very high and rapidly rising lev- The effects of recent monetary policy els of overall output and employment. easings in reducing the opportunity costs The members currently saw few signs of these components, strong growth in that the economic expansion had moder- GDP, and perhaps continued heightened ated to a more sustainable rate, but most demands for liquid and safe assets continued to anticipate substantial slowseemed to have contributed to this per- ing over the year ahead to a pace close formance. Available data for January to or somewhat above that of the econopointed to appreciable moderation in the my's long-run potential. While many growth of both aggregates. From the agreed that such an outlook was subfourth quarter of 1997 to the fourth ject to greater upside risk than they quarter of 1998, M2 and M3 rose at had anticipated a few months ago— rates well above their annual ranges, given the abatement of market turmoil while total domestic nonfinancial debt and positive business and consumer expanded at a pace somewhat above the sentiment—such factors as the waning middle of its range. effects of the earlier increases in stock The staff forecast prepared for this market wealth on consumer spending meeting pointed to a substantial modera- and some slowing in the extraordinary tion in the expansion to a rate com- growth in business expenditures for mensurate with the growth of the econ- equipment were likely to exert a moderomy's potential. Growth of private final ating effect on the expansion. Moreover, demand would be damped by the antici- potentially greater weakness in foreign pated waning of positive wealth effects economies and possible disruption to stemming from earlier large increases in foreign financial markets remained a equity prices and by slow growth of downside risk to the outlook. Against spending on consumer durables, hous- this background, the members generally ing units, and business capital goods anticipated some pickup in inflation, after the earlier buildup in the stocks of though to a still relatively low rate, these items. Subdued expansion of for- primarily as last year's declines in eign economic activity and the lagged oil and other import prices were not effects of the earlier rise in the foreign repeated. A number referred, however, exchange value of the dollar were to the experience of recent years, which expected to place continuing, though suggested that the inflation process diminishing, restraint on the demand for was not well understood and that infla- U.S. exports for some period ahead and tion forecasts were subject to a wide to lead to further substitution of imports range of uncertainty. for domestic products. Pressures on In keeping with the practice at meetlabor resources were likely to remain ings just before the Federal Reserve's near current levels and inflation was pro- semiannual monetary policy report Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 211 to Congress and the Chairman's asso- to the problems facing Brazil and the ciated testimony, the members of the risk that further financial and economic Committee and the Federal Reserve instability in that nation would spread Bank presidents not currently serving as to other Latin American countries, with members had provided individual pro- repercussions on the U.S. economy. jections of the growth in real and nomi- Markets in the major trading nations nal GDP, the rate of unemployment, and around the world were likely to remain the rate of inflation for the year 1999. on the soft side, with Japan struggling Their forecasts of the rate of expansion to recover from its ongoing recession in real GDP in 1999 had a central ten- and economic growth in Europe showdency of 2Vz to 3 percent and a full ing signs of becoming more sluggish. range of 2 to 3Vz percent. Such growth Robust domestic demand clearly had was expected to be associated with a offset weakness in net exports by a large civilian unemployment rate in a range margin in 1998, and while the growth in centering on 4Vi to 4Vi percent in the such demand was projected to slow this fourth quarter of this year, implying year it was expected to remain sufficient little or no change from the current to support appreciable further expansion level. With regard to nominal GDP in overall economic activity. Consumer growth in 1999, the forecasts were spending had exhibited considerable mainly in a range of 4 to 4Vi percent, vigor during the recent holiday season with an overall range of 33A to 5 per- and anecdotal reports from several cent. Projections of the rate of inflation, regions suggested that the momentum in as measured by the consumer price such spending had carried into the openindex, had a central tendency of 2 to ing weeks of this year. Further, though 2Vz percent, somewhat above the out- prospectively moderating, growth in come for 1998 when the rise in the jobs and incomes, supportive credit conindex was held down by a marked ditions, and upbeat consumer sentiment decline in energy prices and reduced suggested that consumer expenditures prices of non-oil imports. were likely to be well maintained over In their review of developments coming quarters. Even so, members across the nation, members reported a anticipated at least some moderation in mix of high overall levels of economic the growth of consumption after an activity in every region but softness in extended period of sizable accumulation a number of specific business activities, of consumer durable goods. Among notably those affected by foreign com- other factors, the positive effects on conpetition. In particular, many manufac- sumer spending of the large accumulaturing firms along with businesses tion of stock market wealth in recent engaged in agriculture, mining, and years were likely to abate over time in energy were being adversely affected by the absence of a further and unanticiweak demand in foreign markets, strong pated surge in stock market prices. import competition, and depressed oil Growth in business capital spending and other commodity prices in world also was expected to moderate as the markets. Foreign developments were year progressed to a pace well below seen as a continuing element of weak- that experienced in recent years. Memness for the U.S. economy and also as a bers commented in this regard that slowmajor source of uncertainty in the out- ing growth in overall spending normally look for the year ahead. In this regard fostered reduced capital investment, and many members referred in particular indeed developments in the second half Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 86th Annual Report, 1999 of 1998 suggested that such investment ment, and the absence of any buildup of might already be on a less strong inflation could not be explained in terms uptrend. Moreover, the prospects of of normal historical relationships. While reduced growth in profits and a less temporary factors, such as declining oil ebullient stock market could also be prices, had played a role in depressing expected to damp business fixed invest- inflation, the persistence of very low ment. Nonetheless, growth in such inflation under these conditions most investment likely would continue to likely also resulted from more lasting exceed that of overall spending, reflect- changes in economic relationships. ing ongoing efforts to improve effi- These were perhaps best evidenced by ciency and hold down labor costs in the widespread inability of business highly competitive markets and more firms to raise prices because of strong generally to take advantage of the competitive pressures in domestic and declining costs of business equipment global markets and the related efforts to and the rapid pace of technological hold down costs, including labor costs. innovation. Members also cited reports Contributing importantly to the success from contacts in various sectors of the of those cost-saving efforts were the economy and areas of the country that continued rapid growth of increasingly business plans continued to call for efficient business capital. The accumulasubstantial outlays for business equip- tion of such capital evidently had greatly ment. Nonresidential building activity enhanced productivity in a broad range remained robust in several regions, but of economic activities. In this regard, given already ample capacity in many available indicators suggested that prosectors, the prospects for such construc- ductivity gains had essentially matched tion were relatively weak. increases in labor costs for nonfinancial corporations over the past year. Mem- Housing activity had continued to disbers also cited widespread expectations play impressive strength in many parts of low inflation as an important underof the country, evidently reflecting rapid lying factor in moderating wage and growth in employment and incomes, risprice increases. ing household net worth, and low mortgage interest rates. With the affordabil- Looking ahead, an abatement or ity of new homes expected to remain reversal of some of the temporary facunusually attractive, the members antici- tors reducing prices was likely to raise pated that housing activity would be sus- measured inflation. The course of undertained at a high level. Some moderation lying inflation pressures was more diffiin housing starts from recent peak levels cult to gauge, however. If growth slowed appeared likely, however, in the context to trend, as many expected, uncertainty of the slowing in job and income gains about evolving relationships among ecoassociated with the members' overall nomic activity, productivity growth, and forecasts. wages made it unclear whether the With regard to the outlook for infla- enhanced competitiveness in many martion, the members saw no evidence of kets and greater cost reducing efforts of accelerating price inflation despite high businesses would be sufficient to conlevels of business activity and very tinue to hold price increases in check at tight labor markets across most of the the current degree of tautness in labor nation. Indeed, the conjuncture over an markets. Members generally agreed that extended period of strong economic if labor markets continued to tighten, growth, very low rates of unemploy- cost and price pressures would begin to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 213 pick up. Some members also expressed to have included some rechanneling concern that rapid money growth, of financial flows into money-type should it persist, would suggest that balances after an extended period of monetary policy was too accommoda- surging stock market prices and the tive to contain inflation pressures. On drop in the opportunity cost of holding balance, while a somewhat less favor- money as market interest rates fell over able inflation performance was viewed the latter part of the year. The expanas likely over the year ahead, the mem- sion of M3 was further stimulated by bers did not anticipate any substantial the ongoing strength in institution-only deterioration in the inflation climate money market funds whose popularity if growth in economic activity approxi- as a cash management tool continued to mated the central tendency of their grow. forecasts. The calming of financial markets and In keeping with the requirements of forecasts of moderating nominal GDP the Full Employment and Balanced growth pointed to reduced growth in the Growth Act of 1978 (the Humphrey- broad monetary aggregates this year. Hawkins Act), the Committee reviewed However, it was clear that substantial the ranges for growth of the mone- uncertainty still surrounded any projectary and debt aggregates in 1999 that it tion of monetary expansion and the linkhad established on a tentative basis in age between particular rates of money early July 1998. Those ranges included growth over a year and the basic objecexpansion of 1 to 5 percent for M2 and tives of monetary policy. In these cir- 2 to 6 percent for M3, measured from cumstances, the members did not see the fourth quarter of 1998 to the fourth any firm basis for deviating from the quarter of 1999. The associated range practice in recent years of setting ranges for growth of total domestic nonfinan- that, assuming velocity behavior consiscial sector debt was provisionally set at tent with average historical patterns, 3 to 7 percent for 1999. The tentative would serve as benchmarks for moneranges for 1999 were unchanged from tary expansion consistent with longerthe ranges that had been adopted for the run price stability and a sustainable rate past several years. of real economic growth. All the members endorsed a proposal Domestic nonfinancial debt, which to adopt the growth ranges for M2 and had grown at a rate in the upper part of M3 in 1999 that had been established on its 3 to 7 percent range in 1998, was a provisional basis in July of last year. thought likely to remain within that According to a staff analysis, growth of range this year, indeed near the midthese aggregates would moderate con- point of the range according to a staff siderably this year but was likely to analysis. Outstanding federal debt was remain above the tentative ranges, espe- expected to contract by a larger amount cially in the case of M3. The rapid this year and, given current economic growth of M2 and M3 in 1998 was forecasts, the debt of the major nonfiassociated with outsized declines in their nancial sectors of the economy seemed velocities that appeared to have resulted likely to grow a bit more slowly. Thus, in part from the turbulent behavior of the members saw no reason to depart financial markets and related efforts by from the tentative range for nonfinancial the public to move funds to relatively debt, which was expected to readily safe and liquid assets and to turn to encompass the likely rate of growth in banks for credit. Other factors appear this aggregate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 86th Annual Report, 1999 At the conclusion of this review, the persistence of subdued inflation the Committee voted to approve with- and the absence of current evidence of out change the ranges for 1999 that it accelerating inflation were seen as arguhad established on a tentative basis ing against a policy tightening move at on July 1, 1998. Accordingly, the fol- this point. Moreover, it was clear that lowing statement of longer-run policy the outlook for economic activity was and growth ranges for 1999 was subject to considerable uncertainty and approved for inclusion in the domestic that some shortfall from current forepolicy directive: casts, perhaps in conjunction with unexpectedly adverse trade and financial The Federal Open Market Committee influences stemming from developseeks monetary and financial conditions that ments abroad, might materialize and will foster price stability and promote sus- damp inflationary demand pressures. tainable growth in output. In furtherance of Even in the absence of greater-thanthese objectives, the Committee at this meetanticipated slowing in the economic ing established ranges for growth of M2 expansion, the experience of recent and M3 of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quar- years had amply demonstrated that the ter of 1998 to the fourth quarter of 1999. The relationship between demand pressures range for growth of total domestic nonfinan- on resources and inflation was not folcial debt was set at 3 to 7 percent for lowing historical patterns, and developthe year. The behavior of the monetary ments exerting a more lasting moderataggregates will continue to be evaluated in the light of progress toward price level ing effect on inflation, such as more stability, movements in their velocities, and productive capital investment and effecdevelopments in the economy and financial tive access to spare capacity overseas, markets. could help to contain inflation for some time. Against this background, the mem- Votes for this action: Messrs. Green- bers agreed on the need to continue to span, McDonough, Boehne, Ferguson, monitor the economy with care for signs Gramlich, Kelley, McTeer, Meyer, either of a potential upturn in inflation Moskow, Ms. Rivlin, and Mr. Stern. Votes against this action: None. or greater softness in the expansion than they were currently forecasting and to be prepared to respond promptly in In the Committee's discussion of poleither direction. icy for the intermeeting period ahead, all the members favored an unchanged pol- In light of the uncertainties and divericy stance. Many were concerned that sity of risks surrounding the economic the odds were tilted toward rising infla- outlook, most members were in favor of tion over time, especially if the expan- retaining the existing symmetry of the sion did not slow to a more sustain- directive. In one view, however, the able rate. Members commented that the risks of rising inflation were strong market unsettlement that had in large enough to warrant consideration of an measure prompted the Committee's asymmetrical directive that was tilted easing actions during the fall had now toward restraint. Nonetheless, since lessened appreciably. In the view of inflation was difficult to predict and any some, those actions might need to be needed adjustment to policy in the reversed, at least in part, to restore what period ahead could readily be implethey regarded as a policy stance that mented even with a symmetrical direcseemed most likely to prove consistent tive, all the members indicated that they with desirable economic trends. Still, could accept such a directive. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 215 At the conclusion of this discus- will foster price stability and promote sussion, the Committee voted to authorize tainable growth in output. In furtherance of these objectives, the Committee at this meetand direct the Federal Reserve Bank ing established ranges for growth of M2 of New York, until it was instructed and M3 of 1 to 5 percent and 2 to 6 percent otherwise, to execute transactions in respectively, measured from the fourth quarthe System Account in accordance ter of 1998 to the fourth quarter of 1999. The with the following domestic policy range for growth of total domestic nonfinandirective: cial debt was set at 3 to 7 percent for the year. The behavior of the monetary aggre- The information reviewed at this meeting gates will continue to be evaluated in the suggests that the economy expanded rapidly light of progress toward price level stain the closing months of 1998. Nonfarm bility, movements in their velocities, and payroll employment posted strong gains developments in the economy and financial in November and December, and the civil- markets. ian unemployment rate fell to 4.3 percent To promote the Committee's long-run in December. Total industrial production objectives of price stability and sustainable strengthened in the fourth quarter, owing in economic growth, the Committee in the large measure to a surge in the production immediate future seeks conditions in reserve of motor vehicles and parts. Total retail sales markets consistent with maintaining the rose sharply in the fourth quarter, and home federal funds rate at an average of around sales and housing starts increased apprecia- 43/4 percent. In view of the evidence curbly. Available indicators suggest that busi- rently available, the Committee believes that ness capital spending picked up markedly in prospective developments are equally likely the fourth quarter after a lull in the third. In to warrant an increase or a decrease in the November, the nominal deficit on U.S. trade federal funds rate operating objective during in goods and services was somewhat larger the intermeeting period. than in October, but the combined October- November deficit was slightly smaller than Votes for this action: Messrs. Greenspan, its third-quarter average. Inflation has McDonough, Boehne, Ferguson, Gramremained subdued despite very tight labor lich, Kelley, McTeer, Meyer, Moskow, markets. Ms. Rivlin, and Mr. Stern. Votes against Most short-term interest rates have this action: None. declined somewhat on balance since the meeting on December 22, while longer-term rates have changed little. Share prices in Sunset Legislation Relating to equity markets have posted further siz- Humphrey-Hawkins Reports able gains on balance over the intermeeting period. In foreign exchange markets, the The Committee discussed the Federal trade-weighted value of the dollar has depreciated slightly over the period in relation Reports Elimination and Sunset Act of to other major currencies but it has appreci- 1995 which provides for the termination ated somewhat in terms of the currencies of of the legal requirements for semia broader group that also includes other annual Humphrey-Hawkins reports to important trading partners of the United Congress after 1999. At this meeting, States. M2 and M3 continued to record the members agreed that the semivery large increases in late 1998, but available data pointed to some moderation annual reports and associated Congresin January. From the fourth quarter of 1997 sional hearings had been quite useful to the fourth quarter of 1998, both aggre- and should be continued. They had gates rose at rates well above the Commitgiven the Committee an effective means tee's annual ranges. Total domestic nonfito explain its policies and communicate nancial debt expanded at a pace somewhat above the middle of its range in 1998. its views on a variety of issues and had The Federal Open Market Committee enhanced its accountability to the public seeks monetary and financial conditions that and the Congress. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 86th Annual Report, 1999 Sale of Euro Reserves Messrs. Broaddus, Guynn, Jordan, and Parry, Alternate Members In a notation vote completed on of the Federal Open Market March 22, 1999, the Committee unani- Committee mously approved an off-market sale of approximately $4.8 billion equivalent Mr. Hoenig, Ms. Minehan, and of the System's euro reserves to the Mr. Poole, Presidents of the Exchange Stabilization Fund (ESF). In Federal Reserve Banks of Kansas City, Boston, and return, the System received $3.4 billion St. Louis respectively in dollars and $1.4 billion equivalent of Japanese yen from the ESF. The transac- Mr. Kohn, Secretary and Economist tion reduced the System's overall hold- Mr. Bernard, Deputy Secretary ings of foreign currencies to the level of Ms. Fox, Assistant Secretary those held by the ESF and left the result- Mr. Gillum, Assistant Secretary ing balances of euro and yen equal in Mr. Mattingly, General Counsel both the System and ESF accounts. Mr. Prell, Economist Ms. Johnson, Economist It was agreed that the next meeting of the Committee would be held on Tues- Messrs. Cecchetti, Hooper, Hunter, day, March 30, 1999. Lang, Lindsey, Slifman, Stockton, The meeting adjourned at 11:40 a.m. and Rosenblum, Associate Economists on February 3, 1999. Donald L. Kohn Mr. Fisher, Manager, System Open Secretary Market Account Mr. Ettin, Deputy Director, Division Meeting Held on of Research and Statistics, Board March 30,1999 of Governors A meeting of the Federal Open Market Messrs. Madigan and Simpson, Committee was held in the offices of the Associate Directors, Divisions of Board of Governors of the Federal Monetary Affairs and Research Reserve System in Washington, D.C., and Statistics respectively, Board on Tuesday, March 30, 1999, at of Governors 9:00 a.m. Present: Mr. Reinhart, Deputy Associate Mr. Greenspan, Chairman Director, Division of Monetary Mr. McDonough, Vice Chairman Affairs, Board of Governors Mr. Boehne Mr. Ferguson Ms. Low, Open Market Secretariat Mr. Gramlich Assistant, Division of Monetary Mr. Kelley Affairs, Board of Governors Mr. McTeer Mr. Meyer Mr. Moskow Ms. Pianalto, First Vice President, Ms. Rivlin Federal Reserve Bank of Mr. Stern Cleveland Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 217 Ms. Browne, Messrs. Eisenbeis, The information reviewed at this Goodfriend, Hakkio, Kos, meeting suggested that the economic Rasche, and Sniderman, Senior expansion remained robust early in the Vice Presidents, Federal Reserve year. Consumer spending was particu- Banks of Boston, Atlanta, Richmond, Kansas City, larly strong, and housing starts climbed New York, St. Louis, and higher. While growth of business capital Cleveland respectively spending moderated somewhat after a fourth-quarter surge, it was still quite rapid. Heavy competition from imports Messrs. Judd and Weber, Vice Presidents, Federal Reserve damped the rise of industrial produc- Banks of San Francisco and tion; however, employment expansion Minneapolis respectively remained brisk and labor markets tight. Price inflation was still low. By unanimous vote, the minutes of Nonfarm payroll employment posted the meeting of the Federal Open Market sizable further gains in January and Committee held on February 2-3, 1999, February. Hiring in construction and rewere approved. tail trade was notably strong, and em- The Manager of the System Open ployment in the service industries con- Market Account reported on recent tinued to trend higher. By contrast, developments in foreign exchange mar- manufacturing suffered further job kets. There were no open market opera- losses. The civilian unemployment rate, tions in foreign currencies for the Sys- at 4.4 percent in February, stayed in the tem's account in the period since the narrow 4Vi to AVi percent range that had previous meeting, and thus no vote was prevailed since spring 1998. required of the Committee. Total industrial production was The Manager also reported on unchanged in January and rose slightly developments in domestic financial in February. Gas and oil extraction markets and on System open market slumped in January, and mild weather transactions in government securities restrained utility output in February. and federal agency obligations during Manufacturing production increased the period February 3, 1999, through modestly in both months, reflecting March 29, 1999. By unanimous strong increases in the output of highvote, the Committee ratified these tech industries that more than offset transactions. declines in the production of aircraft The Committee then turned to a dis- and of motor vehicles and parts. The cussion of the economic and financial factory operating rate fell further in the outlook and the implementation of January-February period, as the growth monetary policy over the intermeeting in manufacturing capacity continued to period ahead. A summary of the eco- outpace the rise in production. nomic and financial information avail- Consumer spending surged in the able at the time of the meeting and of early months of 1999, supported by rapthe Committee's discussion is provided idly rising disposable personal income, below. The domestic policy directive soaring household net worth, and buoythat was approved by the Committee ant consumer sentiment. Attractive pricand issued to the Federal Reserve Bank ing and the favorable trends in income of New York follows the summary. and wealth contributed to strong under- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 86th Annual Report, 1999 lying demand for motor vehicles, and over the past twelve months. Retail substantial gains were recorded in most inventories increased considerably in other categories of retail sales as well. January, but with sales growing rapidly, Expenditures on services in January the aggregate inventory-sales ratio (latest available data) also exhibited remained at the bottom of its range over strength, most notably in spending for the past year. energy services, which picked up after The U.S. trade deficit in goods and an unseasonably warm December. services widened substantially in Janu- Housing demand remained elevated. ary from its fourth-quarter average. Single-family home sales were still at The value of exports fell for a third a very strong level in January (latest straight month and reached its lowest data), despite a drop from their recent level since last August; half of the drop record high. Housing starts increased was in agricultural products. The value appreciably in the January-February of imports retraced in January most of period as builders took advantage of its December decline, with sizable good weather to try to catch up with increases recorded for imported conbacklogged demand. sumer goods, computers, and motor Business fixed investment appeared vehicles from Canada. The economies to have decelerated noticeably from the of many of the major foreign industrial very fast pace of the fourth quarter. Data countries faltered in the fourth quarter. on shipments of nondefense capital Japan recorded a fifth straight quarterly goods in January and February sug- decline in economic activity, and growth gested that business outlays for comput- in real output weakened in the euro area ers and motor vehicles were growing and remained sluggish in the United less rapidly, and purchases of most other Kingdom. By contrast, economic activtypes of durable equipment seemed to ity rebounded in Canada. Elsewhere, be slowing somewhat. Nonresidential while economic activity continued to construction activity was down on bal- decline in Latin America and Russia, ance in January, though the construction there were indications that some Asian of office buildings trended still higher economies might be bottoming out and and the building of lodging facilities that recovery might be under way in picked up. Korea. Total business inventories changed Inflation remained subdued in early little in January and stocks generally 1999. Both the total and core measures were at comfortable levels, though con- of consumer prices increased only ditions varied across industries. Manu- slightly in January and February, and facturing stocks fell in January, largely core inflation for the twelve months reflecting further reductions in inven- ended in February was somewhat lower tories of aircraft and parts, and tne than for the year-earlier period. At the aggregate stock-sales ratio for the sec- producer level, prices of finished goods tor was at the bottom of its range over other than food and energy changed the past twelve months. In the wholesale little over January and February. For the sector, a reduction in inventories in twelve months ended in February, core January was concentrated in motor vehi- producer price inflation was somewhat cles. The decline in stocks was closely higher than for the year-earlier period, paralleled by a drop in sales, and the but the pickup partly reflected the large aggregate inventory-sales ratio for the increase in tobacco prices that resulted sector stayed around the top of its range from the settlement of the lawsuit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 219 brought by state attorneys general. Much of the dollar's upward movement Average hourly earnings of private pro- came against a subset of major currenduction or nonsupervisory workers cies. A large rise in terms of the yen increased moderately on balance over occurred in response to an easing of the January-February period. The rise monetary policy by the Bank of Japan in average hourly earnings for the that reduced the overnight call rate to year ended in February was noticeably an extremely low level and fostered a smaller than that for the year-earlier considerable decline in Japanese bond period. yields. The dollar also rose substantially At its meeting on February 2-3,1999, against the euro, which was weighed the Committee adopted a directive that down by signs of continued weakness in called for maintaining conditions in Germany and, late in the period, by the reserve markets consistent with an outbreak of hostilities in the Balkans. unchanged federal funds rate of about Among the emerging countries, the 43/4 percent and that did not contain Brazilian real depreciated on balance any bias relating to the direction of pos- against the dollar, although it firmed late sible adjustments to policy during the in the period as overall financial condiintermeeting period. The Committee tions in that country stabilized somejudged this policy stance to be consis- what, and the Mexican peso appreciated tent with its objectives of fostering high against the dollar in association with a employment and sustained low inflation rebound in oil prices. and, over the near term at least, viewed Expansion of M2 and M3 moderated the risks to this outlook as reasonably considerably on balance in the early well balanced. months of 1999 from the rapid increases Open market operations throughout of the fourth quarter. The deceleration of the intermeeting period were directed these aggregates apparently reflected the toward maintaining the federal funds waning effects of the policy easings of rate at around 43/4 percent. Market inter- last autumn in narrowing the opportuest rates changed little immediately after nity cost of holding M2 assets, a slowthe February meeting because market down in mortgage refinancing activity, participants had expected the Commit- and a bounceback in household purtee's decision. Subsequently, however, chases of stock mutual funds as condi- Treasury yields moved up significantly tions in financial markets brightened. in response to incoming data suggest- Both aggregates were estimated to have ing further robust growth in aggregate increased over the first quarter at rates spending, and then retraced much of somewhat above the Committee's the rise after the receipt of favorable annual ranges. Total domestic nonfinannews on inflation. Short-term interest cial debt continued to expand at a pace rates changed little on balance over the somewhat above the middle of its range. intermeeting interval, and longer-term The staff forecast prepared for this rates rose somewhat. Key indexes of meeting suggested that the expansion stock market prices recorded mixed would gradually moderate to a rate changes. commensurate with the growth of the The trade-weighted value of the dollar economy's estimated potential. Growth in foreign exchange markets increased of private final demand would be somewhat over the intermeeting period damped by the anticipated waning of in relation to the currencies of a broad positive wealth effects stemming from group of important U.S. trading partners. earlier large increases in equity prices Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 86th Annual Report, 1999 and by slower growth of spending on developing nations were to exhibit more consumer durables, housing units, and signs of stabilization or improvement. business equipment after the earlier Given the persistence of robust growth buildup in the stocks of these items. The in domestic demand and the continuing lagged effects of the earlier rise in the forward momentum in U.S. economic foreign exchange value of the dollar activity, many of the members comwere expected to place continuing, mented that the risks to their forecasts though diminishing, restraint on the were tilted toward the eventual emerdemand for U.S. exports for some period gence of somewhat greater inflation ahead and to lead to further substi- pressures. Despite the persistence of tution of imports for domestic prod- very tight labor markets across the ucts. Pressures on labor resources were nation, however, there currently were likely to remain substantial. Price infla- only scattered indications of more rapid tion was projected to rise somewhat over increases in wages and no evidence of the projection horizon, largely as a result rising price inflation. The reasons underof an expected upward trend in energy lying this remarkable economic perprices. formance were potentially transitory but In the Committee's discussion of cur- also possibly of a longer-term nature. rent and prospective economic develop- Lower oil and other input prices had ments, members commented that for an played a role. However, it also seemed extended period most forecasters had likely that accelerating productivity been projecting slower economic growth helped to account for the economy's and higher inflation than actually had ability to sustain not only higher rates materialized. With regard to output, cur- of growth of output but also relatively rent indicators provided little evidence low levels of unemployment, at least of any moderation in the pace of the for a time, without generating higher expansion from the robust growth expe- inflation. rienced on average over the last few In their review of developments years. Even so, most members viewed across the nation, the members reported a slowing to a rate closer to most esti- sustained, and in some areas rising, mates of the growth of the economy's overall growth in regional economic potential as a reasonable expectation. activity. At the same time, some sectors They agreed, however, that the timing were continuing to experience varying and extent of such moderation were degrees of softness, notably those most subject to a wide range of uncertainty. affected by developments abroad such Factors expected to foster slower growth as manufacturing, agriculture, and in key demand sectors of the economy energy. A number of members referred, included the buildup of large stocks of however, to signs of recent improvebusiness equipment, housing units, and ment in manufacturing that appeared durable goods by households and an to be associated primarily with the assumption that the stock market would strength of domestic demand but to play a more neutral role than in recent some extent also with increased demand years. The effects of domestic demand from some developing countries. on domestic production would continue With regard to developments in key to be damped by further increases in expenditure sectors of the economy, the trade deficit, though the offset from the members anticipated that growth in this source might well diminish if finan- consumer spending would retain considcial markets and economies in key erable upward momentum, given their Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 221 expectations of favorable fundamentals building, members reported strong consuch as further expansion in employ- struction activity in many areas, but ment and incomes, the rise in financial some also noted that such construction wealth that had continued through the appeared to have reached a peak, as first quarter, and ready access to con- evidenced in part by signs of overbuildsumer credit. Some also referred to the ing in a few areas. Moreover, current currently elevated level of consumer data suggested little or no growth in confidence. As time went on, however, overall expenditures on nonresidential it seemed unlikely that growth in con- structures. sumer spending would be sustained at Residential sales and construction its recent exceptional pace. The accumu- were described as very strong in many lation of durable goods by consumers in parts of the country and indeed were recent years should at some point inhibit being held down in some areas by low further large increases in spending for inventories of housing available for sale such goods. Moreover, the favorable and a limited supply of qualified coneffect of the extended run-up in stock struction workers. Some members commarket wealth evidently had been a fac- mented that housing construction backtor in bolstering consumer confidence logs and unusually mild winter weather and willingness to spend. While the in many areas had sustained a high level course of stock market prices could not of housing construction in recent reliably be predicted, the market's months. Looking ahead, however, memstimulative effect on spending was likely bers observed that residential building to wane over time in the absence of activity appeared to have peaked in further appreciable advances in prices. some areas and an oversupply of apart- Current indications of some softening in ments was reported in a few major home sales and reduced mortgage refi- cities. More generally, the rise in mortnancing activity, should they persist, gage rates since last fall and some softalso augured less stimulus to consumer ening of demand indicators pointed to spending in coming quarters. less strength in the housing sector. Even The extraordinary expansion in busi- so, the outlook for jobs and income ness fixed investment in recent years, and the buildup of financial wealth confueled to a major extent by purchases of stituted favorable home affordability new equipment, was also expected to factors that appeared likely to support moderate over time as a result of the a continuing high level of housing large buildup and reduced utilization of demand, especially in the single-family capacity and the forecasted slower sector. growth in final sales. While the prospect Relatively heavy spending on imports of further declines in the prices of some owing to strong domestic demand and equipment would encourage continued low prices likely would exert a continugrowth in spending, the lower prices ing negative effect on net exports over were not expected to outweigh the the next several quarters. Nevertheless, effects of relatively low capacity usage demand for U.S. exports could begin to and more moderate growth in overall pick up, given what now appeared to be demand in coming quarters. In this improved prospects for economic activregard, some signs of deceleration could ity in several emerging market econobe detected in the currently available mies. Financial market conditions had data, though from extremely rapid rates become more settled in a number of of growth. With respect to commercial these economies, and contagion from Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 86th Annual Report, 1999 developments in Brazil now seemed to labor markets would remain relatively present a reduced threat to that nation's taut and at some point could trigger trading partners. Even so, foreign-sector faster increases in labor compensation forecasts—for industrial as well as and, in turn, rising price inflation. Moreemerging market economies—remained over, the dissipation or reversal of favorsubject to considerable downside risk, able supply factors—including, for including uncertainties stemming from example, in addition to energy prices the the recent flare-up of hostilities in the waning effects of the dollar's earlier Balkans. appreciation, could contribute to higher In the Committee's discussion of the inflation expectations and faster nomioutlook for inflation, members com- nal compensation increases. In the view mented that they saw no evidence of any of some others, though, the impact on acceleration in price inflation despite the prices of the unwinding of the favorable continuing strength of the economic factors might well be muted or offset expansion and the tightness of labor by a possible further uptick in producmarkets. Anecdotal reports from around tivity growth. Accelerating producthe nation continued to underscore the tivity had been spurring investment in difficulty or inability of most business capacity and intense competition among firms to raise prices in highly competi- businesses, and had been holding down tive markets. There were a limited num- labor costs. Furthermore, optimism ber of reports of relatively sizable about improving productivity was eviincreases in wages paid to workers with dent in projections of business profits skills in especially short supply, but on and the high level of equity prices. In the whole employers were successful in any event, it was clear that forecasts in holding down increases in labor com- recent years typically had overstated the pensation and offsetting them through rise in inflation, and a great deal of improvements in productivity. Indeed, uncertainty surrounded the extent to increases in unit labor costs, at least which productivity gains and other facin the nonfinancial corporate sector tors, some unspecified, might continue and perhaps more widely as well, had to hold down inflation in a period of declined to a very low rate over the past robust economic growth and relatively year. tight labor markets. The members saw little reason to In the Committee's discussion of polanticipate any significant, continuing icy for the intermeeting period ahead, all increase in inflation in the near term. the members indicated that they favored Inflation was expected to rise, owing to an unchanged policy stance. Several the recent hikes in oil prices, but the commented that they saw no significant increase should be limited. And with changes in the tenor of recent statistical little evidence of rising pressures on and anecdotal reports that would constiprices at early stages of production or on tute the basis for an adjustment to policy nominal wages, inflation should remain or a greater presumption that policy contained for a time. However, some might need to be changed soon. Many members were concerned about the risk referred in particular to the absence of that sustained rapid growth in aggregate any warning signs of accelerating inflademand would stretch markets even tion over the near term as a major conmore. Even presuming that growth in sideration in support of a steady policy economic activity would moderate to a at this time. In the view of some, howpace close to the economy's potential, ever, the next policy action was more Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 223 likely to be a finning than an easing. also was noted that a biased directive They saw a greater likelihood that would not be consistent with the memtight—and perhaps tightening—labor bers' view that a policy adjustment markets would add to price pressures was unlikely in the period just ahead. than that demand would falter or that Moreover, while the Committee's inflation would decrease further. Yet disclosure procedures do not always they recognized that such forecasts require the immediate announcement of were subject to a substantial degree of a shift in symmetry, the members agreed uncertainty. This argued for a cautious that were they to announce a shift to a approach to any policy change, espe- tightening bias, it would likely have in cially in light of an economic perfor- current circumstances a relatively promance that had not conformed to his- nounced and undesired effect on finantorical patterns in recent years. While a cial markets. In particular, the markets number of members noted that a case might well build in higher odds of a might be made for unwinding part of the policy tightening move at the May or Committee's easing actions during the June meetings than currently was confall of last year, given the recovery in sistent with the members' thinking. It financial markets and the improvement also seemed desirable to defer any in the economic outlook since then, they change in the directive and await further argued that the incoming data and developments relating to the hostilities prospects for sustained favorable eco- in the Balkans. nomic performance did not support At the conclusion of this discussion, such an action. The members concluded the Committee voted to authorize and that the Committee was in a position direct the Federal Reserve Bank of New to wait for developments to unfold, York, until it was instructed otherwise, especially given the absence of any to execute transactions in the System evidence of an impending acceleration Account in accordance with the followof underlying inflation. If the risks of ing domestic policy directive: higher inflation intensified, it would still have time to take action to head off price pressures in order to foster sustained The information reviewed at this meeting economic growth and a high level of suggests that the expansion in economic employment. Many of the members activity is still robust. Nonfarm payroll employment posted sizable further gains in emphasized, however, that in such cir- January and February, and the civilian unemcumstances the Committee might need ployment rate remained below 4V2 percent. to act promptly to forestall a buildup of Total industrial production edged higher over inflationary forces that could destabilize the first two months of the year. Total retail the expansion. sales rose sharply further over the two months, and housing starts increased appre- All the members endorsed a proposal ciably from an already elevated level. Availto retain the existing symmetry of the able indicators suggest that business capital directive with respect to possible adjust- spending decelerated in early 1999 but ments to policy during the intermeeting growth was still relatively rapid. The nomiperiod. While many believed that the nal deficit on U.S. trade in goods and services widened substantially in January from next policy move likely would be in the its fourth-quarter average. Inflation has direction of some tightening, such an remained subdued despite very tight labor outcome was not a foregone conclusion, markets. and in any event the timing of the next Short-term interest rates have changed policy action was highly uncertain. It little since the meeting on February 2-3, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 86th Annual Report, 1999 1999, while longer-term rates have risen It was agreed that the next meeting somewhat on balance. Key measures of share of the Committee would be held on prices in equity markets have registered Tuesday, May 18, 1999. mixed changes over the intermeeting period. The meeting adjourned at 12:35 p.m. In foreign exchange markets, the tradeweighted value of the dollar has risen somewhat over the period in relation to the curren- Donald L. Kohn cies of a broad group of important U.S. Secretary trading partners, and the appreciation has been a bit larger against a subset of major currencies. M2 and M3 continued to record large Meeting Held on increases in January and February, but avail- May 18,1999 able data pointed to substantial moderation in March. Both aggregates are estimated to A meeting of the Federal Open Market have increased over the first quarter at rates somewhat above the Committee's annual Committee was held in the offices of the ranges. Total domestic nonfinancial debt has Board of Governors of the Federal continued to expand at a pace somewhat Reserve System in Washington, D.C., above the middle of its range. on Tuesday, May 18, 1999, at 9:00 a.m. The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sus- Present: tainable growth in output. In furtherance of Mr. Greenspan, Chairman these objectives, the Committee at its meet- Mr. McDonough, Vice Chairman ing in February established ranges for Mr. Boehne growth of M2 and M3 of 1 to 5 percent and Mr. Ferguson 2 to 6 percent respectively, measured from Mr. Gramlich the fourth quarter of 1998 to the fourth quar- Mr. Kelley ter of 1999. The range for growth of total Mr. McTeer domestic nonfinancial debt was set at 3 to Mr. Meyer 7 percent for the year. The behavior of the Mr. Moskow monetary aggregates will continue to be Ms. Rivlin evaluated in the light of progress toward Mr. Stern price level stability, movements in their velocities, and developments in the economy Messrs. Broaddus, Guynn, Jordan, andf inancial markets. and Parry, Alternate Members To promote the Committee's long-run of the Federal Open Market objectives of price stability and sustainable Committee economic growth, the Committee in the immediate future seeks conditions in reserve Mr. Hoenig, Ms. Minehan, and markets consistent with maintaining the fed- Mr. Poole, Presidents of the eral funds rate at an average of around 43/4 percent. In view of the evidence cur- Federal Reserve Banks of Kansas City, Boston, and rently available, the Committee believes that St. Louis respectively prospective developments are equally likely to warrant an increase or a decrease in the federal funds rate operating objective during Mr. Kohn, Secretary and Economist the intermeeting period. Mr. Bernard, Deputy Secretary Ms. Fox, Assistant Secretary Votes for this action: Messrs. Greenspan, Mr. Gillum, Assistant Secretary McDonough, Boehne, Ferguson, Gram- Mr. Mattingly, General Counsel lich, Kelley, McTeer, Meyer, Moskow, Mr. Baxter, Deputy General Counsel Ms. Rivlin, and Mr. Stern. Votes against Mr. Prell, Economist this action: None Ms. Johnson, Economist Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 225 Messrs. Alexander, Cecchetti, Hooper, previous meeting, and thus no vote was Hunter, Lang, Lindsey, Rolnick, required of the Committee. Rosenblum, Slifman, and The Manager also reported on devel- Stockton, Associate Economists opments in domestic financial markets and on System open market transactions Mr. Fisher, Manager, System Open in government securities and federal Market Account agency obligations during the period March 30, 1999, through May 17, 1999. Messrs. Madigan and Simpson, Associate Directors, Divisions By unanimous vote, the Committee ratiof Monetary Affairs and Research fied these transactions. and Statistics respectively, Board The Committee voted unanimously to of Governors extend for one year beginning in mid- December 1999 the reciprocal currency Mr. Reinhart, Deputy Associate ("swap") arrangements with the Bank Director, Division of Monetary of Canada and the Bank of Mexico. The Affairs, Board of Governors arrangement with the Bank of Canada is in the amount of $2 billion equivalent Ms. Low, Open Market Secretariat Assistant, Division of Monetary and that with the Bank of Mexico in the Affairs, Board of Governors amount of $3 billion equivalent. Both arrangements are associated with the Mr. Connolly, First Vice President, Federal Reserve's participation in the Federal Reserve Bank of Boston North American Framework Agreement, which was established in 1994. The vote Ms. Browne, Messrs. Goodfriend, to renew was taken at this meeting Hakkio, Ms. Krieger, and rather than later in the year to give the Mr. Sniderman, Senior Vice Committee members a timely oppor- Presidents, Federal Reserve Banks of Boston, Richmond, tunity to discuss whether or not they Kansas City, New York, and wanted to extend the maturity of the Cleveland respectively agreements; the terms of the agreements require that any decision not to renew be Messrs. Cunningham and Gavin, Vice communicated to swap line partners at Presidents, Federal Reserve Bank least 6 months in advance of the swap of Atlanta and St. Louis maturities. respectively The Committee then turned to a dis- Mr. Trehan, Research Officer, Federal cussion of the economic and financial Reserve Bank of San Francisco outlook and the implementation of monetary policy over the intermeeting By unanimous vote, the minutes of period ahead. A summary of the ecothe meeting of the Federal Open Market nomic and financial information avail- Committee held on March 30, 1999, able at the time of the meeting and of were approved. the Committee's discussion is provided The Manager of the System Open below. The domestic policy directive Market Account reported on recent that was approved by the Committee developments in foreign exchange mar- and issued to the Federal Reserve Bank kets. There were no open market opera- of New York follows the summary. tions in foreign currencies for the Sys- The information reviewed at this tem's account in the period since the meeting suggested that economic activ- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 86th Annual Report, 1999 ity had continued to expand vigorously. Consumer spending has been very Consumer spending had maintained its strong this year, supported by rapid strong forward momentum, and housing income growth, soaring household net activity generally had remained at a high worth, and buoyant consumer sentiment. level. Growth of business capital spend- Retail sales edged still higher in April ing had slowed appreciably but was still after recording large gains earlier in quite rapid. The expansion in industrial the year. Sales of motor vehicles in production had quickened recently while April again were exceptionally high, and gains in employment had moderated outlays for non-auto goods remained somewhat. Inflation had remained low, robust. In addition, spending on services although consumer prices registered a grew briskly in the first quarter (latest sizable rise in April; labor costs were data available), paced by sharply still quiescent despite very tight labor increased outlays for energy, bank and markets. brokerage services, and recreation. Growth in nonfarm payroll employ- Total housing starts fell in April after ment slowed on balance over March several months of unusually favorable and April, but hiring was still relatively weather conditions that had allowed rapid. Employment gains were concen- builders to maintain a relatively high trated in the services, retail trade, and level of construction activity. Some of finance, insurance, and real estate cate- the decline in starts apparently reflected gories. By contrast, manufacturing expe- shortages of labor and some types of rienced further job losses, and construc- building materials. However, sales of tion employment fell on balance over new homes had fallen somewhat on balthe March-April period after having ance thus far this year, and applications expanded briskly since last fall. The for mortgages to finance purchases of civilian unemployment rate in April, at homes remained below their 1998 peak 4.3 percent, matched its first-quarter despite a recent turn upward. average. Business capital spending decelerated Industrial production increased sub- in the first quarter, though to a still relastantially in March and April after a tively rapid pace. Growth of spending period of sluggish growth. In manufac- on durable equipment was boosted by a turing, the production of durable goods surge in outlays for communications rose rapidly in both months, paced by equipment, brisk expenditures for motor sharp increases in the output of semicon- vehicles, and continuing though lessductors and motor vehicles and parts. ened strength in purchases of comput- The production of office automation ers. Nonresidential building activity equipment picked up from an already advanced moderately in the first quarter, rapid pace in the March-April period, reflecting significant further increases in and the manufacture of communications the construction of office buildings and equipment surged in April. Although lodging facilities. Building activity in growth in the output of nondurable other nonresidential categories changed goods had increased somewhat in recent little. months, the level of production was still Total business inventories rose conbelow its year-earlier level. The step-up siderably in March, mostly reflecting a in industrial production in recent months huge run-up in inventories at automohad lifted the rate of utilization of man- tive dealerships. For the first quarter as a ufacturing capacity, but it remained whole, inventory accumulation exclubelow its long-term average. sive of motor vehicles was near the sub- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 227 dued pace of late 1998, and stocks gen- Latin America might have bottomed erally appeared to be at fairly low levels out, with some countries beginning to relative to sales. In the manufacturing recover. sector, inventories fell further in the first Consumer prices rose substantially in quarter, largely reflecting reductions of April. Energy prices increased sharply, stocks of aircraft and parts, and the food prices edged up, and the prices of aggregate inventory-sales ratio for the consumer items other than food and sector in March was somewhat below energy rose appreciably. For the twelve the bottom of its range over the previous months ended in April, core consumer twelve months. The first-quarter rise in inflation was slightly higher than for the non-auto wholesale inventories was year-earlier period. Producer prices of nearly the same as the fourth-quarter finished goods also increased in April, increase. With sales up appreciably, but by less than consumer prices. Finhowever, the inventory-sales ratio for ished energy prices were up sharply, but the sector dropped sharply and was near prices of finished foods declined apprethe bottom of its range for the past year. ciably, and prices of core producer Non-auto retail inventories increased goods advanced only slightly. For the considerably in the first quarter, but twelve months ended in April, core prosales grew by even more and the aggre- ducer inflation was up noticeably over gate inventory-sales ratio was near the that for the year-earlier period, reflectbottom of its range over the last year. ing importantly the sharp increase in The U.S. trade deficit in goods and prices of tobacco products. In contrast to services widened substantially in Janu- price inflation, labor costs appeared to ary and February from its fourth-quarter have remained quiescent. The increase average, with exports falling sharply in average hourly earnings was the same and imports rising strongly. The drop in April as in March, and the rise for the in exports in the January-February twelve months ended in April was sigperiod nearly reversed the large fourth- nificantly smaller than that for the yearquarter increase, with substantial earlier period. declines occurring in aircraft, machin- At its meeting on March 30, 1999, ery, industrial supplies, and agricultural the Committee adopted a directive that products. The jump in imports was called for maintaining conditions in concentrated in consumer goods, auto- reserve markets that would be consistent motive products, computers, and semi- with an unchanged federal funds rate of conductors. Economic growth continued about 43/4 percent and that did not conto be sluggish in many of the major tain any bias relating to the direction of foreign industrial countries, according possible adjustments to policy during to the limited information available the intermeeting period. The Committee for the first quarter. Growth was weak judged this policy stance to be consison balance in the euro zone and the tent with its objectives of fostering high United Kingdom, and there were few employment and sustained low inflation, signs of economic recovery in Japan. with the risks of different outcomes However, the expansion in Canada being reasonably well balanced, at least appeared to have remained strong. Else- for the near term. where, the Korean economy grew vigor- Open market operations throughout ously in the first quarter, and there were the intermeeting period were directed indications that the slowdown in eco- toward maintaining the federal funds nomic activity in Southeast Asia and rate at around 43/4 percent. The average Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 86th Annual Report, 1999 rate for the period was in line with the M2 and M3 recorded sizable Committee's target level; however, sub- increases in April, apparently arising stantial fluctuations in the rate associ- from a buildup of liquid accounts by ated with tax-season uncertainties com- households to make larger-than-usual plicated reserve management. Yields final tax payments. For the year through on Treasury securities rose appreciably April, M2 and M3 had grown less rapon balance, with the largest increases idly than in 1998; even so, M2 was occurring in intermediate- and longer- estimated to have grown this year at a term maturities. The climb in rates rate somewhat above the Committee's reflected not only the strength of incom- annual range, and M3 at a rate slightly ing data on the U.S. economy but also above its range. Total domestic nonimproved economic prospects in many financial debt continued to expand at a foreign countries and higher world pace somewhat above the middle of its commodity prices. Increasing optimism range. about economic conditions in the United The staff forecast prepared for this States and abroad apparently eased con- meeting suggested that the expansion cerns about the creditworthiness of busi- would gradually moderate to a rate comness borrowers, especially firms of rela- mensurate with the rise in the econotively low credit standing, and rates on my's estimated potential. Growth of private obligations registered mixed private final demand would be damped changes over the period. Most key mea- by the anticipated waning of positive sures of share prices in equity markets wealth effects stemming from large recorded sizable gains over the inter- increases in equity prices and by slower meeting period. growth of spending on consumer dura- The trade-weighted value of the dol- bles, houses, and business equipment lar in foreign exchange markets depreci- after the earlier buildup in the stocks ated somewhat over the intermeeting of these items. The lagged effects of period in relation to the currencies of the rise that had occurred in the foreign a broad group of important U.S. trading exchange value of the dollar were partners. The dollar's decline partly expected to place continuing, though reflected improvements in the economic diminishing, restraint on the demand and financial outlook for many emerg- for U.S. exports for some period ahead. ing market economies. The dollar also Labor markets were anticipated to depreciated significantly against the remain tight, and inflation was projected Canadian and Australian currencies as to increase somewhat on balance over the prices of metals, oil, and lumber the projection period, partly as a result moved higher. By contrast, the dollar of some firming of import prices that, moved up on balance in terms of the in turn, would give domestic firms euro and the Japanese yen. A reduction somewhat more leeway to raise their in the European Central Bank's refi- prices. nance rate and the diminished prospects In the Committee's discussion of curfor a near-term resolution of hostilities rent and prospective economic developin the Balkans weighed on the euro. ments, members commented that they The dollar's rise against the yen evi- saw few signs of any moderation in the dently was partly a response to a decline expansion of economic activity from the in the yield on ten-year Japanese gov- rapid pace that had prevailed in recent ernment bonds while dollar yields quarters—a pace greater than the growth moved higher. in the economy's potential, even though Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 229 the growth of potential was rising as a eral months of the year featured notable result of accelerating productivity. For gains in consumer and business expendia number of reasons, they still viewed tures and appreciable growth in outlays some slowing in the expansion to a for residential construction. Underlying growth rate more in line with that of the strength in these key sectors of the potential as a reasonable expectation. economy was the marked improvement However, the timing and extent of the in overall financial market conditions moderation remained subject to substan- since the fall of last year, including the tial uncertainty. And in light of the per- ample availability of financing on relasistent strength in domestic demand, the tively favorable terms for many borrowreduced risks of economic weakness ers and the sharp rise in stock market abroad, and the recovery in U.S. finan- prices. Indicators of possible slowing cial markets, most members believed in these sectors of the economy were that for the year ahead the odds around limited, especially outside of housing. their forecasts were tilted toward further Consumer expenditures were exrobust growth that would add to pres- pected to be well maintained in conjuncsures on already tight labor markets. tion with projections of appreciable fur- The latest statistical and anecdotal infor- ther growth in jobs and incomes and a mation on wages and prices, while ready availability of financing. A major somewhat more mixed than earlier, con- uncertainty in the outlook for the continued on balance to present a picture sumer sector was the largely unpredictof benign inflation. However, the firm- able behavior of the stock market. The ing of oil and other commodity prices, very large equity price increases in the more frequent anecdotal reports of recent years evidently had contributed increases in some costs and prices, and to high levels of consumer confidence the most recent CPI statistics could be and robust consumer spending, and the read as suggesting at least that the trend further gains in those prices thus far this toward lower inflation was coming to year would continue to bolster spending an end and perhaps also as harbingers of for a while. A leveling trend in stock a less favorable inflation performance market prices, should one materialize, going forward, especially if growth in likely would have a significant restraindemand did not slow to a more sustain- ing effect on consumer confidence and able pace. A key uncertainty in the out- the growth of spending over time. In look for inflation related to the prospects addition, the substantial accumulation of for productivity, whose continued accel- durable goods by consumers in recent eration over the past several quarters years was seen as a constraining influclearly had helped to contain cost pres- ence on spending for such goods going sures despite widespread indications of forward. persistently tight labor markets. On bal- Expenditures by business firms for ance, while an upward trend in under- durable equipment were expected to lying inflation had not materialized post further sizable gains this year and thus far, the members were concerned next, though probably at rates somewhat that if recent developments continued— below those recorded in recent years. especially if demand did not slow to a Technical advances and ongoing commore sustainable pace—inflation was petitive pressures were likely to remain more likely to rise over time. relatively stimulative factors, but a num- The impressive strength in private ber of developments also were anticidomestic spending during the first sev- pated to exert a tempering influence. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

230 86th Annual Report, 1999 These included the large buildup in to Asian markets, lent some support equipment over the course of recent to this outlook. Members commented, years, some moderation in the growth of however, that financial and economic demand for capital associated with prospects remained worrisome in sevslower expansion of overall spending, eral parts of the world and that the outand in these circumstances more slug- look for net exports continued to be gish growth of business profits. The subject to downside risks, albeit to a behavior of stock market prices also lesser extent than in late 1998 and early would play a role in the cost of business 1999. finance and the level of business con- Members expressed concern about fidence but one that could not readily what they now saw as a greater risk of be predicted. According to anecdotal rising inflation even though current indireports, commercial and other nonresi- cators continued on the whole to point dential construction activity was at high to quiescent wage and price behavior. levels in several regions, though con- The recent performance of the CPI and strained in a number of areas by short- industrial commodity prices and the ages of skilled labor and some con- more numerous anecdotal reports of struction materials. Concerns about price and cost increases were reasons overbuilding were reported in a few for added caution about the outlook for parts of the country. Residential con- inflation, though these developments struction activity also was at a high still constituted only very tentative evilevel, and backlogs had developed in dence of a possible change in inflation some regions because of shortages of trends. Several members commented in labor and some building materials. particular that substantial weight should While these backlogs and continued not be attached to the one-month jump affordability of home purchases were in the just-released CPI data. Unexpectexpected to help sustain residential con- edly large gains in productivity had both struction activity near current levels for contributed to demand and helped outsome period of time, statistical and sur- put to keep pace with the strong growth vey indicators pointed to some loss of in demand, but an important portion of momentum in housing sales and new that demand also had been met by drawconstruction, perhaps partly in response ing down the pool of available workers to the rise in long-term interest rates. and by rapid increases in imports. Infla- Foreign trade on net was damping tion expectations, while perhaps deteriodemand pressures on U.S. production rating a bit recently, were still subdued capacity, but its negative impact was and undoubtedly continued to help thought likely to diminish over time. account for restrained pricing behavior Factors underlying this outlook included and for relatively moderate wage indications of stabilizing or improving demands despite the tightness in labor financial and economic conditions in markets. several East Asian and Latin American Partly because the economy contincountries and expectations of some ued to demonstrate a marked ability to strengthening in European economies. absorb large increases in demand with- The resulting impetus to exports was out generating significant cost and price projected to be accompanied by a lower pressures, the members did not see a rate of growth in imports as the expan- sizable upturn in underlying inflation as sion of the U.S. economy slowed. Anec- a likely prospect over the next few quardotal reports of rising exports, notably ters. The longer-run outlook was more Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 231 worrisome and would depend impor- tivity were subject to a wide range of tantly on the extent to which the expan- uncertainty, and there were reasons to sion put pressure on labor resources. In believe that economic growth could well particular, if that pressure intensified, at slow without any adjustment to policy. some point further gains in productivity The members recognized that the recovwould not be able to offset rising wage ery in credit markets, the rise in equity increases. Moreover, the effect on prices prices, and the turnaround in some forwould tend to be exacerbated by the eign economies could imply that the ebbing or reversal of temporary factors lower federal funds rate established last that had served to damp inflation; fall was no longer entirely appropriate. notable among those factors were the However, they concluded that given the upturn in energy prices and the current prevailing uncertainties in the economic or prospective firming of commodity outlook it was preferable to defer any and other import prices as economic policy action and to monitor the econactivity strengthened abroad. With both omy closely for further signs that inflathe extent of prospective pressures in tionary pressures were likely to rise. labor markets and the outlook for pro- The members nonetheless agreed ductivity subject to considerable uncer- that their increased concerns about tainty, a firmer assessment of the future the outlook for inflation called for the course of inflation needed to await fur- adoption of an asymmetric directive ther developments. that was tilted toward tightening and, in Against this background, all the mem- keeping with the Committee's recently bers supported a proposal to maintain reaffirmed policy, to announce that an unchanged policy stance and to adopt change after this meeting. The Commitand announce an asymmetric directive tee had said that it would not necessarily that was tilted toward tightening. publish every change in the symmetry Although their concerns about the out- of its directive, but this shift to asymmelook for inflation had increased signifi- try represented a significant change in cantly since the previous meeting, the the Committee's assessment of the risks members felt that there was still a rea- of higher inflation, and its announcesonable chance that the current stance ment would alert the financial markets of policy would remain consistent with and the public more generally to this containing price pressures for some development. That, in turn, should period of time. Signs of an actual change encourage stabilizing reactions in finanin inflation were still quite tentative cial markets and perhaps reduce the and anecdotal, and they did not warrant odds of an outsized response if evolving an adjustment to policy at this meet- circumstances in the near term were to ing. Moreover, as the experience of require an adjustment to policy that had recent years had amply demonstrated, not previously been anticipated. It was improvements in productivity growth important that the public, including might permit the economy to continue those who participated in financial marto accommodate strong demand for kets, understood the Committee's resome time without generating higher solve to keep inflation at a low level. A inflation, especially if the growth of number of members emphasized, howdemand were to moderate somewhat in ever, that the adoption and announcethe months ahead. In that regard, the ment of an asymmetrical directive prospective strength of demand pres- should not be viewed as necessarily sures and related outlook for produc- implying a near-term policy change or Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 86th Annual Report, 1999 indeed any change over time unless cir- financial debt has continued to expand at a cumstances warranted. For now, an pace somewhat above the middle of its range. asymmetric directive represented the The Federal Open Market Committee right balance in terms of positioning the seeks monetary and financial conditions that Committee for possible tightening at will foster price stability and promote sussome point. tainable growth in output. In furtherance of At the conclusion of this discussion, these objectives, the Committee at its meeting in February established ranges for the Committee voted to authorize and growth of M2 and M3 of 1 to 5 percent and direct the Federal Reserve Bank of New 2 to 6 percent respectively, measured from York, until it was instructed otherwise, the fourth quarter of 1998 to the fourth quarto execute transactions in the System ter of 1999. The range for growth of total Account in accordance with the follow- domestic nonfinancial debt was set at 3 to 7 percent for the year. The behavior of the ing domestic policy directive: monetary aggregates will continue to be evaluated in the light of progress toward The information reviewed at this meeting price level stability, movements in their suggests continued vigorous expansion in velocities, and developments in the economy economic activity. Nonfarm payroll employ- and financial markets. ment moderated on balance over March and To promote the Committee's long-run April, and the civilian unemployment rate objectives of price stability and sustainable in April matched its first-quarter average. economic growth, the Committee in the Total industrial production increased sub- immediate future seeks conditions in reserve stantially in March and April. Total retail markets consistent with maintaining the sales edged up in April after recording large federal funds rate at an average of around gains earlier in the year. Housing starts fell 43/4 percent. In view of the evidence curin April. Available indicators suggest that rently available, the Committee believes that growth of business capital spending has prospective developments are more likely to remained relatively rapid. The nominal defi- warrant an increase than a decrease in the cit on U.S. trade in goods and services wid- federal funds rate operating objective during ened substantially in January and February the intermeeting period. from its fourth-quarter average. Consumer prices rose substantially in April, boosted Votes for this action: Messrs. Greenspan, by a sharp increase in energy prices; labor McDonough, Boehne, Ferguson, Gramcosts have remained quiescent thus far this lich, Kelley, McTeer, Meyer, Moskow, year despite very tight labor markets. Ms. Rivlin, and Mr. Stern. Votes against Interest rates on Treasury securities have this action: None risen appreciably since the meeting on March 30, 1999, with the largest increases It was agreed that the next meeting concentrated in intermediate- and long-term of the Committee would be held on maturities; rates on private obligations show mixed changes over the period. Most key Tuesday-Wednesday, June 29-30,1999. measures of share prices in equity markets The meeting adjourned at 12:45 p.m. have registered sizable gains over the intermeeting period. In foreign exchange mar- Donald L. Kohn kets, the trade-weighted value of the dollar Secretary has depreciated somewhat over the period in relation to the currencies of a broad group of important U.S. trading partners. Meeting Held on M2 and M3 recorded sizable increases June 29-30, 1999 in April, apparently owing to a tax-related buildup in liquid accounts. For the year A meeting of the Federal Open Market through April, M2 is estimated to have Committee was held in the offices of the increased at a rate somewhat above the Committee's annual range and M3 at a rate Board of Governors of the Federal slightly above its range. Total domestic non- Reserve System in Washington, D.C., Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, June 233 on Tuesday, June 29, 1999, at 2:30 p.m. Messrs. Porter8 and Reinhart, Deputy and continued on Wednesday, June 30, Associate Directors, Division of Monetary Affairs, Board of 1999, at 9:00 a.m. Governors Present: Mr. Reifschneider,8 Section Chief, Mr. Greenspan, Chairman Division of Research and Mr. McDonough, Vice Chairman Statistics, Board of Governors Mr. Boehne Mr. Ferguson Mses. Edwards,9 and Mauskopf,9 and Mr. Gramlich Messrs. Lebow8 and Orphanides,8 Mr. Kelley Senior Economists, Divisions of Mr. McTeer Monetary Affairs, International Mr. Meyer Finance, Research and Statistics, Mr. Moskow and Monetary Affairs Mr. Stern respectively, Board of Governors Messrs. Broaddus, Guynn, Jordan, Ms. Garrett and Mr. Tetlow,8 and Parry, Alternate Members Economists, Divisions of of the Federal Open Market Monetary Affairs and Research Committee and Statistics respectively, Board of Governors Mr. Hoenig, Ms. Minehan, and Mr. Poole, Presidents of the Ms. Low, Open Market Secretariat Federal Reserve Banks of Assistant, Division of Monetary Kansas City, Boston, and Affairs, Board of Governors St. Louis respectively Mr. Barron, First Vice President, Mr. Kohn, Secretary and Economist Federal Reserve Bank of Atlanta Mr. Bernard, Deputy Secretary Ms. Fox, Assistant Secretary Messrs. Beebe, Eisenbeis, Goodfriend, Mr. Gillum, Assistant Secretary Hakkio, Rasche, and Sniderman, Mr. Mattingly, General Counsel Senior Vice Presidents, Federal Mr. Prell, Economist Reserve Banks of San Francisco, Mr. Johnson, Economist Atlanta, Richmond, Kansas City, St. Louis, and Cleveland Messrs. Alexander, Cecchetti, Hooper, respectively Hunter, Lang, Lindsey, Rolnick, Rosenblum,7 Slifman, and Mr. Fuhrer and Ms. Perelmuter, Vice Stockton, Associate Economists Presidents, Federal Reserve Banks of Boston and New York Mr. Fisher, Manager, System Open respectively Market Account By unanimous vote, the minutes of Mr. Ettin, Deputy Director, Division of the meeting of the Federal Open Market Research and Statistics, Board of Committee held on May 18, 1999, were Governors approved. Messrs. Madigan and Simpson, Associate Directors, Divisions of 8. Attended portions of the meeting relating to Monetary Affairs and Research the discussion of the policy implications of uncerand Statistics respectively, Board tainty about key economic variables. of Governors 9. Attended portions of the meeting relating to the Committee's review of the economic outlook and consideration of its monetary and debt ranges 7. Attended Tuesday's session only. for 1999 and 2000. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 86th Annual Report, 1999 The Manager of the System Open sector: payrolls in manufacturing and Market Account reported on recent mining continued to contract, and condevelopments in foreign exchange mar- struction employment changed little on kets. There were no open market opera- net after a sizable first-quarter increase. tions in foreign currencies for the Sys- The civilian unemployment rate edged tem's account in the period since the down in May to 4.2 percent, matching previous meeting, and thus no vote was its low for the year and for the period required of the Committee. since 1970. The Manager also reported on devel- Industrial production advanced someopments in domestic financial markets what further in May despite a sharp and on System open market transactions weather-related drop in utility services in government securities and federal and continued sluggishness in mining agency obligations during the period activity. Manufacturing output regis- May 18, 1999, through June 29, 1999. tered another substantial advance, The Committee ratified these transac- reflecting a surge in the production tions by unanimous vote. of motor vehicles and parts and per- The Committee then turned to a dis- sisting strength in the manufacture of cussion of the economic and financial many other durable goods. The output outlook, the ranges for the growth of of nondurable goods posted another money and debt in 1999 and 2000, and small increase in May, with the gains the implementation of monetary policy being relatively broadly based. Reflectover the intermeeting period ahead. ing the stepped-up pace of manu- The information reviewed at this facturing, the rate of utilization of meeting suggested that economic activ- capacity edged higher in May but conity continued to expand vigorously, tinued to be below its long-run average though at a somewhat slower pace level. than earlier in the year. Consumer Growth of consumer spending apoutlays and construction spending had peared to have slowed somewhat from decelerated somewhat after having its extraordinary pace of the first quargrown very rapidly in the first quarter, ter; nonetheless, the underlying trend in but the deceleration had been partly off- consumption remained strongly upward, set by a step-up in business purchases of with household income and wealth condurable equipment and a smaller decline tinuing to expand rapidly and consumer in net exports. Labor markets remained sentiment remaining very high. Total very tight, and recent wage and price retail sales rose substantially in May increases had been a little larger on bal- following large increases on average ance; nonetheless, longer-term inflation earlier in the year. Gains in retail sales trends continued generally favorable in were relatively widespread, with outan environment of robust improvements sized advances in the food, general merin productivity. chandise, and durable goods categories. Nonfarm payroll employment rose Housing demand remained robust in substantially further on balance in April recent months despite the recent rise in and May, but the increase was a little mortgage rates. However, builders were below the rate for the first quarter. faced with shortages of workers and Growth in employment remained robust some materials and were hard-pressed in the service-producing sector in the to keep pace with the demand for new April-May period. However, the num- homes. As a result, both single-family ber of jobs fell in the goods-producing and multifamily housing starts fell Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, June 235 somewhat on balance over April and and semiconductors, motor vehicles, and May. industrial supplies. The value of imports Information on shipments of non- rose somewhat more, principally owing defense capital goods in April and May to larger imports of oil. The available suggested that business investment in information suggested that economic durable equipment picked up substan- activity had picked up somewhat on baltially in the second quarter from the ance in the major foreign industrial already brisk pace of the first quarter. countries. The Japanese economy was Shipments of high-tech equipment, reported to have expanded markedly in notably computers, were particularly the first quarter, recording its first quarrobust over the April-May period. In terly rise in the past year and a half. In addition, business demand for motor Europe, economic growth rebounded vehicles continued to be strong, particu- in Germany but slowed somewhat in larly for medium and heavy trucks for France and the United Kingdom. Signs which the backlog of unfilled orders was of an improved economic performance still quite large. By contrast, nonresiden- also were evident in Latin America and tial construction activity weakened in Southeast Asia. April (latest data) after a rise in the first The consumer price index was quarter, and available information on unchanged in May following a sizable contracts for future construction pointed increase in April that was associated to sluggish building activity for some in part with a jump in energy prices. period ahead. Excluding the effects of movements Business inventory accumulation in food and energy prices, though, conslowed a bit in April from the relatively sumer inflation was a little higher in the subdued first-quarter pace, and total April-May period than in the first quarbusiness stocks remained at fairly low ter; for the twelve months ended in May, levels in relation to sales. In manufactur- core consumer prices rose slightly less ing, inventories continued to decline in than in the previous twelve-month April, and the aggregate inventory- period. Producer prices of finished shipment ratio for this sector stayed at goods also were affected by the volatilthe bottom of its range for the past ity of energy prices in April and May, twelve months. Wholesale stocks rose in but core producer prices recorded only a April at about their average pace for the small rise in each month. For the twelve early months of the year, and the ratio of months ended in May, however, core stocks to sales in this sector stayed in producer inflation was up noticeably the lower end of its range for the past compared with the year-earlier period, year. Retail inventory accumulation owing in important part to sharp slowed in April after a relatively large increases in the prices of tobacco prodgain in the first quarter, and the aggre- ucts. With regard to labor costs, average gate inventory-sales ratio also remained hourly earnings grew a little faster in in the lower end of its range for the past May than in April, but they rose less twelve months. in the twelve months ended in May than The nominal deficit on U.S. trade in in the previous twelve-month period. goods and services widened somewhat At its meeting on May 18, 1999, in April from its first-quarter average. the Committee adopted a directive that The value of exports increased slightly called for maintaining conditions in from its first-quarter average, primarily reserve markets that would be consistent reflecting greater exports of computers with an unchanged federal funds rate of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 86th Annual Report, 1999 about 43/4 percent, but the directive also U.S. Treasury securities. Among other contained a bias toward a possible tight- important trading partners, the dollar fell ening of policy. The members' concerns against the currencies of many emerging about inflation had increased apprecia- Asian economies, whose financial marbly since the meeting in late March; kets had generally improved, but apprenonetheless, the members felt that the ciated in terms of the Brazilian real in current stance of policy could remain association with periods of particular consistent with subdued inflation for stress in Brazil's financial markets. some time, especially if productivity After having recorded sizable ingains continued robust and, as projected, creases in April that apparently were the growth of aggregate demand moder- associated with tax-related buildups in ated somewhat in the months ahead. liquid accounts, the growth of M2 and Open market operations were directed M3 slowed sharply in May, as tax paythroughout the intermeeting period ments cleared, and appeared to have toward maintaining the federal funds remained moderate in June. The expanrate at around 43A percent, and the aver- sion of these aggregates also seemed age rate for the period was very close to to have been damped in recent months the Committee's target. Other interest by the rise in their opportunity costs rates rose somewhat over the period associated with earlier increases in intersince the May meeting in response to est rates. M2 was estimated to have the combined effects of the Committee's increased for the year through June at a announcement of an asymmetric direc- rate somewhat above the Committee's tive, economic data that generally were annual range and M3 at a rate near the stronger than expected, and reported upper end of its range. Although growth comments of Federal Reserve officials. of total domestic nonfinancial debt had With the market effects of higher inter- moderated a little recently, it continued est rates roughly offset by brighter to expand at a pace somewhat above the second-quarter earnings prospects, middle of its range. broad indexes of share prices in equity The staff forecast prepared for this markets changed little on balance over meeting suggested that the expansion the intermeeting period. would gradually moderate to a rate com- In foreign exchange markets, the mensurate with the growth of the econotrade-weighted value of the dollar edged my 's estimated potential. The lagged up over the intermeeting period in rela- effects of the earlier rise in the foreign tion to the currencies of a broad group exchange value of the dollar were of important U.S. trading partners. The expected to place continuing, though dollar appreciated against the euro, diminishing, restraint on the demand for partly reflecting the contrast between U.S. exports for some period ahead. The continuing robust growth in the United increase of private final demand would States and generally subpar activity in be restrained by the anticipated waning euro-area economies. The dollar also of positive wealth effects associated rose against the pound in association with earlier large increases in equity with slower growth in the United King- prices; by slower growth of spending on dom and a reduction in the Bank of consumer durables, houses, and busi- England's repo rate. By contrast, the ness equipment in the wake of the prodollar weakened against the yen as longed buildup in the stocks of these yields on Japanese government debt items; and by the rise that had already increased sharply relative to rates on occurred in market interest rates, espe- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, June 237 cially for intermediate and longer matu- ing, given the extraordinary strength in rities, in the expectation that higher final U.S. demands, which if continued interest rates would be needed to would show through into higher inflaachieve a better balance between aggre- tion. Moreover, it remained unclear how gate demand and aggregate supply. Price long faster gains in productivity could inflation was projected to rise somewhat continue to offset increases in labor over the projection horizon, in large part costs and avert an intensification of price as a result of some upturn in import inflation. prices and a slight firming of gains in In keeping with the practice at meetnominal labor compensation that would ings just before the Federal Reserve's not be fully offset by rising productivity. semiannual monetary policy report to In the Committee's discussion of the the Congress and the Chairman's associoutlook for economic activity and infla- ated testimony, the members of the tion, members commented that the Committee and the Federal Reserve incoming information continued to sug- Bank presidents not currently serving as gest a vigorous expansion but also sub- members had provided individual produed inflation despite very tight labor jections of the growth in nominal and markets. Growth in aggregate demand real GDP, the rate of unemployment, was estimated to have slowed somewhat and the rate of inflation for the years in the second quarter from outsized 1999 and 2000. With regard to the advances in the two previous quarters, growth of nominal GDP, most of the largely as a result of less ebullient forecasts were in ranges of 5 to 5Vz perthough still robust growth in consumer cent for 1999 as a whole and 4 to 5 perspending. The members questioned, cent for 2000. The forecasts of the rate however, whether the limited indica- of expansion in real GDP for 1999 had tions of some moderation in the expan- a central tendency of 3V2 to 33A percent sion in recent months were a harbinger and for 2000 they were centered on a of a more sustainable pace of economic range of 2Vi to 3 percent, below the activity that would be consistent with increases experienced over the last three the economy's estimated output poten- years. The civilian rate of unemploytial and low inflation. Indeed, in the ment associated with these forecasts had absence of some policy firming most of central tendencies of 4 to AXA percent in the members saw tightening labor mar- the fourth quarter of 1999 and AlA to kets and an upward drift in measured AV2 percent in the fourth quarter of inflation as a significant risk. They ac- 2000. Projections of the rate of inflation, knowledged that the timing and extent as measured by the consumer price of a potential rise in inflation were sub- index, pointed to an appreciable increase ject to considerable uncertainty. In par- in 1999, largely reflecting a swing in the ticular, as the experience of recent years price of energy, and little further change had amply demonstrated, strengthening in 2000; specifically, the projections advances in productivity had reduced converged on CPI inflation rates of increases in unit costs to very low or 2V4 to 2Vi percent in 1999 and 2 to even slightly negative levels despite 2V2 percent in 2000. The members growing scarcities of labor and some anticipated that the effects of the century rise in the growth of labor compensation date change on economic activity and in profit margins. Rising productiv- would, on balance, be limited or negliity growth had not been sufficient, how- gible over the forecast period, possibly ever, to keep labor markets from tighten- adding somewhat to growth later this Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 86th Annual Report, 1999 year and temporarily reducing growth in their outlays for equipment as foreearly next year. casts of moderating expansion in aggre- Key factors underlying the members' gate demand materialized. Such a cutforecasts of appreciable moderation back would be abetted to an extent by in the trend of real GDP growth the somewhat higher levels of market included a waning of the financial stimu- interest rates that business borrowers lus that had boosted domestic demand in now faced. While growth in spending recent years and the buildup of stocks of for high-technology equipment and consumer durables, housing, and busi- related products probably would remain ness equipment after an extended period rapid in light of the accelerated pace of of rapidly expanding purchases. How- innovations and declining prices for ever, the members acknowledged that such equipment, a significant decelerathe signs of slower growth in household tion or slowdown in spending for other and business spending were still quite types of capital equipment seemed likely limited. under projected economic conditions, In the household sector, further especially given currently reduced rates substantial increases in income and of capacity utilization in many manufacfinancial wealth and high levels of turing industries. In the nonresidential consumer confidence had fostered construction sector, business expendicontinued robust growth in consumer tures were expected to remain near curspending in recent months, but apart rent levels, reflecting ongoing strength from exceptional strength in purchases in many parts of the country but also of motor vehicles, growth in real some signs of overbuilding in other spending for durable consumer goods areas. appeared to have moderated recently A number of recent indicators sugfrom a very rapid pace earlier in the gested that on a seasonally adjusted year. How long the favorable factors basis residential building activity had that continued to stimulate substantial slowed a bit in the second quarter from growth in consumer expenditures would an elevated level earlier in the year. persist was uncertain, notably with However, homebuilding apparently had regard to the outlook for stock market been held back to some extent recently prices and their effects on consumer by scarcities of labor and some building resources and willingness to spend. The supplies, and sizable backlogs evidently stimulus to household spending from had built up. Looking ahead, the memrapidly rising stock market wealth obvi- bers expected residential construction ously would diminish should prices in expenditures to hold near current levels the stock market tend to level out as in the second half of this year as backmany expected. In that event, growth in logs were worked lower, but they anticiconsumer spending might be expected pated some softening subsequently. Facto moderate to a pace more in line with tors bearing on this outlook included the the expansion in disposable incomes. large additions to the stock of housing Business investment spending, which in recent years and to some extent the featured exceptional growth in expendi- backup that had occurred in mortgage tures for producers' durable equipment, rates. At some point the higher financing appeared to have picked up in recent costs would begin to show through to months from an already rapid pace ear- housing demand. lier in the year. Nonetheless, business The available information indicated firms were expected to trim the growth that U.S. exports of goods and services Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, June 239 had declined on balance thus far this ample availability of capacity in most year, while imports had posted very industries and the declines that had strong gains in line with continuing occurred in non-oil import prices. strength in U.S. domestic spending. Despite these favorable developments, However, improving economies in a most members had become increasingly number of the nation's important trad- worried about the risks of an overheating partners and the slower expansion ing economy and rising inflation over forecast for the U.S. economy were time. expected to have a favorable effect on The concerns about the outlook for exports and to moderate increases in inflation tended to focus on the risk that, imports over the next several quarters. in the absence of an appreciable modera- Indeed, recent data suggested that U.S. tion in overall demands, very tight labor exports had advanced slightly after hav- markets would at some point foster siging posted sizable declines during the nificantly faster increases in labor comfirst quarter while imports had contin- pensation that could no longer be offset ued to grow strongly. On net, the mem- by stronger productivity growth. Indeed, bers anticipated that the nation's trade at recent rates of increase in output, balance would continue to worsen, labor utilization was likely to continue although more slowly and with a less to rise, adding to pressures on costs. The negative effect on the U.S. economy higher labor cost increases would in turn over the forecast period. generate more rapid price inflation. Members commented that inflation, Members noted in this regard that as reflected in a wide range of statis- the trend in average hourly earnings tical measures and anecdotal reports, appeared to have tilted up in recent remained remarkably subdued despite months. While this relatively recent the persisting strength of the expansion development was not yet conclusive eviand very tight labor markets across the dence of accelerating labor costs, espenation. It seemed likely that rising pro- cially without further information about ductivity, which appeared to have accel- productivity, anecdotal reports of faster erated markedly of late, accounted for increases in labor compensation also much of the surprising combination of appeared to have multiplied. In addition, rapid growth in economic activity and improving economic conditions abroad, low inflation. In particular, accelerating among other factors, had induced a firmlabor productivity clearly had curbed ing in oil and other commodity prices, the rise in unit labor costs and damped and had supported the foreign exchange pressures on prices. Very recent data on value of other currencies relative to the underlying productivity trends were not dollar. As a consequence, the declines in yet available, but the fact that profit commodity and other import prices that forecasts had continued to be marked had helped to suppress inflation and up suggested that it might still be accel- inflation expectations over the past two erating and holding down costs. Such years were not likely to be repeated. increases in productivity along with Members acknowledged that the prosslack in foreign economies contributed pects for rising inflation, including the to the very strong competition in most potential timing of an acceleration, if markets that was continuing generally any, remained uncertain given the questo suppress efforts to raise prices. Other tions surrounding both the ongoing factors constraining inflation that were strength of aggregate demand and the cited by the members included the outlook for productivity, but they Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

240 86th Annual Report, 1999 viewed the risks of added price pres- those ranges for 1999 and their extensures as having risen further. sion to 2000 would therefore under- In keeping with the requirements of score the Committee's commitment to the Full Employment and Balanced achieving and maintaining price sta- Growth Act of 1978 (the Humphrey- bility over time and thereby fostering Hawkins Act), the Committee reviewed maximum sustainable economic growth. at this meeting the ranges for growth of It was noted during this discussion the monetary and debt ranges that it had that the apparent pickup in productivestablished in February for 1999, and it ity, if it persisted, suggested that someset tentative ranges for those aggregates what higher ranges than those adopted for 2000. The current ranges approved in recent years might more accurately in February for the period from the reflect money growth under conditions fourth quarter of 1998 to the fourth of price stability and historically typiquarter of 1999, which were unchanged cal velocity trends. However, the memfrom those for the last several years, bers agreed that the marked degree included growth of 1 to 5 percent for of uncertainty in the outlook for pro- M2 and 2 to 6 percent for M3. An ductivity as well as velocity argued unchanged range of 3 to 7 percent also against any increases in the ranges at was set in February for growth of total this point. domestic nonfinancial debt in 1999. The Committee members were unani- All the members favored retaining the mously in favor of retaining the current current ranges for this year and extend- range of 3 to 7 percent for growth of ing them on a provisional basis to 2000. total domestic nonfinancial debt in 1999 The members recognized that the and extending that range on a provigrowth of both M2 and M3, while decel- sional basis to 2000. They took account erating markedly from 1998, might still of a staff projection indicating that exceed the ranges for the current year growth of the debt aggregate was likely and be near the upper ends of the ranges to be around the middle of this range, in 2000, assuming economic and finan- perhaps somewhat above in 1999 and cial conditions approximating their cur- somewhat below in 2000. Unlike the rent expectations. However, as had been ranges for the monetary aggregates, the case for many years, the members selection of the range for debt did not remained concerned that forecasts of reflect a price stability and sustainable money growth were still subject to a economic growth rationale but was wide range of error in terms of the based on forecasts of actual growth in anticipated relationships between money this measure. growth and aggregate economic perfor- At the conclusion of this discussion, mance. Accordingly, they agreed that the Committee voted to reaffirm the those ranges should not reflect or be ranges for growth of M2, M3, and total centered on forecasts of money growth domestic nonfinancial debt that it had under projected economic and financial established in February for 1999 and to conditions, but should be regarded as extend these ranges on a tentative basis anchors or benchmarks for money to 2000. In keeping with its usual procegrowth that would be associated with dures under the Humphrey-Hawkins approximate price stability and sus- Act, the Committee would review its tained economic expansion, assuming preliminary ranges for 2000 early next behavior of velocity in line with his- year. Accordingly, the Committee voted torical experience. A reaffirmation of to incorporate the following statement Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, June 241 regarding the 1999 and 2000 ranges in of domestic demand augmented by its domestic policy directive: increasing demand from abroad would show through at some point to even The Federal Open Market Committee tighter labor markets and higher inflaseeks monetary and financial conditions that tion, which would impinge over time will foster price stability and promote sus- on the economy's ability to realize its tainable growth in output. In furtherance of full growth potential. In these circumthese objectives, the Committee reaffirmed at this meeting the ranges it had established stances, a small preemptive move at this in February for growth of M2 and M3 of 1 to time would provide a degree of insur- 5 percent and 2 to 6 percent respectively, ance against worsening inflation later. measured from the fourth quarter of 1998 Members commented that the action in to the fourth quarter of 1999. The range for question would reverse a portion of the growth of total domestic nonfinancial debt easing actions implemented during the was maintained at 3 to 7 percent for the year. For 2000, the Committee agreed on a tenta- fall of 1998 that had been undertaken tive basis to set the same ranges for growth in part to protect against the possibility of the monetary aggregates and debt, mea- that unsettled global markets would sured from the fourth quarter of 1999 to place even greater constraints on foreign the fourth quarter of 2000. The behavior of and domestic economic activity than the monetary aggregates will continue to be evaluated in the light of progress toward were then evident. As financial markets price level stability, movements in their and foreign economies stabilized and velocities, and developments in the economy recovered, that added protection was no and financial markets. longer required and policy needed to move to a less accommodative stance to Votes for this action: Messrs. Greenspan, promote sustainable growth in spending. McDonough, Boehne, Ferguson, Gram- One member did not agree that any lich, McTeer, Meyers, Moskow, Kelly, and Stern. Votes against this action: None. tightening of policy was necessary to Absent and not voting: Ms. Rivlin contain inflation, given the persistence of low inflation, accelerating productiv- In the Committee's discussion of ity, and what in his view was an already policy for the intermeeting period ahead, sufficiently restrictive monetary policy all but one member supported a pro- stance. posal for a slight tightening of condi- The members were divided over tions in reserve markets consistent with whether to retain the current asymmetrian increase of lA percentage point in cal directive tilted toward restraint or to the federal funds rate to an average of adopt a symmetrical directive in conaround 5 percent. In the view of most junction with the contemplated tightenmembers, such a policy move repre- ing action. A majority endorsed a prosented a desirable and cautious preemp- posal to shift to a symmetrical directive. tive step in the direction of reducing They agreed that following today's limwhat they saw as a significant risk of ited policy move the risks would still rising inflation. While current indica- remain tilted toward rising inflation, and tions of accelerating inflation were quite they expected that the announcement limited, the economy had been expand- of a change in policy shortly after the ing rapidly enough to put added pres- meeting would include a reference to sure on labor markets over time, and the Committee's ongoing concerns in many members expressed growing con- that regard. But in light of the marked cern that, given the current stance of degree of uncertainty relating to the monetary policy, the persisting strength extent and timing of prospective infla- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

242 86th Annual Report, 1999 tionary pressures, they believed that fur- direct the Federal Reserve Bank of New ther firming of policy might not be nec- York, until it was instructed otherwise, essary in the near term and in any case to execute transactions in the System would depend importantly on future Account in accordance with the followdevelopments. Some of these members ing domestic policy directive: were concerned that retention of asymmetry might be interpreted as an indica- The information reviewed at this meeting tion that the Committee was relatively suggests continued vigorous expansion in certain that it would need to take further economic activity. Nonfarm payroll employtightening action fairly soon, a view that ment has increased at a relatively rapid pace tended to be reinforced by the behavior in recent months and the civilian unemployof expectations in the period after the ment rate, at 4.2 percent in May, matched its low for the year. Manufacturing output rose announcement of a shift to asymmetry substantially further in May. Total retail sales at the May meeting. increased briskly last month after recording Members who preferred to retain an large gains on average earlier in the year. asymmetrical directive agreed that, Housing activity has remained robust in although there was little likelihood of a recent months. Available indicators suggest that business capital spending, especially for further policy change during the interinformation technology, has accelerated this meeting period, such a directive was spring. The nominal deficit on U.S. trade the best way to convey their concerns in goods and services widened somewhat about the risks of rising inflation and the in April from its first-quarter average. Conpotential need for policy tightening over sumer price inflation was up somewhat on balance in April and May, boosted by a sharp time. A number of those in favor of increase in energy prices; improving producasymmetry were concerned that a symtivity has held down increases in unit labor metrical directive would not capture costs despite very tight labor markets. the Committee's thinking with regard to Interest rates have risen somewhat since the most likely policy course over an the meeting on May 18, 1999. Key meaextended period of time and could foster sures of share prices in equity markets are unchanged to somewhat lower on balance the misleading conclusion that the over the intermeeting period. In foreign Committee no longer believed a further exchange markets, the trade-weighted value adjustment to policy might be warranted of the dollar has changed little over the at some point later this year. They saw period in relation to the currencies of a broad the odds as reasonably high that further group of important US. trading partners. After recording sizable increases in April, tightening would be needed before the apparently owing to a tax-related buildup in end of the year to gain adequate assurliquid accounts, growth of M2 and M3 ance that inflation would be contained. slowed in May as tax payments cleared and Despite their differing preferences, all appears to have remained moderate in June. the members who supported a policy For the year through June, M2 is estimated to have increased at a rate somewhat above tightening move also indicated that the Committee's annual range and M3 at they could accept a symmetrical direca rate near the upper end of its range. Total tive because the announcement to be domestic nonfinancial debt has continued to released after this meeting along with expand at a pace somewhat above the middle the Chairman's Humphrey-Hawkins of its range. testimony during the latter part of The Federal Open Market Committee seeks monetary and financial conditions that July could serve to correct possible will foster price stability and promote susmisinterpretations. tainable growth in output. In furtherance of At the conclusion of this discussion, these objectives, the Committee reaffirmed the Committee voted to authorize and at this meeting the ranges it had established Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, June 243 in February for growth of M2 and M3 of 1 to productivity growth has accelerated in 5 percent and 2 to 6 percent respectively, recent quarters. Mr. McTeer does not measured from the fourth quarter of 1998 believe that rapid growth based on to the fourth quarter of 1999. The range for growth of total domestic nonfinancial debt new technology, rising productivity, and was maintained at 3 to 7 percent for the year. other supply-side factors is inflationary, For 2000, the Committee agreed on a tenta- especially in the current global environtive basis to set the same ranges for growth ment. He would have preferred to conof the monetary aggregates and debt, meatinue to test the growth limits of the new sured from the fourth quarter of 1999 to economy. the fourth quarter of 2000. The behavior of the monetary aggregates will continue to be By notation vote completed on evaluated in the light of progress toward July 14, 1999, available members of price level stability, movements in their the Committee voted unanimously to velocities, and developments in the economy delegate responsibility to Mr. Gramlich and financial markets. and in his absence to Mr. Ferguson for To promote the Committee's long-run objectives of price stability and sustainable making decisions on appeals of denials economic growth, the Committee in the by the secretary of the Committee for immediate future seeks conditions in reserve access to Committee records. This markets consistent with increasing the action was taken in keeping with the federal funds rate to an average of around provisions of 271.4(d) of the Commit- 5 percent. In view of the evidence currently available, the Committee believes that pro- tee's Rules Regarding Availability of spective developments are equally likely Information. to warrant an increase or a decrease in the federal funds rate operating objective during Votes for this action: Messrs. Greenspan, the intermeeting period. McDonough, Boehne, Ferguson, Gramlich, Meyers, Moskow, Kelley, and Stern. Votes for this action: Messrs. Greenspan, Votes against this action: None. Not vot- McDonough, Boehne, Ferguson, Gram- ing: Mr. McTeer and Ms. Rivlin lich, Meyers, Moskow, Kelley, and Stern. Vote against this action: Mr. McTeer. It was agreed that the next meeting of Absent and not voting: Ms. Rivlin the Committee would be held on Tuesday, August 24, 1999. Mr. McTeer dissented because he The meeting adjourned at 11:45 a.m. believed that tightening was unnecessary to contain inflation. He noted that Donald L. Kohn most measures of current inflation Secretary remain low, and he saw few signs of inflation in the pipeline. Conditions that After the meeting, the following press called for a preemptive tightening in release was issued: 1994—rapidly rising commodity prices and real short-term interest rates near The Federal Open Market Committee today voted to raise its target for the federal funds zero—are not present today. While rate 25 basis points, to 5 percent. Last fall money growth has been rapid by histori- the Committee reduced interest rates to cal standards, market-based indicators counter a significant seizing-up of financial of monetary policy suggest sufficient markets in the United States. Since then restraint. Except for oil, most sensitive much of the financial strain has eased, foreign economies have firmed, and economic commodity prices have risen only activity in the United States has moved forslightly after years of decline, the dollar ward at a brisk pace. Accordingly, the full remains strong, real short-term interest degree of adjustment is judged no longer rates are near historical norms, and necessary. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

244 86th Annual Report, 1999 Labor markets have continued to tighten Messrs. Howard, Hunter, Lang, over recent quarters, but strengthening pro- Lindsey, Slifman, and Stockton, ductivity growth has contained inflationary Associate Economists pressures. Owing to the uncertain resolution of the Mr. Fisher, Manager, System Open balance of conflicting forces in the economy Market Account going forward, the FOMC has chosen to adopt a directive that includes no predilec- Mr. Ettin, Deputy Director, Division tion about near-term policy action. The Com- of Research and Statistics, mittee, nonetheless, recognizes that in the Board of Governors current dynamic environment it must be especially alert to the emergence, or poten- Messrs. Madigan and Simpson, tial emergence, of inflationary forces that Associate Directors, Divisions could undermine economic growth. of Monetary Affairs and Research and Statistics respectively, Meeting Held on Board of Governors August 24,1999 Mr. Whitesell, Assistant Director, A meeting of the Federal Open Mar- Division of Monetary Affairs, Board of Governors ket Committee was held in the offices of the Board of Governors of the Fed- Ms. Edwards,10 Senior Economist, eral Reserve System in Washington, Division of Monetary Affairs, D.C., on Tuesday, August 24, 1999, at Board of Governors 9:00 a.m. Ms. Low, Open Market Secretariat Present: Assistant, Division of Monetary Mr. Greenspan, Chairman Affairs, Board of Governors Mr. McDonough, Vice Chairman Mr. Boehne Mr. Stewart and Ms. Strand, First Vice Mr. Ferguson Presidents, Federal Reserve Banks Mr. Gramlich of New York and Minneapolis Mr. Kelley respectively Mr. McTeer Mr. Meyer Mr. Beebe, Ms. Browne, Messrs. Mr. Moskow Eisenbeis, Hakkio, Ms. Krieger, Mr. Stern Messrs. Lacker, Rasche, and Steindel, Senior Vice Presidents, Messrs. Broaddus, Guynn, Jordan, and Federal Reserve Banks of Parry, Alternate Members of the San Francisco, Boston, Atlanta, Federal Open Market Committee Kansas City, New York, Richmond, St. Louis, and Mr. Hoenig, Ms. Minehan, and New York respectively Mr. Poole, Presidents of the Federal Reserve Banks of Mr. Weber, Senior Research Officer, Kansas City, Boston, and Federal Reserve Bank of St. Louis respectively Minneapolis Mr. Kohn, Secretary and Economist Mr. Bryan, Assistant Vice President, Mr. Bernard, Deputy Secretary Federal Reserve Bank of Ms. Fox, Assistant Secretary Cleveland Mr. Gillum, Assistant Secretary Mr. Mattingly, General Counsel Mr. Baxter, Deputy General Counsel Mr. Prell, Economist 10. Attended portion of meeting relating to Ms. Johnson, Economist issues pertaining to year-end operations. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 245 Mr. Viard, Senior Economist, Federal that it would be prudent to provide Reserve Bank of Dallas the Manager with added leeway and flexibility for a limited period. Because By unanimous vote, the minutes of the plans of market participants were the meeting of the Federal Open Market likely to be influenced by the Federal Committee held on June 29-30, 1999, Reserve's contemplated action and were approved. because detailed preparations with By unanimous vote, Christine Cum- market participants needed to begin ming and David Howard were elected promptly, the Committee decided to put to serve as associate economists until the new authorizations in place at this the first meeting of the Committee meeting. after December 31, 1999, with the The new authority encompassed understanding that in the event of the three policy instruments that, unless discontinuance of their official connec- renewed, would expire during the early tion with a Federal Reserve Bank or part of 2000 and one permanent change. with the Board of Governors, they The temporary authorizations included would cease to have any official connec- (1) the expansion of collateral that tion with the Committee. could be accepted in System open mar- The Manager of the System Open ket transactions, (2) authority to use Market Account reported on recent reverse repurchase agreements in addidevelopments in foreign exchange mar- tion to the currently available matched kets. There were no open market opera- sale-purchase transactions to absorb tions in foreign currencies for the Sys- reserves on a temporary basis, and (3) a tem's account in the period since the standby financing facility involving the previous meeting, and thus no vote was auction of options on repurchase agreerequired of the Committee. ments, reverse repurchase agreements, The Manager also reported on devel- and matched sale-purchase transacopments in domestic financial markets tions that could be exercised in the and on System open market transactions period surrounding the year-end. The in government securities and federal permanent change, which also might agency obligations during the period prove useful during the year-end period, June 30, 1999, through August 23,1999. involved the extension of the maximum By unanimous vote, the Committee rati- maturity on regular repurchase and fied these transactions. matched sale-purchase transactions from At this meeting, the Committee con- sixty days to ninety days. sidered a number of proposals whose The broader range of collateral purpose was to enhance the Manager's approved by the Committee for repurability to counter potential liquidity chase transactions included mainly strains in money and financing markets pass-through mortgage securities of in the period surrounding the century GNMA, FHLMC, and FNMA, U.S. date change and in the process help to Treasury STRIPS, and "stripped" secuensure the effective implementation of rities of other federal government the Committee's monetary policy objec- agencies. The expanded pool would tives. The members believed that the facilitate the Manager's task of addressprospects for major liquidity problems ing what potentially could be very large associated with the century date change needs to supply reserves in the months were remote, but some strains were ahead, especially in the weeks surroundalready in evidence, and they agreed ing the year-end. Such transactions Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

246 86th Annual Report, 1999 would have to be undertaken at a time of might be particularly desirable to have likely heightened demand for U.S. gov- in place during the upcoming yearernment securities that would diminish end period. Accordingly, the Comthe available pool of currently autho- mittee voted unanimously to add reverse rized securities for System open market repurchase agreements to its "Authorioperations. The Federal Reserve Bank zation for Domestic Open Market of New York would need to establish Operations," as shown in new paracustody arrangements with commercial graph l(c) below. banks to manage the clearing of the The Committee also approved a newly authorized securities on a triparty temporary financing facility authobasis. Some time would be needed to rizing the Federal Reserve Bank of make these arrangements and inform New York to sell options on repurchase other market participants, and it was agreements, reverse repurchase agreeanticipated that the new arrangements ments, and matched sale-purchase transwould not be in place before early Octo- actions. The members hoped that the ber. To implement this decision, the availability of such a System facility Committee voted unanimously to sus- would reduce concerns about year-end pend until April 30, 2000, several provi- financial conditions and thus help avert sions of the "Guidelines for the Con- the emergence of the illiquid markets duct of System Operations in Federal that were feared by an apparently grow- Agency Issues," which impose limits on ing number of market participants transactions in federal agency transac- and that would complicate the conduct tions. The "Guidelines" as temporarily of open market operations. The sales amended now read as follows: would be made on a competitive basis to the primary government securities 1. System open market operations in Fed- dealers who are regular counterparties eral agency issues are an integral part of total in the System's open market operations. System open market operations designed to The details of these transactions would influence bank reserves, money market conbe worked out during the weeks ahead. ditions, and monetary aggregates. Members agreed that there was some 2. System open market operations in Federal agency issues are not designed to sup- risk of unintended consequences in port individual sectors of the market or to implementing these untried transactions. channel funds into issues of particular Nonetheless, the costs stemming from a agencies. dysfunctional financing market at yearend, in the unlikely event that it materi- The Committee's decision to autho- alizes, were immeasurably greater. The rize the use of reverse repurchase agree- members did not question the desirabilments until April 30 was intended to ity of addressing the latter risks and facilitate temporary reserve draining providing greater assurance that financoperations. These agreements are funda- ing markets would retain sufficient depth mentally equivalent to matched sale- and liquidity to permit market participurchase transactions, which the Man- pants including the Federal Reserve to ager already has the authority to employ. make necessary portfolio adjustments at However, the latter are not a common year-end. Accordingly, the Committee instrument in financial markets. Partly voted unanimously to authorize the sale as a consequence, they lack the flex- of options on temporary transactions ibility for use to drain reserves late dur- for exercise though January 2000. This ing the business day, a flexibility that authority is indicated in the temporary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 247 addition of paragraph 4, shown below, (c) To sell U.S. Government securities to the Authorization for Domestic Open that are direct obligations of, or fully guaranteed as to principal and interest by, Market Operations. any agency of the United States to dealers The decision to extend the maxi- for System Open Market Account under mum maturity on repurchase and sale- agreements for the resale by dealers of purchase transactions was intended to such securities or obligations in 90 calenbring the terms of such transactions into dar days or less, at rates that, unless otherwise expressly authorized by the Committee, conformance with market practice and shall be determined by competitive bidding, the pattern of market demand, thereby after applying reasonable limitations on enhancing the Manager's ability to use the volume of agreements with individual these instruments. This maturity exten- dealers. sion, which the Committee decided to 3. In order to ensure the effective conduct make permanent, was likely to prove of open market operations, while assisting in the provision of short-term investments for particularly useful in the period of foreign and international accounts mainunusually large reserve operations over tained at the Federal Reserve Bank of New the months ahead. The new authority is York, the Federal Open Market Committee incorporated in paragraphs l(b), l(c), authorizes and directs the Federal Reserve and 3 below. Bank of New York (a) for System Open Market Account, to sell U.S. Government The paragraphs of the Authorization securities to such foreign and international for Domestic Open Market Operations accounts on the bases set forth in paragraph that were amended or added by the l(a) under agreements providing for the Committee, all by unanimous vote, read resale by such accounts of those securities within 90 calendar days on terms compaas follows: rable to those available on such transactions in the market; and (b) for New York Bank Authorization for Domestic account, when appropriate, to undertake with Open Market Operations dealers, subject to the conditions imposed on purchases and sales of securities in para- 1. The Federal Open Market Committee graph l(b), repurchase agreements in U.S. authorizes and directs the Federal Reserve Government and agency securities, and to Bank of New York, to the extent neces- arrange corresponding sale and repurchase sary to carry out the most recent domestic agreements between its own account and policy directive adopted at a meeting of the foreign and international accounts main- Committee: tained at the Bank. Transactions undertaken (b) To buy U.S. Government securities, with such accounts under the provisions of obligations that are direct obligations of, or this paragraph may provide for a service fee fully guaranteed as to principal and interest when appropriate. by, any agency of the United States, from 4. In order to help ensure the effective dealers for the account of the Federal conduct of open market operations during Reserve Bank of New York under agree- the transition period surrounding the century ments for repurchase of such securities or date change, the Committee authorizes the obligations in 90 calendar days or less, at Federal Reserve Bank of New York to sell rates that, unless otherwise expressly autho- options on repurchase agreements, reverse rized by the Committee, shall be determined repurchase agreements, and matched sale by competitive bidding, after applying rea- purchase transactions for exercise no later sonable limitations on the volume of agree- than January 2000. ments with individual dealers; provided that in the event Government securities or agency The Committee then turned to a disissues covered by any such agreement are cussion of the economic and financial not repurchased by the dealer pursuant to the agreement or a renewal thereof, they shall be outlook, and the implementation of sold in the market or transferred to the Sys- monetary policy over the intermeeting tem Open Market Account. period ahead. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

248 86th Annual Report, 1999 The information reviewed at this the underlying trend in spending meeting suggested that expansion of remained relatively strong as a result of economic activity remained solid. The continuing robust expansion of disposgrowth of consumer spending and busi- able incomes and household wealth thus ness outlays for durable equipment had far this year and very positive consumer moderated somewhat after having sentiment. Retail sales had increased increased rapidly earlier in the year. moderately recently—a small decline in Residential construction activity had June was more than offset by a July weakened a little from the level of last rebound—while consumer outlays for winter but was still elevated. Job growth services were buoyant in the second was quite strong, however, and indus- quarter (latest data). Housing activity trial production appeared to be picking remained strong in the June-July period; up. Labor markets remained very tight, housing starts were only a little below and recent wage and price increases had the very high levels of earlier months of been a little larger on balance, though the year, and home sales remained at an price inflation continued subdued. elevated level in June (latest data). Nonfarm payroll employment in- The limited available information creased sharply in June and July. Job suggested that the pace of expansion in growth in the service-producing indus- business fixed investment had modertries soared in both months, and con- ated somewhat after having advanced struction employment remained on an rapidly in the second quarter. Demand upward trend. In manufacturing, the for high-tech equipment remained number of jobs turned up in July. The strong overall, even though growth of civilian unemployment rate was 4.3 per- outlays for computers appeared to have cent in July, matching its average for the eased a little recently; spending for first half of the year. motor vehicles and aircraft seemed to be Industrial production recorded a large leveling out after a marked decrease in increase in July after having edged up in the first half of the year; and expendi- June. Part of the July advance reflected a tures on other types of durable equipsurge in the output of electric utilities ment remained sluggish. Nonresidential associated with the heat wave in the construction activity slipped in the seceastern United States and an upturn in ond quarter after sizable gains last year mining production after a weak first and the early part of this year. half of the year. In manufacturing, pro- The book value of business invenduction advanced briskly over the tories increased moderately in the sec- June-July period. While production of ond quarter, and in many industries the motor vehicles and aircraft fell on bal- levels of inventory stocks were lean ance over the two months, output of in relation to sales. In manufacturing, high-tech products continued to expand inventories continued to edge down in at a rapid pace, and the manufacture the second quarter, and the aggregate of other goods rebounded strongly in inventory-sales ratio for the sector at July after a small decline in June. Utili- the end of the quarter was slightly below zation of manufacturing capacity edged the lower end of its range for the precedup in July but remained below its long- ing twelve months. Wholesale stocks run average rate. recorded another modest gain in the sec- Growth of consumer spending slowed ond quarter, and the stock-shipments appreciably in the second quarter after ratio for this sector at quarter's end was having surged earlier in the year; still, below the bottom of its narrow range for Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 249 the past year. Inventory accumulation in consumer price inflation in the twelve the retail sector slowed in the second months ended in July compared with the quarter, but stocks kept pace with sales, previous twelve-month period. Excludand the aggregate stock-sales ratio was ing food as well as the volatile energy in the middle of its range for the past component, core consumer price inflatwelve months. tion had remained subdued thus far in The nominal deficit on U.S. trade in 1999 and during the twelve months goods and services widened substan- ended in July. Inflation was modest at tially in the second quarter, as the value the producer level as well, as prices of of imports increased much more than finished goods other than food and that of exports. The rise in imports was energy edged lower over the June-July spread widely across the major trade period. Core producer prices rose more categories; sharply higher prices for in the twelve months ended in July than imported oil, along with a moderate in the year-earlier period, but that addition in the quantity imported, pickup resulted in important part from accounted for much of the rise, but there sharp increases in the prices of tobacco also were sizable step-ups in imports of products. At earlier stages of processcomputers, semiconductors, and indus- ing, producer prices of crude and intertrial supplies—notably building materi- mediate materials other than food and als. The increase in exports was concen- energy had firmed noticeably in recent trated in agricultural goods, automotive months. While the source of some of products, industrial supplies, computers, those increases had been the passand semiconductors. Recent information through of higher crude oil prices, suggested that economic recovery in improved worldwide growth, especially Europe was continuing to gain momen- in Asia, also contributed. With labor tum through the second quarter, while markets very tight, increases in wages the Japanese economy was showing and total compensation had been somesome signs of having bottomed out over what larger recently. The employer cost the first half of the year. Economic activ- index for hourly compensation of priity had remained on a strong upward vate industry workers jumped in the trend in Canada in recent months, and second quarter after an unusually small economic growth picked up during the gain in the first quarter, and increases spring in the United Kingdom after in average hourly earnings of produchaving stagnated over the previous two tion or nonsupervisory workers picked quarters. The recent economic perfor- up in June and July. Nonetheless, yearmance of the developing countries had over-year changes in some measures been mixed. Most Asian economies of nominal compensation continued to grew robustly in the first half of the decline. year, but economic activity in a number At its meeting on June 29-30, 1999, of Latin American economies, with the Committee adopted a directive that the notable exceptions of Brazil and called for a slight tightening of condi- Mexico, remained weak. tions in reserve markets consistent with Consumer prices rose moderately in an increase of V* percentage point in the July after having been unchanged in federal funds rate to an average of May and June; a rebound in energy around 5 percent. The members noted at prices contributed to the July increase. that meeting that there were few current The strong upturn in energy prices this indications of rising inflation; nonetheyear accounted for all of the up tick in less, with financial markets and foreign Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

250 86th Annual Report, 1999 economies recovering since the Com- In foreign exchange markets, the mittee had eased policy last fall, the trade-weighted value of the dollar deprepersisting strength of demand was ciated slightly over the intermeeting enough to put added pressure over time period in relation to the currencies of a on already very tight labor markets broad group of important U.S. trading and at some point lead to a pickup in partners. The dollar declined against inflation that could threaten the sustain- the currencies of the major industrial ability of the economy's expansion. countries in response to indications of Because there was substantial uncer- improved economic performances in tainty relating to the extent and timing Europe and Japan and to higher longof prospective inflationary pressures and term interest rates in many of those thus the possibility that further firming countries. However, this depreciation of policy might not be needed in the was partially offset by a rise in relation very near term, the directive did not to the currencies of other important tradcontain any bias relating to the direction ing partners, reflecting increased uncerof possible adjustments to policy in the tainty in financial markets in many intermeeting period. Asian and Latin American countries that Open market operations immediately was associated in part with concerns after the meeting were directed toward about rising U.S. interest rates. implementing the desired, slightly The expansion of broad measures of greater pressure on reserve positions, money had moderated in recent months. and the federal funds rate averaged very The slower growth of nominal GDP and close to the Committee's 5 percent tar- the rise in market interest rates in the get over the intermeeting period. Trea- spring and summer likely had restrained sury coupon yields fell early in the inter- increases in both M2 and M3. In addimeeting interval, as market participants tion, M3's expansion probably had been apparently adjusted downward their held down by a sharp slowing in the expectations regarding further monetary growth of bank credit in July. For the tightening in response to the generally year through July, M2 was estimated to unexpected move to a neutral directive have increased at a rate somewhat above and, subsequently, the receipt of favor- the Committee's annual range and M3 able data on inflation. Yields later at a rate approximating the upper end retraced their declines, however, in reac- of its range. Total domestic nonflnancial tion to the semiannual monetary policy debt had continued to expand at a pace report and the Chairman's associated somewhat above the middle of its range, testimony and to the release of data though borrowing by nonflnancial secindicating an acceleration of labor tors had slowed in recent months. costs, growing signs of a firming of The staff forecast prepared for this activity abroad, and a weaker dollar. meeting suggested that the expansion On net, most interest rates were about would gradually moderate to a rate comunchanged over the intermeeting inter- mensurate with the growth of the ecoval. Key measures of share prices in nomy's estimated potential. The growth equity markets, buoyed early in the of domestic final demand increasingly period by lower interest rates and would be held back by the anticipated better-than-anticipated quarterly earn- waning of positive wealth effects assoings reports, largely reversed those gains ciated with earlier large gains in equity when rates backed up, and share prices prices; the slower growth of spending ended the period with mixed results. on consumer durables, houses, and busi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 251 ness equipment in the wake of the pro- developed in recent months—higher longed buildup in the stocks of these long-term interest rates and a flattening items; and the higher intermediate- and of equity prices. Given the persistent longer-term interest rates that had strength of domestic demand and evolved as markets came to expect that improving economies abroad, many a rise in short-term interest rates would members saw the risks to this outlook be needed to achieve a better balance as tilted to the upside, especially if between aggregate demand and aggre- short-term interest rates were to remain gate supply. The lagged effects of the at their current levels. Against this earlier rise in the foreign exchange background, the risks in the outlook value of the dollar were expected to for prices also seemed to be tilted place continuing, though diminishing, toward somewhat higher inflation. Price restraint on U.S. exports for some period inflation had been held in check by ahead. Price inflation was projected to accelerating productivity and declines rise somewhat over the forecast horizon, in oil and other import prices. Eviin part as a result of higher import prices dence was mixed on whether the acceland some firming of gains in nominal eration in productivity was persisting, labor compensation in persistently tight but the earlier favorable developments labor markets that would not be fully in import prices were already dissipatoffset by rising productivity. ing, adding to the inflation risk posed by In the Committee's discussion of cur- the possibility of further tightening in rent and prospective economic develop- labor markets should domestic demand ments, members commented that the fail to moderate. expansion of economic activity contin- In their comments about regional ued to display substantial underlying economic developments, the members strength with few indications of slowing reported generally favorable business in the growth of consumer and business conditions and further growth in all expenditures. While the information for regions, with variations ranging from the second quarter pointed to a marked some acceleration in a number of Feddeceleration from the pace in other eral Reserve Districts to modest decelrecent quarters, the slowdown was eration in some others. Several indicated induced to an important extent by that economic activity in some parts of sharply reduced inventory investment the country was being held down by that partly offset robust further growth shortages of labor. Most industries conin consumer and housing expenditures tinued to exhibit strength, but weakness and a surge in spending by business was reported in agriculture and related for equipment. The members generally businesses and in manufacturing indusanticipated a rebound in the rate of eco- tries such as textiles. nomic expansion over the balance of With regard to the outlook for key the year and in 2000, possibly to a pace sectors of the economy, members averaging around the economy's long- referred to the favorable prospects for run potential. Growth at this rate would continued robust growth in employment represent a noticeable slowing from and incomes that likely would sustain the pace that had prevailed in recent appreciable further expansion in conyears, and its realization depended sumer expenditures. However, substanimportantly on the damping effects on tial uncertainty surrounded the outlook domestic demand of the less accommo- for stock market prices whose sharp dative financial conditions that had rise and the associated increase in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

252 86th Annual Report, 1999 wealth over the course of recent years shortfall in the second quarter. While the had helped to foster a high level of long-run trend undoubtedly remained in consumer confidence and willingness the direction of declining inventoryto spend. The absence of further large sales ratios, the shortfall of inventory gains in stock prices, should recent investment during the spring probably trends persist, would remove this stimu- had on the whole lowered holdings at lus and probably induce some modera- least temporarily below intended levels tion in the growth of consumer spend- as evidenced in part by anecdotal reports ing. However, as the experience of that lean inventories had reduced sales recent years had amply demonstrated, in some areas. Moreover, some buildup stock market trends were very difficult relating to century date change concerns to predict. Concerning the prospects for seemed likely; in this regard, anecdotal business capital investment, members reports suggested that some businesses saw indications that outlays might rise planned to accumulate inventories in the more moderately after a surge in the form of imports because of questions second quarter. Weak trends in orders about the availability of such goods for many types of equipment and soft- around the year-end. Members acknowlness in nonresidential construction edged that available survey and anecpointed to a considerable deceleration dotal evidence did not point to any in total business investment. At the same widespread perception of a significant time, however, further advances in need to build up inventories, and indeed technology and declining prices were there were indications of overstocking likely to underpin continued very strong in some industries. Even so, appreciable expenditures for computer and commu- inventory accumulation was seen as the nications equipment, thereby sustaining most likely prospect for the balance of still robust if reduced increases in over- the year. While such a forecast was suball business investment. ject to substantial risks in both direc- Residential construction activity was tions, it implied, if realized, a significant expected to moderate a bit over coming boost to GDP growth over the second quarters as the rise that had occurred half of the year. in mortgage interest rates exerted its The government sector was now lagged effects. The deceleration was expected to exert somewhat less relikely to be limited in the near term, straint on overall demand in the econhowever, as the backlogs that had built omy, as burgeoning budget surpluses up earlier in the year and associated seemed to be weakening restraints on shortages in inventories of new homes federal government outlays and tax cuts were worked down. Indeed, anecdotal were a possibility. In addition, export reports indicated currently strong hous- growth was projected to strengthen in ing markets in several areas of the coun- conjunction with an improving ecotry. Over time, the outlook for employ- nomic outlook in a number of imporment and incomes should provide tant U.S. trading partners, and import support to the housing market, but likely growth seemed likely to moderate over at a modestly diminished level. the next several quarters, reflecting the The outlook for inventory investment projected deceleration in the U.S. econremained characteristically uncertain, omy and the waning effects of the past though the members commented that appreciation of the dollar. A number of there were reasons to anticipate some members commented, however, that pickup in such investment following the they saw downside risks to the trade Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 253 outlook despite the improving econo- possibility of accelerating costs at curmic performance in many countries. rent levels of labor resource utilization. Adverse developments in those coun- The major uncertainty was the extent to tries remained a worrisome concern in which labor productivity would conlight of unsettled political conditions tinue to accelerate and hold down the that made it very difficult for govern- rise in unit labor costs. Recent data from ment authorities in many of them to the product side of the national income implement the measures that were and product accounts suggested some needed to solve underlying economic slowing in productivity growth and presproblems. sure on unit labor costs, but these ten- In the course of the Committee's dis- dencies were not confirmed by a close cussion of the outlook for inflation, reading of income side data. In these members commented that there was no circumstances, the outlook for price persuasive evidence in recent statistical inflation remained subject to considermeasures that price inflation was cur- able uncertainty. rently picking up or that inflation expec- In the Committee's discussion of poltations were rising, though the declines icy for the period ahead, the members in both inflation and expectations expe- with one exception favored a proposal rienced over the course of recent years for a slight tightening of conditions in no longer seemed to be occurring. Mem- reserve markets that would be consistent bers nonetheless expressed concern with an increase in the federal funds rate about the risks of some acceleration to an average of about 5lA percent. In under foreseeable economic circum- the view of these members, a limited stances. They cited a variety of statisti- policy move at this time would approprical and anecdotal signs that could be ately supplement the small firming viewed as harbingers of rising price action taken at midyear and at least for inflation. Those included an upturn in now would position monetary policy commodity prices, notably that of oil where it needed to be to foster continued whose effects tended over time to spread subdued inflation and good economic relatively widely through the economy, performance. It would tend to validate and the direct and indirect effects of the appreciable firming in financial marthe dollar's depreciation. Members also kets that had occurred in recent months, reported some indications of reduced to some extent in anticipation of Comdiscounting by business firms and plans mittee tightening. That firming was for, or actual implementation of, higher important to hold the expansion of ecoprices that businesses now saw as less nomic activity to a sustainable pace, likely than earlier to be reversed for especially as improving foreign econocompetitive reasons. However, these mies boosted the demand for U.S. reports were still relatively scattered. exports. While key measures of prices The members' basic concern about did not at this point suggest any upturn the outlook for inflation related to the in inflation, a failure to act would incur possibility that continued strength in a substantial risk of increasing pressure demand might not be accommodated on already tight labor markets and without placing greater pressures on higher inflation. During the discussion, labor compensation and prices. The some members observed that today's greatest risks would come from a further action would reduce further the stimulus tightening of labor markets, but many provided during the autumn of last year members were also concerned about the to counter the global financial turmoil Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 86th Annual Report, 1999 and related risks to the U.S. economy. ment has increased rapidly in recent months, While not all vestiges of that turmoil and the civilian unemployment rate, at 4.3 percent in July, matched its average for had disappeared, financial conditions the first half of the year. Manufacturing outhad improved markedly, foreign econoput continued to grow moderately on avermies had strengthened on balance, and age in June and July. Total retail sales have downside risks to economic perfor- grown less rapidly in recent months, while mance in the United States were gener- housing activity has remained robust. Available indicators suggest that the expansion in ally reduced. One member indicated that business capital spending has slackened in light of the persistence of low inflasomewhat after a surge this spring. The tion, a policy tightening move was not nominal deficit on U.S. trade in goods and warranted at this time and would in fact services widened substantially in the second incur some risk of unnecessarily curbing quarter. Consumer price inflation has been boosted in recent months by an appreciable the expansion in economic activity. rise in energy prices; against the background All the members who supported a of very tight labor markets, increases in tightening action also favored the reten- wages and total compensation have been tion of a symmetric directive. These somewhat larger. members agreed that the Committee Most interest rates are little changed on should keep its options open with regard balance since the meeting on June 29-30, 1999. Key measures of share prices in equity to the next policy move, whose direction markets have posted mixed changes over the and timing would depend on evolving intermeeting period. In foreign exchange economic and financial conditions. In markets, the trade-weighted value of the dolthis regard, while agreeing that inflation lar has declined slightly over the period in risks had been substantially reduced by relation to the currencies of a broad group of important U.S. trading partners. the actions taken in June and contem- M2 and M3 have grown at a moderate plated at today's meeting, many mempace in recent months. For the year through bers continued to see a possible increase July, M2 is estimated to have increased at in inflation pressures as the main threat a rate somewhat above the Committee's to sustained economic expansion. How- annual range and M3 at a rate approximating the upper end of its range. Total domestic ever, they did not anticipate that further nonfinancial debt has continued to expand at tightening would be needed in the near a pace somewhat above the middle of its term, allowing the Committee time to range. gather substantial additional information The Federal Open Market Commitabout the balance of aggregate supply tee seeks monetary and financial conand demand. The members all agreed ditions that will foster price stability and promote sustainable growth in output. In that a symmetric directive would not furtherance of these objectives, the Compreclude a tightening move if warranted mittee reaffirmed at its meeting in June the by developments over the months ahead. ranges it had established in February for At the conclusion of this discussion, growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respectively, measured from the Committee voted to authorize and the fourth quarter of 1998 to the fourth quardirect the Federal Reserve Bank of New ter of 1999. The range for growth of total York, until it was instructed other- domestic nonfinancial debt was maintained wise, to execute transactions in the Sys- at 3 to 7 percent for the year. For 2000, the tem Account in accordance with the Committee agreed on a tentative basis in June to retain the same ranges for growth of following domestic policy directive: the monetary aggregates and debt, measured from the fourth quarter of 1999 to the fourth The information reviewed at this meeting quarter of 2000. The behavior of the monesuggests continued solid expansion of eco- tary aggregates will continue to be evalunomic activity. Nonfarm payroll employ- ated in the light of progress toward price Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 255 level stability, movements in their velocities, ments, it might want to examine whether and developments in the economy and finan- some adjustment in its procedures would cial markets. be helpful. The Chairman did not feel To promote the Committee's long-run that the Committee was prepared to objectives of price stability and sustainable economic growth, the Committee in the come to a decision on these issues immediate future seeks conditions in reserve before more experience was gained with markets consistent with increasing the fed- the current announcement approach, but eral funds rate to an average of around he believed it was advisable to form a 5lA percent. In view of the evidence cursubcommittee at this time to study the rently available, the Committee believes that prospective developments are equally likely various questions that were involved. to warrant an increase or a decrease in the He anticipated that the subcommittee federal funds rate operating objective during would come back to the Committee no the intermeeting period. later than next spring with recommendations or at least some alternatives Votes for this action: Messrs. Greenspan, for Committee consideration. He asked McDonough, Boehne, Ferguson, Gramlich, Meyers, Moskow, Kelley, and Stern. Vote Mr. Ferguson to serve as its chairman against this action: Mr. McTeer. and to select other members after consultation with his colleagues on the Mr. McTeer dissented for essentially Committee. the same reasons he did at the June 30 meeting: low inflation and, except for It was agreed that the next meeting energy, minimal inflation in the pipe- of the Committee would be held on line. He believes that positive supply- Tuesday, October 5, 1999. side forces will continue to damp the The meeting adjourned at 1:40 p.m. impact of strong demand on output prices and that productivity gains will Donald L. Kohn continue to damp the effect of higher Secretary wages on unit labor costs. After the meeting, the following press Establishment of Subcommittee release was issued: Chairman Greenspan announced the formation of a subcommittee to review the The Federal Open Market Committee today voted to raise its target for the federal funds wording of the directive, its meaning, rate by 25 basis points to 5lA percent. In and what the Committee announces a related action, the Board of Governors shortly after its meetings. He noted that approved a 25 basis point increase in the the sentence relating to the symmetry of discount rate to 43/4 percent. the directive was subject to differing With financial markets functioning more normally, and with persistent strength in interpretations, and the Committee's domestic demand, foreign economies firmdecision to announce immediately siging and labor markets remaining very tight, nificant changes in the symmetry or the degree of monetary ease required to asymmetry in the directive had made it address the global financial market turmoil desirable to clarify its meaning. Mem- of last fall is no longer consistent with susbers also had expressed some discom- tained, noninflationary, economic expansion. Today's increase in the federal funds rate, fort with the way these announcements together with the policy action in June and had been interpreted. While the Comthe firming of conditions more generally in mittee did not contemplate retreating U.S. financial markets over recent months, from its policy of immediate announce- should markedly diminish the risk of rising Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 86th Annual Report, 1999 inflation going forward. As a consequence, Ms. Cumming, Messrs. Howard, Lang, the directive the Federal Open Market Com- Lindsey, Rolnick, Rosenblum, mittee adopted is symmetrical with regard to Slifman, and Stockton, Associate the outlook for policy over the near term. Economists In taking the discount rate action, the Federal Reserve Board approved requests Mr. Fisher, Manager, System Open submitted by the Boards of Directors of Market Account the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Messrs. Ettin and Reinhart, Deputy Atlanta, Chicago, St. Louis, Kansas City, Directors, Divisions of Research and San Francisco. The discount rate is the and Statistics and International interest rate that is charged depository insti- Finance respectively, Board of tutions when they borrow from their district Governors Federal Reserve Banks. Messrs. Madigan and Simpson, Associate Directors, Divisions of Monetary Affairs and Research Meeting Held on and Statistics respectively, Board October 5, 1999 of Governors A meeting of the Federal Open Mar- Mr. Whitesell, Assistant Director, ket Committee was held in the offices Division of Monetary Affairs, Board of Governors of the Board of Governors of the Federal Reserve System in Washington, Mr. Kumasaka, Assistant Economist, D.C., on Tuesday, October 5, 1999, at Division of Monetary Affairs, 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. Boehne Mr. Ferguson Mr. Gramlich Ms. Browne, Messrs. Eisenbeis, Mr. Kelley Goodfriend, Kos, Rasche, Mr. McTeer and Sniderman, Senior Vice Mr. Meyer Presidents, Federal Reserve Mr. Moskow Banks of Boston, Atlanta, Mr. Stern Richmond, New York, St. Louis, and Cleveland Messrs. Broaddus, Guynn, Jordan, and respectively Parry, Alternate Members of the Federal Open Market Committee Messrs. Judd and Sullivan, Vice Presidents, Federal Reserve Mr. Hoenig, Ms. Minehan, and Banks of San Francisco and Mr. Poole, Presidents of the Chicago respectively Federal Reserve Banks of Kansas City, Boston, and Mr. Filardo, Assistant Vice President, St. Louis respectively Federal Reserve Bank of Kansas City Mr. Kohn, Secretary and Economist Ms. Fox, Assistant Secretary By unanimous vote, the minutes of Mr. Gillum, Assistant Secretary the meeting of the Federal Open Market Mr. Mattingly, General Counsel Mr. Prell, Economist Committee held on August 24, 1999, Ms. Johnson, Economist were approved. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, October 257 The Manager of the System Open Industrial production was up appre- Market Account reported on recent ciably further on balance in July and developments in foreign exchange mar- August. Mining activity rose markedly, kets. There were no open market opera- utility output increased moderately on tions in foreign currencies for the Sys- balance, and manufacturing production tem's account in the period since the recorded a further sizable advance over previous meeting, and thus no vote was the two months. Within manufacturing, required of the Committee. high-tech goods and motor vehicles The Manager also reported on devel- were sources of particular strength, opments in domestic financial markets while the production of nondurable and on System open market transactions goods changed little. The rate of utilizain government securities and federal tion of manufacturing capacity climbed agency obligations during the period over the two months but remained well August 24, 1999, through October 4, below its long-term average. 1999. By unanimous vote, the Commit- Total retail sales posted strong gains tee ratified these transactions. over July and August. Increases in sales The information reviewed at this were spread across all major categories, meeting suggested that the expansion of with spending for nondurable goods and economic activity was substantial in the motor vehicles notably strong. Expendiquarter just ended. Consumer spending tures on services rose moderately in the and business investment in durable two-month period. There were mixed equipment remained strong, and inven- signals with regard to the housing sectory investment picked up from the slug- tor. Construction was at a high level, the gish pace of the second quarter, while inventory of unsold homes remained residential housing activity showed quite low, and starts of multifamily units some signs of deceleration. To meet rose over the July-August period. Howaggregate demand, industrial production ever, single-family housing starts edged increased further and employment gains lower on balance over July and August, continued to be relatively robust, keep- and sales of existing homes weakened. ing labor markets taut. Inflation was The available information suggested moderate, but somewhat above that in that business capital spending continued 1998, owing to a sharp rebound in to climb rapidly. Shipments of nondeenergy prices. fense capital goods posted further large Although private nonfarm payroll gains in July and August, with outlays employment expanded relatively slowly for high-tech machinery and transporin August, the slowdown had followed tation equipment particularly strong. a surge in July, and growth for the two In addition, new orders for durable months was very close to the brisk equipment turned up sharply in the two pace of the first half of the year. Job months. Nonresidential construction gains in the service-producing sector activity changed little on balance in July remained strong in the July-August as continued strength in the office and period, while employment in the goods- an increase in the lodging and miscellaproducing sector continued to decline, neous categories offset reductions in the though at a slightly slower rate than industrial and non-office commercial earlier in the year. The civilian unem- categories. ployment rate dropped back to 4.2 per- Manufacturing and trade inventories, cent in August, matching its low for the outside of motor vehicles, picked up year. sharply in July after posting a small Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

258 86th Annual Report, 1999 increase in the first half of the year, but In the past twelve months, the core inventories remained lean in relation CPI rose less than in the previous to sales. In manufacturing, stocks twelve-month period. At the producer rebounded from a substantial June level, prices of finished goods other decline; however, the aggregate stock- than food and energy were essentially shipments ratio remained at the bottom unchanged over the two months; moreof its range for the past twelve months. over, the change in core producer prices Wholesalers also increased their inven- in the past year was about the same as in tories in July; while the inventory- the year-earlier period. At earlier stages shipments ratio for this sector rose, it of processing, however, producer prices was in the low end of its range for the of crude and intermediate materials past year. In the retail sector, inventories excluding food and energy had firmed contracted somewhat in July, and the noticeably over recent months. Average inventory-sales ratio for this sector also hourly earnings continued to grow at a was near the bottom of its range over the moderate pace over July and August, past year. and the rise over the past year was con- The nominal deficit on U.S. trade siderably smaller than that for the yearin goods and services widened in July earlier period. from its second-quarter average, with At its meeting on August 24, 1999, the value of imports rising more than the Committee adopted a directive that the value of exports. The increase in called for a slight tightening of condiimports was concentrated in aircraft, tions in reserve markets consistent with consumer goods, industrial supplies, and an increase of lA percentage point in oil. The step-up in exports occurred pri- the federal funds rate to an average of marily in industrial machinery and semi- around 5XA percent. The members noted conductors. Among the major foreign that this move, together with the firming industrial countries, the limited avail- in June, should help to keep inflation able information suggested that eco- subdued and to promote sustainable nomic activity was strengthening in economic expansion. The Committee Europe and the United Kingdom in the also agreed that the directive should be third quarter while economic indicators symmetric. A possible rise in inflation for Japan were mixed after the strong remained the main threat to sustained advance in the first half of the year. economic expansion, but it was not Economic growth in Canada seemed to anticipated that further tightening be continuing at a robust pace, and eco- would be needed in the near term and nomic recovery in most of the Asian there would be time to gather substanemerging-market economies was pro- tially more information about the balceeding briskly. ance of risks relating to trends in aggre- Inflation remained relatively moder- gate demand and supply. ate, though somewhat above the pace of Open market operations after the 1998 because of a sharp rebound in meeting were directed toward impleenergy prices. Overall consumer prices menting and maintaining the desired increased in July and August at about slight tightening of pressure on reserve the second-quarter rate. Abstracting positions, and the federal funds rate from the sharp advances in energy prices averaged very close to the Committee's and the mild increases in food prices, 5V4 percent target. Most other shortconsumer inflation continued to be rela- term market interest rates posted small tively subdued over the two months. mixed changes on balance because the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, October 259 policy action was widely anticipated and market rates. For the year through the FOMC's policy announcement after September, M2 was estimated to have the August 24 meeting referenced mark- increased at a rate somewhat above the edly diminished inflation risks. How- Committee's annual range and M3 at a ever, longer-term yields rose somewhat rate just above the upper end of its over the intermeeting period in response range. Total domestic nonfinancial debt to the receipt of new information indi- continued to expand at a pace somewhat cating both surprisingly strong spending above the middle of its range. at home and abroad and higher com- The staff forecast prepared for this modity prices. Most measures of share meeting suggested that the expansion prices in equity markets registered siz- would gradually moderate to a rate able declines over the intermeeting around or perhaps a little below the period, apparently reflecting not only growth of the economy's estimated higher interest rates but also concerns potential. The growth of domestic final that U.S. stocks might be overvalued demand increasingly would be held back and that foreign equities were becoming by the anticipated waning of positive relatively more attractive as economic wealth effects associated with earlier prospects brightened abroad. large gains in equity prices; the slower In foreign exchange markets, the growth of spending on consumer duratrade-weighted value of the dollar bles, houses, and business equipment changed little over the period in rela- in the wake of the prolonged buildup tion to the currencies of a broad group in the stocks of these items; and the of important U.S. trading partners. The higher intermediate- and longer-term dollar depreciated against the currencies interest rates that had evolved as marof the major foreign industrial countries, kets came to expect that a rise in shortespecially the Japanese yen, in response term interest rates would be needed to to generally stronger-than-expected in- achieve a better balance between aggrecoming data on spending and produc- gate demand and aggregate supply. The tion in those countries. However, the lagged effects of the earlier rise in the dollar rose against the currencies of foreign exchange value of the dollar the other important trading partners were expected to place continuing, but in the broad group, reflecting sizable substantially diminishing, restraint on declines in the currencies of several US. exports for some period ahead. countries in Latin America and Asia. Core price inflation was projected to rise Despite a further rise in opportunity somewhat over the forecast horizon, in costs, M2 and M3 continued to grow at part as a result of higher non-oil import moderate rates in August and evidently prices and some firming of gains in in September as well. Expansion of nominal labor compensation in persisthese two monetary aggregates was sup- tently tight labor markets that would not ported by further rapid expansion in the be fully offset by rising productivity demand for currency and stronger growth. inflows to retail money market funds at In the Committee's discussion of cura time of weakness in U.S. bond and rent and prospective economic condiequity markets. In addition, growth of tions, members commented that the M3 was sustained by large flows into incoming information suggested that institution-only money market funds the expansion had been considerably as the yields on those funds caught stronger in recent months than many up to earlier increases in short-term had anticipated, while most measures Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 86th Annual Report, 1999 of inflation had remained subdued. bers generally saw some risk of rising The economy's substantial momentum inflation going forward, but they also seemed likely to persist over the balance recognized that similar forecasts in of the year, but the members continued recent years had proved wrong and that to expect some slackening during the considerable uncertainty surrounded year ahead. This outlook was supported expectations of somewhat higher core by the emergence of somewhat less inflation. accommodative conditions in financial In their review of developments markets, including the increases that across the nation, members reported had occurred in interest rates over continued high levels of activity in all the past several months and the steady- regions and few indications of moderating of stock market prices over the ing growth, though agriculture remained same period. On the other hand, foreign relatively depressed in many areas. The economies were strengthening more anecdotal information from around the quickly than anticipated and rising nation clearly supported the overall staexports were likely to offset part of tistical evidence of persisting strength in the slowdown in domestic demand. key components of domestic demand. The implications of continued robust Consumer spending, notably for light growth for the inflation outlook de- motor vehicles, was continuing to rise at pended critically on judgments about the a brisk pace. Some of the strength in supply side of the economy. Productiv- consumer durables was related to purity and economic potential seemed to chases associated with homebuildhave been growing at an increasingly ing, which, though likely to slacken a rapid rate in recent years. That accelera- little owing to the rise in mortgage tion had itself tended to boost consump- interest rates, seemed to be staying at tion and investment demand—in com- a high level. While consumer spendplex interactions of aggregate supply ing probably would be sustained by and demand—but it also had held down further anticipated growth in employincreases in unit costs and prices. A ment and incomes, the pause in the great deal of uncertainty surrounded the stock market, should it persist, and behavior of productivity growth going the attendant effects on financial forward, but some further pickup, and wealth were expected with some lag the associated ability of the economy to to damp further gains in consumer accommodate more rapid growth with- expenditures. out added inflation, was a possibility Business fixed investment appeared that could not be overlooked. However, to have accelerated to a surprising extent a further pickup in productivity growth in the third quarter from an already was by no means assured, and a number robust pace earlier in the year. Further of other favorable developments in sup- noteworthy gains were recorded in busiply and prices that had acted to restrain ness expenditures for computing and inflation in recent years had already communications equipment, evidently begun to dissipate or reverse. These reflecting ongoing efforts to take advanincluded the substantial upturn in energy tage of declining prices and improving prices, the ebbing of import price technology. Some of the rise in such declines, and the pickup in health care spending could represent accelerated costs; adverse trends in the latter two purchases in advance of the century factors in particular were likely to be date change and might well tend to extended. In these circumstances, mem- be offset in early 2000. Over time, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, October 261 however, ongoing efforts to enhance that improvement was more attractive productivity for competitive reasons investment opportunities abroad and suggested further vigorous growth in some associated weakening in the forspending for such equipment. Forecasts eign exchange value of the dollar that of other business investment expen- implied upward pressure on the prices ditures were much less ebullient and of imports and to an uncertain extent on on the whole pointed to little change. those of competing domestically pro- Building activity currently displayed duced products. Moreover, some memsubstantial strength in some major cit- bers saw the possibility of a steeper drop ies, largely involving office and hotel in the dollar—under pressure from burstructures, but nonresidential construc- geoning foreign dollar portfolios as a tion activity more generally was rela- consequence of very large U.S. current tively sluggish. It seemed likely that account deficits—as an added source of commercial building activity would be risk to the maintenance of sustainable damped later as new capacity was com- growth and low inflation in the United pleted and financing became less attrac- States. tive in response to the rise that had In the Committee's discussion of the occurred in market interest rates. outlook for inflation, a number of mem- The prospects for business inventories bers emphasized that the behavior of over coming months were difficult to prices had remained surprisingly benign evaluate, with the usual uncertainties for an extended period, confounding accentuated by century date change earlier forecasts of appreciable acceleraeffects. According to fragmentary infor- tion stemming from tight labor marmation, inventory investment picked up kets and rising labor costs. That experiduring the summer months from a very ence argued forcefully in their view for low pace in the second quarter. To some the need to regard forecasts of increasextent, the recent strengthening may ing inflation with considerable caution. have reflected precautionary stockbuild- Most members nonetheless continued to ing as insurance against potential supply view some increase in core price infladisruptions relating to the century date tion as a definite possibility. This view change. Such stockbuilding might well reflected their expectations that the curintensify during the closing months of rent expansion, even if it did moderate the year and be reversed early next year, to a pace approximating the economy's with effects of uncertain magnitude on trend potential growth, would do so at a overall economic activity in that period. level of resource use that, based on the Looking beyond such a swing, business historical record, exceeded the econoinventories, which currently appeared to my's sustainable capacity—perhaps by be near desired levels in most industries, even more than at present, given the were projected to grow at a moderate evident strength of aggregate demand. pace broadly in line with the expansion Such an outcome seemed likely to genin final sales. erate further pressures on unit labor The strengthening of many econo- costs, which had tended in recent years mies around the world was seen as a to be contained by accelerating producharbinger of increasing demand for tivity. There was no evidence that the U.S. exports, a view that was reinforced acceleration was coming to an end, but by growing anecdotal indications of the members saw a clear risk that improving foreign markets for a wide upward pressures on labor costs could at range of U.S. products. An aspect of some point outpace gains in productiv- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 86th Annual Report, 1999 ity. Members also mentioned that labor It was noted that expanding aggregate compensation would come under greater supply, boosted by accelerating producpressures as a result of rising healthcare tivity, had remained in reasonable balbenefit costs and possible increases in ance with rapidly growing aggregate the minimum wage. demand despite an already high level of Other factors cited as pointing to a economic activity; however, substantial less benign inflation performance uncertainty surrounded the outlook for involved the waning or reversal of a aggregate supply and aggregate demand number of temporary influences that had going forward, and it was unclear how exerted a beneficial effect on prices in their interaction would affect the behavrecent years. In particular, the decline of ior of inflation. In light of the uncertainthe dollar from its recent high in July, ties surrounding these developments, the especially if it were to continue, would members agreed that it would be desirmean higher import prices and reduced able to await more evidence on the perprice competition for a wide range of formance of the economy, and in this domestic goods. In this regard, several regard considerable new information on members observed that they were hear- the behavior of the economy and the ing noticeably fewer comments by busi- outlook for inflation would become ness contacts about their inability to available during the intermeeting period. raise prices. Members also noted that, in The risks of waiting seemed small at the context of apparently strengthening this juncture, in part because inflation economic activity worldwide, non-oil and inflation expectations were not commodity prices seemed poised to turn likely to worsen substantially in the near upward, though they had risen only term, and the Committee had demonslightly thus far. While oil prices, which strated its willingness to take needed had increased sharply this year, had anticipatory action to curb rising inflachanged relatively little recently and tionary pressures that could threaten the could move down in the future, second- overall performance of the economy. ary effects of the earlier increase on They also agreed that century date costs and prices in other sectors of the change concerns were not likely to be of economy seemed likely. Nonetheless, a kind or magnitude that would preclude considerable uncertainty surrounded a policy tightening move at the Novemexpectations of rising inflation. Labor ber meeting, should such an action seem cost increases had not turned up, and warranted at that time. core inflation continued to edge lower. On the issue of the tilt in the Commit- Further improvements in productivity tee's directive, a majority of the memgrowth could keep price pressures in bers favored associating an unchanged check for some time. policy stance with a directive that was In the Committee's discussion of pol- biased toward restraint. These members icy for the intermeeting period ahead, all did not anticipate that intermeeting the members indicated that they favored developments would require policy to or could accept an unchanged policy be tightened during the weeks immedistance. Members commented that they ately ahead, but they believed that the saw little risk of a surge in inflation over Committee probably would need to coming months, though some pickup move to a less accommodative policy from the currently subdued level of core stance in the relatively near future, posprice inflation was a distinct possibility sibly at the November meeting. They under prospective economic conditions. also believed that, given the Commit- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, October 263 tee's recently adopted practice of imme- tem Account in accordance with the foldiately announcing its decisions to lowing domestic policy directive: change the symmetry of the directive, an asymmetrical directive would help con- The information reviewed at this meetvey the message that policy adjustments ing suggests that the expansion of ecomight not yet be completed for the bal- nomic activity was substantial in the quarter ance of this year and that the Committee just ended. Nonfarm payroll employment increased briskly through August, and the remained concerned about potential incivilian unemployment rate dropped back to flationary developments in coming 4.2 percent, matching its low for the year. months. Other members, while gener- Industrial production was up appreciably furally agreeing that the risks pointed on ther in July and August. Total retail sales balance to some rise in inflation over posted sizable gains over the two months. Housing construction apparently has slowed time, nonetheless were quite uncertain somewhat but has remained at a high level. about the timing of any additional firm- Available indicators suggest that the expaning in monetary policy and preferred to sion in business capital spending has continleave the Committee's possible future ued to be rapid. The nominal deficit on U.S. course of action more open. Even so, trade in goods and services widened in July from its average in the second quarter. Inflathey could accept an asymmetric direction has continued at a moderate pace, albeit tive in light of the consensus that had somewhat above that in 1998 owing to a emerged at this meeting in favor of an sharp rebound in energy prices. unchanged policy stance. Most short-term interest rates have With regard to the Committee's posted small mixed changes since the meetannouncement of its decision to adopt ing on August 24, 1999, while longer-term yields have risen somewhat. Most meaan asymmetric directive, members obsures of share prices in equity markets have served that the recent practice of making registered sizable declines over the intersuch announcements had led to some meeting period. In foreign exchange marmisinterpretations of the Committee's kets, the trade-weighted value of the dollar intentions and seemed to have added to has changed little over the period in relation to the currencies of a broad group of imporvolatility in financial markets. As a contant U.S. trading partners. sequence, Committee members briefly M2 and M3 have continued to grow at considered alternative treatments of a moderate pace. For the year through Sepsymmetry and disclosure for this meet- tember, M2 is estimated to have increased ing. Because the Committee had begun at a rate somewhat above the Committee's annual range and M3 at a rate just above the a process for examining the wording of upper end of its range. Total domestic nonits directive and its announcement polfinancial debt has continued to expand at icy, most of the members concluded that a pace somewhat above the middle of its the most satisfactory alternative for range. now, though it was not fully satisfac- The Federal Open Market Committee seeks monetary and financial conditions that tory, was to continue with the Commitwill foster price stability and promote sustee's recent announcement practice. tainable growth in output. In furtherance of However, the working group chaired by these objectives, the Committee reaffirmed Governor Ferguson was requested to at its meeting in June the ranges it had estabexpedite its report, if possible. lished in February for growth of M2 and M3 of 1 to 5 percent and 2 to 6 percent respec- At the conclusion of this discussion, tively, measured from the fourth quarter of the Committee voted to authorize and 1998 to the fourth quarter of 1999. The range direct the Federal Reserve Bank of New for growth of total domestic nonfinancial York, until it was instructed other- debt was maintained at 3 to 7 percent for the wise, to execute transactions in the Sys- year. For 2000, the Committee agreed on a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

264 86th Annual Report, 1999 tentative basis in June to retain the same Mr. Meyer ranges for growth of the monetary aggre- Mr. Moskow gates and debt, measured from the fourth Mr. Stern quarter of 1999 to the fourth quarter of 2000. The behavior of the monetary aggregates Messrs. Broaddus, Guynn, Jordan, and will continue to be evaluated in the light of Parry, Alternate Members of the progress toward price level stability, move- Federal Open Market Committee ments in their velocities, and developments in the economy and financial markets. Mr. Hoenig, Ms. Minehan, and To promote the Committee's long-run Mr. Poole, Presidents of the objectives of price stability and sustainable Federal Reserve Banks of economic growth, the Committee in the Kansas City, Boston, and immediate future seeks conditions in reserve St. Louis respectively markets consistent with maintaining the federal funds rate at an average of around 5V4 percent. In view of the evidence cur- Mr. Kohn, Secretary and Economist rently available, the Committee believes that Mr. Bernard, Deputy Secretary prospective developments are more likely to Ms. Fox, Assistant Secretary warrant an increase than a decrease in the Mr. Gillum, Assistant Secretary federal funds rate operating objective during Mr. Mattingly, General Counsel the intermeeting period. Ms. Johnson, Economist Mr. Prell, Economist Votes for this action: Messrs. Greenspan, McDonough, Boehne, Ferguson, Gram- Ms. Cumming, Messrs. Howard, lich, McTeer, Meyers, Moskow, Kelley, Hunter, Lang, Lindsey, Rolnick, and Stern. Votes against this action: None. Slifman, 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, November 16, 1999. Market Account The meeting adjourned at 1:25 p.m. Messrs. Ettin and Reinhart, Deputy Directors, Divisions of Research Donald L. Kohn and Statistics and International Secretary Finance respectively, Board of Governors Meeting Held on Messrs. Madigan and Simpson, November 16, 1999 Associate Directors, Divisions of Monetary Affairs and Research A meeting of the Federal Open Mar- and Statistics respectively, Board ket Committee was held in the offices of Governors of the Board of Governors of the Federal Reserve System in Washing- Mr. Whitesell, Assistant Director, ton, D.C., on Tuesday, November 16, Division of Monetary Affairs, Board of Governors 1999, at 9:00 a.m. Present: Ms. Low, Open Market Secretariat Mr. Greenspan, Chairman Assistant, Division of Monetary Mr. McDonough, Vice Chairman Affairs, Board of Governors Mr. Boehne Mr. Ferguson Messrs. Stewart and Stone, First Mr. Gramlich Vice Presidents, Federal Mr. Kelley Reserve Banks of New York Mr. McTeer and Philadelphia respectively Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 265 Messrs. Beebe, Eisenbeis, Lacker, what. However, industrial production Rasche, and Sniderman, Senior was trending up, job growth was still Vice Presidents, Federal Reserve solid, and the unemployment rate had Banks of San Francisco, Atlanta, edged down. Despite tight job markets, Richmond, St. Louis, and Cleveland respectively labor compensation had been rising more slowly than last year. Inflation Messrs. Bentley, Fuhrer, and Kahn, remained moderate, though at a pace Vice Presidents, Federal Reserve above that in 1998 because of a sharp Banks of New York, Boston, and rebound in energy prices. Kansas City respectively A large increase in nonfarm payroll Mr. Wynne, Research Officer, Federal employment in October followed a Reserve Bank of Dallas small rise in September; the average gain for the two months was appreciable By unanimous vote, the minutes of but somewhat below the pace of earlier the meeting of the Federal Open Market in the year. Job growth rebounded Committee held on October 5, 1999, strongly in most employment categowere approved. ries, but further small losses were posted The Manager of the System Open in manufacturing and retail trade. The Market Account reported on recent robust expansion in the demand for developments in foreign exchange mar- workers in October led to a small kets. There were no open market trans- decline in the civilian unemployment actions in foreign currencies for the Sys- rate, to 4.1 percent, a new low for the tem's account in the period since the year. previous meeting, and thus no vote was Industrial production recorded a required of the Committee. strong gain in October after having The Manager also reported on devel- fallen slightly in September as a result opments in domestic financial markets of the adverse effects of Hurricane and on System open market transactions Floyd. Manufacturing and utilities outin government securities and federal put advanced strongly in October, while agency obligations during the period mining activity edged up. The increases October 5, 1999, through November 15, in manufacturing were widespread; 1999. By unanimous vote, the Commit- however, production of transit equiptee ratified these transactions. ment, particularly aircraft and parts, and The Committee then turned to a dis- farm equipment continued to decline. cussion of recent and prospective eco- The utilization of total industrial capacnomic and financial developments, and ity rebounded in October from the the implementation of monetary policy hurricane-related production losses of over the intermeeting period ahead. the previous month but remained some- The information reviewed at this what below its long-run average level. meeting suggested that economic activ- Growth of consumer spending apparity continued to expand briskly. The ently had moderated somewhat further limited data on aggregate demand that recently, but surveys indicated that conhad become available since the sum- sumer confidence continued to be high mer pointed to some moderation in the and personal income rose briskly in the growth of consumer spending and of third quarter. Total nominal retail sales business investment in capital equip- changed little in September and Octoment and software. Residential construc- ber, with purchases at auto dealerships tion appeared to have weakened some- falling in both months and sales at other Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

266 86th Annual Report, 1999 stores growing less rapidly on balance. of its range over the past year. In the Housing activity weakened somewhat retail sector, the pace of inventory accuover the summer but was still at a high mulation slowed noticeably in the third level. Some of the drop in housing starts quarter, reflecting a runoff of stocks at in September probably was attributable auto dealerships. Excluding autos, the to unusually heavy rains in parts of the rate of retail inventory accumulation South and Northeast. In addition, sales changed little from that of the second of both new and existing homes declined quarter, and with sales rising rapidly the appreciably in September. aggregate inventory-sales ratio fell to The expansion of business fixed its lowest quarterly level since 1980. investment picked up sharply in the third The deficit in U.S. trade in goods and quarter, as a marked acceleration in out- services widened on balance over July lays for durable equipment and com- and August from its average for the puter software more than offset a further second quarter. The value of exports weakening of nonresidential construc- picked up considerably over the two tion activity. The strength in spending months, with gains widely spread across for durable equipment was concentrated major trade categories. The value of in computer hardware and transporta- imports surged, with large increases tion equipment; the latter included recorded in all the major trade categomedium and heavy trucks, fleet sales of ries except food. The available informalight vehicles, and commercial aircraft. tion indicated that economic expansion Outlays for computer software and com- in the foreign industrial countries munications equipment also were up strengthened further in the third quarter. appreciably. Trends in orders suggested Economic recovery continued in Japan, that the buoyancy in business spending though there were signs that consumer for capital equipment had continued into demand was lagging somewhat. In the the fourth quarter. Weakness in nonresi- euro area, the United Kingdom, and dential building activity in the third Canada, economic activity appeared to quarter was widespread, though office have accelerated in the third quarter. construction remained on a solid upward Among the developing countries, ecotrend. nomic activity continued to expand in Business inventory investment in emerging Asia and parts of Latin book value terms picked up somewhat America. in the third quarter, but with sales Consumer prices increased at a increasing rapidly stock-sales ratios slightly faster rate in September, with a generally remained quite low. Manufac- further large rise in energy prices a conturers added slightly to their stocks after tributing factor. Core consumer inflation two quarters of inventory liquidation. also picked up in September, in part However, the buildup of stocks in the because of a sharp jump in tobacco third quarter did not keep pace with the prices. Nonetheless, core consumer rise in shipments, and the sector's prices rose less over the twelve months stock-shipments ratio was near the bot- ended in September than over the pretom of its range over the preceding ceding twelve-month period. At the protwelve months. Wholesalers also added ducer level, price inflation for finished to their inventories in the third quarter, goods other than food and energy items and with stockbuilding keeping pace slowed appreciably in October from with sales, the inventory-sales ratio for the elevated September rate, which the sector remained in the lower portion had been boosted by the tobacco price Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 267 increase. For the year ended in October, producer prices and retail sales that core producer prices rose appreciably boosted market concerns about unsusmore than in the preceding year. Mea- tainable growth, higher inflation, and sured on a year-over-year basis, labor further monetary tightening. Over the compensation rose more slowly in the second half of the intermeeting period, year ending in the third quarter than it however, rates largely retraced their had in the preceding year. However, the increases in reaction to the release of gain in the third quarter was a little data indicating low wage and consumer larger than the subdued average pace for price inflation. Most measures of share the first half of the year; the step-up was prices in equity markets registered sizentirely attributable to larger increases able gains over the intermeeting period, in benefits. Average hourly earnings apparently reflecting stronger-thanedged up in October after a large rise expected earnings reports and greater in September. For the twelve months optimism about the prospects for continended in October, average hourly earn- ued robust output growth and low ings decelerated slightly from the previ- inflation. ous twelve months. In foreign exchange markets, the At its meeting on October 5, the Com- trade-weighted value of the dollar mittee adopted a directive that called for changed little over the period in relation maintaining conditions in reserve mar- to the currencies of a broad group of kets consistent with an unchanged fed- important U.S. trading partners. A small eral funds rate of around 5lA percent. appreciation against the currencies of The members noted that the behavior of the major foreign industrial countries prices had continued to be relatively offset a comparable depreciation in relasubdued and that the risk of a substan- tion to the currencies of other important tial worsening in inflation and infla- trading partners. Among the major curtion expectations over coming months rencies, the dollar rose against the euro seemed to be small. Nonetheless, they and the pound sterling despite a tightsaw some pickup in inflation as a dis- ening of European monetary policy in tinct possibility under anticipated eco- response to the implications for future nomic conditions and concluded that the inflation of indications of a strong directive should indicate that prospec- pickup in economic activity. The dollar tive developments were more likely to fell further against the yen, whose warrant an increase than a decrease in strength presumably reflected evidence the funds rate objective in the near term. of continued economic recovery in Open market operations throughout Japan and the prospect of another subthe intermeeting period were directed stantial fiscal stimulus package. The toward maintaining the federal funds dollar's drop in terms of the currencies rate at around 5lA percent, and the rate of other important trading partners averaged close to the Committee's tar- reflected in part optimism about continget. On balance, most market interest ued recovery in Asian emerging econorates posted small mixed changes over mies as well as signs of renewed politithe intermeeting interval. The Commit- cal stability in some Latin American and tee's announcement of a bias toward Asian countries. tightening surprised many market par- M2 continued to grow at a moderate ticipants, and interest rates rose some- rate in October. The recent performance what after the meeting. Yields climbed of this aggregate likely was associated, further in response to incoming data on at least in part, with the rise in market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

268 86th Annual Report, 1999 interest rates earlier in the year that be fully offset by rising productivity boosted the opportunity cost of holding growth. liquid balances. The expansion of M3 In the Committee's discussion of curpicked up over September and October, rent and prospective economic developreflecting a strong acceleration in its ments, members commented that the non-M2 component that was associated statistical and anecdotal information that with strong inflows to institutional had become available since the October money market funds and stepped-up meeting continued to point to robust issuance of large time deposits to meet growth in overall economic activity, credit demands. For the year through despite some indications of softening in October, M2 and M3 were estimated to interest-sensitive sectors of the econhave increased at rates somewhat above omy. Although productivity developtheir annual ranges for 1999. Total ments remained quite favorable, the domestic nonfinancial debt continued to faster rise in productivity itself apparexpand at a pace somewhat above the ently had tended to bolster demand more middle of its range. than supply through its effects on equity The staff forecast prepared for this prices and consumption and on the meeting suggested that the expansion demand for capital equipment. While would moderate gradually to a rate real interest rates had increased to some around, or perhaps a little below, the extent to restore balance between supply growth of the economy's estimated and demand, they evidently had not potential. The expansion of domestic risen enough or had not been high for final demand increasingly would be held long enough, and growth at an unsusback by the anticipated waning of posi- tainable pace continued to ratchet up tive wealth effects associated with ear- pressures in labor markets. Abstracting lier large gains in equity prices; the from possible temporary fluctuations slower growth of spending on consumer associated with the upcoming century durables, houses, and business equip- date change, the members saw few signs ment and software in the wake of the of significant slowing in aggregate prolonged buildup in the stocks of these demand over the next few months. Over items; and the higher intermediate- and a somewhat longer horizon, however, longer-term interest rates that had they believed that growth in aggregate evolved as markets came to expect that demand was likely to moderate to a a rise in short-term interest rates would more sustainable pace that would bring be needed to achieve sustainable, non- it into closer balance with the expansion inflationary growth. The lagged effects in aggregate supply. Key factors cited of the earlier rise in the foreign by the members in support of their exchange value of the dollar were expectations of slower growth in overall expected to place continuing, though domestic spending were the lagged and substantially diminishing, restraint on to some extent already evident effects of U.S. exports for some period ahead. the rise that had occurred in long-term Core price inflation was projected to interest rates, including mortgage rates, rise somewhat over the forecast hori- and the effects on business and conzon, partly as a result of the pass- sumer sentiment of a less buoyant stock through of higher non-oil import prices market, should the latter persist. Howand some firming of gains in nom- ever, the recent depreciation of the dolinal labor compensation in persis- lar and the ongoing strengthening of tently tight labor markets that would not many foreign economies would stimu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 269 late rising export demand and perhaps sumer spending, however, was the prossubstantially reduce the drag exerted on pect that the wealth effects from sharp the economy by the foreign trade sector. earlier increases in the value of stock The members acknowledged that their market holdings would wane in the forecasts were subject to a substantial absence of a new upsurge in stock mardegree of uncertainty, but the risks on ket prices. balance were seen as tilted toward Growth of business spending for growth strong enough to put added pres- equipment and software was expected to sures on already tight labor markets. moderate in the current quarter, largely Greater pressures on labor resources, in conjunction with what was seen as a should they materialize, would at some temporary slowdown in purchases of point foster larger increases in labor computers in the period before the cencosts, with potentially adverse implica- tury date change. However, the memtions for price inflation over time. bers saw no significant evidence that the With regard to the prospective perfor- strong uptrend in spending on capital mance of key sectors of the economy, equipment might otherwise be weakenforecasts of somewhat slower growth in ing. In contrast to the pattern for busiconsumer spending appeared to be sup- ness fixed investment, nonfarm invenported by recent reports of some mod- tory investment was projected to rise in eration in sales of motor vehicles from the current quarter in connection with a extraordinarily high levels. Anecdotal temporary bulge related to the century reports relating to recent retail sales date change but also to bring lean invenaround the country were mixed, but tories into better alignment with anticimembers indicated that their contacts in pated sales. Once the perturbations the retail industry were uniformly opti- related to the century date change had mistic about the outlook for sales during run their course, inventory growth was the holiday season and recent surveys expected to return to a more normal suggested a very high level of consumer pace during 2000. confidence. Retail sales might be also In the housing market, rising mortaugmented during the closing weeks gage rates had fostered some declines of the year by precautionary purchases from recent peaks in starts and sales, related to century date change concerns. and persisting softness in housing activ- Looking ahead, and abstracting from the ity was anticipated. This expectation unwinding in the early part of 2000 of tended to be supported by anecdotal some transitory stockpiling of consumer reports of moderating homebuilding goods, growth in consumer spending activity in several parts of the country. seemed likely to moderate over time. In Nonetheless, the members cited a numpart, forecasts of a less ebullient con- ber of factors that should tend to sussumer sector reflected expectations of tain overall housing activity at a fairly reduced demand for household goods elevated level. These included continuassociated with a mild downturn in ing though diminishing backlogs of housing activity and the previous slow- unbuilt homes, rising incomes, and high down in mortgage refinancings that had levels of consumer confidence. In any lowered household debt-servicing bur- event, the outlook for housing was dens and frequently had made accumu- subject to considerable uncertainty as lated housing equity available for con- reflected in recent surveys that had prosumer expenditures. A potentially more duced mixed results with regard to the important factor in the outlook for con- near-term prospects for housing activity. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 86th Annual Report, 1999 Members anticipated that the dollar's Even so, the pool of unemployed workrecent depreciation and the strengthen- ers willing to take a job had continued to ing of foreign economies would foster be drawn down, and it seemed likely to a significant further pickup in exports. many members that prospective growth Indeed, available data and anecdotal in aggregate demand might generate reports from around the country indi- increasing pressures on the economy's cated that foreign demand already had ability to produce goods and services improved markedly for some U.S. prod- and thus add to inflationary pressures ucts. In these circumstances, domestic over time. This concern was heightened demand would need to decelerate con- by the prospect that a number of develsiderably for growth to proceed at a opments that had tended to contain sustainable pace. inflation in the last few years were now Concerning the outlook for inflation, reversing. Members mentioned in parmembers noted that despite the long ticular the likelihood that increases in duration of very tight labor markets labor compensation might be headed across the nation, labor compensation higher in lagged response to the pickup had increased at a slightly lower rate in consumer price inflation this year. this year while consumer price inflation Also likely adding to labor cost preshad remained moderate, albeit above sures were relatively large advances in year-earlier levels owing to a sharp rise the cost of health care benefits and the in energy prices. The deceleration in possibility of a higher minimum wage. labor compensation may have been Moreover, the turnaround in energy induced in large measure by the low and import prices could tend to feed level of consumer price inflation in through more directly into the prices of 1998. In addition, a major factor under- U.S.-produced goods by raising costs lying the persistence of generally sub- and reducing competitive pressures dued price inflation in a period of robust to hold down prices. Strengthening deeconomic expansion was the contin- mand around the world already seemed ued acceleration in productivity, which to be contributing to higher prices of clearly was holding down increases in materials and other nonlabor inputs in unit production costs. The latter contrib- the production "pipeline." In general, uted to ongoing competitive pressures however, the members anticipated that that severely limited the ability of firms any pickup in inflation was likely to to raise prices, helping to this point to be gradual, with cost pressures quite keep inflation at a low level. possibly continuing to be held largely The members nonetheless remained in check for some time by improving concerned about the outlook for infla- productivity trends. They recognized tion. They continued to focus especially that forecasts of rising inflation had on the possibility that the anticipated failed to materialize in recent years, moderation in the growth of aggregate raising questions about their understanddemand, taking into account the outlook ing of the empirical specification of the for rising foreign demand for U.S. goods relationships that currently underlie the and services, might not be sufficient to inflation process. On balance, though, avoid added pressures on labor and other the unsustainable pace of economic resources. To be sure, the economy's expansion along with the reversal of potential output appeared to be expand- factors that previously had held down ing briskly, with much of the impetus overall price increases suggested a provided by accelerating productivity. significant risk that inflation would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 271 strengthen over time given prevailing subsequent outlook for policy. On the financial conditions. basis of currently available information, Against this background, all the mem- a number of members indicated that they bers supported raising the Committee's were quite uncertain about the possible target for the federal funds rate by need for further tightening action over 25 basis points at this meeting. Views coming months to keep inflation within differed to an extent on the outlook for acceptable limits. Continued favorable inflation and policy going forward. price and unit cost data, driven in part However, with tightening resource con- by improving productivity, suggested straints indicating unsustainable growth, that any further action should depend only tentative signs that growth might on incoming information about ecobe slowing, and various factors that had nomic activity, pressures on resources, been damping prices now turning and inflation. Other members, emphasizaround, all the members agreed on the ing the persistently strong growth in need for a slight tightening at this meet- economic activity and the unusually ing to raise the odds on containing infla- high level of labor resource utilization, tion and forestalling the inflationary suggested that additional firming of the imbalances that would undercut the very stance of policy probably would be necfavorable performance of the economy. essary to keep inflation in check and This view was reinforced by the pros- hence maintain the favorable backdrop pect that the Committee might not find for maximum economic growth. Howit desirable to adjust policy at its Decem- ever, in view of the questions surroundber meeting when a tightening action ing the outlook, the amount of firming could add to the potential financial un- already undertaken by the Committee this year including at this meeting and certainties and unsettlement surrounding its uncertain effects, and the special situthe century date change. Accordingly, ation in financial markets over the yearany action might have to wait until the end, they supported the adoption of a meeting in early February, and the memsymmetric directive. At the conclusion bers agreed that the risks of waiting for of this discussion, the Committee voted such an extended period were unacceptto authorize and direct the Federal ably high. Reserve Bank of New York, until it was All the members accepted a proposal instructed otherwise, to execute transto adopt a symmetric directive. Such a actions in the System Account in accordirective was viewed as consistent with dance with the following domestic the Committee's current expectation that directive: no further policy move was likely to be considered before the Committee's meeting in February. In the circum- The information reviewed at this meeting suggests continued solid expansion of ecostances, a Committee decision to retain nomic activity. Nonfarm payroll employthe existing asymmetry toward tightenment increased appreciably on average over ing could well send a misleading signal September and October, and the civilian about the probability of near-term action unemployment rate dropped to 4.1 percent and have an unsettling effect on finan- in October, its low for the year. Industrial cial markets at a time when concerns production recorded a strong gain in October after having been depressed in September by relating to the century date change might the effects of Hurricane Floyd. Total retail be adding to normal year-end pressures. sales were flat in September and October As noted previously, however, views owing to a drop in sales at auto dealers; sales differed to some degree regarding the at other stores were fairly robust. Housing Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

272 86th Annual Report, 1999 activity softened somewhat over the summer markets consistent with increasing the fedbut has remained at a high level. Trends in eral funds rate to an average of around orders suggest that business spending on 5!/2 percent. In view of the evidence curcapital equipment has continued to increase. rently available, the Committee believes that The July-August deficit in U.S. trade in prospective developments are equally likely goods and services was higher than its aver- to warrant an increase or a decrease in the age in the second quarter, as further growth federal funds rate operating objective during in imports exceeded the rise in exports. Infla- the intermeeting period. tion has continued at a moderate pace, though above that in 1998 owing to a sharp Votes for this action: Messrs. Greenspan, rebound in energy prices. Labor compensa- McDonough, Boehne, Ferguson, Gramtion rates have been rising more slowly than lich, Kelley, McTeer, Meyers, Moskow, last year. and Stern. Votes against this action: None. Most market interest rates have posted small mixed changes since the meeting on At this meeting, the working group October 5, 1999. However, measures of chaired by Mr. Ferguson provided an share prices in equity markets have registered sizable increases over the intermeeting interim report on its work to date conperiod. In foreign exchange markets, the cerning the wording of the Committee's trade-weighted value of the dollar has directives, the Committee's announcechanged little over the period in relation to ments after each meeting, and related the currencies of a broad group of important issues. The members expressed broad U.S. trading partners. M2 continued to grow at a moderate pace in October while agreement with the direction of the M3 accelerated. For the year through Octo- working group's tentative recommendaber, M2 and M3 are estimated to have tions and provided feedback on specific increased at rates somewhat above the Comissues and wording. It was contemplated mittee's annual ranges for 1999. Total that the Committee would consider the domestic nonfinancial debt has continued to expand at a pace somewhat above the middle working group's final report at a meetof its range. ing in the near future. The Federal Open Market Committee It was agreed that the next meeting seeks monetary and financial conditions that of the Committee would be held on will foster price stability and promote sus- Tuesday, December 21, 1999. The meettainable growth in output. In furtherance of ing adjourned at 1:40 p.m. these objectives, the Committee reaffirmed at its meeting in June the ranges it had established in February for growth of M2 and M3 Donald L. Kohn of 1 to 5 percent and 2 to 6 percent respec- Secretary tively, measured from the fourth quarter of 1998 to the fourth quarter of 1999. The range After the meeting, the following press for growth of total domestic nonfinancial debt was maintained at 3 to 7 percent for the release was issued: year. For 2000, the Committee agreed on a tentative basis in June to retain the same The Federal Open Market Committee today ranges for growth of the monetary aggre- voted to raise its target for the federal funds gates and debt, measured from the fourth rate by 25 basis points to 5V2 percent. In quarter of 1999 to the fourth quarter of 2000. a related action, the Board of Governors The behavior of the monetary aggregates approved a 25 basis point increase in the will continue to be evaluated in the light of discount rate to 5 percent. progress toward price level stability, move- Although cost pressures appear generally ments in their velocities, and developments contained, risks to sustainable growth perin the economy and financial markets. sist. Despite tentative evidence of a slowing To promote the Committee's long-run in certain interest-sensitive sectors of the objectives of price stability and sustainable economy and of accelerating productivity, economic growth, the Committee in the the expansion of activity continues in excess immediate future seeks conditions in reserve of the economy's growth potential. As a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 273 consequence, the pool of available workers Mr. Hoenig, Ms. Minehan, and willing to take jobs has been drawn down Mr. Poole, Presidents of the further in recent months, a trend that must Federal Reserve Banks of eventually be contained if inflationary imbal- Kansas City, Boston, and St. Louis ances are to remain in check and economic respectively expansion continue. Today's increase in the federal funds rate, Mr. Kohn, Secretary and Economist together with the policy actions in June and Mr. Bernard, Deputy Secretary August and the firming of conditions more Ms. Fox, Assistant Secretary generally in U.S. financial markets over the Mr. Gillum, Assistant Secretary course of the year, should markedly diminish Mr. Mattingly, General Counsel the risk of inflation going forward. As a Mr. Baxter, Deputy General Counsel consequence, the directive the Federal Open Ms. Johnson, Economist Market Committee adopted is symmetrical Mr. Prell, Economist with regard to the outlook for policy over the near term. Ms. Cumming, Messrs. Howard, In taking the discount rate action, the Hunter, Lang, Rosenblum, Federal Reserve Board approved requests Slifman, and Stockton, submitted by the Boards of Directors of the Associate Economists Federal Reserve Banks of Boston, Cleveland, Richmond, and Kansas City. The dis- Mr. Fisher, Manager, System Open count rate is the rate charged depository Market Account institutions when they borrow short-term adjustment credit from their District Federal Reserve Banks. Mr. Winn, Assistant to the Board, Office of Board Members, Board of Governors Meeting Held on Messrs. Ettin and Reinhart, Deputy Directors, Divisions of Research December 21, 1999 and Statistics and International Finance respectively, Board of A meeting of the Federal Open Market Governors Committee was held in the offices of the Board of Governors of the Federal Messrs. Madigan and Simpson, Reserve System in Washington, D.C., Associate Directors, Divisions of on Tuesday, December 21, 1999, at Monetary Affairs and Research 9:00 a.m. and Statistics respectively, Board of Governors Present: Ms. Roseman,11 Director, Division of Mr. Greenspan, Chairman Reserve Bank Operations and Mr. McDonough, Vice Chairman Payment Systems, Board of Mr. Boehne Governors Mr. Ferguson Mr. Gramlich Messrs. Dennis11 and Whitesell, Mr. Kelley Assistant Directors, Divisions of Mr. McTeer Reserve Bank Operations and Mr. Meyer Payment Systems and Monetary Mr. Moskow Affairs respectively, Board of Mr. Stern Governors Messrs. Broaddus, Guynn, Jordan, and Parry, Alternate Members 11. Attended portion of meeting relating to the of the Federal Open Market Committee's consideration of the Report of Committee Examination of the System Open Market Account. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

274 86th Annual Report, 1999 Ms. Low, Open Market Secretariat the implementation of monetary policy Assistant, Division of Monetary over the intermeeting period ahead. Affairs, Board of Governors The information reviewed at this meeting suggested continued strong Mr. Moore, First Vice President, expansion of economic activity. Con- Federal Reserve Bank of San Francisco sumer demand was particularly robust, and business fixed investment remained Messrs. Beebe, Eisenbeis, Goodfriend, on a strong upward trend. Housing Hakkio, Rasche, and Sniderman, activity was still at an elevated level Senior Vice Presidents, Federal despite some recent slippage. As a con- Reserve Banks of San Francisco, sequence, manufacturing production had Atlanta, Richmond, Kansas City, St. Louis, and Cleveland increased briskly in recent months, and respectively nonfarm payrolls continued to rise rapidly. Despite very tight labor markets, Ms. Perelmuter, Messrs. Rosengren and labor compensation had been climbing Weber, Vice Presidents, Federal more slowly than last year. Aggregate Reserve Banks of New York, price increases had been smaller in Boston, and Minneapolis respectively recent months, reflecting a flattening in energy prices after a rapid run-up. By unanimous vote, the minutes of Nonfarm payroll employment rose the meeting of the Federal Open Market substantially further in October and Committee held on November 16, 1999, November. Job growth in the services were approved. industry remained rapid in the two The Report of Examination of the months, construction hiring continued System Open Market Account, con- buoyant against a backdrop of project ducted by the Board's Division of backlogs and unseasonably warm Reserve Bank Operations and Payment weather, and the pace of job losses in Systems as of the close of business on manufacturing slowed further. The civil- September 10, 1999, was accepted. ian unemployment rate fell to 4.1 per- The Manager of the System Open cent in October, its low for the year, and Market Account reported on recent remained at that level in November. developments in foreign exchange mar- Industrial production continued to kets. There were no open market opera- advance briskly in the Octobertions in foreign currencies for the Sys- November period, reflecting sizable tem's account in the period since the gains in manufacturing and mining outprevious meeting, and thus no vote was put. Within manufacturing, the producrequired of the Committee. tion of consumer goods, construction The Manager also reported on devel- supplies, and materials was up substanopments in domestic financial markets tially. The further advance in manuand on System open market transactions facturing production in the two months in government securities and federal boosted the factory operating rate, but agency obligations during the period capacity utilization in manufacturing in November 16, 1999, through Decem- November was still a little below its ber 20, 1999. By unanimous vote, the long-term average. Committee ratified these transactions. Total nominal retail sales rose appre- The Committee then turned to a dis- ciably in the first two months of the cussion of recent and prospective eco- fourth quarter. Sales gains were widenomic and financial developments, and spread, but purchases of durable goods, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 275 especially light vehicles, were particu- ably and the inventory-sales ratio for larly strong. Anecdotal reports sug- this sector also was near the bottom of gested that growth in consumer outlays its range for the last twelve months. was remaining brisk in December. Total retail stocks changed little on bal- Housing activity, though somewhat ance in October because of the sharp softer in recent months, continued at a runoff at automotive dealerships. The high level. Total private housing starts inventory-sales ratio for the retail sector slipped in November after having held as a whole was at the bottom of its range steady in October. In addition, sales of for the last year. new homes in the September-October The U.S. deficit on trade in goods and period (latest data) were a little below services widened somewhat in October the pace recorded in the spring and early from its average for the third quarter. summer months, and existing home The value of exports edged up in Octosales registered a fourth consecutive ber from its third-quarter level but the decline in October. value of imports rose appreciably more, The available information on orders with much of the increase reflecting and shipments suggested some slow- greater imports of consumer goods and ing in the very rapid growth of business machinery. The available information spending for capital equipment. Ship- suggested that economic expansion in ments of nondefense capital equipment the euro area, the United Kingdom, and recovered only partially in October from Canada picked up sharply in the third a large September decline. Much of the quarter. In contrast, economic activity pickup reflected a surge in shipments declined in Japan during the third quarof computers and related equipment in ter after a surge in the first half of the October after a plunge in the preceding year. Among the developing countries, two months. Trends in orders suggested economic activity continued to expand that business spending on capital in emerging Asia and parts of Latin equipment, notably for high-tech and America. transportation equipment, probably had Inflation had remained subdued in increased further over the balance of the recent months. Consumer price inflation fourth quarter. Outlays and contracts for edged down in October and November nonresidential construction slowed fur- as energy prices steadied after having ther in October. The pace of office con- increased rapidly earlier in the year. struction was close to its third-quarter Moreover, excluding the volatile food average; spending for industrial build- and energy components, consumer ings continued to drop, and outlays for prices rose slightly less in the twelve commercial structures were unchanged months ended in November than in the from their low September level. previous twelve-month period. At the Business inventory investment producer level, prices of finished goods slowed in October from the third-quarter other than food and energy were pace, primarily reflecting a sizable liqui- unchanged in November after a moddation of stocks at automotive dealer- erate increase in October. For the ships. Stockbuilding among manufactur- year ended in November, core producer ers stepped up slightly in October, but prices rose somewhat more than in the stock-sales ratio for the sector was the preceding year. However, producer near the bottom of its range for the last prices at earlier stages of processing twelve months. At the wholesale level, continued to register increases someinventory accumulation slowed notice- what larger than those for finished Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

276 86th Annual Report, 1999 goods. With regard to labor costs, the As a result, most market interest rates rise in compensation per hour in the rose somewhat in the period after the nonfarm business sector over the four November 16 meeting. Despite the quarters ending in September was down appreciable increase in Treasury bond considerably from the advance in the yields, most broad stock market indexes preceding four-quarter period. In addi- advanced further during the intermeettion, average hourly earnings rose mod- ing period. erately in the October-November period In foreign exchange markets, the and in the twelve months ended in trade-weighted value of the dollar November. changed little over the period in relation At its meeting on November 16, the to the currencies of a broad group of Committee adopted a directive that important U.S. trading partners. The dolcalled for a slight tightening of condi- lar appreciated against the euro and the tions in reserve markets consistent with Canadian dollar, but those movements an increase of lA percentage point in were largely counterbalanced by dethe federal funds rate to an average of clines against the Japanese yen and the around 5lA percent. The members noted currencies of other important trading that the slight tightening would enhance partners. the chances for containing inflation and M2 continued to grow at a moderate forestalling the emergence of inflation- rate in November despite strong curary imbalances that could undermine rency demand that likely was associated the economy's highly favorable perfor- with a combination of robust holiday mance. The members also agreed on a spending and precautionary stockpiling symmetric directive. The special sit- for the century rollover. Higher opportuuation in financial markets over the nity costs and currency demand apparyear-end, along with uncertainty about ently damped growth in holdings of the economy's response to the firming liquid deposits. By contrast, M3 surged already undertaken in 1999, suggested in November, reflecting heavy issuance that the Committee would want to assess of large time deposits to fund increases further developments through early next in bank credit and vault cash and large year before considering additional pol- inflows to institution-only money maricy action. ket funds. For the year through Novem- Open market operations during the ber, M2 and M3 were estimated to have intermeeting period were directed to- increased at rates somewhat above the ward implementing the desired slightly Committee's annual ranges for 1999. greater pressure on reserve positions, Total domestic nonfinancial debt conand the federal funds rate averaged close tinued to expand at a pace in the upper to the Committee's 5Vi percent target. portion of its range. However, with the economic expansion The staff forecast prepared for this still quite strong and in the context of meeting suggested that the expansion the expression of concern about the would gradually moderate from its curinflationary implications of unsustain- rently elevated pace to a rate around ably fast growth in the Committee's or perhaps a little below the growth of announcement of its decision at the the economy's estimated potential. The November meeting, incoming economic expansion of domestic final demand data were viewed by market participants increasingly would be held back by the as increasing, on balance, the chances anticipated waning of positive wealth of further monetary tightening in 2000. effects associated with large earlier Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 277 gains in equity prices, the slower growth uncertainty related in part to the diffiof spending on consumer durables, culty of anticipating trends in stock marhouses, and business equipment and ket prices and their effects on business software in the wake of the prolonged and consumer sentiment and spending. buildup in the stocks of these items, and Members also noted that prospective the higher intermediate- and longer-term slowing in domestic demand was likely interest rates that had evolved as mar- to be offset, at least to some extent, kets came to expect that a rise in short- by further growth in exports should term interest rates would be needed foreign economies as a group conto achieve sustainable, noninflationary tinue to strengthen as many forecasters growth. However, continued solid eco- anticipated. nomic expansion abroad was expected Uncertainties about the level and to boost the growth of U.S. exports for growth of potential output and the some period ahead. Core price inflation dynamics of the inflation process made was projected to rise somewhat over the it difficult to relate with confidence proforecast horizon, partly as a result of jections of demand and activity to proshigher non-oil import prices and some pects for inflation. Members observed firming of gains in nominal labor com- that they saw no indications that the pensation in persistently tight labor impressive gains in productivity might markets that would increasingly out- be moderating, and, indeed, the most pace even continued rapid productivity recent data suggested some further growth. acceleration. Moreover, persistent dis- In the Committee's discussion of cur- parities between the household and rent and prospective economic devel- establishment series on employment opments, members commented that the growth might be reconciled by higher most recent statistical and anecdotal immigration than previously estimated, information provided further evidence further boosting potential growth. Noneof persisting strength in the expansion theless, the increase in aggregate and of relatively subdued wage and demand had been exceeding even the price inflation. The economy clearly now-higher sustainable rate of growth would carry substantial expansionary in aggregate supply, as indicated by momentum into the new year, quite pos- declines in the pool of available but sibly in excess of growth in the econo- unemployed workers to a very low level my's long-run potential, and the key and by the rise in imports. This differissue for the Committee was whether ence between the growth of demand and growth in aggregate demand would slow potential supply could well persist to a more sustainable pace without fur- unless demand moderated. Absent a ther tightening in the stance of monetary possible moderation, an upturn in unit policy. Members noted in this regard labor costs was seen as a likely possibilthat evidence of a slowdown in the ity, with eventual adverse implications expansion was quite marginal at this for price inflation. Inflation pressures point and seemed to be limited largely might also be augmented over time by to some softening in housing activity. a number of special factors such as the Looking beyond the near term, members rise in energy prices, the effects on continued to anticipate some modera- import prices of the dollar's depreciation in the growth of domestic demand, tion and strengthening foreign econothough the extent of the moderation mies, and faster increases in medical remained subject to a wide range of costs. While several of these factors Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 86th Annual Report, 1999 implied limited price level adjustments, equipment. Business spending on conthey could become embedded to a struction was expected to change little degree in ongoing inflation through their on the whole, with strength in some effects on wage increases and inflation sectors, such as warehouse facilities, offexpectations. Over the nearer term, set by softness in sectors such as indushowever, subdued inflation expectations trial structures and office buildings. were likely to damp any incipient Some members noted, however, that uptrend in the rate of price inflation. public works projects would help to sup- In their review of economic condi- port overall construction activity. tions across the nation, several members Recent data along with anecdotal noted that high levels of business activ- reports indicated some loss of vigor in ity were severely taxing available labor the nation's housing markets, though resources and appeared to be constrain- overall activity was still at a high level. ing growth in a number of industries and The recent pace of homebuilding was parts of the country. Rising employment somewhat uneven, with relative strength and incomes, along with the advance in some areas supported by seasonally in stock market prices to new highs in favorable weather conditions or large recent weeks, were fostering elevated backlogs. Rising mortgage rates were levels of consumer confidence and cited as a key factor underlying the would be supporting consumer spending limited moderation in residential congoing forward. Anecdotal reports struction, but other factors included the pointed to notably brisk retail sales dur- scarcity of skilled construction workers, ing the current holiday season in many with some diverted to nonresidential parts of the country. Sales of new auto- construction projects, and indications mobiles had rebounded recently after of overbuilding in some areas. Looking moderating somewhat from an excep- ahead, the members anticipated that furtionally rapid pace earlier. While recent ther growth in incomes and the ready developments provided little basis for availability financing for most homeanticipating slower growth in consumer buyers would sustain overall housing spending, members commented that activity at a relatively high level. such spending could be vulnerable to Forecasts indicated that while real net adverse developments in the stock exports would continue to decline over market and the attendant effects on the next several quarters, the rate of consumer wealth and confidence; and decline would moderate substantially. spending for household durables could The solid further expansion expected in be damped by the anticipated softness in many foreign economies, the slower housing activity. growth of domestic demand in the The capital goods markets also dis- United States, and the effects of the slipplayed very little evidence of any weak- page of the foreign exchange value ening. They continued to be charac- of the dollar on the relative prices of terized by disproportionately large U.S. goods and services were all seen investments in high-tech business equip- as contributing to this outcome. In the ment, although demand for more con- course of their comments, members ventional equipment, apart from farm cited a number of examples of alreadyequipment, also was relatively robust. improved export markets for a variety of Assessments of the outlook for overall U.S. products. While expanding foreign business capital investment pointed to demand for U.S. goods and services was further rapid growth led by outlays for a welcome development from the per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 279 spective of numerous business firms, all the members endorsed a proposal to such demand might add to pressures on maintain an unchanged policy stance U.S. resources with potentially inflation- consistent with a target for the federal ary implications, depending on the funds rate centering on 5V2 percent. The extent to which the growth in domestic members agreed that the Committee's demand would slow going forward. Sev- primary near-term objective was to foseral members indicated their concern ter steady conditions in financial marabout the burgeoning current account kets during the period of the century deficit and the potential that it could date change and to avoid any action that lead to a considerable weakening of the might erode the markets' confidence that dollar at some point, which would tend the Federal Reserve was fully prepared to add to upward pressure on prices and to provide whatever liquidity would be demand. needed in this period. The members In their comments regarding the out- generally agreed that, if necessary, their look for inflation, a number of members concerns about rising inflation could be expressed concern that the anticipated addressed at the meeting in early Februmoderation in overall demand might not ary. They saw little risk of a significant be large enough or soon enough to fore- acceleration in inflation over the near stall added pressures on already-taut term, given recent price trends and the labor markets. Although wage growth absence of indications that inflationary had remained moderate to date and unit expectations might be deteriorating, and labor costs damped, at some point tight- thus little cost in deferring consideration ening labor markets would begin to gen- of a policy tightening action. Moreover, erate wage gains increasingly in excess the Committee would be in a better of productivity gains. Indeed, a few position by early February to assess the members were concerned that unit labor delayed effects of its earlier tightening costs could begin to accelerate even at actions. existing labor utilization levels. In addi- On the issue of the intermeeting tilt tion, some of the forces that had been in the Committee's directive, most of restraining inflation—declining oil, the members expressed a preference for import, and commodity prices, and sub- retaining the symmetry adopted at the dued increases in the costs of health November meeting. While a preemptive care—had already reversed. Even so, tightening move might be warranted in resulting acceleration in price inflation the not-too-distant future to help contain might be held down and possibly inflationary pressures in the economy, averted for a time by the economy's these members believed that a symbuoyant upward trend in productivity, metrical directive would best convey the which could support profit margins and message that no tightening action was help maintain the highly competitive contemplated for the weeks immediconditions in many markets that made it ately ahead. Such a directive would difficult or impossible for most business therefore be more consistent with their firms to raise their prices. In addition, desire to avoid any misinterpretations there had been no evidence of any ero- of their policy intentions that might sion in the widespread expectation that unsettle financial markets during the inflation would remain subdued over the sensitive century-date-change period. In long run. this view, longer-run concerns about In the Committee's discussion of pol- rising inflation could be addressed in the icy for the period immediately ahead, press statement that would be issued Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 86th Annual Report, 1999 after this meeting. A few members Most market interest rates are up someindicated a marginal preference for an what since the meeting on November 16, 1999. Measures of share prices in equity asymmetric directive that focused on markets have risen further over the interthe possibility of an eventual rise in meeting period. In foreign exchange marinterest rates. In their view, an asym- kets, the trade-weighted value of the dollar metric directive would be more con- has changed little over the period in relation sistent with the consensus among the to the currencies of a broad group of important U.S. trading partners. Committee members regarding the M2 continued to grow at a moderate pace most likely course of monetary policy in November while M3 surged. For the year over the next few meetings and the use through November, M2 and M3 are estiof the bias statement that had come mated to have increased at rates somewhat to encompass this longer horizon and above the Committee's annual ranges for was understood as such by financial 1999. Total domestic nonfinancial debt has expanded at a pace in the upper end of its market participants and the public. range. Moreover, such a directive was widely The Federal Open Market Committee anticipated in financial markets and seeks monetary and financial conditions that hence would incur little risk in their will foster price stability and promote susview of a market disturbance in the tainable growth in output. In furtherance of weeks immediately ahead. However, these objectives, the Committee reaffirmed at its meeting in June the ranges it had estabthey could readily accept a symmetrical lished in February for growth of M2 and M3 directive in light of the contemplated of 1 to 5 percent and 2 to 6 percent respecpress announcement. tively, measured from the fourth quarter of 1998 to the fourth quarter of 1999. The range At the conclusion of this discussion, for growth of total domestic nonfinancial the members voted to authorize and debt was maintained at 3 to 7 percent for the direct the Federal Reserve Bank of year. For 2000, the Committee agreed on a New York, until it was instructed other- tentative basis in June to retain the same wise, to execute transactions in the Sys- ranges for growth of the monetary aggregates and debt, measured from the fourth tem Account in accordance with the folquarter of 1999 to the fourth quarter of 2000. lowing domestic directive: The behavior of the monetary aggregates will continue to be evaluated in the light of The information reviewed at this meet- progress toward price level stability, moveing suggests continued strong expansion ments in their velocities, and developments of economic activity. Nonfarm payroll em- in the economy and financial markets. ployment increased substantially further in To promote the Committee's long-run October and November, and the civilian objectives of price stability and sustainable unemployment rate stayed at 4.1 percent in economic growth, the Committee in the im- November, its low for the year. Manufactur- mediate future seeks conditions in reserve ing output recorded sizable gains in October markets consistent with maintaining the fedand November. Total retail sales rose appre- eral funds rate at an average of around ciably over the two months. Housing activity 5Vi percent. In view of the evidence curhas softened somewhat over recent months rently available, the Committee believes that but has remained at a high level. Trends in prospective developments are equally likely orders suggest that business spending on to warrant an increase or a decrease in the capital equipment has increased further. The federal funds rate operating objective during U.S. nominal trade deficit in goods and ser- the intermeeting period. vices rose in October from its average in the third quarter. Aggregate price increases have been smaller in the past two months, reflect- Votes for this action: Messrs. Greenspan, ing a flattening in energy prices; labor com- McDonough, Boehne, Ferguson, Grampensation rates have been rising more slowly lich, Kelley, McTeer, Meyer, Moskow, and than last year. Stern. Votes against this action: None. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 281 Disclosure Policy decisions, the members agreed that an explanatory press release should be The members of the Committee agreed issued before the February meeting. at this meeting to adopt a number of The Committee also accepted a proproposals offered by the Working Group posal to codify current practice regardon the Directive and Disclosure Policy ing policy moves in the intermeeting chaired by Mr. Ferguson, effective with period by amending the Authorization the first meeting in 2000. One proposal for Domestic Open Market Operations was to issue a press statement after in February. The amendment was made every meeting even when the Commitnecessary by the change in the language tee decided to maintain its existing polof the directive. Intermeeting moves, icy stance and did not change its view of authorized by the Chairman, would future developments in a major way. remain possible but, as in recent years, Another proposal was to change the would be made only in exceptional cirway the Committee characterizes its cumstances. One member expressed resview of future developments. A few ervations about the proposed amendmembers wanted to retain the current ment, questioning its need in light of the focus on the possible future stance of instruments already in place to deal with policy because they thought that the liquidity emergencies and its appropri- Committee would more readily be able ateness because it could potentially to reach agreement on the likelihood of allow policy moves to be made, howfuture actions than on the potential reaever rarely, without necessarily drawing sons such actions might be considered. on the benefits of full Committee partici- The consensus opinion, however, was to pation. The other members, however, replace the Committee's judgment about noted that the practices in place had the likelihood of an increase or decrease worked well over the years, proving in the intended federal funds rate with a themselves a useful adjunct to the regudescription of the Committee's perceplar Committee decision-making process; tion of the risks in the foreseeable future that the new language would maintain to the attainment of its long-run goals of those practices, clarifying that latitude price stability and sustainable economic to change policy was to be exercised growth. Although the Committee would against the background of the Commitvote on this assessment of the risks tee's previous discussions and only in together with its policy stance, the Comunusual circumstances; and that, if necmittee would no longer include its view essary, adjustments to the Authorization of future developments in the domestic could be made in the future. policy directive to the Federal Reserve It was agreed that the next meeting Bank of New York, because the new of the Committee would be held on wording did not refer to an operational Tuesday-Wednesday, February 1-2, matter. The Committee's new directive 2000. would contain only a general statement The meeting adjourned at 1:30 p.m. of its policy objectives, its specific operating instructions for the intermeeting Donald L. Kohn period, and in February and July a para- Secretary graph on the yearly money and debt ranges. To inform the public about these Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

283 Litigation During 1999, the Board of Governors 1998), was a petition for review of a was a party in ten lawsuits or appeals Board order dated August 17, 1998, apfiled that year and was a party in four- proving the application by NationsBank teen other cases pending from previous Corporation, Charlotte, North Carolina, years, for a total of twenty-four cases; in to merge with BankAmerica Corpora- 1998, the Board had been a party in a tion, San Francisco, California (84 Fedtotal of thirty-three cases. One of the eral Reserve Bulletin 858). The court lawsuits or appeals filed in 1999 raised dismissed the petition on January 19, questions under the Bank Holding Com- 1999. pany Act. As of December 31, 1999, twelve cases were pending. Litigation under the Financial Institutions Supervisory Act Judicial Review of Board Orders In Board of Governors v. Carrasco, under the Bank Holding No. 98-3474 (S.D. New York, filed Company Act May 15, 1998), the Board sought to Irontown Housing Corp. v. Board of freeze the assets of an individual pend- Governors, No. 99-9549 (10th Circuit, ing the administrative adjudication of filed December 27, 1999), is a petition an action by the Board requiring restitufor review of a Board order dated tion by the individual. On May 26, 1998, December 13, 1999, approving the the district court granted the Board's merger of First Security Corporation and request for a preliminary injunction. Zions Bancorporation, both of Salt Lake Following entry of the Board's order City, Utah (86 Federal Reserve Bulletin requiring restitution, 85 Federal Reserve 122). Bulletin 142 (1998), the court granted In Independent Community Bankers the Board's motion for judgment in the of America v. Board of Governors, asset freeze action and authorized a judi- No. 98-1482 (D.C. Circuit, filed Octo- cial sale of the seized property. ber 21, 1998), petitioners sought review In Board of Governors v. Pharaon, of a Board order dated September 23, Nos. 98-6101 and 98-6121 (2nd Cir- 1998, conditionally approving the appli- cuit, filed May 4 and May 22, 1998), cation of Travelers Group, Inc., New both parties appealed an order of the York, New York, to become a bank U.S. District Court for the Southern holding company by acquiring Citicorp, District of New York (No. 91-6250, New York, New York, and its bank March 18, 1998) granting in part and and nonbank subsidiaries (84 Federal denying in part the Board's motion for Reserve Bulletin 985). On November 2, partial summary judgment in an action 1999, the court affirmed the Board's to freeze the assets of an individual order (195 R3d 28). pending adjudication of a civil money Attorneys Against American Apart- penalty assessment by the Board. On heid v. Board of Governors, No. 98- February 24, 1999, the court of appeals 1483 (D.C. Circuit, filed October 21, affirmed the district court's grant of a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

284 86th Annual Report, 1999 10 percent surcharge on an unpaid Kerr v. Department of the Treasury, civil money penalty and reversed the No. 99-16263 (9th Circuit, filed district court to the extent it denied the April 28, 1999), is an appeal of the Board prejudgment interest on that district court's dismissal of an action penalty. 169 F.3d 110. The case is challenging income taxation and Fedpending before the district court. eral Reserve notes. In Banking Consultants of America v. Sedgwick v. Board of Governors, Board of Governors, No. 98-5354 (6th No. Civ 99 0701 (D. Arizona, filed Circuit, filed March 10, 1998), plain- April 14, 1999), is an action under the tiffs appealed an order of the U.S. Dis- Federal Tort Claims Act alleging violatrict Court for the Western District of tion of bank supervision requirements. Tennessee (No. 97-2791, January 23, Gadson v. Federal Reserve Bank, 1998) dismissing their action to enjoin No. 99-0866 (N.D. Georgia, filed an investigation by the Board, the Office April 2, 1999), was dismissed as frivoof the Comptroller of the Currency, and lous on May 14, 1999. On Decemthe Department of Labor. The appeal ber 21, 1999, the Eleventh Circuit Court was voluntarily dismissed on Novem- of Appeals affirmed the dismissal ber 10, 1999. (No. 99-11608). Towe v. Board of Governors, No. 97- Folstad v. Board of Governors, 71143 (9th Circuit, filed September 15, No. 1:99 CV 124 (W.D. Michigan, 1997), was a petition for review of a filed February 17, 1999), was an action Board order dated August 18, 1997 (83 under the Freedom of Information Act. Federal Reserve Bulletin 849), prohibit- On November 16, 1999, the district ing Edward Towe and Thomas E. Towe court granted the Board's motion for from further participation in the banking summary judgment and dismissed the industry. On February 23, 1999, the action. 1999 U.S. Dist. LEXIS 17852. court affirmed the Board's order. 1999 Hummingbird v. Greenspan et al., U.S. App. LEXIS 3078. No. 99-D-319 (D. Colorado, filed February 13, 1999), was a suit involving a federal tax lien. The case was dismissed Other Actions on March 1, 1999. Wasserman v. Board of Governors, Nelson v. Greenspan, No. No. 99-6290 (2nd Circuit, filed Octo- l:99CV00215 (EGS) (D. District of ber 27, 1999), is an appeal by plaintiff Columbia, filed January 28, 1999), is an of the denial of various post-dismissal employment discrimination complaint. motions following the voluntary dis- In Fraternal Order of Police v. Board missal of the plaintiffs action in the of Governors, No. 98-3116 (D. Dis- United States District Court for the trict of Columbia, filed December 22, Southern District of New York (No. 98- 1998), plaintiff seeks a declaratory judg- CIV-6017). ment regarding the Board's labor rela- Artisv. Greenspan,No. l:99CV02073 tions policy. (EGS) (D. District of Columbia, filed Hunter v. Board of Governors, August 3, 1999), is an employment dis- No. l:98CV02994 (TFH) (D. District of crimination action. Columbia, filed December 9, 1998), is Sheriff Gerry AH v. US. State Depart- an action under the Freedom of Informament, No. 99-7438 (CD. California, tion Act, the Privacy Act, and the First filed July 21, 1999), is an action relating Amendment. to impounded bank drafts. In Inner City Press/Community on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 285 the Move v. Board of Governors, an appeal of a district court order grant- No. 98-4608 (2nd Circuit, filed Decem- ing the Board's motion for summary ber 3, 1998), plaintiff appealed an order judgment on plaintiff's Freedom of of the U.S. District Court for the South- Information Act complaint. The court of ern District of New York (No. 98-4608, appeals affirmed the district court's September 30, 1998) granting the order on March 2, 1999. Board's motion for summary judgment Fenili v. Davidson, No. C-98on plaintiff's Freedom of Information 01568CW (N.D. California, filed Act complaint. On June 23, 1999, the April 17,1998), was a case claiming tort court of appeals affirmed the district and constitutional violations arising out court's dismissal. 1999 U.S. App. of the return of a check. The case was LEXIS 3078. dismissed on September 29, 1999. Goldman v. Department of the Trea- Logan v. Greenspan, No. 98-0049 sury, No. 98-9451 (11th Circuit, filed (D. District of Columbia, filed Jan- November 10, 1998), was an appeal uary 9, 1998), was an employment disfrom an order of the U.S. District Court crimination action. On September 29, for the Northern District of Georgia 1999, the case was dismissed without (No. 1-97-CV-3798, November 2, prejudice. 1998) dismissing an action challenging Bettersworth v. Board of Governors, Federal Reserve notes as lawful money. No. 97-CA-624 (W.D. Texas, filed The district court's judgment was August 21, 1997), is a complaint under affirmed on August 9, 1999. the Privacy Act. • Clarkson v. Greenspan, No. 98-5349 (D.C. Circuit, filed July 29, 1998), was Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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

Federal Reserve System Organization 289 Board of Governors of the Federal Reserve System December 31,1999 Members Term expires January 31, ALAN GREENSPAN, of New York, Chairmanl 2006 ROGER W. FERGUSON, JR., of Massachusetts, Vice Chairmanl 2000 LAURENCE H. MEYER, of Missouri 2002 EDWARD W. KELLEY, JR., of Texas 2004 EDWARD M. GRAMLICH, of Virginia 2008 VACANCY 2010 VACANCY 2012 Officers OFFICE OF BOARD MEMBERS OFFICE OF THE SECRETARY Lynn S. Fox, Assistant to the Board Jennifer J. Johnson, Secretary Donald J. Winn, Assistant to the Board Robert deV. Frierson, Associate Secretary Winthrop P. Hambley, Deputy Barbara R. Lowrey, Associate Secretary Congressional Liaison and Ombudsman Bob Stahly Moore, Special Assistant to the Board DIVISION OF INTERNATIONAL FINANCE Diane E. Weraeke, Special Assistant Karen H. Johnson, Director to the Board David H. Howard, Deputy Director Vincent R. Reinhart, Deputy Director LEGAL DIVISION Dale W. Henderson, Associate Director J. Virgil Mattingly, Jr., General Counsel Thomas A. Connors, Deputy Associate Scott G. Alvarez, Associate General Director Counsel Donald B. Adams, Senior Adviser Richard M. Ashton, Associate Richard T. Freeman, Assistant Director General Counsel William L. Helkie, Assistant Director Oliver Ireland, Associate General Steven B. Kamin, Assistant Director Counsel Ralph W. Tryon, Assistant Director Kathleen M. O'Day, Associate General Counsel DIVISION OF MONETARY AFFAIRS Katherine H. Wheatley, Assistant General Donald L. Kohn, Director Counsel David E. Lindsey, Deputy Director Brian F. Madigan, Associate Director Richard D. Porter, Deputy Associate Director 1. The designations as Chairman and Vice Chairman William C. Whitesell, Assistant Director expire on June 20, 2000, and October 5, 2003, respectively, unless the service of these members of the Board Normand R.V. Bernard, Special Assistant shall have terminated sooner. to the Board Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

290 86th Annual Report, 1999 Board of Governors—Continued DIVISION OF RESEARCH Mary Cross Jacowski, Assistant Director AND STATISTICS Richard A. Small, Assistant Director Michael J. Prell, Director William C. Schneider, Jr., Project Director, Edward C. Ettin, Deputy Director National Information Center David J. Stockton, Deputy Director William R. Jones, Associate Director DIVISION OF CONSUMER Myron L. Kwast, Associate Director AND COMMUNITY AFFAIRS Patrick M. Parkinson, Associate Director Dolores S. Smith, Director Thomas D. Simpson, Associate Director Glenn E. Loney, Deputy Director Lawrence Slifman, Associate Director Sandra F. Braunstein, Assistant Director Martha S. Scanlon, Deputy Maureen P. English, Assistant Director Associate Director Adrienne D. Hurt, Assistant Director Stephen D. Oliner, Assistant Director Irene Shawn McNulty, Assistant Director Stephen A. Rhoades, Assistant Director Janice Shack-Marquez, Assistant Director DIVISION OF FEDERAL RESERVE BANK Charles S. Struckmeyer, Assistant Director OPERATIONS AND PAYMENT SYSTEMS Alice Patricia White, Assistant Director Louise L. Roseman, Director Joyce K. Zickler, Assistant Director Paul W. Bettge, Assistant Director Glenn B. Canner, Senior Adviser Kenneth D. Buckley, Assistant Director David S. Jones, Senior Adviser Jack Dennis, Jr., Assistant Director Joseph H. Hayes, Jr., Assistant Director DIVISION OF BANKING SUPERVISION Jeffrey C. Marquardt, Assistant Director AND REGULATION Marsha W. Reidhill, Assistant Director Richard Spillenkothen, Director Jeff J. Stehm, Assistant Director Stephen C. Schemering, Deputy Director Herbert A. Biern, Associate Director OFFICE OF STAFF DIRECTOR Roger T. Cole, Associate Director FOR MANAGEMENT William A. Ryback, Associate Director Stephen R. Malphrus, Staff Director Gerald A. Edwards, Jr., Deputy Associate Director Stephen M. Hoffman, Jr., Deputy MANAGEMENT DIVISION Stephen J. Clark, Associate Director, Associate Director Finance Function James V. Houpt, Deputy Darrell R. Pauley, Associate Director, Associate Director Human Resources Function Jack P. Jennings, Deputy Sheila Clark, Equal Employment Associate Director Opportunity Programs Director Michael G. Martinson, Deputy Associate Director Sidney M. Sussan, Deputy Associate Director Molly S. Wassom, Deputy Associate Director Howard A. Amer, Assistant Director Norah M. Barger, Assistant Director Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 291 Board of Governors—Continued DIVISION OF INFORMATION DIVISION OF SUPPORT SERVICES TECHNOLOGY Robert E. Frazier, Director Richard C. Stevens, Director George M. Lopez, Assistant Director Marianne M. Emerson, Deputy Director David L. Williams, Assistant Director Tillena G. Clark, Assistant Director Maureen T. Hannan, Assistant Director OFFICE OF THE INSPECTOR GENERAL Po Kyung Kim, Assistant Director Barry R. Snyder, Inspector General Raymond H. Massey, Assistant Director Donald L. Robinson, Deputy Inspector Edward T. Mulrenin, Assistant Director General Day W. Radebaugh, Jr., Assistant Director Federal Open Market Committee December 31,1999 Members ALAN GREENSPAN, Chairman, Board of Governors WILLIAM J. McDONOUGH, Vice Chairman, President, Federal Reserve Bank of New York EDWARD G. BOEHNE, President, Federal Reserve Bank of Philadelphia ROGER W. FERGUSON, JR., Board of Governors EDWARD M. GRAMLICH, Board of Governors EDWARD W. KELLEY, JR., Board of Governors ROBERT D. MCTEER, JR., President, Federal Reserve Bank of Dallas LAURENCE H. MEYER, Board of Governors MICHAEL H. MOSKOW, President, Federal Reserve Bank of Chicago GARY H. STERN, President, Federal Reserve Bank of Minneapolis Alternate Members J. ALFRED BROADDUS, President, Federal Reserve Bank of Richmond JACK GUYNN, President, Federal Reserve Bank of Atlanta JERRY L. JORDAN, President, Federal Reserve Bank of Cleveland ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco JAMIE B. STEWART, 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 LYNN S. FOX, KAREN H. JOHNSON, Assistant Secretary Economist GARY P. GILLUM, MICHAEL J. PRELL, Assistant Secretary Economist Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

292 86th Annual Report, 1999 Federal Open Market Committee—Continued CHRISTINE M. CUMMING, ARTHUR J. ROLNICK, Associate Economist Associate Economist DAVID H. HOWARD, HARVEY ROSENBLUM, Associate Economist Associate Economist WILLIAM C. HUNTER, LAWRENCE SLIFMAN, Associate Economist Associate Economist RICHARD W. LANG, DAVID J. STOCKTON, Associate Economist Associate Economist DAVID E. LINDSEY, Associate Economist PETER R. FISHER, Manager, System Open Market Account During 1999 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 31,1999 Members District 1—LAWRENCE K. FISH, Chairman, President, and Chief Executive Officer, Citizens Financial Group, Inc., Providence, Rhode Island District 2—DOUGLAS A. WARNER III, Chairman, President, and Chief Executive Officer, J.P. Morgan & Co., Incorporated, New York, New York District 3—RONALD L. HANKEY, President and Chief Executive Officer, Adams County National Bank, Gettysburg, Pennsylvania District 4—ROBERT W. GILLESPIE, Chairman and Chief Executive Officer, KeyCorp, Cleveland, Ohio District 5—KENNETH D. LEWIS, President, Bank of America, Charlotte, North Carolina District 6—STEPHEN A. HANSEL, President and Chief Executive Officer, Hibernia National Bank, New Orleans, Louisiana District 7—NORMAN R. BOBINS, President and Chief Executive Officer, LaSalle National Bank and LaSalle National Corporation, Chicago, Illinois District 8—KATIE S. WINCHESTER, President and Chief Executive Officer, First Citizens National Bank, Dyersburg, Tennessee District 9—RICHARD A. ZONA, Vice Chairman, U.S. Bancorp, Minneapolis, Minnesota District 10—C.Q. CHANDLER, Chairman and Chief Executive Officer, INTRUST Financial Corporation, Wichita, Kansas District 11—RICHARD W. EVANS, Chairman and Chief Executive Officer, Frost National Bank, San Antonio, Texas District 12—WALTER A. DODS, JR., Chairman and Chief Executive Officer, BancWest Corporation, Honolulu, Hawaii Officers ROBERT W. GILLESPIE, President KENNETH D. LEWIS, Vice President JAMES E. ANNABLE, Co-Secretary WILLIAM J. KORSVIK, Co-Secretary Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 293 Federal Advisory Council—Continued Directors STEPHEN A. HANSEL RICHARD A. ZONA The Federal Advisory Council met on Feb- from each of the twelve Federal Reserve ruary 4-5, May 6-7, September 9-10, and Districts, is required by the Federal Reserve November 4-5, 1999. Trie Board of Gov- Act to meet in Washington at least four times ernors met with the council on Febru- each year and is authorized by the Act to ary 5, May 7, September 10, and Novem- consult with, and advise, the Board on all ber 5,1999. The council, which is composed matters within the jurisdiction of the Board, of one representative of the banking industry Consumer Advisory Council December 31,1999 Members LAUREN ANDERSON, Executive Director, Neighborhood Housing Services of New Orleans, Inc., New Orleans, Louisiana WALTER J. BOYER, Chairman, The Diamond Group, Dallas, Texas WAYNE-KENT A. BRADSHAW, President and Chief Executive Officer, Family Savings Bank, FSB, Los Angeles, California MALCOLM BUSH, President, Woodstock Institute, Chicago, Illinois MARY ELLEN DOMEIER, President, State Bank and Trust Company of New Ulm, New Ulm, Minnesota JEREMY D. EISLER, Director of Litigation, South Mississippi Legal Services Corp., Biloxi, Mississippi ROBERT F. ELLIOTT, Retired Vice Chairman, Household International, Prospect Heights, Illinois JOHN GAMBOA, Executive Director, The Greenlining Institute, San Francisco, California ROSE GARCIA, Executive Director, Tierra del Sol Housing Corporation, Las Cruces, New Mexico VINCENT J. GIBLIN, Chief Executive Officer, International Union of Operating Engineers, West Caldwell, New Jersey KARL A S. IRVINE, Executive Director, Housing Opportunities Made Equal of Greater Cincinnati, Inc., Cincinnati, Ohio WILLIE JONES, Deputy Director, The Community Builders, Inc., Boston, Massachusetts JANET C. KOEHLER, President, Koehler Associates, Ponte Vedra Beach, Florida GWENN S. KYZER, Vice President, Experian, Inc., Allen, Texas JOHN C. LAMB, Senior Staff Counsel, Department of Consumer Affairs, Sacramento, California ANNE S. LI, Executive Director, New Jersey Community Loan Fund, Trenton, New Jersey MARTHA W. MILLER, President, Choice Federal Credit Union, Greensboro, North Carolina DANIEL W. MORTON, Vice President and Senior Counsel, The Huntington National Bank, Columbus, Ohio CAROL J. PARRY, Retired Executive Vice President, Chase Manhattan Bank, New York, New York PHILIP PRICE, JR., Executive Director, The Philadelphia Plan, Philadelphia, Pennsylvania Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

294 86th Annual Report, 1999 Consumer Advisory Council—Continued MARTA RAMOS, Vice President and Community Reinvestment Act Officer, Banco Popular de Puerto Rico, San Juan, Puerto Rico DAVID L. RAMP, Assistant Attorney General State of Minnesota, St. Paul, Minnesota MARILYN ROSS, Executive Director, Holy Name Housing Corporation, Omaha, Nebraska ROBERT G. SCHWEMM, Ashland Professor of Law, University of Kentucky, Lexington, Kentucky DAVID J. SHIRK, Senior Manager, Lending Systems Framework, Tarrytown, New York GAIL M. SMALL, Executive Director, Native Action, Lame Deer, Montana GARY S. WASHINGTON, Senior Vice President, ABN AMRO, Chicago, Illinois ROBERT L. WYNN II, Financial Education Officer, Wisconsin Department of Financial Institutions, Madison, Wisconsin Officers YVONNE SPARKS STRAUTHER, Chair DWIGHT GOLANN, Vice Chair Vice President, Bank of America Professor of Law, Community Development Banking, Suffolk University Law School, St. Louis, Missouri Boston, Massachusetts The Consumer Advisory Council met with tatives of consumer and community intermembers of the Board of Governors on ests. It was established pursuant to the 1976 March 25, June 24, and October 21, 1999. amendments to the Equal Credit Opportunity The council is composed of academics, state Act to advise the Board on consumer finanand local government officials, representa- cial services, tives of the financial industry, and represen- Thrift Institutions Advisory Council December 31,1999 Members GAROLD R. BASE, President and Chief Executive Officer, Community Credit Union, Piano, Texas JAMES C. BLAINE, President, State Employees' Credit Union, Raleigh, North Carolina DAVID A. BOCHNOWSKI, Chairman, President, and Chief Executive Officer, Peoples Bank, SB, Munster, Indiana LAWRENCE L. BOUDREAUX III, President and Chief Executive Officer, Fidelity Homestead Association, New Orleans, Louisiana RICHARD P. COUGHLIN, Former President and Chief Executive Officer, Stoneham Co-operative Bank, Stoneham, Massachusetts WILLIAM A. FITZGERALD, Chairman and Chief Executive Officer, Commercial Federal Bank, Omaha, Nebraska BABETTE E. HEIMBUCH, President and Chief Executive Officer, First Federal Bank of California, FSB, Santa Monica, California THOMAS S. JOHNSON, Chairman and Chief Executive Officer, GreenPoint Bank, Manhattan, New York WILLIAM A. LONGBRAKE, Vice Chair and Chief Financial Officer, Washington Mutual Bank, Seattle, Washington Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 295 Thrift Institutions Advisory Council—Continued KATHLEEN E. MARINANGEL, Chair, President, and Chief Executive Officer, McHenry Savings Bank, McHenry, Illinois F. WELLER MEYER, President and Chief Executive Officer, Acacia Federal Savings Bank, Falls Church, Virginia ANTHONY J. POPP, President and Chief Executive Officer, Marietta Savings Bank, Marietta, Ohio Officers WILLIAM A. FITZGERALD, President F. WELLER MEYER, Vice President The members of the Thrift Institutions ings and loan associations, and savings Advisory Council met with the Board of banks, consults with, and advises, the Board Governors on April 2, July 23, and Decem- on issues pertaining to the thrift industry and ber 3, 1999. The council, which is composed on various other matters within the Board's of representatives from credit unions, sav- jurisdiction. Officers of Federal Reserve Banks and Branches December 31,1999 Chairman1 President Vice President BANK or Branch Deputy Chairman First Vice President in charge of Branch BOSTON2 William C. Brainard Cathy E. Minehan William 0. Taylor Paul M. Connolly NEW YORK2 John C. Whitehead William J. McDonough Peter G. Peterson Jamie B. Stewart, Jr. Buffalo Bal Dixit Carl W. Turnipseed3 PHILADELPHIA Joan Carter Edward G. Boehne Charisse R. Lillie William H. Stone, Jr. CLEVELAND2 G. Watts Jerry L. Jordan Humphrey, Jr. Sandra Pianalto David H. Hoag Cincinnati George C. Juilfs Barbara B. Henshaw Pittsburgh John T Ryan III Robert B. Schaub RICHMOND2 Claudine B. Malone J. Alfred Broaddus, Jr. Jeremiah J. Sheehan Walter A. Varvel Baltimore Daniel R. Baker William J. Tignanelli3 Charlotte Joan H. Zimmerman Dan M. Bechter3 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

296 86th Annual Report, 1999 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 John F. Wieland Jack Guynn James M. McKee Paula Lovell Patrick K. Barron Birmingham V. Larkin Martin Andre T- Anderson Jacksonville Marsha G. Rydberg Robert J. Slack Miami Mark T. Sodders James T. Curry III Nashville Whitney Johns Martin MelvynK. Purcell3 New Orleans Glenn Pumpelly Robert J.Musso3 CHICAGO2 Lester H. Michael H. Moskow McKeever, Jr. William C. Conrad Arthur C. Martinez Detroit Florine Mark David R. Allardice3 ST.LOUIS Susan S. Elliott William Poole Charles W. Mueller W. LeGrande Rives Little Rock Diana T. Hueter Robert A. Hopkins Louisville Roger Reynolds Thomas A. Boone Mike P. Sturdivant, Jr. Martha Perine Beard Memphis David A. Koch Gary H. Stern MINNEAPOLIS James J. Howard Colleen K. Strand Tom Markle Samuel H. Gane Helena Jo Marie Dancik Thomas M. Hoenig KANSAS CITY Terrence P. Dunn Richard K. Rasdall Kathryn A. Paul CarlM. Gambs3 Denver Larry W. Brummett Kelly J. Dubbert Oklahoma City Gladys Styles Johnston Steven D. Evans Omaha Roger R. Robert D. McTeer, Jr. DALLAS Hemminghaus Helen E. Holcomb James A. Martin El Paso Patricia Z. Holland-Branch Sammie C. Clay Houston Edward O. Gaylord Robert Smith III3 San Antonio Patty Puig Mueller James L.Stull3 SAN FRANCISCO Gary G. Michael Robert T. Parry Nelson C. Rising John F. Moore Los Angeles Lonnie Kane MarkL. Mullinix3 Portland Nancy Wilgenbusch Raymond H. Laurence3 Salt Lake City Barbara L. Wilson 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

Federal Reserve System Organization 297 Conference of Chairmen sas City, served as its vice chair. Niel D. Willardson, of the Federal Reserve Bank of The chairmen of the Federal Reserve Banks Minneapolis, served as its secretary, and are organized into the Conference of Chair- Leesa M. Guyton, of the Federal Reserve men, which meets to consider matters of Bank of Kansas City, served as its assistant common interest and to consult with, and secretary. advise, the Board of Governors. Such meet- On October 5, 1999, the conference ings, attended also by the deputy chairmen, elected Richard K. Rasdall, Jr., as its chair were held in Washington on June 2 and 3, for 2000-2001, and Paul M. Connolly, First and on December 1 and 2, 1999. Vice President of the Federal Reserve Bank The members of the Executive Commit- of Boston, as its vice chair. tee of the Conference of Chairmen during 1999 were G. Watts Humphrey, Jr., chair; Jo Marie Dancik, vice chair; and Claudine B. Directors Malone, member. On December 2, 1999, the conference The following list of directors of Federal elected its Executive Committee for 2000; Reserve Banks and Branches shows for each it named Jo Marie Dancik as chair, John F. director the class of directorship, the direc- Wieland as vice chair, and Peter G. Peterson tor's principal organizational affiliation, and as the third member. the date the director's term expires. Each Federal Reserve Bank has a nine-member board: three Class A and three Class B direc- Conference of Presidents tors, who are elected by the stockholding member banks, and three Class C directors, The presidents of the Federal Reserve Banks who are appointed by the Board of Goverare organized into the Conference of Presi- nors of the Federal Reserve System. dents, which meets periodically to consider Class A directors represent the stockholdmatters of common interest and to consult ing member banks in each Federal Reserve with, and advise, the Board of Governors. District. Class B and Class C directors repre- Jerry L. Jordan, President of the Federal sent the public and are chosen with due, but Reserve Bank of Cleveland, served as chair not exclusive, consideration to the interests of the conference in 1999, and J. Alfred of agriculture, commerce, industry, services, Broaddus, Jr., President of the Federal labor, and consumers; they may not be offi- Reserve Bank of Richmond, served as its cers, directors, or employees of any bank or vice chair. Stephen J. Ong, of the Federal bank holding company. In addition, Class C Reserve Bank of Cleveland, served as its directors may not be stockholders of any secretary, and Claudia N. MacSwain, of the bank or bank holding company. Federal Reserve Bank of Richmond, served For the election of Class A and Class B as its assistant secretary. directors, the Board of Governors classifies the member banks of each Federal Reserve Conference of First District into three groups. Each group, which Vice Presidents comprises banks with similar capitalization, elects one Class A director and one Class B The Conference of First Vice Presidents of director. Annually, the Board of Governors the Federal Reserve Banks was organized in designates one of the Class C directors as 1969 to meet periodically for the consider- chair of the board of each District Bank, and ation of operations and other matters. it designates another Class C director as Colleen K. Strand, First Vice President of deputy chair. the Federal Reserve Bank of Minneapolis, Federal Reserve Branches have either five served as chair of the conference in 1999, or seven directors, a majority of whom are and Richard K. Rasdall, Jr., First Vice Presi- appointed by the parent Federal Reserve dent of the Federal Reserve Bank of Kan- Bank; the others are appointed by the Board Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

298 86th Annual Report, 1999 of Governors. One of the directors appointed For the name of the chair and deputy chair by the Board is designated annually as chair of the board of directors of each Reserve of the board of that Branch in a manner Bank and of the chair of each Branch, see prescribed by the parent Federal Reserve the preceding table, "Officers of Federal Bank. Reserve Banks and Branches." Directors of Federal Reserve Banks and Branches Term expires Dec. 31 DISTRICT l—BOSTON Class A G. Kenneth Perine President and Chief Executive Officer, 1999 National Bank of Middlebury, Middlebury, Vermont Edwin N. Clift President and Chief Executive Officer, 2000 Merrill Merchants Bank, Bangor, Maine Terrence Murray Chairman and Chief Executive Officer, 2001 FleetBoston Corporation, Boston, Massachusetts Class B Vacancy 1999 Edward Dugger III President and Chief Executive Officer, 2000 UNC Partners, Inc., Boston, Massachusetts Robert R. Glauber Adjunct Lecturer, John F. Kennedy School of 2001 Government, Harvard University, Cambridge, Massachusetts Class C William O. Taylor Chairman Emeritus, The Boston Globe, 1999 Boston, Massachusetts James J. Norton President, Graphic Communications 2000 International Union, Washington, D.C. William C. Brainard Professor of Economics, Yale University, 2001 New Haven, Connecticut DISTRICT 2—NEW YORK Class A George W. Hamlin IV President and Chief Executive Officer, 1999 The Canandaigua National Bank and Trust Company, Canandaigua, New York Walter V. Shipley Chairman, The Chase Manhattan Corporation, 2000 New York, New York Richard L. Carrion Chairman, President, and Chief Executive 2001 Officer, Banco Popular de Puerto Rico, San Juan, Puerto Rico Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 299 Term expires Dec. 31 DISTRICT 2, NEW YORK—Continued Class B Ann M. Fudge Executive Vice President, Kraft Foods, Inc., 1999 and President, Coffee & Cereals Division, Tarrytown, New York Eugene R. McGrath Chairman, President, and Chief Executive Officer, 2000 Consolidated Edison Company of New York, Inc., New York, New York Ronay Menschel President, Phipps Houses, New York, New York 2001 Class C John C. Whitehead Former Chairman, Goldman, Sachs & Co., Inc., 1999 New York, New York Charles A. Heimbold, Jr. ....Chairman and Chief Executive Officer, 2000 Bristol-Myers Squibb Co., New York, New York Peter G. Peterson Chairman, The Blackstone Group, New York, 2001 New York BUFFALO BRANCH Appointed by the Federal Reserve Bank Louise Woerner Chairman and Chief Executive Officer, 1999 HCR, Rochester, New York Maureen Torrey Marshall .. .Co-owner, Torrey Farms, Inc., Elba, New York 2000 William E. Swan President and Chief Executive Officer, Lockport 2000 Savings Bank, Lockport, New York Kathleen R. Whelehan Executive Vice President, Consumer Finance 2001 Division, HSBC, Buffalo, New York Appointed by the Board of Governors Patrick P. Lee Chairman and Chief Executive Officer, 1999 International Motion Control, Inc., Buffalo, New York John E. Friedlander President and Chief Executive Officer, 2000 Kaleida Health, Buffalo, New York Bal Dixit President and Chief Executive Officer, 2001 Newtex Industries, Inc., Victor, New York DISTRICT 3—PHILADELPHIA Class A David B. Lee President and Chief Executive Officer, 1999 Omega Bank, N.A., State College, Pennsylvania Harry Elwell III President and Chief Executive Officer, 2000 First National Bank of Absecon, Absecon, New Jersey Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

300 86th Annual Report, 1999 Term expires Dec. 31 DISTRICT 3, Class A—Continued Rufus A. Fulton, Jr. Chairman, President, and Chief Executive Officer, 2001 Fulton Financial Corporation, Lancaster, Pennsylvania Class B J. Richard Jones President and Chief Executive Officer, 1999 Insignia/ESG Jackson-Cross Company, Philadelphia, Pennsylvania Robert D. Burris President and Chief Executive Officer, 2000 Bums Foods, Inc., Milford, Delaware Howard E. Cosgrove Chairman and Chief Executive Officer, 2001 Conectiv, Wilmington, Delaware Class C Joan Carter President and Chief Operating Officer, 1999 UM Holdings Ltd., Haddonfleld, New Jersey Glenn A. Schaeffer President, Pennsylvania Building and 2000 Construction Trades Council, Harrisburg, Pennsylvania Charisse R. Lillie Partner Ballard Spahr Andrews & Ingersoll, 2001 Philadelphia, Pennsylvania DISTRICT 4—CLEVELAND Class A Tiney M. McComb Chairman and President, Heartland BancCorp, 1999 Gahanna, Ohio David S. Dahlmann President and Chief Executive Officer, 2000 Southwest Bank, Greensburg, Pennsylvania John R. Cochran Chairman and Chief Executive Officer, 2001 FirstMerit Corporation, Akron, Ohio Class B David L. Nichols Cincinnati, Ohio 1999 Cheryl L. Krueger-Horn President and Chief Executive Officer, 2000 Cheryl & Co., Westerville, Ohio Wayne R. Embry President and Chief Operating Officer, 2001 Cleveland Cavaliers, Cleveland, Ohio Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 301 Term expires Dec. 31 DISTRICT 4, CLEVELAND—Continued Class C Robert Y. Farrington Executive Secretary-Treasurer, Emeritus, 1999 Ohio State Building and Construction Trades Council, Columbus, Ohio G. Watts Humphrey, Jr. President, GWH Holdings, Incorporated, 2000 Pittsburgh, Pennsylvania David H. Hoag Former Chairman, The LTV Corporation, 2001 Cleveland, Ohio CINCINNATI BRANCH Appointed by the Federal Reserve Bank Judith G. Clabes President and Chief Executive Officer, 1999 Scripps Howard Foundation, Cincinnati, Ohio Phillip R. Cox President and Chief Executive Officer, 1999 Cox Financial Corporation, Cincinnati, Ohio Stephen P. Wilson President and Chief Executive Officer, 2000 Lebanon Citizens National Bank, Lebanon, Ohio Jean R. Hale President and Chief Executive Officer, 2001 Community Trust Bancorp, Inc., Pikeville, Kentucky Appointed by the Board of Governors George C. Juilfs President and Chief Executive Officer, 1999 SENCORP, Newport, Kentucky Wayne Shumate Chairman and Chief Executive Officer, 2000 Kentucky Textiles, Inc., Paris, Kentucky Thomas Revely III President and Chief Executive Officer, 2001 Cincinnati Bell Supply Co., Cincinnati, Ohio PITTSBURGH BRANCH Appointed by the Federal Reserve Bank Georgia Berner President, Berner International Corp., 1999 New Castle, Pennsylvania Peter N. Stephans Chairman and Chief Executive Officer, 1999 Trigon Incorporated, McMurray, Pennsylvania Thomas J. O'Shane Senior Executive Vice President, 2000 Sky Financial Group, New Castle, Pennsylvania Edward V. Randall, Jr. Management Consultant, Babst Calland 2001 Clements & Zomnir, Pittsburgh, Pennsylvania Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

302 86th Annual Report, 1999 Term expires Dec. 31 DISTRICT 4, PITTSBURGH BRANCH—Continued Appointed by the Board of Governors Charles E. Bunch Senior Vice President, Strategic Planning and 1999 Corporate Services, PPG Industries, Inc., Pittsburgh, Pennsylvania John T. Ryan III Chairman and Chief Executive Officer, 2000 Mine Safety Appliances Company, Pittsburgh, Pennsylvania Gretchen R. Haggerty Vice President-Accounting and Finance, 2001 U.S. Steel Group, Pittsburgh, Pennsylvania DISTRICT 5—RICHMOND Class A J. Walter McDowell Executive Vice President, Wachovia Corporation, 1999 Winston-Salem, North Carolina Elizabeth A. Duke President and Chief Executive Officer, 2000 The Bank of Tidewater, Virginia Beach, Virginia James M. Culberson, Jr. Chairman Emeritus, First National Bank & 2001 Trust Company, Asheboro, North Carolina Class B Wesley S. Williams, Jr Partner, Covington & Burling, Washington, D.C. 1999 James E. Haden President and Chief Executive Officer, Martha 2000 Jefferson Hospital, Charlottesville, Virginia Craig A. Ruppert President, Ruppert Nurseries, Inc., 2001 Laytonsville, Maryland Class C Jeremiah J. Sheehan Chairman and Chief Executive Officer, 1999 Reynolds Metals Company, Richmond, Virginia Claudine B. Malone President, Financial & Management 2000 Consulting, Inc., McLean, Virginia Irwin Zazulia President and Chief Executive Officer, Hecht' s, 2001 Arlington, Virginia BALTIMORE BRANCH Appointed by the Federal Reserve Bank Morton I. Rapoport President and Chief Executive Officer, 1999 University of Maryland Medical System, Baltimore, Maryland William L. Jews President and Chief Executive Officer, 2000 Blue Cross Blue Shield of Maryland, Owings Mills, Maryland Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 303 Term expires Dec. 31 DISTRICT 5, BALTIMORE BRANCH Appointed by the Federal Reserve Bank—Continued Virginia W. Smith President and Chief Executive Officer, 2000 Union National Bank, Westminster, Maryland Jeremiah E. Casey Director and Former Chairman, Allfirst 2001 Financial, Inc., Baltimore, Maryland Appointed by the Board of Governors George L. Russell, Jr Partner, Piper & Marbury, L.L.P, 1999 Baltimore, Maryland Betty Bednarczyk International Secretary-Treasurer, Service 2000 Employees International Union, AFL-CIO, CLC, Washington, D.C. Daniel R. Baker President & Chief Executive Officer, 2001 Tate Access Floors, Inc., Jessup, Maryland CHARLOTTE BRANCH Appointed by the Federal Reserve Bank Lucy J. Reuben Dean, School of Business, South Carolina State 1999 University, Orangeburg, South Carolina Elleveen T. Poston President, Quality Transport, Inc., 2000 Lake City, South Carolina Cecil W. Sewell, Jr. Chairman and Chief Executive Officer, Centura 2000 Banks, Inc., Rocky Mount, North Carolina William H. Nock President and Chief Executive Officer, Sumter 2001 National Bank, Sumter, South Carolina Appointed by the Board of Governors Dennis D. Lowery Chief Executive Officer and Chairman, 1999 Continental Chemicals, Charlotte, North Carolina Joan H. Zimmerman President, Southern Shows, Inc., 2000 Charlotte, North Carolina James O. Roberson President, Research Triangle Foundation of 2001 North Carolina, Research Triangle Park, North Carolina DISTRICT 6—ATLANTA Class A Howard L. McMillan, Jr. ....Wealth Management & Investments, Morgan 1999 Stanley Dean Witter, Jackson, Mississippi Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

304 86th Annual Report, 1999 Term expires Dec. 31 DISTRICT 6, Class A—Continued D. Paul Jones, Jr. Chairman and Chief Executive Officer, Compass 2000 Bancshares, Inc., Birmingham, Alabama Waymon L. Hickman Chairman and Chief Executive Officer, 2001 First Farmers and Merchants National Bank, Columbia, Tennessee Class B Juanita P. Baranco Executive Vice President, Baranco Automotive 1999 Group, Morrow, Georgia John Dane HI Chairman, President, and Chief Operating 2000 Officer, Friede Goldman Halter, Inc., Gulfport, Mississippi Suzanne E. Boas President, Consumer Credit Counseling Service, Inc., Atlanta, Georgia 2001 Class C John F. Wieland Chief Executive Officer and Chairman, 1999 John Wieland Homes and Neighborhoods, Inc., Atlanta, Georgia Paula Lovell President, Lovell Communications, Inc., 2000 Nashville, Tennessee Maria Camila Leiva Executive Vice President, Miami Free Zone 2001 Corporation, Miami, Florida BIRMINGHAM BRANCH Appointed by the Federal Reserve Bank W. Charles Mayer III President, Alabama Banking Group, 1999 AmSouth Bank, Birmingham, Alabama Roland Pugh Chairman, Roland Pugh Construction, Inc., 2000 Northport, Alabama Hundley Batts, Sr. Owner and Managing Agent, Hundley Batts & 2000 Associates, Huntsville, Alabama Robert M. Barrett President, Union Planters National Bank, 2001 Wetumpka, Alabama Appointed by the Board of Governors V. Larkin Martin Managing Partner, Martin Farm, 1999 Courtland, Alabama D. Bruce Carr Labor-Relations Liaison, Laborers' District 2000 Council of Alabama, Gadsden, Alabama Catherine Sloss Crenshaw .. .President, Sloss Real Estate Group, 2001 Birmingham, Alabama Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 305 Term expires Dec. 31 DISTRICT 6, ATLANTA—Continued JACKSONVILLE BRANCH Appointed by the Federal Reserve Bank William G. Smith, Jr. President and Chief Executive Officer, 1999 Capital City Bank Group, Tallahassee, Florida Terry R. West President and Chief Executive Officer, 2000 Jax Navy Federal Credit Union, Jacksonville, Florida Michael W. Poole Principal, Poole Carbone Capital Partners, Inc., 2000 Winter Park, Florida Harvey R. Heller President, Heller Bros. Packing Corp., 2001 Winter Garden, Florida Appointed by the Board of Governors Marsha G. Rydberg Partner, Foley & Lardner, Tampa, Florida 1999 William E. Flaherty Chairman, Blue Cross and Blue Shield of 2000 Florida, Inc., Jacksonville, Florida Julie K. Hilton Vice President and Partner, 2001 Paradise Found Resorts & Hotels, Panama City Beach, Florida MIAMI BRANCH Appointed by the Federal Reserve Bank D. Keith Cobb Chairman, Laundromax, Inc., 1999 Ft. Lauderdale, Florida James W. Moore Managing Partner, Riverside Capital, LLC, 1999 Fort Myers, Florida Carlos A. Migoya Regional President, Dade and Monroe Counties, 2000 First Union National Bank of Florida, Miami, Florida Vacancy 2001 Appointed by the Board of Governors Mark T. Sodders President, Lakeview Farms, Inc., 1999 Pahokee, Florida Kaaren Johnson-Street President, Kaaren Street Associates, Inc., 2000 Miami, Florida Gregg Borgeson President and Chief Executive Officer, 2001 Hellmann International Forwarders, Inc., Miami, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

306 86th Annual Report, 1999 Term expires Dec. 31 DISTRICT 6, NASHVILLE BRANCH Appointed by the Federal Reserve Bank Leonard A. Walker, Jr. Chairman and Chief Executive Officer, 1999 First National Bank and Trust Company, Athens, Tennessee James E. Dalton, Jr. President and Chief Executive Officer, 2000 Quorum Health Group, Inc., Brentwood, Tennessee John E. Seward, Jr. President and Chief Executive Officer, PLC, Inc., 2000 Piney Flats, Tennessee Dale W. Polley President, First American National Bank, 2001 Nashville, Tennessee Appointed by the Board of Governors Michael E. Bennett Past UAW Manufacturing Adviser, 1999 Saturn Corporation, Spring Hill, Tennessee Whitney Johns Martin Chairman and Chief Executive Officer, 2000 Capital Across America, Nashville, Tennessee Frances F. Marcum Director, Micro Craft, Inc., Tullahoma, Tennessee 2001 NEW ORLEANS BRANCH Appointed by the Federal Reserve Bank Howard C. Gaines President, Military Division, First USA Partners, 1999 Bank One, New Orleans, Louisiana Ten G. Fontenot President and Chief Executive Officer, Woman's 2000 Health Foundation, Baton Rouge, Louisiana David Guidry President and Chief Executive Officer, 2000 Guico Machine Works, Inc., Harvey, Louisiana Howell N. Gage Chairman, Vicksburg Advisory Group, 2001 BankCorp South, Vicksburg, Mississippi Appointed by the Board of Governors Glenn Pumpelly President and Chief Executive Officer, 1999 Pumpelly Oil, Inc., Sulphur, Louisiana Ben Tom Roberts Senior Executive Vice President, 2000 Roberts Brothers, Inc., Mobile, Alabama Dwight H. Evans President and Chief Executive Officer, 2001 Mississippi Power Company, Gulfport, Mississippi Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 307 Term expires Dec. 31 DISTRICT 7—CHICAGO Class A Verne G. Istock President, Bank One Corporation, 1999 Chicago, Illinois Robert R. Yohanan Managing Director and Chief Executive Officer, 2000 First Bank & Trust of Evanston, Evanston, Illinois Alan R. Tubbs President, Maquoketa State Bank and Ohnward 2001 Bancshares Inc., Maquoketa, Iowa Class B Migdalia Rivera Former Executive Director, Latino Institute, 1999 Chicago, Illinois Jack B. Evans President, The Hall-Perrine Foundation, 2000 Cedar Rapids, Iowa James H. Keyes Chairman and Chief Executive Officer, 2001 Johnson Controls, Inc., Milwaukee, Wisconsin Class C Robert J. Darnall President and Chief Executive Officer, 1999 Ispat North America, Chicago, Illinois Lester H. McKeever, Jr. Managing Partner, Washington, Pittman & 2000 McKeever, Chicago, Illinois Arthur C. Martinez Chairman and Chief Executive Officer, 2001 Sears, Roebuck and Co., Hoffman Estates, Illinois DETROIT BRANCH Appointed by the Federal Reserve Bank Denise Hitch President, Olympia Development, Inc., 1999 Detroit, Michigan Irma B. Elder President, Troy Motors, Inc., Troy, Michigan 1999 David J. Wagner Chairman, President, and Chief Executive Officer, 2000 Old Kent Financial Corporation, Grand Rapids, Michigan Richard M. Bell President and Chief Executive Officer, 2001 The First National Bank of Three Rivers, Three Rivers, Michigan Appointed by the Board of Governors Florine Mark President and Chief Executive Officer, 1999 The WW Group, Inc., Farmington Hills, Michigan Timothy D. Leuliette Senior Managing Director and Chief Executive 2000 Officer, Heartland Industrial Partners, LP, Bloomfleld Hills, Michigan Stephen R. Polk Chairman and Chief Executive Officer, 2001 R.L. Polk & Co., Southfield, Michigan Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

308 86th Annual Report, 1999 Term expires Dec. 31 DISTRICT 8—ST. LOUIS Class A W.D. Glover Chairman and Chief Executive Officer, 1999 First National Bank of Eastern Arkansas, Forrest City, Arkansas Michael A. Alexander Chairman and President, First National Bank, 2000 Mt. Vernon, Illinois Thomas H. Jacobsen Chairman, Firstar Corporation, 2001 St. Louis, Missouri Class B Joseph E. Gliessner, Jr. Executive Director, New Directions Housing Corp., 1999 Louisville, Kentucky Robert L. Johnson Chairman and Chief Executive Officer, 2000 Johnson Bryce, Inc., Memphis, Tennessee Bert Greenwalt Partner, Greenwalt Company, Hazen, Arkansas 2001 Class C Veo Peoples, Jr. Partner, Haverstock, Garrett and Roberts, 1999 St. Louis, Missouri Susan S. Elliott Chairman and Chief Executive Officer, 2000 Systems Service Enterprises, Inc., St. Louis, Missouri Charles W. Mueller Chairman, President, and Chief Executive Officer, 2001 Ameren Corporation, St. Louis, Missouri LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank Mark Simmons Chairman, Simmons Foods, Inc., 1999 Siloam Springs, Arkansas Ross M. Whipple Chairman, Horizon Bank of Columbia County, 1999 Magnolia, Arkansas Lunsford W. Bridges President and Chief Executive Officer, 2000 Metropolitan National Bank, Little Rock, Arkansas Lawrence A. Davis, Jr. Chancellor, University of Arkansas at Pine Bluff, 2001 Pine Bluff, Arkansas Appointed by the Board of Governors Janet M. Jones President, The Janet Jones Company, 1999 Little Rock, Arkansas Diana T. Hueter Hueter and Associates, Inc., 2000 Little Rock, Arkansas Vick M. Crawley Plant Manager, Baxter Healthcare Corporation, 2001 Mountain Home, Arkansas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 309 Term expires Dec. 31 DISTRICT 8, LOUISVILLE BRANCH Appointed by the Federal Reserve Bank Larry E. Dunigan Chairman and Chief Executive Officer, 1999 Holiday Management Corp., Evansville, Indiana Edwin K. Page Vice President, External Affairs, 1999 AP Technoglass Co., Elizabethtown, Kentucky Frank J. Nichols Chairman, President, and Chief Executive Officer, 2000 Bank of Benton, Benton, Kentucky Orson Oliver President, Mid-America Bank of Louisville, 2001 Louisville, Kentucky Appointed by the Board of Governors J. Stephen Barger Executive Secretary-Treasurer, Kentucky State 1999 District Council of Carpenters, AFL-CIO, Frankfort, Kentucky Debbie Scoppechio Chairman and Chief Executive Officer, 2000 Creative Alliance, Inc., Louisville, Kentucky Roger Reynolds President and Chief Executive Officer, 2001 Reynolds Coatings, LLC, Louisville, Kentucky MEMPHIS BRANCH Appointed by the Federal Reserve Bank Katie S. Winchester President, Chief Executive Officer, and Director, 1999 First Citizens National Bank, Dyersburg, Tennessee John C. Kelley, Jr. President, Memphis Banking Group, 1999 First Tennessee Bank, Memphis, Tennessee E.C. Neelly III Chief Executive Officer, First American 2000 National Bank, Iuka, Mississippi Walter L. Morris, Jr. President, H & M Lumber Co., Inc., 2001 West Helena, Arkansas Appointed by the Board of Governors Mike P. Sturdivant, Jr. Partner, Due West, Glendora, Mississippi 1999 Carol G. Crawley Senior Vice President, Community Development, 2000 Memphis Area Chamber of Commerce, Memphis, Tennessee Gregory M. Duckett Senior Vice President and Corporate Counsel, 2001 Baptist Memorial Health Care Corporation, Memphis, Tennessee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

310 86th Annual Report, 1999 Term expires Dec. 31 DISTRICT 9—MINNEAPOLIS Class A Lynn M. Hoghaug President, Ramsey National Bank and Trust Co., 1999 Devils Lake, North Dakota Bruce Parker President, Norwest Bank Montana, 2000 Billings, Montana W.W. LaJoie Chief Executive Officer and Chairman, 2001 Central Savings Bank, Sault Ste. Marie, Michigan Class B Rob L. Wheeler Vice President, Wheeler Manufacturing Co., Inc., 1999 Lemmon, South Dakota Kathryn L. Ogren Owner, Bitterroot Motors, Missoula, Montana 2000 Jay F. Hoeschler President and Owner, Hoeschler Corporation, 2001 La Crosse, Wisconsin Class C David A. Koch Chairman, Graco, Inc., Plymouth, Minnesota 1999 Ronald N. Zwieg President, United Food & Commercial Workers, 2000 Local 653, Plymouth, Minnesota James J. Howard Chairman, President, and Chief Executive Officer, 2001 Northern States Power Company, Minneapolis, Minnesota HELENA BRANCH Appointed by the Federal Reserve Bank Richard E. Hart President, Mountain West Bank, 1999 Great Falls, Montana Emil W. Erhardt Chairman and President, Citizens State Bank, 2000 Hamilton, Montana Sandra M. Stash, P.E Vice President, Environmental Services, 2001 ARCO Environmental Remediation, L.L.C., Anaconda, Montana Appointed by the Board of Governors Thomas O. Markle President and Chief Executive Officer, 1999 Markle's Inc., Glasgow, Montana William P. Underriner General Manager, Selover Buick Inc., 2000 Billings, Montana Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 311 Term expires Dec. 31 DISTRICT 10—KANSAS CITY Class A Dennis E. Barrett Vice Chairman, FirstBank Holding Company 1999 of Colorado, Lakewood, Colorado Bruce A. Schriefer President, Bankers' Bank of Kansas, 2000 Wichita, Kansas Jeffrey L. Gerhart President and Chief Executive Officer, 2001 First National Bank, Newman Grove, Nebraska Class B Charles W. Nichols Managing Partner, Davison & Sons Cattle Company, 1999 Arnett, Oklahoma Hans Helmerich President and Chief Executive Officer, 2000 Helmerich & Payne, Inc., Tulsa, Oklahoma Frank A. Potenziani M & T Trust, Albuquerque, New Mexico 2001 Class C Colleen D. Hernandez Executive Director, Kansas City Neighborhood 1999 Alliance, Kansas City, Missouri Terrence P. Dunn President and Chief Executive Officer, 2000 J.E. Dunn Construction Company, Kansas City, Missouri Jo Marie Dancik Area Managing Partner, Ernst & Young, LLP, 2001 Minneapolis, Minnesota DENVER BRANCH Appointed by the Federal Reserve Bank C.G. Mammel President and Chief Executive Officer, 1999 The Bank of Cherry Creek, N.A., Denver, Colorado Robert M. Murphy President, Sandia Properties Ltd., Co., 2000 Albuquerque, New Mexico John W. Hay III President, Rock Springs National Bank, 2000 Rock Springs, Wyoming Albert C. Yates President, Colorado State University, 2001 Ft. Collins, Colorado Appointed by the Board of Governors Teresa N. McBride Chief Executive Officer, McBride and 1999 Associates, Inc., Albuquerque, New Mexico Kathryn A. Paul President, Western Operations (Retired), 2000 Kaiser Permanente, Denver, Colorado James A. King Chief Executive Officer, BT, Incorporated, 2001 Riverton, Wyoming Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

312 86th Annual Report, 1999 Term expires Dec. 31 OKLAHOMA CITY BRANCH Appointed by the Federal Reserve Bank William H. Braum President, Braum Ice Cream Co., 1999 Oklahoma City, Oklahoma Michael S. Samis President and Chief Executive Officer, 2000 Macklanburg-Duncan Co., Oklahoma City, Oklahoma Betty Bryant Shaull President-Elect and Director, Bank of Cushing 2001 and Trust Company, Cushing, Oklahoma W. Carlisle Mabrey III President and Chief Executive Officer, Citizens 2001 Bank & Trust Co., Okmulgee, Oklahoma Appointed by the Board of Governors Larry W. Brummett Chairman, President, and Chief Executive Officer, 1999 ONEOK, Inc., Tulsa, Oklahoma Patricia B. Fennell Executive Director, Latino Community 2000 Development Agency, Oklahoma City, Oklahoma David L. Kruse II Senior Vice President, American Airlines, Inc., 2001 Tulsa, Oklahoma OMAHA BRANCH Appointed by the Federal Reserve Bank Bruce R. Lauritzen Chairman and President, First National Bank of 1999 Omaha, Omaha, Nebraska Frank L. Hayes President, Hayes & Associates, L.L.C., 2000 Omaha, Nebraska H.H. Kosman Chairman, President, and Chief Executive Officer, 2000 Platte Valley National Bank, Scottsbluff, Nebraska Bill L. Fairfield Chairman, Inacom Corp., Omaha, Nebraska 2001 Appointed by the Board of Governors Bob L. Gottsch Vice President, Gottsch Feeding Corporation, 1999 Hastings, Nebraska A.F Raimondo Chairman and Chief Executive Officer, 2000 Behlen Manufacturing Company, Columbus, Nebraska Gladys Styles Johnston Chancellor, University of Nebraska at Kearney, 2001 Kearney, Nebraska Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 313 Term expires Dec. 31 DISTRICT 11—DALLAS Class A Gayle M. Earls President and Chief Executive Officer, 1999 The Independent Bankers Bank, Dallas, Texas Kirk A. McLaughlin President and Chief Executive Officer, 2000 Security Bank, Rails, Texas Dudley K. Montgomery President and Chief Executive Officer, 2001 The Security State Bank of Pecos, Pecos, Texas Class B Dan Angel President, Stephen F. Austin State University, 1999 Nacogdoches, Texas Judy Ley Allen Partner, Allen Investments, Houston, Texas 2000 Julie S. England Vice President, Texas Instruments, Dallas, Texas 2001 Class C James A. Martin Second General Vice President (Retired), 1999 International Association of Bridge, Structural, Ornamental, and Reinforcing Iron Workers, Austin, Texas H.B. Zachry, Jr. Chairman and Chief Executive Officer, 2000 H.B. Zachry Company, San Antonio, Texas Roger R. Hemminghaus Chairman, Ultramar Diamond Shamrock Corp., 2001 San Antonio, Texas EL PASO BRANCH Appointed by the Federal Reserve Bank 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 Cecil E. Nix Member, IBEW Local 460, 2000 Midland, Texas Lester L. Parker El Paso, Texas 2001 Appointed by the Board of Governors Patricia Z. Holland-Branch ..President and Chief Executive Officer, 1999 HB/PZH Commercial Environments, Inc., El Paso, Texas Gail S. Darling President, Gail Darling, Inc., 2000 El Paso, Texas Beauregard Brite White Rancher, J.E. White, Jr. & Sons, Marfa, Texas 2001 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

314 86th Annual Report, 1999 Term expires Dec. 31 DISTRICT 11, HOUSTON BRANCH Appointed by the Federal Reserve Bank Judith B. Craven Physician and Administrator, Houston, Texas 1999 Ray B. Nesbitt President (Retired), Exxon Chemical Company, 1999 Houston, Texas Alan R. Buckwalter III Chairman and Chief Executive Officer, 2000 Chase Bank of Texas, N.A., Houston, Texas Richard W. Weekley Chairman, Weekley Development Company, 2001 Houston, Texas Appointed by the Board of Governors Peggy Pearce Caskey President, PPC Holding, L.L.C., Houston, Texas 1999 Malcolm Gillis President, Rice University, Houston, Texas 2000 Edward O. Gay lord Chairman, Jacintoport Terminal Company, 2001 Houston, Texas SAN ANTONIO BRANCH Appointed by the Federal Reserve Bank Juliet V. Garcia President, The University of Texas at Brownsville, 1999 Brownsville, Texas Douglas G. MacDonald President, South Texas National Bank, 1999 Laredo, Texas Arthur R. Emerson Vice President and General Manager, 2000 KVDA-TV 60, San Antonio, Texas R. Tom Roddy Chairman, CaminoReal Bank, San Antonio, Texas 2001 Appointed by the Board of Governors Patty P. Mueller Vice President, Mueller Energetics Corp., 1999 Corpus Christi, Texas Marvin L. Ragsdale President, Iron Workers District Council of the 2000 State of Texas, Austin, Texas Ron R. Harris President and Chief Executive Officer, 2001 Pervasive Software, Austin, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 315 Term expires Dec. 31 DISTRICT 12—SAN FRANCISCO Class A E. Lynn Caswell Chairman and Chief Executive Officer, 1999 Pacific Community Banking Group, Laguna Hills, California John V. Rindlaub President, Northwest Region, Bank of America, 2000 Seattle, Washington Warren K.K. Luke Chairman and Chief Executive Officer, 2001 Hawaii National Bank, Honolulu, Hawaii Class B Robert S. Attiyeh Senior Vice President and Chief Financial 1999 Officer (Retired), Amgen, Inc., Thousand Oaks, California Krestine Corbin President and Chief Executive Officer, 2000 Sierra Machinery, Inc., Sparks, Nevada Vacancy 2001 Class C Gary G. Michael Chairman and Chief Executive Officer, 1999 Albertson's, Inc., Boise, Idaho Nelson C. Rising President and Chief Executive Officer, 2000 Catellus Development Corporation, San Francisco, California Sheila D. Harris Consultant, Harris Consulting, 2001 Litchfield Park, Arizona Los ANGELES BRANCH Appointed by the Federal Reserve Bank John H. Gleason Executive Vice President, Del Webb Corporation, 1999 Phoenix, Arizona Liam E. McGee President, Bank of America Southern California, 2000 Los Angeles, California Linda Griego President and Chief Executive Officer, 2000 Los Angeles Community Development Bank, Los Angeles, California Russell Goldsmith Chairman and Chief Executive Officer, 2001 City National Bank, Beverly Hills, California Appointed by the Board of Governors Lori R. Gay President, Los Angeles Neighborhood Housing 1999 Service, Los Angeles, California Lonnie Kane President, Karen Kane, Inc., Los Angeles, California 2000 William D. Jones Chairman, President, and Chief Executive Officer, 2001 CityLink Investment Corporation, San Diego, California Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

316 86th Annual Report, 1999 Term expires Dec. 31 DISTRICT 12, PORTLAND BRANCH Appointed by the Federal Reserve Bank Phyllis A. Bell President, Oregon Coast Aquarium, 1999 Newport, Oregon Martin Brantley President and General Manager, 1999 Oregon Television, Inc., KPTV-12, Portland, Oregon Guy L. Williams President and Chief Executive Officer, 2000 Security Bank, Coos Bay, Oregon Gary T Duim Vice Chairman, U.S. Bancorp, Portland, Oregon 2001 Appointed by the Board of Governors Nancy Wilgenbusch President, Marylhurst University, 1999 Marylhurst, Oregon Patrick Borunda Director, Oweesta Fund, First Nation's 2000 Development Institute, Vancouver, Washington Karla S. Chambers Vice President, Stahlbush Island Farms, Inc., 2001 Corvallis, Oregon SALT LAKE CITY BRANCH Appointed by the Federal Reserve Bank J. Pat McMurray President, First Security Bank, N.A., 1999 Boise, Idaho Maria Garciaz Executive Director, Salt Lake Neighborhood 1999 Housing Services, Salt Lake City, Utah R.D. Cash Chairman, President, and Chief Executive 2000 Officer, Questar Corporation, Salt Lake City, Utah Curtis H. Harris Chairman, President, and Chief Executive 2001 Officer, Barnes Banking Company, Kaysville, Utah Appointed by the Board of Governors Nancy S. Mortensen Vice President-Marketing Services, ZCMI, 1999 Salt Lake City, Utah Barbara L. Wilson Idaho and Regional Vice President, U.S. West, 2000 Boise, Idaho Jon M. Huntsman, Jr. Vice Chairman, Huntsman Corporation, 2001 Salt Lake City, Utah Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 317 Term expires Dec. 31 DISTRICT 12, SEATTLE BRANCH Appointed by the Federal Reserve Bank Tomio Moriguchi Chairman and Chief Executive Officer, 1999 Uwajimaya, Inc., Seattle, Washington James C. Hawkanson Managing Director and Chief Executive Officer, 1999 The Commerce Bank of Washington, N.A., Seattle, Washington Betsy Lawer Vice Chair and Chief Operating Officer, 2000 First National Bank of Anchorage, Anchorage, Alaska Peter H. van Oppen Chairman and Chief Executive Officer, 2001 Advanced Digital Information Corp., Redmond, Washington Appointed by the Board of Governors Boyd E. Givan Senior Vice President and Chief Financial Officer 1999 (Retired), The Boeing Company, Seattle, Washington Richard R. Sonstelie Chairman, Puget Sound Energy, Inc., 2000 Bellevue, Washington Helen M. Rockey President and Chief Executive Officer, 2001 Just for Feet, Inc., Seattle, Washington Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

318 86th Annual Report, 1999 Membership of the Board of Governors, 1913-99 Appointed Members Name Federal Reserve Date initially took Other dates! District oath of office Charles S. Hamlin Boston Aug. 10,1914 Reappointed in 1916 and 1926. Served until Feb. 3,1936.2 Paul M. Warburg New York Aug. 10, 1914 Term expired Aug. 9, 1918. Frederic A. Delano Chicago Aug. 10, 1914 Resigned July 21,1918. W.RG. Harding Atlanta Aug. 10, 1914 Term expired Aug. 9, 1922. Adolph C. Miller San Francisco Aug. 10, 1914 Reappointed in 1924. Reappointed in 1934 from the Richmond District. Served until Feb. 3, 1936.2 Albert Strauss New York Oct. 26, 1918 Resigned Mar. 15,1920. Henry A. Moehlenpah Chicago Nov. 10, 1919 Term expired Aug. 9, 1920. Edmund Platt New York June 8, 1920 Reappointed in 1928. Resigned Sept. 14, 1930. David C. Wills Cleveland Sept. 29,1920 Term expired Mar. 4, 1921. John R. Mitchell Minneapolis May 12, 1921 Resigned May 12,1923. Milo D. Campbell Chicago Mar. 14, 1923 Died Mar. 22, 1923. Daniel R. Crissinger Cleveland May 1, 1923 Resigned Sept. 15,1927. George R. James St. Louis May 14, 1923 Reappointed in 1931. Served until Feb. 3, 1936.3 Edward H. Cunningham Chicago May 14, 1923 Died Nov. 28,1930. Roy A. Young Minneapolis Oct. 4, 1927 Resigned Aug. 31, 1930. Eugene Meyer New York Sept. 16, 1930 Resigned May 10,1933. Wayland W Magee Kansas City May 18, 1931 Term expired Jan. 24, 1933. Eugene R. Black Atlanta May 19, 1933 Resigned Aug. 15, 1934. M.S. Szymczak Chicago June 14, 1933 Reappointed in 1936 and 1948. Resigned May 31, 1961. J.J. Thomas Kansas City June 14, 1933 Served until Feb. 10, 1936.2 Marriner S. Eccles San Francisco Nov. 15, 1934 Reappointed in 1936, 1940, and 1944. Resigned July 14, 1951. Joseph A. Broderick New York Feb. 3, 1936 Resigned Sept. 30, 1937. John K. McKee Cleveland Feb. 3, 1936 Served until Apr. 4, 1946.2 Ronald Ransom Atlanta Feb. 3,1936 Reappointed in 1942. Died Dec. 2, 1947. Ralph W. Morrison Dallas Feb. 10, 1936 Resigned July 9,1936. Chester C. Davis Richmond June 25,1936 Reappointed in 1940. Resigned Apr. 15, 1941. Ernest G. Draper New York Mar. 30,1938 Served until Sept. 1, 1950.2 Rudolph M. Evans Richmond Mar. 14,1942 Served until Aug. 13,1954.2 James K. Vardaman, Jr. St. Louis Apr. 4, 1946 Resigned Nov. 30, 1958. Lawrence Clayton Boston Feb. 14, 1947 Died Dec. 4, 1949. Thomas B. McCabe Philadelphia Apr. 15, 1948 Resigned Mar. 31, 1951. Edward L. Norton Atlanta Sept. 1,1950 Resigned Jan. 31,1952. Oliver S. Powell Minneapolis Sept. 1,1950 Resigned June 30,1952. Wm. McC. Martin, Jr. New York April 2,1951 Reappointed in 1956. Term expired Jan. 31,1970. A.L. Mills, Jr. San Francisco Feb. 18,1952 Reappointed in 1958. Resigned Feb. 28, 1965. J.L. Robertson Kansas City Feb. 18, 1952 Reappointed in 1964. Resigned Apr. 30, 1973. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Membership of the Board of Governors, 1913-99 319 Appointed Members—Continued Name Fede D ra i l s t R ri e c s t erve Da o te a th in i o ti f a l o l f y f ic to e ok Other dates1 C. Canby Balderston Philadelphia Aug. 12, 1954 Served through Feb. 28, 1966. Paul E. Miller Minneapolis Aug. 13, 1954 Died Oct. 21, 1954. Chas. N. Shepardson Dallas Mar. 17, 1955 Retired Apr. 30, 1967. G.H. King, Jr. Atlanta Mar. 25, 1959 Reappointed in 1960. Resigned Sept. 18, 1963. George W. Mitchell Chicago Aug. 31, 1961 Reappointed in 1962. Served until Feb. 13, 1976.2 J. Dewey Daane Richmond Nov. 29, 1963 Served until Mar. 8, 1974.2 Sherman J. Maisel San Francisco Apr. 30, 1965 Served through May 31, 1972. Andrew F. Brimmer Philadelphia Mar. 9, 1966 Resigned Aug. 31, 1974. William W. Sherrill Dallas May 1, 1967 Reappointed in 1968. Resigned Nov. 15, 1971. Arthur F. Burns New York Jan. 31, 1970 Term began Feb. 1, 1970. Resigned Mar. 31, 1978. John E. Sheehan St. Louis Jan. 4, 1972 Resigned June 1, 1975. Jeffrey M. Bucher San Francisco June 5, 1972 Resigned Jan. 2, 1976. Robert C. Holland Kansas City June 11,1973 Resigned May 15, 1976. Henry C. Wallich Boston Mar. 8, 1974 Resigned Dec. 15, 1986. Philip E. Coldwell Dallas Oct. 29, 1974 Served through Feb. 29, 1980. Philip C. Jackson, Jr. Atlanta July 14, 1975 Resigned Nov. 17, 1978. J. Charles Partee Richmond Jan. 5, 1976 Served until Feb. 7, 1986.2 Stephen S. Gardner Philadelphia Feb. 13, 1976 Died Nov. 19, 1978. David M. Lilly Minneapolis June 1, 1976 Resigned Feb. 24, 1978. G.William Miller San Francisco Mar. 8, 1978 Resigned Aug. 6, 1979. Nancy H. Teeters Chicago Sept. 18, 1978 Served through June 27, 1984. Emmett J. Rice New York June 20, 1979 Resigned Dec. 31, 1986. Frederick H. Schultz Atlanta July 27, 1979 Served through Feb. 11, 1982. Paul A. Volcker Philadelphia Aug. 6, 1979 Resigned August 11, 1987. Lyle E. Gramley Kansas City May 28, 1980 Resigned Sept. 1, 1985. Preston Martin San Francisco Mar. 31, 1982 Resigned April 30, 1986. Martha R. Seger Chicago July 2, 1984 Resigned March 11, 1991. Wayne D. Angell Kansas City Feb. 7, 1986 Served through Feb. 9, 1994. Manuel H. Johnson Richmond Feb. 7,1986 Resigned August 3, 1990. H. Robert Heller San Francisco Aug. 19, 1986 Resigned July 31, 1989. Edward W. Kelley, Jr. Dallas May 26, 1987 Reappointed in 1990. Alan Greenspan New York Aug. 11,1987 Reappointed in 1992. John P. LaWare Boston Aug. 15, 1988 Resigned April 30, 1995. David W. Mullins, Jr. St. Louis May 21, 1990 Resigned Feb. 14, 1994. Lawrence B. Lindsey Richmond Nov. 26, 1991 Resigned Feb. 5, 1997. Susan M. Phillips Chicago Dec. 2, 1991 Served through June 30, 1998. Alan S. Blinder Philadelphia June 27, 1994 Term expired Jan. 31, 1996. Janet L. Yellen San Francisco Aug. 12, 1994 Resigned Feb. 17, 1997. Laurence H. Meyer St. Louis June 24, 1996 Alice M. Rivlin Philadelphia June 25, 1996 Resigned July 16, 1999. Roger W. Ferguson, Jr. Boston Nov. 5, 1997 Edward M. Gramlich Richmond Nov. 5, 1997 NOTE. Under the original Federal Reserve Act, the to twelve years. The Banking Act of 1935 changed the Federal Reserve Board was composed of five appointed name to the Board of Governors of the Federal Reserve members, the Secretary of the Treasury (ex-officio chair- System and provided that the Board be composed of man of the Board), and the Comptroller of the Currency. seven appointed members; that the Secretary of the Trea- The original term of office was ten years; the five original sury and the Comptroller of the Currency continue to appointed members had terms of two, four, six, eight, and serve until Feb. 1, 1936; that the appointed members in ten years. In 1922 the number of appointed members was office on Aug. 23, 1935, continue to serve until Feb. 1, increased to six, and in 1933 the term of office was raised 1936, or until their successors were appointed and had Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

320 86th Annual Report, 1999 CHAIRMEN3 Charles S. Hamlin Aug. 10, 1914-Aug. 9, 1916 W.P.G. Harding Aug. 10, 1916-Aug. 9, 1922 Daniel R. Crissinger May 1,1923-Sept. 15, 1927 Roy A. Young Oct. 4, 1927-Aug. 31,1930 Eugene Meyer Sept. 16, 1930-May 10, 1933 Eugene R. Black May 19,1933-Aug. 15, 1934 Marriner S. Eccles Nov. 15, 1934-Jan. 31, 19484 Thomas B. McCabe Apr. 15, 1948-Mar. 31, 1951 Wm. McC. Martin, Jr. Apr. 2, 1951-Jan. 31, 1970 Arthur F. Burns Feb. 1, 1970-Jan. 31, 1978 G. William Miller Mar. 8, 1978-Aug. 6, 1979 Paul A. Volcker Aug. 6, 1979-Aug. 11, 1987 Alan Greenspan Aug. 11, 1987-5 VICE CHAIRMEN3 Frederic A. Delano Aug. 10, 1914-Aug. 9, 1916 Paul M. Warburg Aug. 10, 1916-Aug. 9, 1918 Albert Strauss Oct. 26, 1918-Mar. 15, 1920 Edmund Platt July 23, 1920-Sept. 14, 1930 J.J. Thomas Aug. 21, 1934-Feb. 10, 1936 Ronald Ransom Aug. 6,1936-Dec. 2, 1947 C. Canby Balderston Mar. 11,1955-Feb. 28, 1966 J.L. Robertson Mar. 1, 1966-Apr. 30, 1973 George W. Mitchell May 1,1973-Feb. 13, 1976 Stephen S. Gardner Feb. 13, 1976-Nov. 19, 1978 Frederick H. Schultz July 27, 1979-Feb. 11,1982 Preston Martin Mar. 31, 1982-Apr. 30, 1986 Manuel H. Johnson Aug. 4, 1986-Aug. 3, 1990 David W.Mullins, Jr. July 24, 1991-Feb. 14, 1994 Alan S. Blinder June 27, 1994-Jan. 31, 1996 Alice M. Rivlin June 25, 1996-July 16, 1999 Roger W. Ferguson, Jr. Oct. 5, 1999- Ex-Officio Members SECRETARIES OF THE TREASURY W.G. McAdoo Dec. 23,1913-Dec. 15,1918 Carter Glass Dec. 16, 1918-Feb. 1,1920 David F. Houston Feb. 2,1920-Mar. 3,1921 Andrew W. Mellon Mar. 4, 1921-Feb. 12,1932 Ogden L. Mills Feb. 12,1932-Mar. 4,1933 William H. Woodin Mar. 4, 1933-Dec. 31,1933 Henry Morgenthau, Jr. Jan. 1, 1934-Feb. 1, 1936 COMPTROLLERS OF THE CURRENCY John Skelton Williams Feb. 2, 1914-Mar. 2, 1921 Daniel R. Crissinger Mar. 17,1921-Apr. 30, 1923 Henry M. Dawes May 1, 1923-Dec. 17, 1924 Joseph W. Mclntosh Dec. 20, 1924-Nov. 20, 1928 J.W. Pole Nov. 21,1928-Sept. 20, 1932 J.F.T. O'Connor May 11,1933-Feb. 1, 1936 qualified; and that thereafter the terms of members be 3. Before Aug. 23, 1935, Chairmen and Vice Chairfourteen years and that the designation of Chairman and men were designated Governor and Vice Governor. Vice Chairman of the Board be for four years. 4. Served as Chairman Pro Tempore from February 3, 1. Date following "Resigned" and "Retired" denotes 1948, to April 15, 1948. final day of service. 5. Served as Chairman Pro Tempore from March 3, Digitized fo2r. FSuRcAceSssEorR t ook office on this date. 1996, to June 20, 1996. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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

323 Board of Governors Financial Statements The financial statements of the Board for 1999 and 1998 were audited by Deloitte & Touche LLP, independent auditors. Deloitte & Touche INDEPENDENT AUDITORS' REPORT 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, 1999 and 1998, 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 accompanying financial statements present fairly, in all material respects, the financial position of the Board as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 5 to the financial statements, in 1999 the Board changed its method of accounting for the costs of software obtained for internal use. In accordance with Government Auditing Standards, we have also issued our report dated February 18, 2000, on our consideration of the Board's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. February 18, 2000 MoffleTbuche ttmatsu Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

324 86th Annual Report, 1999 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEETS As of December 31, 1999 1998 ASSETS CURRENT ASSETS Cash $31,072,908 $20,111,430 Accounts receivable 873,148 910,282 Prepaid expenses and other assets 794,000 1,215,277 Total current assets 32,740,056 22,236,989 PROPERTY, BUILDINGS, AND EQUIPMENT, NET (Note 5) 63,928,406 58,438,555 Total assets $96,668,462 $80,675,544 LIABILITIES AND FUND BALANCE CURRENT LIABILITIES Accounts payable and accrued liabilities $12,360,089 $ 8,231,187 Accrued payroll and related taxes 7,090,754 7,745,624 Accrued annual leave 8,063,655 7,493,533 Capital lease payable (current portion) 172,058 135,205 Unearned revenues and other liabilities 2,347,303 2,034,129 Total current liabilities 30,033,859 25,639,678 CAPITAL LEASE PAYABLE (non-current portion) 366,464 406,773 ACCUMULATED RETIREMENT BENEFIT OBLIGATION (Note 2) 747,717 773,177 ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (Note 3) 3,614,828 20,721,869 ACCUMULATED POSTEMPLOYMENT BENEFIT OBLIGATION (Note 4) 2,581,079 2,183,602 Total liabilities 37,343,947 49,725,099 FUNDBALANCE 59,324,515 30,950,445 Total liabilities and fund balance $96,668,462 $80,675,544 See notes to financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 325 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF REVENUES AND EXPENSES AND FUND BALANCE For the years ended December 31, 1999 1998 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $213,789,510 $ 178,008,900 Other revenues (Note 6) 8,661,435 8,345,087 Total operating revenues 222,450,945 186,353,987 BOARD OPERATING EXPENSES Salaries 115,618,738 110,455,527 Retirement and insurance contributions 16,012,513 18,684,301 Contractual services and professional fees 15,642,464 17,913,599 Depreciation and net losses on disposals 8,124,505 13,013,690 Postage and supplies 6,879,584 6,843,836 Utilities 6,109,935 4,798,940 Travel 5,970,437 5,170,630 Equipment and facilities rental 4,761,618 4,257,297 Software 4,189,644 4,344,064 Repairs and maintenance 3,662,547 3,280,615 Printing and binding 2,387,568 2,138,315 Other expenses (Note 6) 4,717,322 3,931,877 Total operating expenses 194,076,875 194,832,691 BOARD OPERATING REVENUES OVER (UNDER) EXPENSES 28,374,070 (8,478,704) ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 484,959,221 408,544,472 Expenses for currency printing, issuance, retirement, and shipping 484,959,221 408,544,472 CURRENCY ASSESSMENTS OVER (UNDER) EXPENSES 0 0 TOTAL REVENUE OVER (UNDER) EXPENSES 28,374,070 (8,478,704) FUND BALANCE, Beginning of year 30,950,445 39,429,149 TRANSFERS TO THE U.S. TREASURY Transfers and accrued transfers from surplus Federal Reserve Bank earnings (Note 1) 0 18,438,855,572 Transfers and accrued transfers to the U.S. Treasury (Note 1) 0 (18,438,855,572) FUND BALANCE, End of year $ 59,324,515 $ 30,950,445 See notes to financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

326 86th Annual Report, 1999 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF CASH FLOWS For the years ended December 31, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES Board operating revenues over (under) expenses $28,374,070 $ (8,478,704) Adjustments to reconcile operating revenue over (under) expenses to net cash provided by operating activities: Depreciation and net losses on disposals 8,124,505 13,013,690 (Increase) decrease in accounts receivable, prepaid expenses and other assets 458,411 (62,185) (Increase) decrease in transfers receivable—surplus Federal Reserve Bank earnings 0 652,913,560 Increase (decrease) in accounts payable and accrued liabilities 4,128,902 (1,566,642) Increase (decrease) in accrued payroll and related taxes (654,870) 135,843 Increase (decrease) in transfers payable—surplus Federal Reserve Bank earnings 0 (652,913,560) Increase (decrease) in accrued annual leave 570,122 16,346 Increase (decrease) in capital lease payable (3,456) (73,022) Increase (decrease) in unearned revenues and other liabilities 313,174 17,939 Increase (decrease) in accumulated retirement benefit obligation (25,460) 32,680 Increase (decrease) in accumulated postretirement benefit obligation (17,107,041) 528,835 Increase (decrease) in accumulated postemployment benefit obligation 397,477 413,956 Net cash provided by operating activities 24,575,834 3,978,736 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals 88,292 16,400 Capital expenditures (13,702,648) (7,248,540) Net cash used in investing activities (13,614,356) (7,232,140) NET INCREASE (DECREASE) IN CASH 10,961,478 (3,253,404) CASH BALANCE, Beginning of year 20,111,430 23,364,834 CASH BALANCE, End of year $31,072,908 $ 20,111,430 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Capital lease obligations incurred $ 123,020 $ 0 See notes to financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 327 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOTES TO FINANCIAL STATEMENTS FOR THE Reserve System (System Plan). The System Plan is a YEARS ENDED DECEMBER 31, 1999 AND 1998 multiemployer plan which covers employees of the Federal Reserve Banks, the Board, and the Plan Administrative Office. Employees of the Board who entered on duty (1) SIGNIFICANT ACCOUNTING POLICIES prior to 1984 are covered by a contributory defined bene- Organization—The Federal Reserve System was fits program under the System Plan. Employees of the founded by Congress in 1913 and consists of the Board of Board who entered on duty after 1983 are covered by a Governors (Board) and twelve regional Reserve Banks. non-contributory defined benefits program under the Sys- The Board was established as a federal government tem Plan. Contributions to the System Plan are actuarially agency and is supported by Washington staff numbering determined and funded by participating employers at about 1,700, as it carries out its responsibilities in con- amounts prescribed by the System Plan's administrator. junction with other components of the Federal Reserve Based on actuarial calculations, it was determined that System. The accompany financial statements include only employer funding contributions were not required for the the operations and activities for the Board and are pre- years 1999 and 1998, and the Board was not assessed a pared in accordance with generally accepted accounting contribution for these years. Excess Plan assets will conprinciples. tinue to fund future years' contributions. The Board is not Board Operating Revenues and Expenses— accountable for the assets of this plan. Assessments made on the Federal Reserve Banks for A relatively small number of Board employees partici- Board operating expenses and capital expenditures are pate in the Civil Service Retirement System (CSRS) or calculated based on expected cash needs. These assess- the Federal Employees' Retirement System (FERS). The ments, other operating revenues, and operating expenses Board matches employee contributions to these plans. are recorded on the accrual basis of accounting. These defined benefits plans are administered by the Issuance and Redemption of Federal Reserve Notes— Office of Personnel Management. The Board's contribu- The Board incurs expenses and assesses the Federal tions to these plans totaled $244,000 and $233,000 in Reserve Banks for the costs of printing, issuing, shipping, 1999 and 1998, respectively. The Board has no liability and retiring Federal Reserve Notes. These assessments for future payments to retirees under these programs, and and expenses are separately reported in the statements of it is not accountable for the assets of the plans. revenues and expenses because they are not Board operat- Employees of the Board may also participate in the ing transactions. Federal Reserve System's Thrift Plan. Under the Thrift Property, Buildings and Equipment—The Board's Plan, members may contribute up to a fixed percentage property, buildings and equipment are stated at cost less of their salary. Board contributions are based upon a accumulated depreciation. Depreciation is calculated on a fixed percentage of each member's basic contribution straight-line basis over the estimated useful lives of the and were $4,966,000 and $4,794,000 in 1999 and 1998, assets, which range from 4 to 10 years for furniture and respectively. equipment and from 10 to 50 years for building equip- Effective January 1, 1996, Board employees covered ment and structures. Upon the sale or other disposition of under the System Plan are also covered under a Benefits a depreciable asset, the cost and related accumulated Equalization Plan (BEP). Benefits paid under the BEP depreciation are removed from the accounts and any gain are limited to those benefits that cannot be paid from the or loss is recognized. System Plan because of limitations imposed by Sections Federal Reserve Bank Surplus Earnings—The Omni- 401(a)(17), 415(b), and 415(e) of the Internal Revenue bus Budget Reconciliation Act of 1993 required that Code of 1986. Pension costs attributed to the BEP reduce surplus Federal Reserve Bank earnings be transferred the pension costs of the System Plan. Activity for 1999 from the Banks to the Board and then to the U.S. Treasury and 1998 is summarized in the following table: for the period October 1, 1996, to September 30, 1998. 1999 1998 Prior to October 1, 1996, and after September 30, 1998, the Federal Reserve Banks made their transfers directly to Change in benefit obligation the Treasury. The Board accounted for these transfers Benefit obligation at when earned and due, which may have resulted in trans- beginning of year $897,822 $527,980 fers receivable and payable as of the balance sheet date. Service cost 12,206 65,357 Interest cost 37,840 21,296 Estimates—The preparation of financial statements in Plan participants' conformity with generally accepted accounting principles contributions 0 0 requires management to make estimates and assumptions Plan amendments 0 0 that affect the reported amounts of assets and liabilities Actuarial (gain)/loss (234,999) 319,002 and the disclosure of contingent assets and liabilities Benefitspaid (81,605) (35,813) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting Benefit obligation at period. Actual results could differ from those estimates. endofyear $631,264 $897,822 Reclassifications—Certain 1998 amounts have been reclassified to conform with the 1999 presentation. (2) RETIREMENT BENEFITS Substantially all of the Board's employees participate in the Retirement Plan for Employees of the Federal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

328 86th Annual Report, 1999 (3) POSTRETIREMENT BENEFITS 1999 1998 The Board provides certain defined benefit health bene- Change in plan assets fits (through 1998) and life insurance programs for its Fair value of plan assets active employees and retirees. Activity for 1999 and 1998 at beginning is summarized in the following table: of year $ 0 $ 0 Actual return on plan 1999 1998 assets 0 0 Change in benefit Employer contributions . 81,605 35,813 obligation Plan participants' Benefit obligation at contributions 0 0 Benefits paid (81,605) (35,813) beginning of year .. $22,946,312 $22,973,898 Service cost 162,487 133,733 Fair value of plan assets at end of year $ 0 $ 0 Interest cost 265,565 1,397,922 Plan participants' contributions 0 195,272 Reconciliation of funded Plan amendments (1,384,322) 0 status at end of year Actuarial (gain)/loss .... (1,703,601) (549,800) Funded status $(631,264) $(897,822) Benefits paid (16,190,030) (1,204,713) Unrecognized net Benefit obligation actuarial (gain)/ atendofyear $ 4,096,411 $22,946,312 loss (320,381) (109,357) Unrecognized prior Change in plan assets service cost (851,331) (923,851) Fair value of plan Unrecognized net assets at beginning transistion of year $ 0 $ 0 obligation 1,055,259 1,157,853 Actual return on Prepaid/(accrued) plan assets 0 0 postretirement Employer contributions . 16,190,030 1,009,441 benefit cost $ (747,717) $ (773,177) Plan participants' contributions 0 195,272 Amounts recognized Benefits paid (16,190,030) (1,204,713) in the Statement of Fair value of plan Financial Position assets at end consist of: of year $ 0 $ 0 Prepaid benefit cost $ 0 $ 0 Accrued benefit Reconciliation of liability (747,717) (844,000) funded status Intangible asset 0 70,823 at end of year Accumulated other Funded status $(4,096,411) $(22,946,312) comprehensive Unrecognized net income 0 0 actuarial Net amount recognized . $ (747,717) $ (773,177) (gain)/loss 481,583 2,224,443 Unrecognized prior Weighted-average service cost 0 0 assumptions as of Unrecognized net December 31 transition Discount rate 7.50% 6.25% obligation 0 0 Expected asset return ... N/A N/A Prepaid/(accrued) Salary scale 5.00% 4.25% postretirement Corridor 10.00% 10.00% benefit cost $(3,614,828) $(20,721,869) Components of net Components of net periodic expense periodic expense for year for year Service cost $ 12,206 $ 65,357 Service cost $ 162,487 $ 133,733 Interest cost 37,840 21,296 Interest cost 265,565 1,397,922 Expected return Amortization of prior on plan assets 0 0 service cost 0 0 Amortization of Amortization of prior service cost .. (72,520) (72,520) (gainsVlosses 39,259 6,621 Recognized net Total net periodic actuarial gain (23,975) (48,234) expense 467,311 1,538,276 Amortization of Other credit (1,384,322) 0 net liability 102,594 102,594 Total expense $ (917,011) $ 1,538,276 Net periodic benefit expense $ 56,145 $ 68,493 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 329 1999 1998 (4) POSTEMPLOYMENT BENEFIT PLAN The Board provides certain postemployment benefits to Effect of a one- eligible employees after employment but before retirepercentage point ment. Effective January 1, 1994, the Board adopted increase in health care cost Statement of Financial Accounting Standards No. 112, trend rate on: Employers' Accounting for Postemployment Benefits, Year-end benefit which requires that employers providing postemployment obligation N/A $2,382,383 benefits to their employees accrue the cost of such Total of service benefits. Prior to January 1994, postemployment benefit and interest cost expenses were recognized on a pay-as-you-go basis. The components N/A 97,751 postemployment benefit expense was $628,000 and Effect of a one- $614,000 for 1999 and 1998, respectively. percentage point decrease in health care cost (5) PROPERTY, BUILDINGS AND EQUIPMENT trend rate on: The following is a summary of the components of the Year-end benefit Board's property, buildings, and equipment, at cost, net of obligation N/A $(1,885,077) accumulated depreciation. Total of service and interest cost As of December 31, components N/A (156,553) 1999 1998 The liability and costs for the postretirement benefit Land and plan were determined using discount rates of 7.50 percent improvements ... $ 1,301,314 $ 1,301,314 Buildings 43,661,936 41,147,334 as of December 31, 1999, and 6.25 percent as of Decem- Furniture and ber 31, 1998. Unrecognized losses of $481,583 and equipment 49,187,837 42,723,644 $2,224,443 as of December 31, 1999 and 1998, respec- Software 5,047,293 3,409,767 tively, result from changes in the discount rate used to Construction in measure the liabilities. Under Statement of Financial process 4,699,571 2,014,706 Accounting Standards No. 106, Employers' Accounting 103,897,951 90,596,765 for Postretirement Benefits Other Than Pensions, the Less accumulated Board may have to record some of these unrecognized depreciation (39,969,545) (32,158,210) losses in operations in future years. The assumed salary Property, buildings, trend rate for measuring the increase in postretirement and equipment, benefits related to life insurance was an average of net $ 63,928,406 $ 58,438,555 6 percent. The above accumulated postretirement benefit obli- Furniture and equipment and accumulated depreciagation is related to the Board sponsored health benefits tion include $738,000 and $225,000, and $615,000 and (through 1998) and life insurance programs. During 1997, $102,500 as of December 31, 1999 and 1998, respeca special retirement program was offered to employees tively, for capitalized leases. who were eligible to retire by May 31, 1998. This resulted The Board began the Eccles Building Infrastructure in a curtailment loss of $1,174,489 for 1997, comprised Enhancement Project in July 1999. This $12.5 million of $1,044,096 for 62 employees covered by the Board project, scheduled for nineteen phases over three and a sponsored health benefits plan, and $130,393 for 78 em- half years, includes asbestos removal, lighting and plumbployees covered by the Board sponsored life insurance ing improvements, cabling and other enhancements. Mulplan. The Board has no liability for future payments to tiple phases will be in process at the same time. employees who continue coverage under the federally During 1998 the Board increased the threshold for sponsored programs upon retiring. Contributions for capitalization of furniture and equipment from $1,000 to active employees participating in federally sponsored pro- $5,000 per item. The Board expensed the undepreciated grams totaled $4,482,000 and $3,839,000 in 1999 and value of previously capitalized furniture and equipment 1998, respectively. not meeting the new capitalization threshold. The Board The medical component of the benefit obligation at end also simplified the method of capitalizing major building of year 1998 was $18,538,000. Pursuant to the Federal modifications, eliminating the previously used deprecia- Employees Health Care Act of 1998, on January 11, tion recovery method of reporting. For 1998, these 1999, the Board paid the Office of Personnel Manage- changes increased depreciation expense $4,033,000, ment $16,100,000 to compensate the Employee Health decreased cost by $44,112,000, and decreased accumu- Benefits Fund for the costs of providing future health care lated depreciation by $40,079,000. benefits. Coverage for Board employees and retirees Effective January 1, 1999, in accordance with AICPA enrolled in the Federal Reserve System Health Plan termi- Statement of Position 98-1, Accounting for the Costs of nated involuntarily on December 31, 1998. Therefore, Computer Software Developed or Obtained for Internal data for the effect of a one-percentage point increase or Use, the Board began to capitalize the costs of computer decrease in health care cost trend rate is not applicable to software developed or obtained for internal use. Prior to 1999. 1999, the Board capitalized purchased software only. For 1999, these changes increased software assets and decreased expenses by $1,691,000. For 1999, these changes did not affect accumulated depreciation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

330 86th Annual Report, 1999 (6) OTHER REVENUES AND OTHER EXPENSES (7) COMMITMENTS The following are summaries of the components of The Board has entered into several operating leases to Other Revenues and Other Expenses. secure office, training, and warehouse space for periods ranging from one to ten years. Minimum future commit- As of December 31, ments under those leases having an initial or remaining 1999 1998 noncancelable lease term in excess of one year at Decem- Other revenues ber 31, 1999, are as follows: Data processing revenue $4,073,910 $4,332,513 National Information Center 1,937,206 2,052,273 2000 $ 4,851,000 Subscription 2001 4,846,000 revenue 1,240,032 1,248,121 2002 4,820,000 Reimbursable 2003 4,578,000 services to 2004 4,932,000 other agencies ... 609,442 147,491 After 2004 6,247,000 Miscellaneous 800,845 564,689 $30,274,000 Total Other Revenues $8,661,435 $8,345,087 Rental expenses under the operating leases were Other expenses $4,334,000 and $3,873,000 in 1999 and 1998, Tuition, registration, respectively. and membership fees $1,352,849 $1,428,717 (8) FEDERAL FINANCIAL INSTITUTIONS Cafeteria operations, EXAMINATION COUNCIL net 857,435 756,548 The Board is one of the five member agencies of the Subsidies and Federal Financial Institutions Examination Council (the contributions 856,893 666,843 "Council"). During 1999 and 1998, the Board paid Miscellaneous 1,650,145 1,079,769 $327,000 and $249,000, respectively, in assessments for Total Other operating expenses of the Council. These amounts are Expenses $4,717,322 $3,931,877 included in other expenses for 1999 and 1998. During 1998, the Board paid $159,000 for office space sub-leased from the Council, and the Board did not sub-lease office space from the Council in 1999. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 331 Deloitte & Jouche INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND COMPLIANCE BASED UPON THE AUDIT PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Governors of the Federal Reserve System We have audited the financial statements of the Board of Governors of the Federal Reserve System (the Board) as of and for the year ended December 31, 1999, and have issued our report thereon dated February 18, 2000. We conducted our audit 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. Internal Control over Financial Reporting In planning and performing our audit, we considered the Board's internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and not to provide assurance on the internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses. Compliance As part of obtaining reasonable assurance about whether the Board's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of the Members and management of the Board and the Inspector General of the Board of Governors of the Federal Reserve System, and is not intended to be and should not be used by anyone other than these specified parties. February 18, 2000 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

333 Federal Reserve Banks Combined Financial Statements The combined financial statements of the Federal Reserve Banks were audited by PricewaterhouseCoopers LLP, independent accountants, for the years ended December 31, 1999 and 1998. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Governors of The Federal Reserve System and the Board of Directors of each of The Federal Reserve Banks: We have audited the accompanying combined statements of condition of The Federal Reserve Banks (the "Reserve Banks") as of December 31, 1999 and 1998, and the related combined statements of income and changes in capital for the years then ended. These financial statements are the responsibility of the Reserve Banks' management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in 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. As discussed in Note 3, the combined financial statements were prepared in conformity with the accounting principles, policies, and practices established by the Board of Governors of The Federal Reserve System. These principles, policies, and practices, which were designed to meet the specialized accounting and reporting needs of The Federal Reserve System, are set forth in the Financial Accounting Manual for Federal Reserve Banks and constitute a comprehensive basis of accounting other than accounting principles generally accepted in the United States. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Reserve Banks as of December 31, 1999 and 1998, and combined results of their operations for the years then ended, on the basis of accounting described in Note 3. Washington, D.C. March 15, 2000 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

334 86th Annual Report, 1999 THE FEDERAL RESERVE BANKS COMBINED STATEMENTS OF CONDITION December 31, 1999 and 1998 (in millions) ASSETS 1999 1998 Gold certificates $ 11,048 $ 11,046 Special drawing rights certificates 6,200 9,200 Coin 207 358 Items in process of collection 6,524 6,933 Loans to depository institutions 233 17 Securities purchased under agreements to resell (tri-party) 140,640 . . . U.S. government and federal agency securities, net 483,902 488,911 Investments denominated in foreign currencies 16,140 19,768 Accrued interest receivable 5,314 4,680 Bank premises and equipment, net 1,861 1,787 Other assets 2,391 1,942 Total assets $674,460 $544,642 LIABILITIES AND CAPITAL LIABILITIES Federal Reserve notes outstanding, net $600,662 $491,657 Deposits Depository institutions 24,027 26,306 U.S. Treasury, general account 28,402 6,086 Other deposits 274 413 Deferred credit items 6,117 5,924 Surplus transfer due U.S. Treasury 1,066 1,373 Accrued benefit cost 816 780 Other liabilities 234 199 Total liabilities 661,598 532,738 CAPITAL Capital paid-in 6,431 5,952 Surplus 6,431 5,952 Total capital 12,862 11,904 Total liabilities and capital $674,460 $544,642 The accompanying notes are an integral part of these financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks Combined Financial Statements 335 THE FEDERAL RESERVE BANKS COMBINED STATEMENTS OF INCOME for the years ended December 31, 1999 and 1998 (in millions) 1999 1998 Interest income Interest on U.S. government and federal agency securities $28,216 $26,842 Interest on foreign currencies 225 435 Interest on loans to depository institutions H 9 Total interest income 28,452 27,286 Other operating income (loss) Income from services 836 816 Reimbursable services to government agencies 295 299 Foreign currency (losses) gains, net (504) 1,870 Government securities (losses) gains, net (22) 44 Other income 83 72 Total other operating income 688 3,101 Operating expenses Salaries and other benefits 1,446 1,358 Occupancy expense 189 181 Equipment expense 242 244 Cost of unreimbursed Treasury services 8 8 Assessments by Board of Governors 699 587 Other expenses 294 374 Total operating expenses 2,878 2,752 Net income prior to distribution $26,262 $27,635 Distribution of net income Dividends paid to member banks $ 374 $ 343 Transferred to surplus 479 732 Payments to U.S. Treasury as interest on Federal Reserve notes 25,409 8,774 Payments to U.S. Treasury as required by statute 17,786 Total distribution $26,262 $27,635 The accompanying notes are an integral part of these financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

336 86th Annual Report, 1999 THE FEDERAL RESERVE BANKS COMBINED STATEMENTS OF CHANGES IN CAPITAL for the years ended December 31, 1999 and 1998 (in millions) Capital Total paid-in Surplus capital Balance at January 1,1998 (109 million shares) $5,433 $5,220 $10,653 Net income transferred to surplus 732 732 Net change in capital stock issued (10 million shares) 519 519 Balance at December 31, 1998 (119 million shares) $5,952 $5,952 $11,904 Net income transferred to surplus 479 479 Net change in capital stock issued (9 million shares) 479 479 Balance at December 31, 1999 (128 million shares) $6,431 $6,431 $12,862 The accompanying notes are an integral part of these financial statements. NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS (1) ORGANIZATION AND BASIS OF PRESENTATION Board of Directors The twelve Federal Reserve Banks (Reserve Banks) are The Federal Reserve Act specifies the composition of the part of the Federal Reserve System (System) created by board of directors for each of the Reserve Banks. Each Congress under the Federal Reserve Act of 1913 (Federal board is composed of nine members serving three-year Reserve Act), which established the central bank of the terms: three directors, including those designated as United States. The Reserve Banks are chartered by the Chairman and Deputy Chairman, are appointed by the federal government and possess a unique set of govern- Board of Governors, and six directors are elected by mental, corporate, and central bank characteristics. Other member banks. Of the six elected by member banks, three major elements of the System are the Board of Governors represent the public and three represent member banks. of the Federal Reserve System (Board of Governors), the Member banks are divided into three classes according Federal Open Market Committee (FOMC), and the Fed- to size. Member banks in each class elect one director eral Advisory Council. The FOMC is composed of mem- representing member banks and one representing the pubbers of the Board of Governors, the president of the lic. In any election of directors, each member bank Federal Reserve Bank of New York (FRBNY), and, on a receives one vote, regardless of the number of shares of rotating basis, four other Reserve Bank presidents. Reserve Bank stock it holds. Although the Reserve Banks are chartered as independent organizations overseen by the Board of Governors, the Reserve Banks work jointly to carry out their statutory responsibilities. The majority of the assets, liabilities, (2) OPERATIONS AND SERVICES and income of the Reserve Banks is derived from central bank activities and responsibilities with regard to mone- The System performs a variety of services and operations. tary policy and currency. For this reason, the accompany- Functions include formulating and conducting monetary ing combined set of financial statements for the twelve policy; participating actively in the payments mechanism, independent Reserve Banks is prepared, adjusted to elimi- including large-dollar transfers of funds, automated clearnate interdistrict accounts and transactions. inghouse operations, and check processing; distribution of coin and currency; fiscal agency functions for the U.S. Structure Treasury and certain federal agencies; serving as the federal government's bank; providing short-term loans to The Reserve Banks serve twelve Federal Reserve Dis- depository institutions; serving the consumer and the tricts nationwide. In accordance with the Federal Reserve community by providing educational materials and infor- Act, supervision and control of each Reserve Bank is mation regarding consumer laws; supervising bank holdexercised by a Board of Directors. Banks that are mem- ing companies, state member banks, and U.S. offices of bers of the System include all national banks and any foreign banking organizations; and administering other state-chartered bank that applies and is approved for regulations of the Board of Governors. The Board of membership in the System. Governors' operating costs are funded through assess- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks Combined Financial Statements 337 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED The FOMC establishes policy regarding open market The preparation of the financial statements in conoperations, oversees these operations, and issues authori- formity with the Financial Accounting Manual requires zations and directives to the FRBNY for its execution of management to make certain estimates and assumptions transactions. Authorized transaction types include direct that affect the reported amounts of assets and liabilities purchase and sale of U.S. government and federal agency and disclosure of contingent assets and liabilities at the securities, matched sale-purchase transactions, the pur- date of the financial statements and the reported amounts chase of securities under agreements to resell, and the of income and expenses during the reporting period. lending of U.S. government securities. Additionally, the Actual results could differ from those estimates. Unique FRBNY is authorized by the FOMC to hold balances of accounts and significant accounting policies are explained and to execute spot and forward foreign exchange and below. securities contracts in fourteen foreign currencies, maintain reciprocal currency arrangements (F/X swaps) with (A) Gold Certificates various central banks, and "warehouse" foreign currencies for the U.S. Treasury and Exchange Stabilization The Secretary of the Treasury is authorized to issue gold Fund (ESF) through the Reserve Banks. certificates to the Reserve Banks to monetize gold held by the U.S. Treasury. Payment for the gold certificates by the Reserve Banks is made by crediting equivalent amounts in dollars into the account established for the U.S. Trea- (3) SIGNIFICANT ACCOUNTING POLICIES sury. These gold certificates held by the Reserve Banks are required to be backed by the gold of the U.S. Trea- Accounting principles for entities with the unique powers sury. The U.S. Treasury may reacquire the gold certifiand responsibilities of the nation's central bank have not cates at any time, and the Reserve Banks must deliver been formulated by the Financial Accounting Standards them to the U.S. Treasury. At such time, the U.S. Trea- Board. The Board of Governors has developed special- sury's account is charged, and the Reserve Banks' gold ized accounting principles and practices that it believes certificate account is lowered. The value of gold for are appropriate for the significantly different nature and purposes of backing the gold certificates is set by law at function of a central bank as compared to the private $42% a fine troy ounce. sector. These accounting principles and practices are documented in the Financial Accounting Manual for Fed- (B) Special Drawing Rights Certificates eral Reserve Banks {Financial Accounting Manual), which is issued by the Board of Governors. All Reserve Special drawing rights (SDRs) are issued by the Interna- Banks are required to adopt and apply accounting policies tional Monetary Fund (Fund) to its members in proporand practices that are consistent with the Financial tion to each member's quota in the Fund at the time of Accounting Manual. issuance. SDRs serve as a supplement to international The financial statements have been prepared in accor- monetary reserves and may be transferred from one dance with the Financial Accounting Manual. Differences national monetary authority to another. Under the law exist between the accounting principles and practices of providing for U.S. participation in the SDR system, the the System and generally accepted accounting principles Secretary of the U.S. Treasury is authorized to issue (GAAP). The primary differences are the presentation of SDR certificates, somewhat like gold certificates, to the all security holdings at amortized cost, rather than at the Reserve Banks. At such time, equivalent amounts in fair value presentation requirements of GAAP, and the dollars are credited to the account established for the U.S. accounting for matched sale-purchase transactions as Treasury, and the Reserve Banks' SDR certificate account separate sales and purchases, rather than secured borrow- is increased. The Reserve Banks are required to purchase ings with pledged collateral, as is required by GAAP. In SDRs, at the direction of the U.S. Treasury, for the addition, the Board of Governors and the Reserve Banks purpose of financing SDR certificate acquisitions or for have elected not to include a Statement of Cash Flows or financing exchange stabilization operations. a Statement of Comprehensive Income. The Statement of Cash Flows has not been included as the liquidity and (C) Loans to Depository Institutions cash position of the Reserve Banks are not of primary concern to users of these financial statements. The State- The Depository Institutions Deregulation and Monetary ment of Comprehensive Income, which comprises net Control Act of 1980 provides that all depository instituincome plus or minus certain adjustments, such as the fair tions that maintain reservable transaction accounts or value adjustments for securities, has not been included nonpersonal time deposits, as denned in Regulation D because as stated above the securities are reported at issued by the Board of Governors, have borrowing priviamortized cost and there are no other adjustments in the leges at the discretion of the Reserve Banks. Borrowers determination of Comprehensive Income applicable to execute certain lending agreements and deposit suffithe Reserve Banks. Other information regarding the cient collateral before credit is extended. Loans are evalu- Reserve Banks' activities is provided in, or may be de- ated for collectibility, and currently all are considered rived from, the Statements of Condition, Income, and collectible and fully collateralized. If any loans were Changes in Capital. Therefore, a Statement of Cash Flows deemed to be uncollectible, an appropriate reserve would or a Statement of Comprehensive Income would not be established. Interest is recorded on the accrual basis provide any additional useful information. There are no and is charged at the applicable discount rate established other significant differences between the policies outlined at least every fourteen days by the boards of directors of in the Financial Accounting Manual and GAAP. the Reserve Banks, subject to review by the Board of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

338 86th Annual Report, 1999 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED Governors. However, Reserve Banks retain the option with each strip consisting of the right to exercise overto impose a surcharge above the basic rate in certain night repurchase agreements for up to five consecutive circumstances. business days. In general, the options could only be The Board of Governors established a Special Liquid- exercised at strike price of 150 to 250 basis points above ity Facility (SLF) to make discount window credit readily the most recently announced FOMC Federal funds target available to depository institutions in sound financial rate. condition around the century date change (October 1, Effective April 26, 1999 the FRBNY was given the 1999, to April 7, 2000) in order to meet unusual liquidity sole authorization by the FOMC to lend U.S. government demands and to allow institutions to confidently commit securities held in the SOMA to U.S. government securito supplying loans to other institutions and businesses ties dealers and to banks participating in U.S. government during this period. Under the SLF, collateral requirements securities clearing arrangements, in order to facilitate the are unchanged from normal discount window activity and effective functioning of the domestic securities market. loans are made at a rate of 150 basis points above the These securities-lending transactions are fully collateral- FOMC's target federal funds rate. ized by other U.S. government securities. The FOMC policy requires FRBNY to take possession of collateral in amounts in excess of the market values of the securities (D) US. Government and Federal Agency Securities and loaned. The market values of the collateral and the securi- Investments Denominated in Foreign Currencies ties loaned are monitored by FRBNY on a daily basis, with additional collateral obtained as necessary. The secu- The FOMC has designated the FRBNY to execute open rities loaned continue to be accounted for in the SOMA. market transactions on its behalf and to hold the result- Prior to April 26, 1999, all Reserve Banks were authoing securities in the portfolio known as the System Open rized to engage in such lending activity. Market Account (SOMA). In addition to authorizing and Foreign exchange contracts are contractual agreements directing operations in the domestic securities market, between two parties to exchange specified currencies, at a the FOMC authorizes and directs the FRBNY to execute specified price, on a specified date. Spot foreign contracts operations in foreign markets for major currencies in normally settle two days after the trade date, whereas the order to counter disorderly conditions in exchange mar- settlement date on forward contracts is negotiated kets or other needs specified by the FOMC in carrying out between the contracting parties but will extend beyond the System's central bank responsibilities. two days from the trade date. The FRBNY generally Purchases of securities under agreements to resell and enters into spot contracts, with any forward contracts matched sale-purchase transactions are accounted for as generally limited to the second leg of a swap/warehousing separate sale and purchase transactions. Purchases under transaction. agreements to resell are transactions in which the FRBNY The FRBNY, on behalf of the Reserve Banks, mainpurchases a security and sells it back at the rate specified tains renewable, short-term F/X swap arrangements with at the commencement of the transaction. Matched sale- authorized foreign central banks. The parties agree to purchase transactions are transactions in which the exchange their currencies up to a pre-arranged maximum FRBNY sells a security and buys it back at the rate amount and for an agreed upon period of time (up to specified at the commencement of the transaction. twelve months), at an agreed upon interest rate. These In addition to the aforementioned purchases of securi- arrangements give the FOMC temporary access to foreign ties under agreements to resell and matched sale-purchase currencies that it may need for intervention operations to transactions, the FRBNY also through FOMC's tempo- support the dollar and give the partner foreign central rary authorization engages in tri-party repurchase and bank temporary access to dollars it may need to support reverse repurchase agreements ("tri-party agreements"). its own currency. Drawings under the F/X swap arrange- Tri-party agreements are conducted with two custodial ments can be initiated by either the FRBNY or the partner banks that manage the clearing and settlement of collat- foreign central bank, and must be agreed to by the eral. Acceptable collateral under tri-party repurchase drawee. The F/X swaps are structured so that the party agreements primarily includes U.S. Government and initiating the transaction (the drawer) bears the exchange agency securities, pass-through mortgage securities of rate risk upon maturity. The Bank will generally invest GNMA, FHLMC, and FNMA, STRIP securities of the the foreign currency received under an F/X swap in U.S. Government and "stripped" securities of other gov- interest-bearing instruments. ernment agencies. The tri-party repurchase and reverse Warehousing is an arrangement under which the repurchase transactions are accounted for as financing FOMC agrees to exchange, at the request of the Treasury, transactions with the associated interest income and inter- U.S. dollars for foreign currencies held by the Treasury or est expense recorded over the period of the agreement. ESF over a limited period of time. The purpose of the Tri-party operations commenced in October 1999 and warehousing facility is to supplement the U.S. dollar have been approved by the FOMC through April 2000. resources of the Treasury and ESF for financing pur- Another tool employed by the FRBNY to address chases of foreign currencies and related international potential reserve shortages was the ability to sell options operations. on overnight repurchase agreements. The FRBNY has the In connection with its foreign currency activities, the temporary authority to sell European options to primary FRBNY, on behalf of the Reserve Banks, may enter into dealers that give the dealers the right to enter into repur- contracts that contain varying degrees of off-balancechase agreements with the FRBNY on the exercise date. sheet market risk because they represent contractual com- The options were auctioned in three week long "strips" mitments involving future settlement and counter-party Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks Combined Financial Statements 339 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED credit risk. The FRBNY controls credit risk by obtaining Federal Reserve agents to the Reserve Banks upon credit approvals, establishing transaction limits, and per- deposit with such agents of certain classes of collateral forming daily monitoring procedures. security, typically U.S. government securities. These notes While the application of current market prices to the are identified as issued to a specific Reserve Bank. The securities currently held in the SOMA portfolio and Federal Reserve Act provides that the collateral security investments denominated in foreign currencies may result tendered by the Reserve Bank to the Federal Reserve in values substantially above or below their carrying agent must be equal to the sum of the notes applied for values, these unrealized changes in value would have no by such Reserve Bank. In accordance with the Federal direct effect on the quantity of reserves available to the Reserve Act, gold certificates, special drawing rights banking system or on the prospects for future Reserve certificates, U.S. government and agency securities, loans Bank earnings or capital. Both the domestic and foreign allowed under section 13, and investments denominated components of the SOMA portfolio from time to time in foreign currencies are pledged as collateral for net involve transactions that can result in gains or losses Federal Reserve notes outstanding. The collateral value is when holdings are sold prior to maturity. However, deci- equal to the book value of the collateral tendered, with the sions regarding the securities and foreign currencies trans- exception of securities, whose collateral value is equal actions, including their purchase and sale, are motivated to the par value of the securities tendered. Tri-party by monetary policy objectives rather than profit. Accord- agreements, which received temporary authorization ingly, earnings and any gains or losses resulting from the through April 2000, however, are valued at the contract sale of such currencies and securities are incidental to the amount. The Board of Governors may, at any time, call open market operations and do not motivate its activities upon a Reserve Bank for additional security to adequately or policy decisions. collateralize the Federal Reserve notes. To satisfy the U.S. government and federal agency securities and obligation to provide sufficient collateral for outstanding investments denominated in foreign currencies compris- Federal Reserve notes, the Reserve Banks have entered ing the SOMA are recorded at cost, on a settlement-date into an agreement that provides that certain assets of the basis, and adjusted for amortization of premiums or accre- Reserve Banks are jointly pledged as collateral for the tion of discounts on a straight-line basis. Interest income Federal Reserve notes of all Reserve Banks. In the event is accrued on a straight-line basis and is reported as that this collateral is insufficient, the Federal Reserve Act "Interest on U.S. government and federal agency securi- provides that Federal Reserve notes become a first and ties" or "Interest on foreign currencies," as appropriate. paramount lien on all the assets of the Reserve Banks. Income earned on securities lending transactions is Finally, as obligations of the United States, Federal reported as a component of "Other income." Gains and Reserve notes are backed by the full faith and credit of losses resulting from sales of securities are determined by the U.S. government. specific issues based on average cost. Gains and losses on The "Federal Reserve notes outstanding, net" account the sales of U.S. government and federal agency securi- represents Federal Reserve notes reduced by cash held ties are reported as "Government securities gains, net." in the vaults of the Reserve Banks of $221,297 million Foreign currency denominated assets are revalued and $120,030 million at December 31, 1999 and 1998, monthly at current market exchange rates in order to respectively. report these assets in U.S. dollars. Realized and unreal- At December 31, 1999 and 1998, all gold certificates, ized gains and losses on investments denominated in all special drawing rights certificates, and domestic foreign currencies are reported as "Foreign currency securities with par values of $583,414 million and gains (losses), net." Foreign currencies held through F/X $471,411 million, respectively, were pledged as collatswaps, when initiated by the counter party, and warehous- eral. At December 31, 1999 and 1998, no loans or investing arrangements are revalued monthly, with the unreal- ments denominated in foreign currencies were pledged as ized gain or loss reported as a component of "Other collateral. assets" or "Other liabilities," as appropriate. (G) Capital Paid-in (E) Bank Premises and Equipment The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an Bank premises and equipment are stated at cost less amount equal to 6% of the capital and surplus of the accumulated depreciation. Depreciation is calculated on a member bank. As a member bank's capital and surplus straight-line basis over estimated useful lives of assets changes, its holdings of the Reserve Bank's stock must be ranging from 2 to 50 years. New assets, major alterations, adjusted. Member banks are those state-chartered banks renovations, and improvements are capitalized at cost as that apply and are approved for membership in the Sysadditions to the asset accounts. Maintenance, repairs, and tem and all national banks. Currently, only one-half of the minor replacements are charged to operations in the year subscription is paid-in and the remainder is subject to incurred. call. These shares are nonvoting with a par value of $100. They may not be transferred or hypothecated. By law, each member bank is entitled to receive an annual (F) Federal Reserve Notes dividend of 6% on the paid-in capital stock. This cumulative dividend is paid semiannually. A member bank is Federal Reserve notes are the circulating currency of the liable for Reserve Bank liabilities up to twice the par United States. These notes are issued through the various value of stock subscribed by it. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

340 86th Annual Report, 1999 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED (H) Surplus (J) Taxes The Board of Governors requires Reserve Banks The Reserve Banks are exempt from federal, to maintain a surplus equal to the amount of state, and local taxes, except for taxes on real capital paid-in as of December 31. This amount property, which are reported as a component of is intended to provide additional capital and "Occupancy expense." reduce the possibility that the Reserve Banks would be required to call on member banks for (4) U.S. GOVERNMENT AND FEDERAL AGENCY additional capital. Reserve Banks are required by SECURITIES the Board of Governors to transfer to the U.S. Treasury excess earnings, after providing for the Securities bought outright and held under agreements to costs of operations, payment of dividends, and resell are held in the SOMA at the FRBNY. reservation of an amount necessary to equate surplus with capital paid-in. Payments made after Total securities held in the SOMA at December 31, September 30,1998, represent payment of inter- 1999 and 1998, that were bought outright were as follows (in millions): est on Federal Reserve notes outstanding. The Omnibus Budget Reconciliation Act of 1999 1998 1993 (Public Law 103-66, Section 3002) codified the existing Board surplus policies as statu- Par value Federal agency $ 181 $ 337 tory surplus transfers, rather than as payments of U.S. government interest on Federal Reserve notes, for federal Bills 176,518 194,772 government fiscal years 1998 and 1997 (which Notes 218,467 187,895 ended on September 30, 1998 and 1997, respec- Bonds 82,978 69,474 tively). In addition, the legislation directed the Total par value 478,144 452,478 Reserve Banks to transfer to the US. Treasury Unamortized premiums 9,098 7,387 additional surplus funds of $107 million and Unaccreted discounts (3,340) (3,198) $106 million during fiscal years 1998 and 1997 Total $483,902 $456,667 respectively. Reserve Banks were not permitted to replenish surplus for these amounts during this time. Payments to the U.S. Treasury made after The maturities of U.S. government and federal agency September 30,1998, represent payment of inter- securities bought outright, which were held in the SOMA est on Federal Reserve notes outstanding. at December 31,1999, were as follows (in millions): The Consolidated Appropriations Act of 1999 (Public Law 106-113, Section 302) directed the Par value Reserve Banks to transfer to the U.S. Treasury U.S. Federal additional surplus funds of $3,752 million during Maturities of government agency the Federal Government's 2000 fiscal year. The securities held securities obligations Total Reserve Banks will make this payment prior to Within 15 days ... $ 4,632 $. . . $ 4,632 September 30, 2000. 16 days to 90 days. 91,919 31 91,950 In the event of losses, payments to the U.S. 91 days to 1 year .. 139,866 20 139,886 Treasury are suspended until such losses are Over 1 year to 5 years . 124,169 10 124,179 recovered through subsequent earnings. Weekly Over 5 years to payments to the U.S. Treasury vary significantly. 10 years . 51,107 120 51,227 Over 10 years . 66,270 66,270 Total . $477,963 $181 $478,144 (I) Income and Cost Related to Treasury Services Total securities held under agreements to resell at Reserve Banks are required by the Federal December 31 1999 were $140,640 million that consisted Reserve Act to serve as fiscal agents and deposi- entirely of agreements through third party custodial tories of the United States. By statute, the De- arrangements and are reported as "Securities purchased partment of the Treasury is permitted, but not under agreements to resell (tri-party)." Securities held required, to pay for these services. The costs of under agreements to resell at December 31, 1998 totaled $32,244 million and are included in "U.S. government providing fiscal agency and depository services and federal agency securities, net." In August 1999, the to the Treasury Department that have been billed FOMC extended the maximum pemissible maturity for but will not be paid are reported as the "Cost of securities purchased under agreements to resell from unreimbursed Treasury services." 60 days to 90 days. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks Combined Financial Statements 341 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED At December 31, 1999 and 1998, matched sale- The maturities of investments denominated in foreign purchase transactions involving U.S. government currencies at December 31, 1999, were as follows (in securities with par values of $39,182 million and millions): $20,297 million, respectively, were outstanding. Matched sale-purchase transactions are generally overnight Maturities of Investments Denominated arrangements. in Foreign Currencies At December 31, 1999 and 1998, U.S. government Within 1 year $15,071 Over 1 year to 5 years 496 securities with par values of $2,061 million and $325 mil- Over 5 years to 10 years 573 lion, respectively, were loaned. Total $16,140 Option contracts that were held on overnight repurchase agreements at December 31, 1999 were as follows At December 31, 1999 and 1998, there were no open (in millions): foreign exchange contracts or outstanding F/X swaps. At December 31, 1999 and 1998 the warehousing 12/30/1999- 01/06/1999- facility was $5,000 million, with nothing outstanding. 01/05/2000 01/12/2000 (6) BANK PREMISES AND EQUIPMENT Outstanding options $222,950 $144,000 A summary of bank premises and equipment at December 31 is as follows (in millions): 1999 1998 (5) INVESTMENTS DENOMINATED IN FOREIGN CURRENCIES Bank premises and equipment Land $ 191 $ 191 Buildings 1,222 1,177 The FRBNY, on behalf of the Reserve Banks, holds Building machinery and foreign currency deposits with foreign central banks and equipment 287 271 the Bank for International Settlements and invests in Construction in progress 98 41 foreign government debt instruments. Foreign govern- Furniture and equipment 1,238 1,244 ment debt instruments held include both securities bought outright and securities held under agreements to resell. 3,036 2,924 These investments are guaranteed as to principal and Accumulated depreciation (1,175) (1,137) interest by the foreign governments. Bank premises and equipment, net $1,861 $1,787 Total investments denominated in foreign currencies, Depreciation expense was $183 million and $184 milvalued at current exchange rates at December 31, were as lion for the years ended December 31, 1999 and 1998, follows (in millions): respectively. 1999 1998 Bank premises and equipment at December 31 include the following amounts for leases that have been capital- German marks Foreign currency deposits .... $10,451 ized (in millions): Government debt instruments including agreements 1999 1998 to resell 2,373 Bank premises and equipment $33 $89 European Union euros Accumulated depreciation (19) 08) Foreign currency deposits 4,333 Capitalized leases, net $14 $11_ Government debt instruments including agreements Certain of the Reserve Banks lease unused space to to resell 2,538 outside tenants. Those leases have terms ranging from 1 Japanese yen to 16 years. Rental income from such leases totaled Foreign currency deposits 323 666 $17 million for each of the years ended Decem- Government debt instruments ber 31, 1999 and 1998. Future minimum lease payments including agreements under agreements in existence at December 31, 1999, to resell 8,898 6,196 were (in millions): Accrued interest . 48 97 2000 . $15 Total $16,140 $19,783 2001 , 14 2002 13 In addition to the balances reported above, $15 million 2003 , 9 in unearned interest collected on certain foreign currency 2004 8 Thereafter _21 holdings were also reported as "Investments denominated in foreign currencies" at December 31,1998. Total $80 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

342 86th Annual Report, 1999 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED (7) COMMITMENTS AND CONTINGENCIES related to the participation of employees of the 12 Reserve Banks, the Board of Governors, and the Plan Administra- At December 31, 1999, the Reserve Banks were obli- tive Office in the plan. gated under noncancelable leases for premises and equip- Following is a reconciliation of the beginning and ment with terms ranging from 1 year to approximately ending balances of the System Plan benefit obligations (in 24 years. These leases provide for increased rentals based millions): upon increases in real estate taxes, operating costs, or 1999 1998 selected price indices. Rental expense under operating leases for certain oper- Estimated actuarial present value ating facilities, warehouses, and data processing and of projected benefit obligation at January 1 $2,774 $2,476 office equipment (including taxes, insurance, and mainte- Service cost—benefits earned nance when included in rent), net of sublease rentals, was during the period 89 79 $66 million and $64 million for the years ended Decem- Interest cost of projected ber 31, 1999 and 1998, respectively. Certain of the benefit obligation 169 169 Reserve Banks' leases have options to renew. Actuarial (gain) loss (330) 140 Contributions by plan participants .. 3 4 Future minimum rental payments under noncancelable Benefits paid (129) (125) Plan amendments . . . 31 operating leases, net of sublease rentals, with terms of 1 year or more, at December 31, 1999, were (in Estimated actuarial present value millions): of projected benefit obligation at December 31 .... $2,576 $2,774 Operating Following is a reconciliation showing the beginning 2000. $ 13 and ending balance of the System Plan assets, the funded 2001 . 11 status, and the prepaid pension benefit cost (in millions): 2002 . 7 2003 . 6 1999 1998 2004. 6 Thereafter $114 Estimated fair value of plan assets at January 1 $5,798 $5,031 Total $157 Actual return on plan assets 484 888 Contributions by employer • • ... At December 31,1999, the Reserve Banks had contrac- Contributions by plan participants .. 3 4 tual commitments through the year 2007 totaling $391 Benefits paid (129) (125) million for the maintenance of currency and check pro- Estimated fair value of plan cessing machines, none of which has been recognized. assets at December 31 $6,156 $5,798 One Reserve Bank contracts for maintenance for these Funded status $3,580 $3,024 machines on behalf of the System and allocates the costs, Unrecognized initial net annually, to each other Reserve Bank. transition (obligation) (91) (136) The Reserve Banks are involved in certain legal actions Unrecognized prior service cost 136 152 and claims arising in the ordinary course of business. Unrecognized net actuarial (gain) .. (1,767) (1,549) Although it is difficult to predict the ultimate outcome of Prepaid pension benefit cost 1,858 1,491 these actions, in management's opinion, based on discussions with counsel, the aforementioned litigation and Prepaid pension benefit cost is reported as a component claims will be resolved without material adverse effect of "Other assets." on the financial position or results of operations of the Reserve Banks. The weighted-average assumptions used in developing the pension benefit obligation for the System Plan are as follows: (8) RETIREMENT AND THRIFT PLANS 1999 1998 Discount rate 7.50% 6.25% Retirement Plans Expected long-term rate of return on plan assets 9.00% 9.00% The Reserve Banks currently offer two defined benefit Rate of compensation increase 5.00% 4.25% retirement plans to their employees, based on length of service and level of compensation. Substantially all of the Reserve Banks' employees participate in the Retirement Plan for Employees of the Federal Reserve System (System Plan) and the Benefit Equalization Retirement Plans offered by each individual Reserve Bank (BEPs). The System Plan is a multi-employer plan with contributions roily funded by participating employers. No separate accounting is maintained of assets contributed by the participating employers. FRBNY acts as the sponsor of this plan. The prepaid pension cost includes amounts Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks Combined Financial Statements 343 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED The components of net periodic pension benefit credit Following is a reconciliation of beginning and ending for the System Plan as of December 31 are shown below balances of the benefit obligation (in millions): (in millions): 1999 1998 1999 1998 Accumulated postretirement benefit Service cost—benefits earned obligation at January 1 $645 $588 during the period $ 8899 $ 79 Service cost—benefits earned during Interest cost on projected the period 18 15 benefit obligation 169 169 Interest cost of accumulated Amortization of initial net benefit obligation 39 39 transition obligation (45) (45) Actuarial loss (gain) (73) 41 Amortization of prior service Contributions by plan participants 3 3 cost 16 15 Benefits paid (25) (24) Recognized net (gain) (76) (59) Plan amendments (7) (17) Expected return on plan assets (520) (448) Accumulated postretirement benefit Net periodic pension benefit (credit) . $(367) $(289) obligation at December 31 $600 $645 Net periodic pension benefit (credit) is reported as a Following is a reconciliation of the beginning and ending component of "Other expense." balance of the plan assets, the unfunded postretirement benefit obligation, and the accrued postretirement benefit cost (in millions): The Reserve Banks' projected benefit obligation and 1999 1998 net pension costs for the BEP at December 31, 1999 and 1998, and for the years then ended, are not material. Fair value of plan assets at January 1 ...$... $... Actual return on plan assets ... Contributions by the employer 22 21 Thrift Plan Contributions by plan participants 3 3 Benefits paid (25) (24) Employees of the Reserve Banks may also participate in Fair value of plan assets at the defined contribution Thrift Plan for Employees of the December31 $• • • $• . • Federal Reserve System (Thrift Plan). The Reserve Unfunded postretirement benefit Banks' Thrift Plan contributions totaled $45 million and obligation $600 $645 $43 million for the years ended December 31, 1999 and Unrecognized prior service cost 99 100 1998, respectively, and are reported as a component of Unrecognized net actuarial gain/(loss) .. (23) (50) "Salaries and other benefits." Accrued postretirement benefit cost .... $722 $695 Accrued postretirement benefit cost is reported as a com- (9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS ponent of "Accrued benefit cost." AND POSTEMPLOYMENT BENEFITS The weighted-average assumption used in developing Postretirement Benefits Other Than Pensions the postretirement benefit obligation as of December 31, 1999 and 1998, was 7.50% and 6.25%, respectively. In addition to the Reserve Banks' retirement plans, em- For measurement purposes, an 8.75% annual rate of ployees who have met certain age and length of service increase in the cost of covered health care benefits was requirements are eligible for both medical benefits and assumed for 2000. Ultimately, the health care cost trend life insurance coverage during retirement. rate is expected to decrease gradually to 5.50% by 2006, The Reserve Banks fund benefits payable under the and remain at that level thereafter. medical and life insurance plans as due and, accordingly, have no plan assets. Net postretirement benefit cost is actuarially determined, using a January 1 measurement date. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

344 86th Annual Report, 1999 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED Assumed health care cost trend rates have a significant Postemployment Benefits effect on the amounts reported for health care plans. A 1 percentage point change in assumed health care cost The Reserve Banks offer benefits to former or inactive trend rates would have the following effects for the year employees. Postemployment benefit costs are actuarially ended December 31,1999 (in millions): determined and include the cost of medical and dental insurance, survivor income, disability benefits, and those workers' compensation expenses self-insured by indi- 1 Percentage 1 Percentage vidual Reserve Banks. Costs were projected using the Point Increase Point Decrease same discount rate and health care trend rates as were Effect on aggregate used for projecting postretirement costs. The accrued of service and postemployment benefit costs recognized by the Reserve interest cost Banks at December 31, 1999 and 1998, were $93 million components of and $84 million, respectively. This cost is included as net periodic a component of "Accrued benefit cost." Net periodic postretirement postemployment benefit costs included in 1999 and 1998 benefit cost $ 12 $ (9) Effect on accumulated operating expenses were $20 million and $19 million, postretirement respectively. benefit obligation ... 94 (77) The following is a summary of the components of net periodic postretirement benefit cost for the years ended December 31 (in millions): 1999 1998 Service cost—benefits earned during theperiod $18 $15 Interest cost of accumulated benefit obligation 39 39 Amortization of prior service cost (9) (8) Recognized net actuarial loss . . . . . . Net periodic postretirement benefit cost... $48 $46 Net periodic postretirement benefit cost is reported as a component of "Salaries and other benefits." 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

346 86th Annual Report, 1999 1. Statement of Condition of the Federal Reserve Banks, by Bank, December 31, 1999 and 1998 Millions of dollars Total Boston Item 1999 1998 1999 1998 ASSETS Gold certificate account 11,048 11,046 533 582 Special drawing rights certificate account 6,200 9,200 307 530 Coin 207 358 4 23 Loans To depository institutions 233 17 91 Other 0 0 0 Securities purchased under agreements to resell (tri-party) 140,640 Federal agency obligations Bought outright 181 338 9 18 Held under repurchase agreements 0 10,702 0 0 U.S. Treasury securities Bought outright1 477,963 452,141 24,717 24,625 Held under repurchase agreements 0 19,674 0 0 Total loans and securities 619,017 482,872 24,817 24,643 Items in process of collection 7,278 7,582 383 539 Bank premises 1,365 1,301 93 94 Other assets Denominated in foreign currencies 2 16,140 19,769 725 958 Allother3 17,300 16,628 778 683 Interdistrict settlement account 0 0 9,921 1,172 Total assets 678,556 548,756 37,562 29,225 LIABILITIES Federal Reserve notes 600,662 491,657 34,764 26,417 Deposits Depository institutions 24,027 26,306 1,545 1,568 U.S. Treasury, general account 28,402 6,086 0 0 Foreign, official accounts 71 167 1 7 Other4 1,270 1,619 34 68 Total deposits 53,770 34,179 1,580 1,643 Deferred credit items 6,871 6,574 400 392 4,390 4,442 240 238 Other liabilities and accrued dividends5 65,694 536,852 36,985 28,690 Total liabilities CAPITAL ACCOUNTS 6,431 5,952 289 267 Capital paid in 6,431 5,952 289 267 Surplus 0 0 0 0 Other capital accounts 678^56 548,756 37,562 29,225 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 821,959 611,688 42,799 30,296 Federal Reserve notes outstanding (issued to Bank) 221,297 120,030 8,034 3,879 Less: Held by Bank 600,662 491,657 34,764 26,417 Federal Reserve notes, net Collateral for Federal Reserve notes Gold certificate account 11,048 11,046 Special drawing rights certificate account 6,200 9,200 Other eligible assets 0 0 U.S. Treasury and federal agency securities 583,414 471,412 DigitizedT footar lF cRolAlaSteEraRl 600,662 491,657 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 347 1.—Continued New York Philadelphia Cleveland Richmond 1999 1998 1999 1998 1999 1998 1999 1998 4,435 4,206 319 323 566 643 834 807 2,431 3,202 187 282 299 574 516 792 9 15 8 23 11 16 38 53 0 0 1 0 0 0 12 0 0 0 0 0 0 0 0 0 140,640 72 125 5 10 10 22 14 27 0 10,702 0 0 0 0 0 0 190,346 167,582 14,316 13,145 27,667 29,386 35,957 35,617 0 19,674 0 0 0 0 0 0 331,059 198,083 14,322 13,155 27,677 29,408 35,983 35,644 941 745 282 266 401 527 493 624 164 158 50 50 158 158 125 125 3,277 4,002 479 1,034 1,081 1,271 3,356 3,066 8,056 8,465 522 475 900 815 1,218 1,083 -69,615 -5,656 8,761 2,181 3,273 -4,170 646 4,985 280,757 213,219 24,930 17,790 34366 29,242 43,209 47,179 236,509 194,182 23,437 16,456 31,757 26,164 36,876 41,577 10,035 7,533 592 433 1,118 1,574 1,957 1,898 28,402 6,086 0 0 0 0 0 0 47 53 1 8 2 9 6 22 564 484 15 147 26 89 74 188 39,048 14,156 608 588 1,145 1,672 2,037 2,109 973 809 326 242 315 334 566 676 1,575 1,654 159 151 259 275 347 342 278,106 210,802 24,531 17,437 33,477 28,445 39,826 44,704 1,325 1,208 199 177 444 399 1,691 1,238 1,325 1,208 199 177 444 399 1,691 1,238 0 0 0 0 0 0 0 0 280,757 213,219 24,930 17,790 34366 29,242 43,209 47,179 326,492 239,794 30,931 18,434 38,915 29,535 54,760 50,920 89,983 45,611 7,493 1,978 7,158 3,370 17,884 9,343 236,509 194,182 23,437 16,456 31,757 26,164 36,876 41,577 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

348 86th Annual Report, 1999 1. Statement of Condition of the Federal Reserve Banks, by Bank, December 31, 1999 and 1998—Continued Millions of dollars Atlanta Chicago Item 1999 1998 1999 1998 ASSETS Gold certificate account 724 717 993 998 Special drawing rights certificate account 450 602 549 900 Coin 20 44 32 35 Loans To depository institutions 14 34 Other 0 0 Securities purchased under agreements to resell (tri-party) Federal agency obligations Bought outright 11 21 17 32 Held under repurchase agreements 0 0 0 0 U.S. Treasury securities Bought outright1 29,093 27,504 44,890 43,406 Held under repurchase agreements 0 0 0 0 Total loans and securities 29,118 27,529 44,942 43,442 Items in process of collection 603 1,050 753 794 Bank premises 146 82 107 107 Other assets Denominated in foreign currencies 2 1,134 1,295 1,581 1,911 All other3 945 807 1,379 1,185 Interdistrict Settlement Account 13,643 4,780 23,292 1,838 Total assets 46,784 36,906 73,628 51,210 LIABILITIES Federal Reserve notes 43,852 33,103 68,385 44,608 Deposits Depository institutions 899 1,769 2,970 4,282 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 2 9 3 14 Other4 36 81 56 121 Total deposits 937 1,860 3,029 4,416 Deferred credit items 772 821 637 609 302 285 420 410 Other liabilities and accrued dividends5 863 36,069 72,471 50,044 Total liabilities CAPITAL ACCOUNTS 460 418 578 583 Capital paid in 460 418 578 583 Surplus 0 0 0 0 Other capital accounts 46,784 36,906 73,628 51,210 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 62,089 44,429 79,306 54,114 Federal Reserve notes outstanding (issued to Bank) 18,237 11,326 10,920 9,506 Less: Held by Federal Reserve Bank Federal Reserve notes, net 43,852 33,103 68385 44,608 NOTE. Differences may exist between amounts reported Components may not sum to totals because of in these statistical tables and amounts reported in the rounding. audited Federal Reserve Bank financial statements because ... Not applicable. of intercompany eliminations, reclassifications, and round- 1. Includes securities loaned—fully guaranteed by U.S. Digitizedi nfog rr eFqRuiAreSd EfoRr presentation of the audited data on the Treasury securities pledged with Federal Reserve http://frasbeasri.ss otlfo guenisefrealdly. oarcgce/p ted accounting principles (GAAP). Banks—and excludes securities sold and scheduled to be Federal Reserve Bank of St. Louis

Statistical Tables 349 1.—Continued St. Louis Minneapolis Kansas City Dallas San Francisco 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998 337 358 140 128 313 289 575 530 1,279 1,465 175 340 78 123 175 247 341 367 692 1,241 10 19 13 16 17 24 16 40 30 52 37 7 10 0 11 2 10 0 12 1 0 0 0 0 0 0 0 0 0 0 6 12 2 4 5 9 9 15 19 42 0 0 0 0 0 0 0 0 0 0 15,722 15,889 5,716 4,967 14,333 12,543 23,816 20,558 51,389 56,919 0 0 0 0 0 0 0 0 0 0 15,765 15,908 5,729 4,971 14,350 12,554 23,835 20,574 51,421 56,962 471 516 599 510 474 496 296 392 1,581 1,123 32 31 128 130 51 54 146 149 165 162 327 462 549 710 381 456 616 1,029 2,635 3,574 498 444 209 169 457 362 743 583 1,594 1,558 5,176 -1,841 -3,050 1,381 3,969 1,324 -9,087 1,679 13,071 -7,673 22,792 16,235 4,395 8,139 20,186 15,806 17,481 25343 72,468 58,463 21,575 14,701 2,766 6,136 18,829 14,256 15,269 23,072 66,641 50,984 440 692 482 1,039 480 652 1,246 1,166 2,263 3,700 0 0 0 0 0 0 0 0 0 0 1 3 1 5 1 3 1 7 5 26 20 32 5 33 18 50 49 105 374 222 461 727 488 1,077 499 706 1,297 1,278 2,641 3,948 272 398 584 442 340 414 269 334 1,419 1,102 168 168 87 79 160 149 226 205 446 486 22,476 15,994 3,925 7,734 19,828 15,525 17,060 24,889 71,147 56,520 158 121 235 202 179 140 211 227 660 972 158 121 235 202 179 140 211 227 660 972 0 0 0 0 0 0 0 0 0 0 22,792 16,235 4^95 8,139 20,186 15,806 17,481 25343 72,468 58,463 26,444 17,290 11,348 7,690 24,597 17,214 36,681 33,678 87,597 68,294 4,869 2,589 8,581 1,554 5,769 2,958 21,412 10,606 20,956 17,310 21,575 14,701 2,766 6,136 18,829 14,256 15,269 23,072 66,641 50,984 2. Valued monthly at market exchange rates. deposits are held solely by the Federal Reserve Bank of 3. The Federal Reserve System total includes deposi- New York. tory institution overdrafts of $22 million for 1999 and 5. Includes exchange-translation account reflecting the $11 million for 1998. monthly revaluation at market exchange rates of foreign- Digitized fo4r. FInRclAuSdeEs Ri nternational organization deposits of exchange commitments. http://fras$e13r.9s mtloilulioisnf efodr. o1r9g9/9 and $104 million for 1998. These Federal Reserve Bank of St. Louis

350 86th Annual Report, 1999 2. Federal Reserve Open Market Transactions, 1999 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 35,069 New bills 35,069 Redemptions 0 Others within 1 year Gross purchases 0 Gross sales 0 Maturity shift 2,865 Exchanges -400 Redemptions 492 0 to 5 years Gross purchases 0 Gross sales 0 Maturity shift -2,865 Exchanges 0 5 to 10 years Gross purchases Gross sales . Maturity shift Exchanges More than 10 years Gross purchases Gross sales Maturity shift Exchanges All maturities Gross purchases Gross sales Redemptions Matched transactions Gross purchases Gross sales Repurchase agreements Gross purchases Gross sales Net change in U.S. Treasury securities FEDERAL AGENCY OBLIGATIONS Outright transactions Gross purchases Gross sales Redemptions Repurchase agreements Gross purchases Gross sales Net change in agency obligations Total net change in System Open Market Account.. oooo 0 0 0 0 0 0 36,862 35,065 48,142 36,862 35,065 48,142 0 0 0 2,103 1,060 1,677 0 0 0 5,578 3,015 3,768 -7,458 -5,956 -3,370 0 0 726 2,752 2,428 3,362 0 0 0 -4,928 -3,015 -3,768 4,778 5,956 3,020 335 346 945 0 0 0 -650 0 0 1,340 0 0 615 0 2,404 262 0 0 0 0 0 0 0 0 0 1,340 0 350 615 5,190 6,238 6,246 0 0 0 0 492 0 0 726 357,544 317,833 393,267 365,078 355,369 316,424 394,865 362,716 21,968 26,098 62,878 45,067 37,157 27,025 53,706 48,867 -12,891 5,672 13,812 4,082 0 0 2 23,577 31,744 -8,169 -21,060 ooo 0 0 25 37,416 35,731 36,067 34,009 1,349 1,697 7,021 15,509 ooo 20,623 22,937 -2,314 1,768 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 351 2.—Continued May June July Aug. Sept. Oct. Nov. Dec. Total 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 37,107 35,045 42,037 37,052 42,643 35,844 36,882 42,468 464,218 37,107 35,045 42,037 37,052 42,643 35,844 36,882 42,468 464,218 0 0 0 0 0 0 0 0 0 1,421 880 951 429 960 0 964 1,450 11,895 0 0 0 0 0 0 0 0 0 3,768 2,740 3,279 7,669 3,468 3,831 6,675 3,936 50,590 -4,607 -5,540 -368 -10,798 -2,125 -368 -10,150 -2,175 -53,315 0 0 41 0 0 170 0 0 1,429 4,442 948 0 1,272 0 0 1,014 3,514 19,731 0 0 0 0 0 0 0 0 0 -3,768 -2,740 -3,279 -4,751 -3,468 -3,831 -3,685 -3,936 -44,032 2,562 5,540 0 8,433 2,125 0 8,015 2,175 42,604 1,584 65 0 447 0 0 0 581 4,303 0 0 0 0 0 0 0 0 0 0 0 0 -2,918 0 0 -2,273 0 -5,841 2,045 0 373 1,290 0 0 2,135 0 7,583 2,890 0 0 1,075 0 0 925 1,257 9,428 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -717 0 -717 0 0 0 1,075 0 374 0 0 3,139 10,337 1,893 951 3,223 960 0 2,903 6,802 45,357 0 0 0 0 0 0 0 0 0 0 0 41 0 0 170 0 0 1,429 356,960 379,534 347,067 374,032 346,904 329,213 317,537 488,845 4,373,815 358,362 379,126 346,747 373,159 349,041 327,361 318,294 510,605 4,392,070 27,605 17,710 27,707 23,097 29,369 30,600 48,145 73,995 434,239 30,531 14,614 33,612 23,717 24,337 24,437 35,895 42,090 395,988 6,008 5,397 -4,675 3,476 3,855 7,846 14,396 16,946 63,924 ooo 0 0 52 38,167 32,786 36,962 32,104 1,205 630 7,213 6,028 ooo 0 0 11 46,941 61,968 48,840 56,053 -1,909 5,904 -6,584 9^80 ooo 0 0 0 0 50 7 53,224 47,197 33,205 47,963 52,863 18,575 5,261 -5,716 14,623 9,116 2,130 29,019 ooo 0 0 157 81,583 512,418 22,288 440,406 59,295 71,856 76,241 135,780 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

352 86th Annual Report, 1999 3. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31, 1997-99 Millions of dollars December 31 Change Description 1998 to 1997 to 1999 1998 1997 1999 1998 U.S. TREASURY SECURITIES Held outright1 517,145 473,068 447,762 44,077 25,306 By remaining maturity Bills 1-90 days 124,294 106,996 112,892 17,298 -5,8% 91 days to 1 year 91,405 108,703 101,257 -17,298 7,446 Notes arid bonds 1 year or less 59,899 49,149 49,370 10,750 -221 More than 1 year through 5 years 124,169 107,730 95,028 16,439 12,702 More than 5 years through 10 years ... 51,107 44,822 40,907 6,285 3,915 More than 10 years 66,270 55,668 48,308 10,602 7,360 By type Bills 215,699 215,699 214,149 0 1,550 Notes 218,467 187,895 174,206 30,572 13,689 Bonds 82,978 69,474 59,407 13,504 10,067 Repurchase agreements 57,925 19,674 21,188 38,251 -1,514 MSPs, foreign accounts 39,182 20,927 17,027 18,255 3,900 MSPs, in the market 0 0 0 0 0 FEDERAL AGENCY SECURITIES Held outright1 181 338 685 -157 -347 By remaining maturity 1 year or less 51 102 252 -51 -150 More than 1 year through 5 years 10 61 153 -51 -92 More than 5 years through 10 years 120 175 255 -55 -80 More than 10 years 0 0 25 0 -25 By issuer Federal Farm Credit Banks 0 10 10 -10 0 Federal Home Loan Banks 6 38 57 -32 -19 Federal Land Banks 0 0 0 0 0 Federal National Mortgage Association .. 175 290 618 -115 -328 Repurchase agreements 82,715 10,702 2,652 72,013 8,050 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 353 4. Number and Annual Salaries of Officers and Employees of the Federal Reserve Banks, December 31, 1999 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 211,700 61 7,268,971 1,083 153 53,157,926 1,298 60,638,597 New York 270,100 257 37,747,467 3,280 77 172,176,688 3,615 210,194,255 Philadelphia 236,000 55 6,589,300 1,169 39 48,117,573 1,264 54,942,873 Cleveland 212,700 49 5,445,100 1,271 45 48,343,035 1,366 54,000,835 Richmond 212,700 85 9,115,800 1,958 162 76,911,285 2,206 86,239,785 Atlanta 227,750 92 10,218,800 2,472 56 92,431,469 2,621 102,878,019 Chicago 238,000 84 9,847,650 1,996 66 90,283,184 2,147 100,368,834 St. Louis 200,300 70 7,044,134 1,147 83 43,248,765 1,301 50,493,199 Minneapolis 223,200 47 5,336,700 1,065 112 45,138,755 1.225 50,698,655 Kansas City 211,200 59 6,278,800 1,466 66 56,683,548 1,592 63,173,548 Dallas 211,000 62 5,653,052 1,416 87 47,458,436 1,566 53,322,488 San Francisco ... 291,300 92 11,796,830 2,271 94 111,920,269 2,458 124,008,399 Federal Reserve Information Technology . 0 25 3,059,930 593 11 36,623,080 629 39,683,010 Total 2,745,950 1,038 125,402,534 21,187 1,051 922,494,013 23,288 1,050,642,497 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

354 86th Annual Report, 1999 5. Income and Expenses of the Federal Reserve Banks, by Bank, 1999 Thousands of dollars Item Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 11,117 962 921 104 114 U.S. Treasury and federal agency securities 28,216,124 1,436,150 11,537,044 813,464 1,637,471 Foreign currencies 224,804 10,221 45,641 7,457 14,958 Priced services 835,895 44,326 91,661 40,904 54,289 Other 58,8% 1,460 35,035 994 1,866 Total 29^46,836 1,493,119 11,710^03 862,923 1,708,698 CURRENT EXPENSES Salaries and other personnel expenses 1,140,657 63,601 233,164 57,027 58,560 Retirement and other benefits 305,175 18,012 67,968 14,098 15,489 Net periodic pension costs1 . -366,765 0 -366,870 10 -1 Fees 43,902 2,357 7,804 842 2,289 Travel 50,813 2,402 7,693 2,249 3,093 Software expenses 71,252 3,806 7,481 2,144 5,217 Postage and other shipping costs 83,819 1,735 6,212 1,869 2,406 Communications 11,431 380 2,761 365 683 Materials and supplies 55,261 2,577 9,980 3,577 3,152 Building expenses Taxes on real estate 31,071 4,469 4,041 1,522 2,632 Property depreciation 66,215 4,379 12,986 2,808 5,927 Utilities 27,700 2,333 5,720 2,122 2,068 Rent 35,128 711 14,152 276 281 Other 29,284 754 6,961 1,550 1,978 Equipment Purchases 10,137 599 1,608 743 352 Rentals 31,393 218 2,043 314 171 Depreciation 116,649 6,250 19,245 5,598 5,630 Repairs and maintenance 83,778 4,824 10,581 4,232 5,167 Earnings-credit costs 320,605 17,157 55,848 10,605 30,942 Other 67,734 4,526 12,740 1,948 4,417 Shared costs, net2 0 5,592 23,196 12,003 13,995 Recoveries -65,613 -10,756 -8,699 -2,643 -2,768 Expenses capitalized3 -2,015 -250 0 -198 -117 Total 2,147,611 135,677 136,616 123,061 161,562 Reimbursements -295,449 -16,495 -55,999 -24,611 -28,080 Net expenses 1,852,162 119,182 80,618 98,450 133,482 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 355 5.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 556 772 2,124 1,886 1,490 1,284 35 868 2,085,871 1,666,120 2,586,694 917,220 320,192 804,292 1,331,753 3,079,855 44,893 15,629 21,973 4,665 7,709 5,286 9,067 37,305 65,624 153,058 97,391 41,989 44,797 59,957 56,028 85,871 3,242 3,984 3,552 1,008 659 741 1,136 5,219 2,200,185 1,839,563 2,711,733 966,768 374,848 871,560 1,398,019 3,209,117 133,931 112,018 108,375 52,629 51,726 68,288 68,047 133,291 36,098 30,282 29,927 15,810 13,606 15,439 17,327 31,120 19 20 21 20 0 20 -2 -2 14,515 4,387 3,526 2,242 1,456 890 855 2,740 6,286 4,816 5,231 2,417 3,034 3,325 3,285 6,982 31,052 4,839 3,994 2,279 1,689 1,632 2,322 4,797 3,890 43,051 5,276 2,845 3,104 4,276 2,668 6,486 988 970 1,511 573 478 900 919 902 6,340 6,299 5,426 3,381 1,920 3,323 3,742 5,542 2,032 1,606 3,773 343 5,303 600 1,876 2,874 5,670 4,123 5,712 3,124 4,005 4,120 5,565 7,795 2,337 1,551 2,459 1,460 1,567 1,313 1,763 3,008 10,360 6,197 1,473 721 61 244 378 274 2,752 1,989 5,191 1,220 1,228 989 2,259 2,413 1,711 1,081 617 313 403 566 649 1,495 26,021 625 769 323 214 126 106 464 29,329 11,386 8,991 4,322 4,336 5,343 5,464 10,754 16,346 10,717 8,804 3,093 3,090 3,035 4,327 9,562 44,777 17,234 46,171 15,649 7,373 13,447 21,921 39,481 8,661 7,077 7,000 2,838 2,763 4,371 4,901 6,491 -147,498 5,872 21,451 14,552 8,978 18,064 14,084 9,710 -19,202 -3,169 -5,881 -1,803 -758 -1,000 -4,946 -3,988 -117 -625 -325 -83 0 -208 -49 -43 216,296 272,345 269,493 128,269 115,580 149,103 157,461 282,148 -31,174 -15,347 -21,867 -18,939 -20,555 -21,576 -10,968 -29,840 185,122 256,999 247,626 109,330 95,025 127,527 146,493 252,308 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

356 86th Annual Report, 1999 5. Income and Expenses of the Federal Reserve Banks, by Bank, 1999—Continued Thousands of dollars Item Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 27,494,674 1,373,937 11,629,685 764,473 1,575,216 Additions to and deductions from (-) current net income* Other additions 168 0 18 2 1 Total additions 168 0 18 2 1 Losses on sales of U.S. Treasury and federal agency securities -21,564 -1,110 -8,640 -648 -1,235 Losses on foreign exchange transactions -504,465 -22,664 -102,424 -14,959 -33,778 Other deductions -48 -1 -6 -2 -2 Total deductions -526,076 -23,775 -111,071 -15,609 -35,015 Net addition to or deduction from (-) current net income -525,909 -23,775 -111,052 -15,607 -35,014 Cost of unreimbursed Treasury services 7,649 232 557 3,650 608 Assessments by Board Board expenditures5 213,790 9,626 43,670 6,388 14,282 Cost of currency 484,959 26,057 191,537 16,232 25,808 Net income before payment to U.S. Treasury 26,262,368 1,314,248 11,282,869 722,596 1,499,504 Dividends paid 373,579 16,974 78,159 11,483 24,890 Payments to U.S. Treasury (interest on Federal Reserve notes) 25,409,736 1,276,090 11,087,629 688,190 1,428,727 Transferred to surplus 479,053 21,184 117,081 22,923 45,887 Surplus, January 1 5,952,024 267,411 1,208,394 176,503 398,543 Surplus, December 31 6,431,077 288,595 1,325,475 199,425 444,429 NOTE. Also see note to table 1. 3. Includes expenses for labor and materials tempo- Components may not sum to totals because of rarily capitalized and charged to activities when the prodrounding. ucts are consumed. 1. Reflects the effect of Financial Accounting Stan- 4. Includes reimbursement from the U.S. Treasury for dards Board Statement of Financial Accounting Stan- uncut sheets of Federal Reserve notes, gains and losses on dards No. 87, Employers' Accounting for Pensions (SFAS the sale of Reserve Bank buildings, counterfeit currency 87). The System Retirement Plan for employees is that is not charged back to the depositing institution, and recorded on behalf of the System on the books of the stale Reserve Bank checks that are written off. Federal Reserve Bank of New York, resulting in a reduc- 5. For details, see the chapter "Board of Governors tion in expenses of $366,994 thousand. The Retirement Financial Statements." Benefits Equalization Plan is recorded by each Federal 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 357 5.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 2,015,063 1,582,564 2,464,107 857,438 279,823 744,033 1,251,525 2,956,810 69 18 5 0 0 0 15 37 69 18 5 0 0 0 15 37 -1,615 -1,313 -2,021 -705 -260 -651 -1,083 -2,283 -104,887 -35,450 -49,412 -10,229 -17,150 -11,902 -19,262 -82,348 -10 -3 -8 -2 -2 -4 -6 0 -106,512 -36,766 -51,442 -10,936 -17,412 -12,556 -20,351 -84,631 -106,443 -36,747 -51,437 -10,936 -17,412 -12,556 -20,336 -84,594 350 280 593 123 258 427 263 306 44,415 14,964 20,840 4,479 7,292 5,174 7,956 34,704 41,011 32,652 44,000 14,501 6,052 14,062 22,758 50,289 1,822,844 1,497,920 2,347,236 827,399 248,808 711,814 1,200,212 2,786,917 85,629 25,823 35,775 8,692 12,806 9,827 13,009 50,512 1,283,329 1,429,976 2,316,040 781,446 203,418 663,528 1,203,828 3,047,536 453,887 42,122 -4,578 37,261 32,584 38,459 -16,624 -311,131 1,237,545 418,268 583,009 120,692 202,353 140,425 227,270 971,612 1,691,431 460,390 578,431 157,954 234,937 178,884 210,646 660,481 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

358 86th Annual Report, 1999 6. Income and Expenses of the Federal Reserve Banks, 1914-99 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 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 359 6.—Continued Payments to U.S. Treasury 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 217 1,743 6,804 1,134 i,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 2,011 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

360 86th Annual Report, 1999 6. Income and Expenses of the Federal Reserve Banks, 1914-99—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 -400,366 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 1998 28,149,477 1,833,436 1,906,037 178,009 408,544 1999 29,346,836 1,852,162 -533,557 213,790 484,959 Total, 1914-99 501,822^64 36,209,032 4,846,682 2,880,460 5,647,091 Aggregate for each Bank, 1914-99 Boston 27,098,102 2,451,609 159,416 110,190 327,542 New York 165,137,721 5,843,1734 1,506,510 737,121 1,838,198 Philadelphia 18,789,099 1,999,002 125,768 131,917 219,058 Cleveland 32,313,902 2,292,337 221,671 198,873 349,259 Richmond 39,975,264 3,152,765 354,007 225,573 488,382 Atlanta 24,133,136 3,492,233 388,007 235,960 325,334 Chicago 64,255,429 4,673,235 566,581 362,681 675,717 St. Louis 17,413,129 1,863,842 85,701 77,962 211,406 Minneapolis 8,941,714 1,705,734 142,188 84,082 94,216 Kansas City 19,277,304 2,323,259 139,176 109,520 217,218 Dallas 24,988,909 2,344,656 441,460 183,240 271,408 San Francisco 59,498,657 4,067,186 716,198 423,341 629,352 Total 501,822^64 36,209,032 4,846,682 2,880,460 5,647,091 NOTE. Also see note at the end of table 1. on Bank premises (1927), $139,300 thousand for contri- Components may not sum to totals because of butions to capital of the Federal Deposit Insurance Corporounding. ration (1934), $4 thousand net upon elimination of sec- .. . Not applicable. tion 13b surplus (1958), and $106,000 thousand (1996) 1. For 1987 and subsequent years, includes the cost of and $107,000 thousand (1997) transferred to the Treasury services provided to the Treasury by Federal Reserve as statutorily required; and was increased by transfer of Banks for which reimbursement was not received. $11,131 thousand from reserves for contingencies (1955), 2. Represents transfers made as a franchise tax from leaving a balance of $6,431,077 thousand on Decem- 1917 to 1932; transfers made under section 13b of the ber 31, 1999. Federal Reserve Act from 1935 to 1947; and transfers 4. This amount is reduced $1,773,208 thousand, which made under section 7 of the Federal Reserve Act for 1996 is related to the System Retirement Plan. See note 1, and 1997. table 5. Digitized fo3.r FTRheA $S6,E77R2 ,749 thousand transferred to surplus was reduced by direct charges of $500 thousand for charge-off http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 361 6.—Continued Payments to U.S. Treasury Div p i a d i e d nds Interest on to surplus 1 t 1 o d l s l u al r C p I l T u C s ii Statutory Federal Reserve (section 13b) (section 7) transfers2 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 0 831,705 343,014 17,785,942 8,774,994 731,575 373,579 0 25,409,736 479,053 4,665,159 44,113,958 406380,601 —4 6,772,7493 189,267 2,579,504 21,292,012 135 307,258 1,206,982 17,307,161 138,296,614 -433 1,415,416 224,873 1,312,118 14,802,417 291 225,191 334,645 2,827,043 26,062,046 -10 471,380 391,942 3,083,928 31,274,256 -72 1,712,496 364,317 2,713,230 16,904,129 5 485,935 575,069 4,593,811 53,322,604 12 618,880 127,527 1,833,837 13,215,931 -27 168,351 134,564 416,227 6,405,077 65 243,937 173,416 1,249,703 15,152,229 -9 191,144 279,700 1,510,802 20,613,022 55 227,484 662,857 4,686,594 49,040,263 -17 705,278 4,665,159 44,113,958 406380,601 -4 6,772,7493 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

362 86th Annual Report, 1999 7. Acquisition Costs and Net Book Value of Premises of the Federal Reserve Banks and Branches, December 31, 1999 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)1 equipment BOSTON 22,074 95,845 14,401 132,320 92,989 NEW YORK 20,330 161,882 46,894 229,107 159,202 888 4,761 3,144 8,793 5,202 Buffalo 2,380 63,104 9,004 74,488 50,279 PHILADELPHIA 3,073 119,607 24,452 147,132 128,810 CLEVELAND 2,247 17,345 8,499 28,091 13,082 Cincinnati 1,658 12,533 8,062 22,253 16,158 Pittsburgh RICHMOND 6,375 64,721 25,294 96,390 71,879 Baltimore 6,478 27,101 4,929 38,509 25,740 Charlotte 3,130 27,541 4,750 35,421 27,289 ATLANTA4 17,689 77,436 0 95,125 95,120 5,939 Birmingham4 4,852 0 0 4,852 4,852 Jacksonville 1,730 17,226 2,945 21,901 16,387 ' 48 Miami 3,839 14,188 3,790 21,817 14,812 Nashville 629 3,171 2,724 6,523 3,426 New Orleans 3,497 7,958 4,076 15,532 10,908 CHICAGO 5,044 123,078 14,878 143,001 99,004 Detroit 798 6,363 3,722 10,883 8,082 ST. LOUIS 700 21,599 6,415 28,714 17,181 Little Rock 1,148 4,632 1,272 7,053 5,428 Louisville 700 4,281 1,502 6,483 4,494 Memphis 1,136 4,571 2,792 8,499 5,069 MINNEAPOLIS 11,193 99,947 13,301 124,441 117,922 Helena 1,978 9,419 788 12,185 10,218 KANSAS CITY 2,048 18,826 8,379 29,253 15,922 Denver 3,188 7,436 3,700 14,325 8,833 Oklahoma City 646 11,243 3,493 15,382 11,151 Omaha 6,535 11,058 1,401 18,993 14,905 DALLAS 29,049 104,271 19,700 153,020 130,881 El Paso 262 2,911 1,018 4,191 2,842 Houston 2,205 4,840 2,045 9,090 6,321 679 San Antonio 482 5,506 2,707 8,696 6,012 SAN FRANCISCO .... 15,600 77,529 18,727 111,855 77,772 Los Angeles 3,892 53,609 9,875 67,377 49,303 952 Portland 2,884 11,421 2,598 16,903 14,331 Salt Lake City 495 9,439 2,587 12,520 9,944 Seattle 325 13,450 3,542 17,316 13,672 Total 191,177 1,319,848 287,409 1,798,434 1,365,423 7,618 NOTE. Also see note to table 1. 3. Covers acquisitions for banking-house purposes and Components may not sum to totals because of Bank premises formerly occupied and being held pending rounding. sale. ... Not applicable. 4. The Atlanta and Birmingham offices sold their 1. Includes expenditures for construction at some buildings and building machinery and equipment in 1997 offices, pending allocation to appropriate accounts. and 1998 respectively. These offices are leasing back their 2. Excludes charge-offs of $17,699 thousand before buildings pending completion of their new facilities. 1952. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 363 8. Operations in Principal Departments of the Federal Reserve Banks, 1996-99 Operation 1999 1998 1997 1996 Millions of pieces (except as noted) Loans (thousands)l 4 7 6 Currency processed 29,031 26,341 24,510 23,436 Currency destroyed 7,303 7,251 7,769 8,686 Coin received2 6,719 8,454 9,603 8,654 Checks handled U.S. government checks 288 321 378 436 Postal money orders 226 213 204 206 Allother 17,075 16,573 15,949 15,487 Government securities transfers 13 14 13 13 Transfer of funds 103 98 90 83 Automated clearinghouse transactions Commercial 3,344 2,966 2,603 2,372 Government 809 753 677 625 Food stamps redeemed 1,158 1,843 2,854 3,637 Millions of dollars Loans! 20,431 39,863 25,350 Currency processed 444,234 409,166 399,080 375,399 Currency destroyed 85,259 94,858 123,359 148,394 Coin received2 778 1,001 1,212 1,175 Checks handled U.S. government checks 306,077 343,670 401,989 462,647 Postal money orders 29,118 28,469 26,464 25,831 All other 13,788,037 13,076,097 12,169,087 11,584,276 Government securities transfers 179,486,282 197,781,609 174,949,330 160,637,460 Transfer of funds 343,381,658 328,748,912 288,419,808 249,140,021 Automated clearinghouse transactions Commercial 10,862,424 10,338,376 9,128,779 8,287,711 Government 2,233,279 1,988,335 1,581,552 1,250,472 Food stamps redeemed 6,221 9,278 15,054 18,669 1. Collection of data discontinued effective 1999. 2. For 1999, does not include coin activity at Federal Reserve off-site coin terminals. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

364 86th Annual Report, 1999 9. Federal Reserve Bank Interest Rates on Loans to Depository Institutions, December 31, 1999 Extended credit3 Special Adjustment Seasonal Liquidity Reserve Bank credit1 credit2 First thirty After thirty Facility days of days of credit4 borrowing borrowing All Federal Reserve Banks 5.00 5.70 5.00 6.20 7.00 1. Adjustment credit is available on a short-term basis involve only a particular institution or when an institution to help depository institutions meet temporary needs for is experiencing difficulties adjusting to changing market funds that cannot be met through reasonable alternative conditions over a longer period of time. See section sources. Adjustment credit is usually provided at the 201.3(c) of Regulation A. basic discount rate, but under certain circumstances a Extended-credit loans outstanding more than thirty special rate or rates above the basic discount rate may be days will be charged a flexible rate somewhat above rates applied. See section 201.3(a) of Regulation A. on market sources of funds; the rate will always be at 2. Seasonal credit is available to help smaller deposi- least 50 basis points above the discount rate applicable to tory institutions meet regular, seasonal needs for funds adjustment credit. The flexible rate is reestablished on the that cannot be met through special industry lenders and first business day of each two-week reserve maintenance that arise from a combination of expected patterns of period. At the discretion of the Federal Reserve Bank, the movement in their deposits and loans. The discount rate flexible rate may be charged on extended-credit loans that on seasonal credit takes into account rates on market are outstanding less than thirty days. sources of funds and ordinarily is reestablished on the 4. Special Liquidity Facility credit became available first business day of each two-week reserve maintenance on October 1, 1999, to help depository institutions in period; however, it is never lower than the discount rate sound financial condition meet unusual needs for funds in applicable to adjustment credit. See section 201.3(b) of the period around the century date change. The interest Regulation A. rate on loans from the special facility is the Federal Open 3. Extended credit is available to depository institutions, Market Committee's intended federal funds rate plus 150 if similar assistance is not reasonably available from other basis points. sources, when exceptional circumstances or practices Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 365 10. Reserve Requirements of Depository Institutions, December 31, 1999 Requirements Type of deposit Percentage of deposits Effective date Net transaction accountsl $0 million-$44.3 million2 3 12-30-99 More than $44.3 million3 10 12-30-99 Nonpersonal time deposits * 0 12-27-90 Eurocurrency liabilities 5 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, savings banks, savings and loan associations, period beginning December 30, 1999, for depository credit unions, agencies and branches of foreign banks, institutions that report weekly, and with the reserve mainand Edge Act corporations. tenance period beginning January 20, 2000, for institu- 1. Transaction accounts include all deposits against tions that report quarterly, the exemption was raised from which the account holder is permitted to make withdraw- $4.9 million to $5.0 million. als by negotiable or transferable instruments, payment 3. The reserve requirement was reduced from 12 perorders of withdrawal, or telephone or preauthorized trans- cent to 10 percent on April 2, 1992, for institutions that fers for the purpose of making payments to third persons report weekly, and on April 16,1992, for institutions that or others. However, accounts subject to the rules that report quarterly. permit no more than six preauthorized, automatic, or 4. For institutions that report weekly, the reserve reother transfers per month (of which no more than three quirement on nonpersonal time deposits with an original may be by check, draft, debit card, or similar order maturity of less than 1 Vi years was reduced from 3 perpayable directly to third parties) are savings deposits, not cent to 1 xh percent for the maintenance period that began transaction accounts. December 13, 1990, and to zero for the maintenance 2. The Monetary Control Act of 1980 requires that the period that began December 27, 1990. For institutions amount of transaction accounts against which the 3 per- that report quarterly, the reserve requirement on nonpercent reserve requirement applies be modified annually by sonal time deposits with an original maturity of less than 80 percent of the percentage change in transaction Wz years was reduced from 3 percent to zero on Janaccounts held by all depository institutions, determined as uary 17, 1991. of June 30 each year. Effective with the reserve mainte- The reserve requirement on nonpersonal time deposits nance period beginning December 30, 1999, for deposi- with an original maturity of 1V4 years or more has been tory institutions that report weekly, and with the reserve zero since October 6, 1983. maintenance period beginning January 20, 2000, for insti- 5. The reserve requirement on Euroccurency liabilities tutions that report quarterly, the amount was decreased was reduced from 3 percent to zero in the same manner from $46.5 million to $44.3 million. and on the same dates as the reserve requirement on Under the Garn-St Germain Depository Institutions nonpersonal time deposits with an original maturity of Act of 1982, the Board adjusts the amount of reservable less than 1V2 years (see note 4). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

366 86th Annual Report, 1999 11. Initial Margin Requirements under Regulations T, U, and X Percent of market value Effective date M sto a c rg k i s n Co b n o ve n r d t s ible Sh T o o rt n s l a y l 1 es, 1934, Oct. 1 . 25-45 1936, Feb. 1 . 25-55 Apr. 1 . 55 1937, Nov. 1 . 40 50 1945, Feb. 5 . 50 50 July 5 . 75 75 1946, Jan. 21 . 100 100 1947, Feb. 21 75 75 1949, Mar. 3 . 50 50 1951, Jan. 17 . 75 75 1953, Feb. 20 50 50 1955, Jan. 4 .. 60 60 Apr. 23 70 70 1958, Jan. 16 . 50 50 Aug. 5 . 70 70* Oct. 16 90 90 1960, July 28 70 70 1962, July 10 50 50 1963, Nov. 6 . 70 70 1968, Mar. 11 70 *50' 70 June 8 . 80 60 80 1970, May 6 , 65 50 65 1971, Dec. 6 . 55 50 55 1972, Nov. 24 65 50 65 1974, Jan. 3 . 50 50 50 NOTE. These regulations, adopted by the Board of adopted effective October 15, 1934; Regulation U, effec- Governors pursuant to the Securities Exchange Act of tive May 1, 1936; and Regulation X, effective Novem- 1934, limit the amount of credit to purchase and carry ber 1,1971. The former Regulation G, which was adopted "margin securities" (as defined in the regulations) when effective March 11, 1968, was merged with Regulation U, such value is collateralized by securities. Margin require- effective April 1, 1998. ments on securities are the difference between the market 1. From October 1, 1934, to October 31, 1937, the value (100 percent) and the maximum loan value of requirement was the margin "customarily required" by collateral as prescribed by the Board. Regulation T was the brokers and dealers. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 367 12. Principal Assets and Liabilities and Number of Insured Commercial Banks in the United States, by Class of Bank, June 30, 1999 and 1998 Millions of dollars, except as noted Member banks Nonmember Item Total banks Total National State 1999 ASSETS Loans and investments 3,963,401 3,134,072 2,373,265 760,807 829,328 Loans, gross 2,972,232 2,376,913 1,827,078 549,835 595,319 Net 2,969,585 2,375,445 1,825,931 549,514 594,141 Investments 991,169 757,159 546,187 210,972 234,010 U.S. Treasury and federal agency securities 307,786 205,988 140,704 65,284 101,798 Other 683,383 551,171 405,482 145,688 132,212 Cash assets, total 236,968 196,509 149,177 47,331 40,459 LIABILITIES Deposits, total 3,060,565 2,353,313 1,755,358 597,956 707,251 Interbank 54,663 47,321 36,797 10,524 7,342 Other transaction 650,167 496,439 371,086 125,353 153,728 Other nontransaction 2,355,734 1,809,553 1,347,475 462,079 546,181 Equity capital 457,393 367,684 271,058 96,626 89,709 Number of banks 8,654 3,409 2,409 1,000 5,245 1998r ASSETS Loans and investments 3,644,645 2,870,285 2,193,860 676,425 774,360 Loans, gross 2,763,384 2,199,633 1,720,549 479,083 563,752 Net 2,760,379 2,197,968 1,719,181 478,787 562,411 Investments 881,261 670,653 473,311 197,342 210,608 U.S. Treasury and federal agency securities 301,052 198,655 127,701 70,954 102,397 Other 580,208 471,998 345,609 126,388 108,211 Cash assets, total 243,481 203,091 155,526 47,564 40,390 LIABILITIES Deposits, total 2,933,832 2,263,347 1,708,186 555,161 670,485 Interbank 56,032 48,506 38,083 10,423 7,526 Other transaction 696,993 538,011 408,923 129,088 158,982 Other nontransaction 2,180,808 1,676,831 1,261,180 415,651 503,977 Equity capital 437,465 349,619 258,305 91,313 87,847 Number of banks 8,962 3,534 2,547 987 5,428 NOTE. Components may not sum to totals because of rounding, r. Data have been revised. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

368 86th Annual Report, 1999 13. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-99, and Month-End 1999 Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasury and cial Treafederal agency securities draw- sury Period u H n e d l e d r Loans Float3 ot A he ll r* R F O e e s d th e e r e r v a r e l Total s G to o c l k d 6 c r i i e c i g n r a h t g t i t e f s - s r c t e o a u n u n r c t d - - y - Total Bought repur- assets5 ac- ing7 outright1 chase count agreement2 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 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 369 13.—Continued Factors absorbing reservefunds Deposits, other Member bank than reserves, with Federal Reserve Banks Other Cur- Rerency Trea- Other quired Federal in sury Federal clear- Reserve cash Reserve liacir- hold- ac- ing bilities With Curcula- ings8 Trea- For- Other counts 5 bal- and Federal rency Re- Extion sury eign ances capital5 Reserve and quired11 cess11 Banks coin10 4,951 288 51 96 25 118 0 0 1,636 0 1,585 51 5,091 385 51 73 28 208 0 0 1,890 0 1,822 68 5,325 218 57 5 18 298 0 0 1,781 0 0 0 4,403 214 96 12 15 285 0 0 1,753 0 1,654 99 4,530 225 11 3 26 276 0 0 1,934 0 0 0 4,757 213 38 4 19 275 0 0 ,898 0 1,884 14 4,760 211 51 19 20 258 0 0 2,220 0 2,161 59 4,817 203 16 8 21 272 0 0 2,212 0 2,256 -44 4,808 201 17 46 19 293 0 0 2,194 0 2.250 -56 4,716 208 18 5 21 301 0 0 2,487 0 2,424 63 4,686 202 23 6 21 348 0 0 2,389 0 2,430 -41 4,578 216 29 6 24 393 0 0 2,355 0 2,428 -73 4,603 211 19 6 22 375 0 0 2,471 0 2,375 96 5,360 222 54 79 31 354 0 0 1,961 0 1,994 -33 5,388 272 8 19 24 355 0 0 2,509 0 1,933 576 5,519 284 3 4 128 360 0 0 2,729 0 1,870 859 5,536 3,029 121 20 169 241 0 0 4,096 0 2,282 1,814 5,882 2,566 544 29 226 253 0 0 5,587 0 2,743 2,844 6,543 2,376 244 99 160 261 0 0 6,606 0 4,622 1,984 6,550 3,619 142 172 235 263 0 0 7,027 0 5,815 1,212 6,856 2,706 923 199 242 260 0 0 8,724 0 5,519 3,205 7,598 2,409 634 397 256 251 0 0 11,653 0 6,444 5,209 8,732 2,213 368 1,133 599 284 0 0 4,026 0 7,411 6,615 11,160 2,215 867 774 586 291 0 0 12,450 0 9,365 3,085 15,410 2,193 799 793 485 256 0 0 13,117 0 11,129 1,988 20,499 2,303 579 1,360 356 339 0 0 12,886 0 11,650 1,236 25,307 2,375 440 1,204 394 402 0 0 14,373 0 12,748 1,625 28,515 2,287 977 862 446 495 0 0 15,915 0 14,457 1,458 28,952 2,272 393 508 314 607 0 0 16,139 0 15,577 562 28,868 1,336 870 392 569 563 0 0 17,899 0 16,400 1,499 28,224 1,325 1,123 642 547 590 0 0 20,479 0 19,277 1,202 27,600 1,312 821 767 750 106 0 0 16,568 0 15,550 1,018 27,741 1,293 668 895 565 714 0 0 17,681 0 16,509 1,172 29.206 1,270 247 526 363 746 0 0 20,056 0 19,667 389 30,433 1,270 389 550 455 777 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

370 86th Annual Report, 1999 13. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-99 and Month-End 1999—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 ing curu H n e d l e d r Loans Float3 ot A h l e l r4 R F O e e d s th e e r e r v a r e l Total s G to o c l k d 6 c r i e i c g r a t h t i e f t - s s r t o e a u n n t c d - y - Total Bought repur- assets5 ac- ing7 outright1 chase count agreement2 1960 27,384 26,984 400 33 1,847 74 0 29,338 17,767 5,398 1961 28,881 30,478 159 130 2,300 51 0 31,362 16,889 5,585 1962 30,820 28,722 342 38 2,903 110 0 33,871 15,978 5,567 1963 33,593 33,582 11 63 2,600 162 0 36,418 15,513 5,578 1964 37,044 36,506 538 186 2,606 94 0 39,930 15,388 5,405 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 7,154s 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 259,785 241,431 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 308,517 300,423 8,094 675 3,350 0 30,278 342,820 11,056 8,018 21,452 1993 349,866 336,654 13,212 94 963 0 33,394 384,317 11,053 8,018 22,101 1994 378,746 368,156 10,590 223 740 0 33,441 413,150 11,051 8,018 23,001 1995 394,693 380,831 13,862 135 231 0 33,483 428,543 11,050 10,168 24,011 1996 414,715 393,132 21,583 85 5,297 0 32,222 452,319 11,048 9,718 24,981 1997 455,260 431,420 23,840 2,035 561 0 32,044 489,901 11,047 9,200 25,606 1998 482,854 452,478 30,376 17 1,009 0 37,692 521,573 11,046 9,200 26,270' 1999 618,784 478,144 140,640 233 407 0 34,799 654,223 11,048 6,200 28,013 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 371 13.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with Federa1 Reserve Banks reserves 9 Other Cur- Trea- Other Re- 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 - C \ju it i h c e r r counts 5 a b n a c l e - s 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 ir e e - d11 ce E ss x 1 - 112 Banks coin10 32,869 377 485 217 533 941 0 0 17,081 2,544 18,988 637 33,918 422 465 279 320 1,044 0 0 17,387 2,544 18,988 96 35,338 380 597 247 393 1,007 0 0 17,454 3,262 20,071 645 37,692 361 880 171 291 1,065 0 0 17,049 4,099 20,677 471 39,619 612 820 229 321 1,036 0 0 18,086 4,151 21,663 574 42,056 760 668 150 355 211 0 0 18,447 4,163 22,848 -238 44,663 1,176 416 174 588 -147 0 0 19,779 4,310 24,321 -232 47,226 1,344 1,123 135 563 -773 0 0 21,092 4,631 25,905 -182 50,961 695 703 216 747 -1,353 0 0 21,818 4,921 27,439 -700 53,950 596 1,312 134 807 0 0 1,919 22,085 5,187 28,173 -901 57,903 431 1,156 148 1,233 0 0 1,986 24,150 5,423 30,033 -460 61,068 460 2,020 294 999 0 0 2,131 27,788 5,743 32,496 1,035 66,516 345 1,855 325 840 0 0 2,143 25,647 6,216 32,044 9812 72,497 317 2,542 251 1,41913 0 0 2,669 27,060 6,781 35,268 -1,360 79,743 185 2,113 418 1,27513 0 0 2,935 25,843 7,370 37,011 -3,798 86,547 483 7,285 353 1,090 0 0 2,968 26,052 8,036 35,197 -1,10314 93,717 460 10,393 352 1,357 0 0 3,063 25,158 8,628 35,461 -1,535 103,811 392 7,114 379 1,187 0 0 3,292 26,870 9,421 37,615 -1,265 114,645 240 4,196 368 1,256 0 0 4,275 31,152 10,538 42,694 -893 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 -1,442 154,908 429 5,033 328 1,033 0 436 4,990 26,053 16,666 41,391 1,328 171,935 479 3,661 191 851 0 1,013 5,392 20,413 17,821 39,179 -945 183,796 513 5,316 253 867 0 1,126 5,952 20,693 197,488 550 9,351 480 1,041 0 1,490 5,940 27,141 211,995 447 7,588 287 917 0 1,812 6,088 46,295 230,205 454 5,313 244 1,027 0 1,687 7,129 40,097 247,649 395 8,656 347 548 0 1,605 7,683 37,742 260,456 450 6,217 589 1,298 0 1,618 8,486 36,713 286,965 561 8,960 369 242 0 1,962 8,147 36,696 307,759 636 17,697 968 1,706 0 3,949 8,113 25,464 n.a. n.a. n.a. 334,706 508 7,492 206 372 0 5,898 7,984 26,181 365,277 377 14,809 386 397 0 6,332 9,292 28,619 403,851 335 7,161 250 876 0 4,197 11,959 26,592 424,253 270 5,979 386 932 0 5,167 12,342 24,444 450,663 249 7,742 167 892 0 6,601 13,829 17,923 482,390 225 5,444 457 900 0 6,666' 15,500 24,172' 517,484 85 6,086 167 1,605 0 6,784' 16,354 19,522' 628,359 109 28,402 71 1,261 0 7,483 17,256 16,544 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

372 86th Annual Report, 1999 13. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-99, and Month-End 1999—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 u H n e d l e d r Loans Float3 ot A h l e l r4 R F O e ed s th e e r e r v a r e l Total s G to o c l k d 6 c r i i e c i g n r a h t g t i t e f s - s r c t o e a u n u n r c t d - - y - Total Bought repur- assets5 ac- ing7 outright1 chase count agreement2 1999 Jan. ... 461,795 454,775 7,020 60 376 0 36,700 498,930 11,048 9,200 26,397 Feb. ... 468,814 461,372 7,442 16 184 0 34,317 503,331 11,047 9,200 26,508 Mar. ... 484,333 465,997 18,336 246 -19 0 32,600 517,159 11,049 8,200 26,638 Apr. ... 486,106 473,884 12,222 68 -106 0 33,680 519,747 11,050 8,200 26,757 May ... 493,342 482,841 10,501 121 416 0 32,339 526,218 11,048 8,200 26,874 June ... 499,404 485,125 14,279 220 413 0 33,018 533,056 11,046 8,200 27,004 July ... 492,827 486,352 6,475 348 -44 0 34,547 527,678 11,048 8,200 27,151 Aug. ... 502,206 490,436 11,770 338 317 0 32,622 535,483 11,045 8,200 27,298 Sept. ... 511,338 489,275 22,063 480 231 0 34,305 546,353 11,047 7,200 27,457 Oct. ... 513,486 490,926 22,560 173 -182 0 35,273 548,750 11,049 7,200 27,636 Nov. ... 542,532 493,092 49,440 78 693 0 32,942 576,244 11,049 7,200 27,831 Dec. ... 618,784 478,144 140,640 233 407 0 34,799 654,223 11,048 6,200 28,013 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. r. Revised. 6. Before January 30, 1934, includes gold held in n.a. Not available. Federal Reserve Banks and in circulation. 1. Beginning in 1969, includes securities loaned— 7. Includes currency and coin (other than gold) issued fully guaranteed by U.S. government securities pledged directly by the Treasury. The largest components are with Federal Reserve Banks—and excludes securities fractional and dollar coins. For details see "Currency and sold and scheduled to be bought back under matched Coin in Circulation," Treasury Bulletin. sale-purchase transactions. 8. Coin and paper currency held by the Treasury, as 2. Beginning December 1, 1966, includes federal well as any gold in excess of the gold certificates issued agency obligations held under repurchase agreements and to the Reserve Bank. beginning September 29, 1971, includes federal agency 9. Beginning in November 1979, includes reserves issues bought outright. of member banks, Edge Act corporations, and U.S. agen- 3. Beginning in 1960, figures reflect a minor change in cies and branches of foreign banks. Beginning on concept; see Federal Reserve Bulletin, vol. 47 (February November 13, 1980, includes reserves of all depository 1961), p. 164. institutions. 4. Principally acceptances and, until August 21, 1959, Beginning in 1984, data on "Currency and coin" and industrial loans, authority for which expired on that date. "Required" and "Excess" reserves changed from daily 5. For the period before April 16, 1969, includes the to biweekly basis. total of Federal Reserve capital paid in, surplus, other Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 373 13.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with reserves9 Federal Reserve Banks Other Cur- Re- Trea- Other Federal rency quired sury Federal Reserve in clearcash Reserve liacir- hold- ac- 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 counts9 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 ir e e - d1 pc E c x- 11,12 Banks coin10 505,528 98 7,623 234 246 0 6,510 16,269 9,067 511,709 120 4,538 200 225 0 6,576 16,460 10,259 517,790 135 5,374 166 235 0 6,443 16,805 16,098 519,751 167 10,040 260 263 0 6,458 17,214 11,603 528,042 145 5,056 157 223 0 6,576 17,575 14,564 532,026 90 6,720 410 241 0 6,630 17,662 15,526 533,517 57 4,984 257 229 0 6,770 18,389 9,872 538,466 84 5,559 166 225 0 6,725 18,728 12,075 544,101 93 6,641 243 191 0 6,815 19,105 14,869 555,720 94 4,527 189 202 0 6,796 18,401 8,706 583,103 85 5,025 501 221 0 6,924 18,618 7,847 628,359 109 28,402 71 1,261 0 7,483 17,256 16,544 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

374 86th Annual Report, 1999 14. Banking Offices and Banks Affiliated with Bank Holding Companies in the United States, December 31, 1998 and 1999 Commercial banks1 Statechartered Type of office Total Member savings Total Nonmember banks Total National State All banking offices BANKS Number, Dec 31,1998 .. 9,189 8,729 3,401 2,408 993 5,328 460 Changes during 1999 New banks 259 237 86 53 33 151 22 Banks converted into branches -411 -394 -193 -129 -64 -201 -17 Ceased banking operation2 -50 -45 -16 -13 -3 -29 -5 Other3 0 2 43 -7 50 -41 -2 Net change -202 -200 -80 -96 16 -120 -2 Number, Dec. 31,1999 .. 8,987 8,529 3,321 2,312 1,009 5,208 458 BRANCHES AND ADDITIONAL OFFICES Number, Dec 31,1998 .. 65,916 62,648 45,995 35,337 10,658 16,653 3,268 Changes during 1999 New branches 2,197 2,040 1,309 901 408 731 157 Branches converted from banks 411 397 223 150 73 174 14 Discontinued2 -1,210 -1,158 -934 -768 -166 -224 -52 Other3 0 129 433 193 240 -304 -129 Net change 1,398 1,408 1,031 476 555 377 -10 Number, Dec 31,1999 .. 67,314 64,056 47,026 35,813 11,213 17,030 3,258 Banks affiliated with bank holding companies BANKS Number, Dec. 31,1998 .. 6,988 6,850 2,817 1,984 833 4,033 138 Changes during 1999 BHC-affiliated new banks 281 264 110 66 44 154 17 Banks converted into branches -365 -352 -173 -117 -56 -179 -13 Ceased banking operation2 -46 -42 -15 -12 -3 -27 -4 Other3 0 2 33 -7 40 -31 -2 Net change -130 -128 -45 -70 25 -83 -2 Number, Dec. 31,1999 .. 6,858 6,722 2,772 1,914 858 3,950 136 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 375 15. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1999 A. Mergers Approved Involving Wholly Owned Subsidiaries of Different Holding Companies The following transactions involve banks that on competition. Also, in each case the Federal are subsidiaries of different bank holding compa- Reserve determined that the banking factors and nies. In each case the SUMMARY REPORT BY THE considerations relating to the convenience and ATTORNEY GENERAL indicated that the transac- needs of the community to be served were consistion would not have a significant adverse effect tent with approval. Assets Date Board of Institution] (millions Summary Date of Governors approval of dollars) Report issued comment People First Bank, Hennessey, Oklahoma 394 12-15-98 1-4-99 The parties to merge with operate in the First State Bank, Hobart, Oklahoma 37 same market Centura Banks, Inc., Rocky Mount, North Carolina 7,000 12-30-98 1-8-99 The parties to acquire assets and liabilities of operate in the First Coastal Bank, Virginia Beach, same market Virginia (20 branches) 582 First State Bank, Brunsville, Iowa ... 14 1-14-99 1-8-99 The parties to merge with operate in the Farmers State Bank, Merrill, Iowa ... 25 same market Anadarko Bank and Trust Company, Anadarko, Oklahoma 39 1-14-99 1-12-99 The parties to acquire assets and liabilities of operate in the BancFirst, Oklahoma City, Oklahoma same market (1 branch) 17 Mobile County Bank, Grand Bay, Alabama 23 1-14-99 1-22-99 The parties to acquire assets and liabilities of operate in the Union Planters Bank, N.A., Memphis, same market Tennessee (1 branch) 9 F&M Bank-Northern Virginia, Fairfax, Virginia 658 1-28-99 2-17-99 The parties to merge with operate in the Security Bank Corporation, Manassas same market Virginia 60 Manufacturers and Traders Trust Company, Buffalo, New York . 19,000 2-11-99 2-22-99 The parties to acquire assets and liabilities of operate in the First National Bank of Rochester, same market Rochester, New York (4 branches)... 568 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

376 86th Annual Report, 1999 15. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1999—Continued A. Mergers Approved Involving Wholly Owned Subsidiaries of Different Holding Companies—Continued Assets Date Board of Institution l (millions Summary Date of Governors approval of dollars) Report issued comment Compass Bank (Arizona Bank), Tucson, Arizona 803 12-15-98 3-3-99 The parties to acquire assets and liabilities of do not operate Norwest Bank Arizona, N.A., Phoenix, in the same Arizona (14 branches) 597 market Compass Bank, Birmingham, Alabama 17,700 3-15-99 3-3-99 The parties to merge with do not operate Compass Bank-Colorado, Englewood, in the same Colorado 291 market Bank of Oakfield, Oakfield, Wisconsin 28 3-15-99 3-4-99 The parties to merge with operate in the M&I Central State Bank, same market Ripton, Wisconsin (1 branch) 8 Premier Bank, Lenexa, Kansas 117 4-6-99 3-30-99 The parties to merge with do not operate Bank of Craig, Craig, Missouri 8 in the same market Northwestern Bank, Chippewa Falls, Wisconsin 177 3-30-99 3-30-99 The parties to merge with operate in the M&I Community State Bank, same market Eau Claire, Wisconsin (1 branch) 11,400 WestStar Bank, Vail, Colorado 294 4-20-99 4-12-99 The parties to acquire assets and liabilities of operate in the World Savings Bank and World Savings same market and Loan, Oakland, California 43 First Interstate Bank, Billings, Montana 1,608 4-6-99 4-15-99 The parties to acquire assets and liabilities of operate in the First National Bank of Montana, Libby, same market Montana (2 branches) 2 Union Colony Bank, Greeley, Colorado 249 4-20-99 4-23-99 The parties to acquire assets and liabilities of operate in the World Savings and Loan Association, same market Brighton, Colorado (1 branch) 47 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 377 15.—Continued A.—Continued Assets Date Board of Date of Institution* (millions Summary Governors approval of dollars) Report issued comment Central Savings Bank, Sault Saint Marie, Michigan 120 5-3-99 5-7-99 The parties to acquire assets and liabilities of operate in the North Country Bank & Trust, same market Mainstique, Michigan (2 branches) 12 Summit Bank, Bethlehem, Pennsylvania 2,900 5-24-99 5-17-99 The parties to merge with operate in the Prime Bank, Philadelphia, same market Pennsylvania 1,000 Eaton Bank, Eaton, Colorado 248 5-24-99 5-19-99 The parties to acquire assets and liabilities of operate in the World Savings Bank and World Savings same market and Loan Association, Oakland, California 47 FCNB Bank, Frederick, Maryland 1,300 6-4-99 5-19-99 The parties to merge with operate in the First Bank of Frederick, Frederick, same market Maryland 122 Republic Security Bank, West Palm Beach, Florida 3,000 6-4-99 5-26-99 The parties to merge with operate in the First National Bank of Central Florida, same market Longwood, Florida 137 Old Kent Bank, Grand Rapids, Michigan 16,000 6-4-99 5-27-99 The parties to merge with do not operate Community First Bank, Lansing, in the same Michigan 900 market Chemical Bank Bay Area, Bay City, Michigan 214 6-22-99 6-9-99 The parties to acquire assets and liabilities of operate in the National City Bank Michigan/Illinois, same market Bannockburn, Illinois (2 branches) 32 Laurel Bank, Johnstown, Pennsylvania 1,900 6-22-99 6-10-99 The parties to merge with operate in the First Philson Bank, N.A., Berlin, same market Pennsylvania 212 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

378 86th Annual Report, 1999 15. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1999—Continued A. Mergers Approved Involving Wholly Owned Subsidiaries of Different Holding Companies—Continued Assets Date Board of InstitutionJ (millions Summary Date of Governors approval of dollars) Report issued comment Citizens Banking Company, Salineville, Ohio 1,800 6-4-99 6-17-99 The parties to acquire assets and liabilities of operate in the First Western Bank, N.A., New Castle, same market Pennsylvania (43 branches) 2,000 Mid American National Bank and Trust Company, Toledo, Ohio 2,000 6-4-99 6-17-99 The parties to acquire assets and liabilities of operate in the First Federal Bank, F.S.B., same market Bowling Green, Ohio (4 branches) .... 168 First American Bank & Trust Company, Purcell, Oklahoma 98 6-4-99 6-18-99 The parties to acquire assets and liabilities of do not operate Dewey County State Bank, Taloga, in the same Oklahoma (1 branch) 16 market F&M Bank-Winchester, Winchester, Virginia 802 6-30-99 6-28-99 The parties to acquire assets and liabilities of operate in the Wachovia Bank, N.A., Winston-Salem, same market North Carolina (2 branches) 26 Bank of Utah, Ogden, Utah 330 7-15-99 7-16-99 The parties to acquire assets and liabilities of do not operate First Commerce Bank, in the same Logan, Utah (19 branches) 30 market Old Kent Bank, Grand Rapids, Michigan 16,600 7-29-99 7-28-99 The parties to merge with do not operate Pinnacle Bank, Cicero, Illinois 870 in the same market Clear Lake Bank and Trust Company, Clear Lake, Iowa 141 7-29-99 7-30-99 The parties to acquire assets and liabilities of operate in the Liberty Bank, F.S.B. (Liberty), same market Arnolds Park, Iowa (1 branch) 22 Glacier Bank, Kalispell, Montana 370 8-12-99 8-6-99 The parties to acquire assets and liabilities of do not operate Washington Mutual Bank, FSB, in the same Salt Lake City, Utah (2 branches) 82 market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 379 15.—Continued A.—Continued Assets Date Board of Institutionl (millions Summary Date of Governors approval of dollars) Report issued comment Orrstown Bank, Orrstown, Pennsylvania 239 9-2-99 8-9-99 The parties to acquire assets and liabilities of do not operate Sovereign Bank, Wyomissing, in the same Pennsylvania (1 branch) 5 market Pullman Bank and Trust Company, Chicago Illinois 494 9-2-99 8-13-99 The parties to merge with operate in the Chicago City Bank and Trust Company, same market Chicago Illinois 169 Manufacturers & Traders Trust Company, Buffalo, New York 20,000 7-15-99 8-16-99 The parties to acquire assets and liabilities of operate in the Chase Manhattan Bank, same market New York, New York (33 branches) 291,000 Bank Iowa, Red Oak, Iowa 20 7-29-99 8-18-99 The parties to acquire assets and liabilities of operate in the US Bank, N.A., Minneapolis, same market Minnesota (1 branch) 20 Citizens Bank, Flint, Michigan 4,000 9-2-99 8-19-99 The parties to acquire assets and liabilities of operate in the Bank One Michigan, Detroit, same market Michigan (15 branches) 23,000 Sky Bank, Salineville, Ohio 1,800 9-2-99 8-19-99 The parties to merge with operate in the Mahoning National Bank of same market Youngstown, Youngstown, Ohio 808 Banco Popular North America, New York New York 4,000 7-29-99 8-20-99 The parties to merge with do not operate Banco Popular, N.A. (Texas), in the same Houston, Texas 125 market Texas State Bank, Me Allen, Texas 2,000 7-29-99 8-23-99 The parties to merge with do not operate Harlingen National Bank, in the same Harlingen, Texas 212 market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

380 86th Annual Report, 1999 15. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1999—Continued A. Mergers Approved Involving Wholly Owned Subsidiaries of Different Holding Companies—Continued Assets Date Board of Institutionx (millions Summary Date of Governors approval of dollars) Report issued comment Compass Bank, Birmingham, Alabama 16,400 9-2-99 8-26-99 The parties to merge with operate in the Hartland Bank, National Association, same market Austin, Texas 294 Cumberland Bank, Carthage, Tennessee 158 9-23-99 9-3-99 The parties to acquire assets and liabilities of do not operate American City Bank, in the same Tullahoma, Tennessee (2 branches).. 104 market United Bank of Philadelphia, Philadelphia, Pennsylvania 114 7-29-99 9-7-99 The parties to acquire assets and liabilities of operate in the First Union National Bank, same market Charlotte, North Carolina (4 branches) 230,000 Citizens Bank & Trust Company, Okmulgee, Oklahoma 83 9-2-99 9-14-99 The parties to acquire assets and liabilities of operate in the Bank of Oklahoma, N.A., same market Tulsa, Oklahoma (3 branches) 2 Fifth Third Bank of Indiana, Indianapolis, Indiana 1,380 9-2-99 9-14-99 The parties to merge with operate in the Civitas Bank, St. Joseph, Michigan .. 7,700 same market Fifth Third Bank of Kentucky, Louisville, Kentucky 1,960 9-2-99 9-14-99 The parties to acquire assets and liabilities of operate in the Civitas Bank, Louisville, same market Kentucky (4 branches) Ohio Bank, Findlay, Ohio 1,200 9-23-99 9-15-99 The parties to acquire assets and liabilities of do not operate National City Bank, in the same Kenton, Ohio (1 branch) 31 market Sky Bank, Salineville, Ohio 1,800 9-23-99 9-15-99 The parties to acquire assets and liabilities of do not operate National City Bank, Wellsville, in the same Ohio(l branch) 7 market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 381 15.—Continued A.—Continued Assets Date Board of Institutionl (millions Summary Date of Governors approval of dollars) Report issued comment Southern Financial Bank, Warrenton, Virginia 272 9-2-99 9-15-99 The parties to merge with operate in the Horizon Bank of Virginia, same market Merrifield Virginia 135 Fifth Third Bank-Indiana, Indianapolis, Indiana 1,384 9-23-99 9-20-99 The parties to merge with operate in the Peoples Bank & Trust Company, same market Indianapolis, Indiana 672 First Bank of Philadelphia, Philadelphia, Pennsylvania 71 7-29-99 9-21-99 The parties to merge with operate in the Pennsylvania Savings Bank, same market Philadelphia, Pennsylvania 182 Pinnacle Bank, Papillion, Nebraska 259 9-2-99 9-24-99 The parties to merge with do not operate Waverly Bank, Waverly, Missouri 22 in the same market Union Colony Bank, Greeley, Colorado 279 10-13-99 10-18-99 The parties to merge with do not operate First National Bank of Johnstown, in the same Johnstown Colorado 34 market Compass Bank, Birmingham, Alabama 18,000 10-27-99 11-5-99 The parties to acquire assets and liabilities of do not operate Western Bank, Albuquerque, in the same New Mexico (10 branches) 274 market UnionBank, West, Macomb, Illinois .... 141 10-27-99 11-5-99 The parties to acquire assets and liabilities of do not operate Associated Bank, Illinois N.A., in the same Rockford, Illinois (1 branch) 2,700 market Peapack Gladstone Financial Corporation, Gladstone, New Jersey .... 409 10-27-99 11-12-99 The parties to merge with operate in the Chatham Savings, F.S.B., same market Chatham New Jersey 81 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

382 86th Annual Report, 1999 15. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1999—Continued A. Mergers Approved Involving Wholly Owned Subsidiaries of Different Holding Companies—Continued Assets Date Board of Institutionl (millions Summary Date of Governors approval of dollars) Report issued comment Valencia Bank & Trust, Santa Clarita, California 185 10-13-99 11-16-99 The parties to acquire assets and liabilities of operate in the First Valley National Bank, same market Lancaster, California (2 branches) 38 Provident Bank, Cincinnati, Ohio 8,000 11-10-99 11-17-99 The parties to acquire assets and liabilities of operate in the Centennial Bank, Cincinnati, Ohio same market (8 branches) 803 Midwest Bank of Western Illinois, Monmouth, Illinois 143 10-10-99 12-3-99 The parties to acquire assets and liabilities of do not operate Associated Bank Illinois, N.A., in the same Rockford, Illinois (1 branch) 17 market Republic National Bank of New York, New York, New York 49,000 9-2-99 12-6-99 The parties to merge with operate in the HSBC Bank USA, Buffalo, same market New York 34,000 First Security Bank of Nevada, Las Vegas, Nevada 1,500 12-10-99 12-16-99 The parties to acquire assets and liabilities of operate in the Nevada State Bank, same market Las Vegas, Nevada (42 branches) 1,200 Grant County Bank, Medford, Oklahoma 51 12-22-99 12-22-99 The parties to acquire assets and liabilities of operate in the First Capital Bank, same market Guthrie, Oklahoma (1 branch) 389 Bank of Colorado, Fort Lupton, Colorado 445 12-22-99 12-31-99 The parties to acquire assets and liabilities of do not operate Burns National Bank, in the same Durango, Colorado (1 branch) 145 market Effingham State Bank, Effingham, Illinois 193 12-22-99 12-31-99 The parties to acquire assets and liabilities of do not operate Associated Bank Illinois, National in the same Association, Rockford, Illinois market (1 branch) 25 Footnotes appear at the end of table 15, C. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 383 15. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1999—Continued B. Mergers Approved Involving Wholly Owned Subsidiaries of the Same Bank Holding Company The following transactions involve banks that are of the Board of Governors, whichever approved subsidiaries of the same bank holding company. In the application, determined that the competitive each case, the SUMMARY REPORT BY THE ATTOR- effects of the proposed transaction, the financial NEY GENERAL indicated that the transaction would and managerial resources and prospects of the not have a significantly adverse effect on competi- banks concerned, as well as the convenience and tion because the proposed merger is essentially a needs of the community to be served were consiscorporate reorganization. The Board of Gover- tent with approval. nors, the Federal Reserve Bank, or the Secretary Assets Institution1 (millions Date of approval of dollars) Union Bank & Trust Company, Bowling Green, Virginia 420 1-28-99 Merger King George State Bank, King George, Virginia 73 Baylake Bank, Sturgeon Bay, Wisconsin 486 2-5-99 Merger Baylake Bank, N.A., Poy Sippi, Wisconsin 98 First Virginia Bank-Southwest, Roanoke, Virginia 821 2-11-99 Merger First Virginia Bank-Clinch Valley, Tazewell, Virginia 266 First Virginia Bank-Piedmont, Lynchburg, Virginia 222 First Virginia Bank-Franklin County, Rocky Mount, Virginia 139 First Liberty Bank & Trust, Jermyn, Pennsylvania 352 2-12-99 Merger NBO National Bank-Olyphant, Olyphant, Pennsylvania 164 NBO National Bank-Scranton, Scranton, Pennsylvania 69 NBO National Bank-Pittston, Pittston, Pennsylvania 32 First Community Bank, Glasgow, Montana 3-4-99 Merger 112 First Community Bank of Froid, Froid, Montana 12 Pinnacle Bank-Torrington, Torrington, Wyoming 3-18-99 Merger 87 Pinnacle Bank of Cheyenne, Cheyenne, Wyoming 19 Citizens Bank and Trust Company, Van Buren, Arkansas 3-19-99 Merger 187 River Bank & Trust Company, Lavaca, Arkansas 81 Adams Bank, Ogallala, Nebraska 3-24-99 230 Merger Bank of Indianola, Indianola, Nebraska 22 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

384 86th Annual Report, 1999 15. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1999—Continued B. Mergers Approved Involving Wholly Owned Subsidiaries of the Same Bank Holding Company—Continued Assets Institution1 (millions Date of approval of dollars) Pinnacle Bank, Papillion, Nebraska 242 3-25-99 Merger Gretna State Bank, Gretna, Nebraska 25 Farmers Bank of Maryland, Annapolis, Maryland 887 4-6-99 Merger First Virginia Bank-Maryland, Upper Marlboro, Maryland 290 Fifth Third Bank, Florida, Naples, Florida 240 4-27-99 Merger South Florida Bank, Fort Myers, Florida 90 BANKFIRST, Sioux Falls, South Dakota 221 5-12-99 Merger 4 Minnesota BANKFIRST, Minneapolis, Minnesota 135 First Security Bank of Nevada, Las Vegas, Nevada 1,100 5,14-99 Merger Nevada Banking Company, Stateline, Nevada 128 Comstock Bank, Reno, Nevada 223 Community First Bank & Trust, Celina, Ohio 645 5-21-99 Merger Union Trust Bank, Union City, Indiana 45 Pullman Bank and Trust Company, Chicago, Illinois 914 5-21-99 Merger Regency Savings Bank-Chicago Branch, Chicago, Illinois 44 Regency Savings Bank-Dolton Branch, Dolton, Illinois 146 Regency Savings Bank-Sauk Village Branch, Sauk Village, Illinois 21 Regency Savings Bank-Lansing Branch, Lansing, Illinois 61 Regency Savings Bank-Chicago Branch, Chicago, Illinois 78 F&M Bank-Iowa Central, Marshalltown, Iowa 350 6-14-99 Merger F&M-Iowa South Central, Grinnell, Iowa 121 F&M-Iowa Story County, Story County, Iowa 91 First Virginia Bank of Tidewater, Norfolk, Virginia 534 6-16-99 Merger First Virginia Bank-Commonwealth, Newport News, Virginia 253 Iowa State Bank, Calmar, Iowa 22 6-16-99 Merger Ossian State Bank, Ossian, Iowa 23 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 385 15.—Continued B.—Continued Assets Institution1 (millions Date of approval of dollars) Fifth Third Bank of Central Kentucky, Inc., Cynthiana, Kentucky 61 6-17-99 Merger Fifth Third Bank of Central Kentucky, Inc., Louisville, Kentucky 1,870 Civitas Bank, St. Joseph, Michigan 7,200 7-14-99 Merger First Indiana Bank, F.S.B., Indianapolis, Indiana (5 branches) 132 WestStar Bank, Vail Colorado 290 7-15-99 Merger Bank of Telluride, Telluride, Colorado 86 Western Colorado Bank, Montrose, Colorado 58 County Bank, Merced, California 7-16-99 Merger 441 Town and Country Finance and Thrift, Turlock, California 47 First American Bank, Carpentersville, Illinois 7-27-99 Merger 1,142 First American Bank, Joliet, Illinois First American Bank, Kankakee, Illinois 126 Compass Bank, Birmingham, Alabama 133 7-28-99 Merger Arizona Bank, Tucson, Arizona 16,400 First Interstate Bank, Billings, Montana 833 7-29-99 Merger Security State Bank and Trust Company, Poison, Montana 1,561 Fort Madison Bank & Trust Co., Fort Madison, Iowa 62 8-5-99 Merger Bank of Dallas City, Dallas City, Illinois 113 Effingham State Bank, Effingham, Illinois 14 8-6-99 Merger State Bank of Farina, Farina, Illinois 162 Fifth Third Bank of Lexington, Inc., Lexington, Kentucky 29 8-19-99 Merger Fifth Third Bank, Kentucky, Inc., Louisville, Kentucky 203 Fifth Third Kentucky, Inc., Louisville, Kentucky 1,973 8-19-99 Merger Fifth Third Bank of Lexington, Inc., Lexington, Kentucky 1,973 201 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

386 86th Annual Report, 1999 15. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1999—Continued B. Mergers Approved Involving Wholly Owned Subsidiaries of the Same Bank Holding Company—Continued Assets Institution1 (millions Date of approval of dollars) Pinnacle Bank, Papillion, Nebraska 259 10-14-99 Merger Pinnacle Bank, Palmer, Nebraska 18 Pinnacle Bank, N.A., Central City, Nebraska 33 Provident Bank, Cincinnati, Ohio 10-25-99 Merger 8,071 Oak Hill Savings and Loan Company, Cincinnati, Ohio 277 The Bank of Orange, County, Fountain Valley, California 10-27-99 Merger 95 Security First Bank, Fullerton, California 51 CalWest Bank, Downey, California 10-27-99 Merger 62 National Business Bank, Torrance, California 13 AmSouth Bank, Birmingham, Alabama 11-2-99 Merger 20,500 First American National Bank, Nashville, Tennessee 21,300 SunTrust Bank, Atlanta, Atlanta, Georgia 11-18-99 Merger 20,100 SunTrust Bank, Alabama, N.A., Florence, Alabama SunTrust Bank, Central Florida, N.A., Orlando, Florida 374 SunTrust Bank, East Central Florida, Daytona Beach, Florida 8,619 SunTrust Bank, Gulf Coast, Sarasota, Florida 1,268 SunTrust Bank, Miami, N.A., Miami, Florida 2,249 SunTrust Bank, Mid-Florida, Lakeland, Florida 5,405 SunTrust Bank, Nature Coast, Brooksville, Florida 1,050 SunTrust Bank, North Central Florida, Ocala, Florida 1,775 SunTrust Bank, North Florida, N.A., Jacksonville, Florida 1,034 SunTrust Bank, South Florida, N.A., Fort Lauderdale, Florida 1,137 SunTrust Bank, Southwest Florida, Fort Myers, Florida 4,725 SunTrust Bank, Northwest Florida, Tallahassee, Florida 1,614 SunTrust Bank, Tampa, Florida 1,199 SunTrust Bank, Northeast Georgia, N.A., Athens, Georgia 2,835 SunTrust Bank, Southeast Georgia, N.A., Brunswick, Georgia 694 SunTrust Bank, West Georgia, N.A., Columbus, Georgia 573 SunTrust Bank, Augusta, N.A., Evans, Georgia 551 SunTrust Bank, South Georgia, N.A., Leesburg, Georgia 586 SunTrust Bank, Middle Georgia, N.A., Macon, Georgia 721 SunTrust Bank, Northwest Georgia, N.A., Rome, Georgia 675 SunTrust Bank, Savannah, N.A., Savannah, Georgia 365 SunTrust Bank, Chattanooga, N.A., Chattanooga, Tennessee 710 SunTrust Bank, East Tennessee, N.A., Knoxville, Tennessee 1,570 SunTrust Bank, Nashville, N.A., Nashville, Tennessee 2,210 SunTrust Bank, South Central Tennessee, N.A., Pulaski, Tennessee 4,947 Crestar Bank, Richmond, Virginia 337 Digitized for FRASER 25,659 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 387 15.—Continued B.—Continued Assets Institution1 (millions Date of approval of dollars) SunTrust Bank, Atlanta, Atlanta, Georgia 20,701 11-24-99 Merger STI Capital Management, N.A., Orlando, Florida F&M Bank Northeast, Pulaski, Wisconsin 355 12-2-99 Merger F&M Bank-Algoma, Algoma, Wisconsin 94 F&M Bank-Appleton, Appleton, Wisconsin 76 F&M Bank-Brodhead, Brodhead, Wisconsin 37 F&M Bank-Central, Stevens Point, Wisconsin 138 F&M Bank—Darlington, Darlington, Wisconsin 112 F&M Bank-Elkhorn, Elkhorn, Wisconsin 96 F&M Bank-East Troy, East Troy, Wisconsin 57 F&M Bank-Grant County, Fennimore, Wisconsin 134 F&M Bank-Hilbert, Hilbert, Wisconsin 34 F&M Bank-Jefferson, Jefferson, Wisconsin 97 F&M Bank-Kiel, Kiel, Wisconsin 45 F&M Bank-Kaukauna, Kaukauna, Wisconsin 149 F&M Bank-Lakeland, Woodruff, Wisconsin 197 F&M Bank-Landmark, Hudson, Wisconsin 47 F&M Bank-New London, New London, Wisconsin 38 F&M Bank-Prairie du Chien, Prairie du Chien, Wisconsin 98 F&M Bank-Superior, Superior, Wisconsin 35 F&M Bank-Waushara County, Waucoma, Wisconsin 107 F&M Bank-Winnegago County, Omro, Wisconsin 102 Wesbanco Bank Wheeling, Wheeling, West Virginia 1,111 12-7-99 Merger Wesbanco Bank Charleston, Charleston, West Virginia 144 Wesbanco Bank Fairmont, Fairmont, West Virginia 575 Wesbanco Bank Parkersburg, Parkersburg, West Virginia . 426 Columbia Bank, Tampa, Florida 78 12-8-99 Merger Southern Exchange Bank, Tampa, Florida 220 Gold Bank, Leawood, Kansas 329 12-22-99 Merger Citizens State Bank & Trust Company, Seneca, Kansas ... 67 Peoples National Bank, Clay Center, Kansas 133 Farmers National Bank, Oberlin, Kansas 52 First National Bank in Alma, Alma, Kansas 31 Farmers State Bank, Sebetha, Kansas 58 Peoples State Bank, Colby, Kansas 26 The First State Bank & Trust Company, Pittsburg, Kansas 115 Footnotes appear at the end of table 15, C. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

388 86th Annual Report, 1999 15. Mergers, Consolidations, and Acquisitions of Assets or Assumptions of Liabilities Approved by the Board of Governors, 1999—Continued C. Mergers Approved Involving a Non-Operating Institution with an Existing Bank The following transactions have no significant pany, the merger would have no effect on competieffect on competition; they merely facilitate the tion. The Board of Governors, the Federal Reserve acquisition of the voting shares of a bank (or Bank, or the Secretary of the Board, whichever banks) by a holding company. In such cases, the approved the application, determined that the pro- SUMMARY REPORT BY THE ATTORNEY GENERAL posal would, in itself, have no adverse competitive indicates that the transaction will merely combine effects and that the financial factors and consideran existing bank with a non-operating institution; ations relating to the convenience and needs of the in consequence, and without regard to the acquisi- community were consistent with approval. tion of the surviving bank by the holding com- Assets Institution1 (millions Date of of dollars)2 approval First American Bank and Trust Company, Purcell, Oklahoma 96 1-21-99 Merger First American Bank (Interim Branch), Maysville, Oklahoma Frontier Bank of Laramie County, Cheyenne, Wyoming 21 3-18-99 Merger Pinnacle Bank of Cheyenne (Interim Branch), Cheyenne, Wyoming Minster Bank, Minster, Ohio 181 5-6-99 Merger MSB Interim Bank, Minster, Ohio Lemay Bank and Trust Company, St. Louis, Missouri 561 5-25-99 Merger LBT Interim Bank, St. Louis, Missouri Community First Bank, Lansing, Michigan 900 5-27-99 Merger CFSB Acquisition Corp., Lansing, Michigan State Bank of Remington, Inc., Remington, Virginia 70 7-7-99 Merger JRB Acquisition Bank, Inc., Suffolk, Virginia Main Street Bank, Reading, Pennsylvania 1,291 8-2-99 Merger Main Street Bank New Jersey (in formation), Lambertville, New Jersey Harlingen National Bank, Harlingen, Texas , 212 8-23-99 Merger Texas Regional Acquisition Corp., Delaware The Vintage Bank, Napa, California 191 10-4-99 Merger The Vintage Merger Co., Napa, California Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 389 15.—Continued C.—Continued Assets Institution1 (millions Date of approval of dollars) First National Bank of Johnstown, Johnstown, Colorado 34 10-18-99 Merger FN Acquisition Corp., Johnstown, Colorado Potomac Valley Bank, Petersburg, West Virginia 92 11-26-99 Merger Potomac Interim Bank, Inc., Petersburg, West Virginia First State Bank, Oklahoma City, Oklahoma 112 11-30-99 Merger First State Bank, Oklahoma City, Oklahoma 1. Each proposed transaction was to be effected under 2. Where no assets are listed, the bank is newly orgathe charter of the first named bank. The entries are in nized and not in operation. chronological order of approval. Some transactions include the acquisition of certain assets and liabilities of the affiliated bank. 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

392 86th Annual Report, 1999 The Federal Reserve System 9 1 MINNEAPOLIS • 2 BO•STON 7 12 • o • NEW YORK CHICAGO • CLEVELAKIV PHILADELPHIA • SAN FRANCISCO 10 4 KANSAS CITY • g RICHMOND ST. LOUIS 8 5 c 11 • ATLANTA DALLAS ALASk \ 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 1999. 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 393 1-A 2-B 3-C 4-D 5-E Pittsburgh Baltimore MI NY vtf/ VPA Buffalo Bi •Cincinnati I Charlotte BOSTON NEW YORK PHILADELPHIA CLEVELAND RICHMOND 6-F 7-G 8-H •Nashville Birmingham Detroit • Louisville •Memphis ATLANTA CHICAGO ST. LOUIS 9-1 • Helena MINNEAPOLIS 10-J 12-L Omaha • Denver Oklahoma Cit\ KANSAS CITY 11-K Salt Lake Citv • Los Anseles San Antonio DALLAS SAN FRANCISCO Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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

397 Index 1st Source, 98 Banking organizations, U.S.—Continued Internal control, accounting, and Account Management Agent software, disclosure, 132 163 Overseas investments, 143 Agreement corporations, 127 Proposals, 144 Agriculture, US. Department of, 98, 162 Recourse obligations, 129 Applications, processing of, 143 Risk-focused supervision of large, 124, Assets and liabilities 136 Banks, insured commercial, by class, Structure, regulation of, 140-5 367 Surveillance, 125 Board of Governors, 324 Banks and savings associations, external Federal Reserve Banks, 334, 346-9 auditing, 132 Auditing, banks and savings associations, Basel Capital Accord, 118 132 Basel Committee on Banking Supervision Automated clearinghouse services, 156 Reports, 133 Automated teller machines, 105 Review of Capital Accord, 117 Availability of Funds and Collection of Board of Governors {See also Federal Checks {See Regulations: CC) Reserve System) Bank mergers, consolidations, and Balance sheet, Federal Reserve priced acquisitions, list, 375-89 services, 167 Consumer Advisory Council, 99, 293 Balance sheets, Board of Governors, 324 Financial statements, 323-31 Bank examiners, training, 106 Members and officers, lists, 289-91, Bank holding companies 318-20 Applications, 110 Policy actions, 185-94 Gramm-Leach-Bliley Act, 175 Testimony and recommendations to the Inspections, 121 Congress, 104 Municipal securities dealers and Book-entry securities, Fedwire, 155 securities subsidiaries, 123 Branch closings, policy statement, 132, 191 Reports to the Federal Reserve, 134, 135 Brazilian real 23, 62, 87 Risk-focused supervision of small, 125 Business spending, investment, and finance, Stock repurchases by, 143 9-12, 42-4, 73-6 Transfer agents, 123 BusinessLINC Initiative, 96 Bank Holding Companies and Change in Bank Control {See Regulations: Y) CAESAR {See Complaint Analysis Bank Holding Company Act, 140, 283 Evaluation System and Reports) Bank Merger Act, 141 Call Reports, revisions to, 135 Bank mergers, consolidations, and Capital acquisitions, list, 375-89 Accounts, Federal Reserve Banks, 346-9 Bank mergers, Regulation CC, 188 Changes in, Federal Reserve Banks, 336 Bank Secrecy Act, Anti-money laundering, Markets, supervision of activities, 129 145 Standards, 128-9 Banking Organization National Desktop Cash flows, Board of Governors, 326 (BOND), 125, 136 Cash services, Federal Reserve Banks, 156 Banking organizations, U.S. Century date change {See Year 2000) Capital adequacy, 129 Century Date Change Special Liquidity Examinations and inspections, 121-8 Facility, 87, 182, 185, 192, 193 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

398 86th Annual Report, 1999 Change in Bank Control Act, 142 Directors, Federal Reserve Banks and Check collection, Federal Reserve Banks, Branches, list, 297-317 152 Disclosures, consumer, 178-9 Commercial banks, number of, 367, 374 Disclosures, electronic, proposed rule, 103, Community banks, risk-focused 181 supervision, 124, 136 Discount rate (See also Interest rates), 6, Community Reinvestment Act, 99, 106, 192-^, 255, 272 110, 179 Complaint Analysis Evaluation System and Economic projections, 36, 37, 68-70 Reports, 113 Economies, foreign, 23-8, 61-6, 87-92 Compliance examinations, 101, 105 Argentina, 24, 63, 88 Consolidated Appropriation for Fiscal Asia, 23, 24, 61-3, 89, 90 Year 2000, 180 Brazil, 23, 24, 62, 63, 87, 88 Consumer Advisory Council, 99, 293 Canada, 27, 65, 90 Consumer and community affairs, 95-115 China, 24, 63, 89 Consumer and Economic Development Europe, 26, 64-5, 91 Research and Information Center, 98 Indonesia, 61 Consumer Complaint Manual, 113 Japan, 25-7, 29, 30, 64 Consumer complaints, 113-5 Korea, 24, 89 Consumer Leasing (See Regulations: M) Mexico, 24, 63, 88 Consumer policies program, 102 Russia, 23, 25, 61, 63, 87, 88 Consumer regulations, compliance, 106-11 United Kingdom, 26, 65, 91 Consumers, privacy protection, 99, 178 Venezuela, 63 Credit risk, recourse obligations, 129 Economy, U.S. Currency and coin, 156 Business sector, 9-12, 42-4, 73-6 Capital account, 14, 48, 78 Debit cards, 105 Debt, 21, 57, 83 Debt and depository intermediation, 21, 57, Equity prices, 20, 56, 86 83 Foreign exchange operations, 28 Debt, US. economy, 21, 57, 83 Government sector, 12, 13, 44-7, 76 Delegation of Authority, 190 Household sector, 7-9, 40-2, 71-3 Deposit accounts, electronic statements, 104 Interest rates, 19, 52-6, 85 Depository institutions Labor market, 15-7, 49, 78-80 Branch closings, 132, 191 Monetary aggregates, 22, 57-60, 83-5 Century Date Change Special Liquidity Monetary policy, 3-6, 31-9, 66-71 Facility, 87, 182, 185, 192, 193 Prices, 17, 50-2, 80-3 Debt, 21, 57, 83 Trade and the current account, 14, 47, Deposits, 334, 346-9 77 Electronic disclosures, 189 Edge Act corporations, 126, 127 Exemption threshold, 104 Electronic banking, 103 Management Official Interlocks, 188 Electronic disclosures, 99, 103, 181 Reporting categories, century data Electronic fund transfers (See also change, 191 Regulations: E), 105, 154, 155, 158, Reserve requirements, 185, 365 162 Reserves, 368-73 Electronic Transfer Accounts, Dallas Fed, Risk-based capital standards, 187 162 Deposits Encryption, Federal Reserve data, 163 Federal Reserve Banks, 346-9, 369, 371, Enforcement actions, Federal Reserve 373 System, 124 Insured commercial banks, 367 Enterprise information architecture (EIA), Direct deposit, 105 137 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 399 Equal Credit Opportunity (See Federal Reserve Banks—Continued Regulations: B) Branches Euro, 26, 64, 92 Directors, list, 297-317 Euro reserves, 216 Officers, list, 295 European Economic and Monetary Union, Premises, 166, 362 Stage Three, 64, 92 Vice presidents in charge, list, 295 Examinations and inspections Community development activities, 95-9 Bank holding companies, 121 Condition statements, 334, 346-9 Compliance with consumer protection Conferences of chairmen, presidents, and laws, 101, 105, 106-11 first vice presidents, 297 Fair lending, 100 Deposits, 346-9 Federal Reserve Banks, 164 Directors, list, 297-317 Frequency guidelines, 131 Discount rate, 255, 272, 364 District Banks International banking activities, 126-8 Atlanta, 96, 166 Specialized Boston, 98, 160 Fiduciary activities, 122 Chicago, 96, 98 Government and municipal securities Cleveland, 98 dealers and brokers, 123 Dallas, 96, 98, 162 Information technology activities, 122 Kansas City, 96, 98, 166 Securities clearing agencies, 122, 123 Minneapolis, 98, 160, 161, 166 Securities subsidiaries, 123 New York, 98, 166 Transfer agents, 123 Philadelphia, 159 Year 2000 compliance, 122 Richmond, 98, 161, 166 State member banks, 121 St. Louis, 98, 161 Supervisory policy, 128-36 Examinations of, 164 Financial statements, combined, 164, Fair lending examinations, 100 333^4 Federal Advisory Council, 292 Holdings of loans and securities, 165, Federal agency securities 346-9, 352, 354-7, 368-73 Federal Reserve Banks, 346-9, 352, Income and expenses, 164, 335, 354-7, 368-73 358-61 Federal Reserve open market Officers and employees, number and transactions, 350 salaries, 353, 354 Federal Financial Institutions Examination Officers, list, 295 Council, 106, 135, 139 Operations, volume, 363 Federal funds rate, 4, 6, 59, 243, 255, 272 Payments to the U.S. Treasury, 356, 359, Federal Home Loan Bank System, 98, 179 361 Federal Open Market Committee Premises, 166-7, 334, 341, 346-9, 362 Authorizations, 195, 197, 203, 204, 247 Priced services, 152-7, 164, 167-4, Directives and instructions, 196, 199, 354-7 206, 215, 223, 232, 241, 242, 254, Salaries of officers and employees, 353, 255, 263, 271, 280 354 Disclosure policy, 281 Securities and loan holdings, 165 Meetings, minutes of, 200, 216, 224, Services 232, 244, 256, 264, 273 Automated clearinghouse, 156 Members and officers, list, 291 Book-entry securities, 155 Federal Reserve Act, amendment, 180 Cash, 156 Federal Reserve Banks Check collection, 152 Assessments by Board of Governors, Depository, 161-2 356 Fedwire funds transfer, 154 Audits of, 164 Fiscal agency, 158-61, 162 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

400 86th Annual Report, 1999 Federal Reserve Banks—Continued Glass-Steagall Act of 1933, 101, 175 Services—Continued Gold certificate account of Reserve Banks Float associated with, 157 and gold stock, 346-9, 368-73 Food coupon, 162, 363 Government Noncash collection, 156 Depository services, Federal Reserve Postal money order, 163 Banks, 158-61 Federal Reserve notes, 156, 356 Sector, 12, 44-7, 76 Federal Reserve Retirement Portability Act, Securities dealers and brokers, 180 examination of, 123 Federal Reserve System (See also Board of Government Performance and Results Act Governors) of 1993, 171-3 Applications and proposals, 140-5 Gramm-Leach-Bliley Act, 101, 117-8, Decisions, public notice of, 144 175-80 Enforcement actions and civil money Guangdong International Trust and penalties, 124 Investment Corporation, 89 Examinations and inspections, 121 Guide to the Interagency Country Exposure Maps, 392 Review Committee Process, 131 Membership, 147, 186 Staff training, 138 Home Mortgage Disclosure (See Supervision and regulation Regulations: C) responsibilities, 117-47 Home Mortgage Disclosure Act, data on Technical assistance, 128 loan transactions, 100, 111-3 Federal tax payments, 161 Home Owners' Loan Act, 178 Fedline for Windows, 163 Home ownership initiatives, 97 Fednet, 163 Household sector, 7-9, 40-2, 71-3 Fedwire, 154, 155, 158 Housing and Urban Development, FFIEC (See Federal Financial Institutions Department of, complaint referrals, Examination Council) 115 Fiduciary activities, supervision of, 122 Humphrey-Hawkins Reports, sunset Financial legislation, 215 Disclosure, state member banks, 145 Holding companies, 101, 117-8, 175-80 Income and expenses Statements Board of Governors, 325 Board of Governors, 323-31 Federal Reserve Banks, 164, 335, 354-7, Federal Reserve Banks, combined, 358 333-44 Federal Reserve priced services, 152-7, Federal Reserve priced services, 164, 167-70, 354-7 167-70 Information technology Subsidiaries, 176 Initiatives, 163 Fiscal agency services, Federal Reserve Project management, 137 Banks, 158-61 Risk initiatives, guidance, 125 Float, Federal Reserve, 157 Supervision of, by Federal Reserve Flood insurance violations, state member banks, 103 Banks, 122 Food coupon services, 162, 363 Supervisory Information Technology Foreign (SIT), 136-8 Banking organizations, U.S. activities, Insurance underwriting activities, GLB Act, 105, 126, 127, 142 178 Currencies, 23-9, 61-5, 87-92, 354-7 Insured commercial banks, assets and Economies (See Economies, foreign) liabilities, 367 Exchange operations, 28 Interagency Country Exposure Review Trade, 14, 47, 77 Committee, 131 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 401 Interest rates (See also Discount rates and Loan Federal funds rate), 19, 52-6, 85, 364 Applicants, characteristics of, proposed International Banking Act, applications rules, 103 under, 142, 190 Applications, practice of discrimination, International banking activities, supervision 100, 111-3 of (See also Regulations: K), 126-8 Loss reserves, 132, 177 International Banking Operations (See Write-up standards, 130 Regulatons: K) Loans International economic developments, Federal Reserve Banks 23-8, 61-6, 87-92 Holdings of and income from, 346-9, Investments 354, 363, 368-73 Interest rates for depository Commercial banks, 367 institutions, 364 Federal Reserve Banks, 346-9 Insured commercial banks, by, 367 Overseas, by U.S. banking organizations, Long-Term Capital Management, hedge 143 fund, 53-5 Looking for the Best Mortgage: Shop, Keys to Vehicle Leasing, publications, 103 Compare, Negotiate, brochure, 102 "Know Your Customer" programs, 186 Management Official Interlocks (See Labor market, 15-7, 49, 78-80 Regulations: L) Lending, subprime, 99, 131 Maps, Federal Reserve System, 392 Litigation involving the Board of Margin requirements, 366 Governors Margin stocks, 145, 366 Ali, Sheriff Gerry, 284 Member banks (See also State member Artis, 284 banks) Attorneys against American Apartheid, Assets and liabilities, 367 283 Number of, 367, 374 Banking Consultants of America, 284 Membership of State Banking Institutions Bettersworth, 285 in the Federal Reserve System (See Carrasco, 283 Regulations: H) Clarkson, 285 Mergers, consolidations, and acquisitions, Fenili, 285 list, 375-89 Folstad, 284 Mint, U.S. 50 State Quarters program, 157 Fraternal Order of Police, 284 Monetary aggregates (Ml, M2, M3), 21-3, Gadson, 284 57-60, 83-5 Goldman, 285 Monetary policy, 3-6, 31-6, 66-8 Monetary policy reports to the Congress Hummingbird, 284 February 23, 1999, 31-66 Hunter, 284 July 22, 1999, 66-92 Independent Community Bankers of Money and debt growth, 21-3, 37-9, America, 283 57-60, 70, 83-5 Inner City Press/Community on the Money laundering, 145-7 Move, 284 Mortgage lending, 104, 111-3 Irontown Housing Corporation, 283 Municipal securities dealers, explanation Kerr, 284 of, 123 Logan, 285 Nelson, 284 National Flood Insurance Act, 103 Pharaon, 283 National Information Center (NIC), 136 Sedgwick, 284 Noncash collection services, Federal Towe, 284 Reserve Banks, 156 Wasserman, 284 Nonmember banks, 367, 374 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

402 86th Annual Report, 1999 One-Stop Mortgage Initiative, 98 Regulations—Continued Overseas investments, 143 U, Credit by Banks for the Purpose of Purchasing or Carrying Margin Payday loans, 104 Stocks, 366 Payments system risk, policy statement, X, Borrowers of Securities Credit, 366 190 Y, Bank Holding Companies and Change Point-of-sale systems, 105 in Bank Control, 186-7 Policy statements and other actions, 190-2 Z, Truth in Lending, 99, 103-4, 108, Postal money order, services, 163 181 Predatory lending, 99, 101 A A, Unfair or Deceptive Acts or Premises, Federal Reserve Banks, 166, 334, Practices, 109 341, 346-9, 362 CC, Availability of Funds and Collection Priced services, Federal Reserve Banks, of Checks, 109, 188-9 152-7, 164, 167-70, 354 DD, Truth in Savings, 99, 103-4, 110, Prices, 17, 50-2, 80-3 181, 189 Report of Assets and Liabilities of U.S. Privacy, consumer, 99, 102 Branches and Agencies of Foreign Profit and loss, Federal Reserve Banks, 354 Banks, revision, 135 Publications Reports of Condition and Income {See Call Consumer Complaint Manual, 113 Reports) Guide to the Interagency Country Reports, consumer regulation, compliance, Exposure Review Committee 106-11 Process, 131 Reserve Requirements of Depository Keys to Vehicle Leasing, 103 Institutions (See Regulations: D) Looking for the Best Mortgage: Shop, Reserves of depository institutions, 368-73 Compare, Negotiate, 102 Revenue and income Trading and Capital Markets Activities Board of Governors, 325, 330 Manual, 129 Federal Reserve Banks, 164, 335, 354-7, 358 Quarters program, 50 states, 157 Federal Reserve priced services, 164, 167-70, 354 Real estate lending standards, 130 Risk-based capital standards, 128 Regulations Risk-focused supervision program, 124-5 A, Extensions of Credit by Federal Rural Local Initiatives Support Reserve Banks, 182, 185 Corporation, 98 B, Equal Credit Opportunity, 99, 100, 103, 107, 181 Salaries, Federal Reserve Bank officers C, Home Mortgage Disclosure, 100, and employees, 353 111-3 Savings associations, external auditing, 132 D, Reserve Requirements of Depository Savings bonds, 160 Institutions, 185, 365 Securities (See also Treasury securities) E, Electronic Fund Transfers, 99, 103-4, Activities, GLB Act, 177 108, 181 Book-entry, 162 H, Membership of State Banking Clearing agencies, supervision of, 123 Institutions in the Federal Reserve Credit, regulation of, 145, 366 System, 186-7 Dealers and brokers, supervision of, 123 K, International Banking Operations, Holdings by Federal Reserve Banks, 165 186-7, 190 Subsidiaries of bank holding companies, L, Management Official Interlocks, 188 supervision of, 122 M, Consumer Leasing, 99, 103-4, 108, Securitization activities, retained interest, 181 130 T, Credit by Brokers and Dealers, 366 Sell Direct, 160 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 403 Settlement services, 154, 190, 191 Trading activities, supervision of, 129 Small businesses, 95-7 Training, 106, 138-40 Social insurance tax receipts, 45 Transfer agents, supervision of, 123 Social security, expenditures and revenue, Transfers of funds (See also 12, 45, 76 Regulations: E), 363 Special drawing rights certificates, 346-9, Treasury Direct, 159, 162 368, 370, 372 Treasury Investment Program, 161 Special Liquidity Facility (See Century Treasury securities Date Change Special Liquidity Depository institution holdings, Facility) by class of bank, State member banks 368-73 Applications by, 143 Federal Reserve Banks Complaints against, 113 Holdings, 346-9, 352, 354-7 Examinations of, 105, 121-2 Marketable, 158 Financial disclosure by, 145 Walk-in services, 160 Flood insurance violations, 103 Open market transactions, 350 Foreign branches, 126 Repurchase agreements, 346-9, 350, Information technology, 122 352, 368-73 Loans to executive officers, 147 Yields on, 19, 52, 85 Number, 367, 374 Treasury, U.S. Department of the, 158-62, Securities clearing agencies, 123 165, 356, 359, 361 Securities dealers and brokers, 123 Triple DES, encryption standard, 163 Transfer agents, 123 Truth in Lending (See Regulations: Z) Stock repurchases, bank holding Truth in Lending Act, 101, 104 companies, 143 Truth in Savings (See Regulations: DD) Subprime lending, 99, 131 Supervision and regulation, Federal Unfair or Deceptive Acts or Practices Reserve System, responsibilities, (See Regulations: AA) 117-47, 176 Uniform Retail Credit Classification and Supervisory Education Program, 138 Account Management Policy, 135 Supervisory Information Technology (SIT), Unregulated banking practices, 114 136-8 Synthetic securitizations, 130 Year 2000 Board of Governors, 87 Technical assistance, Federal Reserve Century Date Change Special Liquidity System, 128 Facility, 87, 182, 193 Technology, risk-focused supervision Federal Reserve Banks, 87, 149-52 program, 125 FFIEC supervision program, 135 Testimony and recommendations, Board of Interagency Guidelines Establishing Governors, 104 Year 2000 Standards for Safety and Thrift Institutions Advisory Council, 294 Soundness, 186 TILA (See Truth in Lending Act) Readiness of banking institutions, 122 FRB1/1-1250-O500 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis