annual reports · December 31, 1999

Annual Report of the Federal Reserve Board, 2000

Rp ^Rep eport X LJ 2000 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., June 2001 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-seventh annual report of the Board of Governors of the Federal Reserve System. This report covers operations of the Board during calendar year 2000. 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 2000 7 ECONOMIC AND FINANCIAL DEVELOPMENTS IN 2000 7 The Household Sector 10 The Business Sector 12 The Government Sector 15 The External Sector 16 The Labor Market 18 Prices 20 U.S. Financial Markets 25 Debt and the Monetary Aggregates 27 International Developments 32 Foreign Exchange Operations 33 MONETARY POLICY REPORTS TO THE CONGRESS 33 Report of February 17, 2000 60 Report of July 20, 2000 Federal Reserve Operations 91 CONSUMER AND COMMUNITY AFFAIRS 91 Regulatory Matters 96 Consumer Advisory Council 97 Applications 98 Fair Lending 98 HMDA Data and Mortgage Lending Patterns 100 Consumer Policies 101 Community Affairs 102 Economic Effects of the Electronic Fund Transfer Act 103 Compliance 104 Community Reinvestment Act 104 Agency Reports on Compliance with Consumer Regulations 108 Consumer Complaints Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

113 BANKING SUPERVISION AND REGULATION 114 Scope of Responsibilities for Supervision and Regulation 115 Supervision for Safety and Soundness 124 Supervisory Policy 132 Supervisory Information Technology 132 Staff Training 135 Regulation of the U.S. Banking Structure 139 Enforcement of Other Laws and Regulations 142 Federal Reserve Membership 143 FEDERAL RESERVE BANKS 143 Check Modernization Project 145 Developments in Federal Reserve Priced Services 150 Developments in Currency and Coin 150 Developments in Fiscal Agency and Government Depository Services 155 Information Technology 156 Financial Examinations of Federal Reserve Banks 157 Income and Expenses 158 Holdings of Securities and Loans 159 Volume of Operations 159 Federal Reserve Bank Premises 160 Pro Forma Financial Statements for Federal Reserve Priced Services 165 THE BOARD OF GOVERNORS AND THE GOVERNMENT PERFORMANCE AND RESULTS ACT 165 Strategic and Performance Plans 165 Mission 165 Goals and Objectives 167 Interagency Coordination 169 FEDERAL LEGISLATIVE DEVELOPMENTS 169 American Homeownership and Economic Opportunity Act of 2000 169 Commodity Futures Modernization Act of 2000 169 Electronic Signatures in Global and National Commerce Act Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

171 REGULATORY SIMPLIFICATION 171 Revisions Proposed to Regulation C 172 Simplified Capital Framework for Non-Complex Institutions Records 175 RECORD OF POLICY ACTIONS OF THE BOARD OF GOVERNORS 175 Regulation D (Reserve Requirements of Depository Institutions) 176 Regulation G (Disclosure and Reporting of CRA-Related Agreements) 176 Regulation H (Membership of State Banking Institutions in the Federal Reserve System) 178 Regulation H and Regulation Y (Bank Holding Companies and Change in Bank Control) 178 Regulation P (Privacy of Consumer Financial Information) 179 Regulation Y 183 Regulation Z (Truth in Lending) 183 Rules of Practice for Hearings 183 Policy Statements and Other Actions 184 Discount Rates in 2000 189 MINUTES OF FEDERAL OPEN MARKET COMMITTEE MEETINGS 189 Authorization for Domestic Open Market Operations 191 Domestic Policy Directive 191 Authorization for Foreign Currency Operations 193 Foreign Currency Directive 193 Procedural Instructions with Respect to Foreign Currency Operations 194 Meeting Held on February 1-2, 2000 209 Meeting Held on March 21, 2000 218 Meeting Held on May 16, 2000 225 Meeting Held on June 27-28, 2000 234 Meeting Held on August 22, 2000 242 Meeting Held on October 3, 2000 249 Meeting Held on November 15, 2000 257 Meeting Held on December 19, 2000 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

269 LITIGATION 269 Judicial Review of Board Orders under the Bank Holding Company Act 269 Litigation under the Financial Institutions Supervisory Act 269 Other Actions Federal Reserve System Organization 275 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 277 FEDERAL OPEN MARKET COMMITTEE 278 ADVISORY COUNCILS TO THE BOARD OF GOVERNORS 278 Federal Advisory Council 279 Consumer Advisory Council 280 Thrift Institutions Advisory Council 281 FEDERAL RESERVE BANKS 281 Officers of Federal Reserve Banks and Branches 283 Conference of Chairmen 283 Conference of Presidents 283 Conference of First Vice Presidents 283 Directors 304 HISTORICAL RECORDS: MEMBERSHIP OF THE BOARD OF GOVERNORS, 1913-2000 Financial Statements and Statistical Tables 309 BOARD OF GOVERNORS FINANCIAL STATEMENTS 319 FEDERAL RESERVE BANKS COMBINED FINANCIAL STATEMENTS 331 STATISTICAL TABLES 332 1. Statement of Condition of the Federal Reserve Banks, by Bank, December 31, 2000 and 1999 336 2. Federal Reserve Open Market Transactions, 2000 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

STATISTICAL TABLES—Continued 340 3. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31, 1998-2000 341 4. Number and Annual Salaries of Officers and Employees of the Federal Reserve Banks, December 31, 2000 342 5. Income and Expenses of the Federal Reserve Banks, by Bank, 2000 346 6. Income and Expenses of the Federal Reserve Banks, 1914-2000 350 7. Acquisition Costs and Net Book Value of Premises of the Federal Reserve Banks and Branches, December 31, 2000 351 8. Operations in Principal Departments of the Federal Reserve Banks, 1997-2000 352 9. Federal Reserve Bank Interest Rates on Loans to Depository Institutions, December 31, 2000 353 10. Reserve Requirements of Depository Institutions, December 31, 2000 354 11. Initial Margin Requirements under Regulations T, U, and X 355 12. Principal Assets and Liabilities and Number of Insured Commercial Banks in the United States, by Class of Bank, June 30, 2000 and 1999 356 13. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items—Year-End 1918-2000 and Month-End 2000 362 14. Banking Offices and Banks Affiliated with Bank Holding Companies in the United States, December 31, 1999 and 2000 363 MAPS OF THE FEDERAL RESERVE SYSTEM 367 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 2000 Bolstered by the exceptional strength the overnight federal funds rate lA perof domestic demand, the U.S. economy centage point on each occasion. In continued to expand at a rapid pace in related actions, the Board of Governors the first half of 2000. The economy also approved quarter-point increases in slowed appreciably thereafter, however, the discount rate in both February and and growth eventually became quite March. sluggish as the year wound down. Over- Between the March and May meetall rates of inflation were higher than ings of the FOMC some readings on in 1999, largely as a result of steep labor costs and prices suggested a posincreases in energy prices. sible increase of inflation pressures. The Federal Reserve adjusted its pol- Moreover, aggregate demand had conicy settings and its perceptions of risk as tinued to grow at a fast clip, and markets economic conditions changed. When the for labor and other resources were show- FOMC convened for its first two meet- ing signs of further tightening. Finanings of 2000, in February and March, cial market conditions had firmed in economic indicators were pointing response to these developments; the subtoward an increasingly taut labor mar- stantial rise in private borrowing rates ket as a consequence of a persistent between March and May had been influimbalance between the growth rates of enced by the buildup in expectations of aggregate demand and potential aggre- more policy tightening. Given all these gate supply. Reflecting the underlying circumstances, the FOMC decided in strength in spending and expectations of May to raise the target for the overnight tighter monetary policy, market interest federal funds rate Vi percentage point, to rates were rising, especially after the 6V2 percent, and the Board of Governors century date change passed without inci- approved an increase of the same size in dent. But, at the same time, equity prices the discount rate. were still posting appreciable gains on By the June FOMC meeting, the net. Knowing that the two safety valves incoming data were suggesting that that had been keeping underlying infla- the expansion of aggregate demand tion from picking up until then—the might be starting to moderate toward a economy's ability to draw on the pool of more sustainable pace: Consumers had available workers and to expand its trade increased their outlays for goods moddeficit on reasonable terms—could not estly during the spring; home purchases be counted on indefinitely, the FOMC and starts appeared to have softened; voted for a further tightening in mone- and readings on the labor market sugtary policy at both its February and gested that the pace of hiring might be March meetings, raising the target for cooling off. Moreover, much of the effects on demand of previous policy NOTE. The discussions here and in the next firmings, including the xh percentage section ("Economic and Financial Developments point tightening in May, had not yet in 2000") are adapted mainly from Monetary Polbeen fully realized. Financial market icy Report to the Congress (Board of Governors, participants interpreted signs of eco- February 2001). The data cited are those available as of mid-February 2001. nomic slowing as suggesting that the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

87th Annual Report, 2000 Federal Reserve probably would be able sizable increases in energy prices were to hold inflation in check without much, pushing broad inflation measures above if any, additional policy firming. How- the levels of recent years. Although core ever, whether aggregate demand had inflation measures were at most only moved decisively onto a more moder- creeping up, the Committee felt that ate expansion track was not yet clear, there was some risk that the increase in and labor resource utilization remained energy prices, which was lasting longer unusually elevated. The FOMC decided than had seemed likely earlier in the to take no policy action in June, but it year, would start to leave an imprint on indicated that the balance of risks was business costs and longer-run inflation still on the side of rising inflation in the expectations, posing the risk that core foreseeable future. inflation rates could rise more substan- Further evidence accumulated over tially. Weighing these considerations, the summer and into the fall to indicate the FOMC decided to hold the federal that demand growth was moderating to funds rate unchanged at both its August a pace around that of potential supply. and October meetings, and it indicated Although consumer spending had that the balance of risks still was picked up again during the summer, it weighted toward heightened inflation did not regain the vigor it had displayed pressures. earlier in the year, and capital spending, By the time of the November FOMC while still growing briskly, had decel- meeting, conditions in the financial erated from its first-half pace. With markets were becoming less accommoincreases in demand moderating, private dative in some ways, even as the Fedemployment gains slowed from the rates eral Reserve held the federal funds seen earlier in the year. However, labor rate steady. Equity prices had declined markets remained exceptionally tight, considerably over the previous several and the hourly compensation of work- months, resulting in an erosion of ers had accelerated to a point at which household wealth that seemed likely to unit labor costs were edging up despite restrain consumer spending going forstrong gains in productivity. In addition, ward. Those price declines, along with Selected Interest Rates Percent Thirtv-vear Treasury / s<\ Intended federal funds rate Three-month Tre.'isw' J L L 2/3 3/30 5/18 6/30 8/24 10/5 11/16 12/21 2/2 3/21 5/16 6/28 8/22 10/3 11/1512/191/3 1999 2000 2001 NOTE. The data are daily. The dates on the horizontal axis are those of scheduled FOMC meetings and of any intermeeting policy actions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy and the Economy 5 the elevated volatility of equity prices, widening of risk spreads on lower-rated also hampered the ability of firms to corporate bonds. In this environment, raise funds in equity markets and were growth in business fixed investment likely discouraging business investment. appeared to be slowing appreciably. Some firms faced more restrictive con- Consumer spending showed signs of ditions in credit markets as well, as risk decelerating further, as falling stock spreads in the corporate bond market prices eroded household wealth and conwidened significantly for firms with sumer confidence weakened. Moreover, lower credit ratings and as banks tight- growth in foreign economies seemed to ened the standards and terms on their be slowing, on balance, and U.S. export business loans. Meanwhile, incoming performance began to deteriorate. Mardata indicated that the pace of economic ket interest rates had declined sharply in activity had softened a bit further. Still, response to these developments. Against the growth of aggregate demand appar- this backdrop, the FOMC at its Decemently had moved only modestly below ber meeting decided that the risks to the that of potential supply. Moreover, while outlook had swung considerably and crude oil prices appeared to be topping now were weighted toward economic out, additional inflationary pressures weakness, although it decided to wait were arising in the energy sector in the for additional evidence on the extent form of surging prices for natural gas, and persistence of the slowdown before and there had been no easing of the moving to an easier policy stance. Rectightness in the labor market. In assess- ognizing that the current position of ing the evidence, the members of the the economy was difficult to discern Committee felt that the risks to the out- because of lags in the data and that look were coming into closer balance prospects for the near term were particubut had not yet shifted decisively. At the larly uncertain, the Committee agreed at close of the meeting, the FOMC left the the meeting that it would be especially funds rate unchanged once again, and it attentive over coming weeks to signs stated that the balance of risks continued that an intermeeting policy action was to point toward increased inflation. called for. However, in the statement released after Additional evidence that economic the meeting, the FOMC noted the possi- activity was slowing significantly bility of subpar growth in the economy emerged not long after the December in the period ahead. meeting. New data indicated a marked Toward the end of the year, the mod- weakening in business investment, and eration of economic growth gave way, retail sales over the holiday season fairly abruptly, to more sluggish condi- were appreciably lower than businesses tions. By the time of the December had expected. To contain the resulting FOMC meeting, manufacturing activity buildup in inventories, activity in the had softened considerably, especially in manufacturing sector continued to drop. motor vehicles and related industries, In addition, forecasts of near-term corand a number of industries had accumu- porate profits were being marked down lated excessive stocks of inventories. further, resulting in additional declines Across a broader set of firms, forecasts in equity prices and in business confifor corporate sales and profits in the dence. Market interest rates continued to fourth quarter and in 2001 were being fall, as investors became more pessimisslashed, contributing to a continued tic about the economic outlook. On the decline in equity prices and a further basis of these developments, the Com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

6 87th Annual Report, 2000 mittee held a telephone conference call prices surged on the announcement of on January 3, 2001, and decided to the federal funds rate cut, and the Treacut the intended federal funds rate sury yield curve steepened considerably, Vi percentage point. By the following apparently because market participants day, the Board of Governors had became more confident that a prolonged approved decreases in the discount rate downturn in economic growth would totaling Vi percentage point. Equity likely be forestalled. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments in 2000 The combination of exceptionally strong Change in PCE Chain-Type Price Index growth in the first half of 2000 and Percent subdued growth in the second half D Total resulted in a rise in real GDP of about fi Excluding food and cnerii> 3!/2 percent for the year overall. Domestic demand started out the year with incredible vigor but decelerated thereafter and was sluggish by year-end. Exports surged for three quarters and then faltered. In the labor market, growth of employment slowed over the year but was sufficient to keep the 1994 1996 1998 2000 unemployment rate around the lowest NOTE. Data are for personal consumption expenditures sustained level in more than thirty years. (PCE). Core inflation remained low in 2000 in the face of sharp increases in energy restrained by the slowing of the econprices. Although the chain-type price omy and the persistence of competitive index for personal consumption expen- pricing conditions. ditures (PCE) moved up faster than in The economy continued to benefit in 1999, it showed only a slight step-up in 2000 from the remarkable step-up in the rate of increase after excluding the structural productivity growth since the prices of food and energy. Unit labor mid-1990s, which seems to be closely costs picked up moderately, adding to related to the spread of new technolothe cost pressures from energy, but the gies. Even as the economy slowed in ability of businesses to raise prices was the latter half of the year, evidence of ongoing efficiency gains were apparent in the form of further appreciable advances in output per worker hour Change in Real GDP in the nonfarm business sector. The Percent, annual rate impressive performance of productivity and the accompanying environment of low and stable underlying inflation suggested that the longer-run outlook for the economy remained favorable at the end of 2000, despite the downside risks that were apparent in the near-term outlook. The Household Sector 1994 1996 2000 NOTE. Here and in subsequent charts, except as noted, Personal consumption expenditures annual changes are measured from Q4 to Q4, and change increased AVi percent in real terms in for a half-year is measured between its final quarter and the final quarter of the preceding period. 2000 after having advanced 5 percent in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

8 87th Annual Report, 2000 1998 and 5Vi percent in 1999. A large stock market wealth may well have conportion of the gain in 2000 came in the tinued to exert a strong positive effect first quarter, when consumption moved on consumer spending for several ahead at an unusually rapid pace. The months after share values had topped increase in consumer spending over the out. As time passed, however, the imperemainder of the year was moderate, tus to consumption from this source averaging about 3Vi percent at an annual most likely diminished. The personal rate. Consumer outlays for motor vehi- saving rate, which had dropped sharply cles and parts surged to a record high during the stock market surge of preearly in 2000 but reversed that gain over vious years, fell further in 2000, but the the remainder of the year; sales of vehi- rate of decline slowed, on average, after cles tailed off especially sharply as the the first quarter. year drew to a close. Real consumer Even with real income growth slowpurchases of gasoline fell during the ing and the stock market turning down, year in response to the steep run-up in consumers maintained a high degree of gasoline prices. Most other broad cate- optimism through most of 2000 regardgories of goods and services posted siz- ing the state of the economy and the able gains over the year as a whole, but economic outlook. Indexes of sentiment results late in the year were mixed: Real from both the University of Michigan outlays for goods other than motor vehi- Survey Research Center and the Confercles eked out only a small gain in the ence Board rose to new peaks in the first fourth quarter, while real outlays for quarter of the year, and the indexes consumer services rose very rapidly, not remained close to those levels for sevonly because of higher outlays for home eral more months. Survey readings on heating fuels during a spell of colder- personal finances, general business conthan-usual weather but also because of ditions, and the state of the labor market continued strength in real outlays for remained generally favorable through other types of services. most of the year. As of late autumn, only Changes in income and wealth pro- mild softness could be detected. Toward vided less support to consumption in year-end, however, confidence in the 2000 than in other recent years. Real economy dropped sharply in response to disposable personal income rose about a combination of developments, includ- 2lA percent during the year after a gain ing the weakness in the stock market of slightly more than 3 percent in 1999. over the latter part of the year and more Disposable income did not rise quite as frequent reports of layoffs. much in nominal terms as it had in 1999, and rising prices eroded a larger portion Change in Real Income and Consumption of the nominal gain. Meanwhile, the net Percent, annual rate worth of households turned down in 2000 after having climbed rapidly for '. Disposable personal income several years, as the effect of a decline \ Personal consumpton expenditures in the stock market was only partially offset by a sizable increase in the value of residential real estate. With the peak in stock prices not coming until the year was well under way, and with valuations having previously been on a sharp upward course for an extended period, 1994 1996 1998 2000 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 9 Real outlays for residential invest- able personal income. Consumer credit ment declined about 2!/4 percent, on net, increased rapidly early in the year, over the course of 2000, as construc- boosted by strong outlays on durable tion of new housing dropped back from goods; but as consumer spending cooled the elevated level of the previous year. later in the year, the expansion of con- Investment in housing was influenced sumer credit slowed. For the year as a by a sizable swing in mortgage interest whole, consumer credit is estimated to rates as well as by slower growth of have advanced more than 8!/2 percent, employment and income and the down- up from the 7 percent pace of 1999. turn in the stock market. After having Households also took on large amounts moved up appreciably in 1999, mort- of mortgage debt, which grew an estigage rates continued to advance through mated 9 percent in 2000, reflecting the the first few months of 2000. By mid- solid pace of home sales. May, the average commitment rate on With the rapid expansion of houseconventional fixed-rate mortgages was hold debt in recent years, the household above 8V2 percent, up roughly IV2 per- debt service burden has increased to levcentage points from the level of a year els not seen since the late 1980s. Even earlier. New construction held up even so, with unemployment low and houseas rates were rising in 1999 and early hold net worth still high by histori- 2000, but it softened in the spring cal standards, the credit quality of the of the latter year. Starts and permits household sector appears to have detefor single-family houses declined from riorated little in 2000. Personal bankthe first quarter of 2000 to the third ruptcy filings held relatively steady and quarter. remained well below their peak from But even as homebuilding activity several years ago. Delinquency rates on was turning down, conditions in mort- home mortgages, credit cards, and auto gage markets were moving back in a loans edged up in 2000 but were at most direction more favorable to housing. only slightly above their levels of the From the peak in May, mortgage interest fourth quarter of 1999. Lenders did not rates fell substantially over the remain- appear to be significantly concerned der of the year, reversing the earlier about the credit quality of the household increases. Sales of new homes firmed as sector for most of 2000, although some rates turned down, and prices of new lenders eventually became more cauhouses continued to trend up faster than tious. According to surveys of banks the general rate of inflation. Inventories conducted by the Federal Reserve, of unsold new homes held fairly steady few commercial banks tightened lendover the year and were up only moder- ing conditions on consumer installment ately from the lows of 1997 and 1998. loans and mortgage loans to households With demand well-maintained and over the first three quarters of 2000. inventories under control, activity sta- However, the survey that included the bilized. Starts and permits for single- latter part of the year indicated that a family houses in the fourth quarter of number of banks tightened standards 2000 were up from the average for the and terms on consumer loans, particuthird quarter. larly non-credit-card loans, perhaps Households continued to borrow at a because of some uneasiness about how brisk pace in 2000, with household debt the financial position of households expanding an estimated 83/4 percent, might hold up as the pace of economic well above the growth rate of dispos- activity slowed. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

10 87th Annual Report, 2000 The Business Sector est portion of the drop coming in the fourth quarter; the declines in real out- Real business fixed investment rose lays on larger types of trucks were par- 10 percent in 2000 according to the ticularly sizable. Investment in indusadvance estimate from the Commerce trial equipment, tracking the changing Department. Investment spending shot conditions in manufacturing, also fell ahead at an annual rate of 21 percent in in the fourth quarter but was up apprethe first quarter of the year; its strength ciably for the year overall. Investment in in that period came, in part, from highhigh-tech equipment decelerated over tech purchases that had been delayed the year but was still expanding in the from 1999 by companies that did not fourth quarter: Real outlays for telecomwant their operating systems to be in a munications equipment posted excepstate of change at the onset of the new tionally large gains in the first half of millennium. Expansion of investment the year, flattened out temporarily in the was slower but still relatively brisk in third quarter, and expanded again in the second and third quarters, at annual the fourth. Spending on computers and rates of about 15 percent and 8 perperipherals increased, in real terms, at cent respectively. In the fourth quarter, an average rate of about 45 percent over however, capital spending downshifted the first three quarters of the year but abruptly in response to the slowing slowed abruptly to a 6 percent rate of economy, tightening financial condiexpansion in the year's final quarter, the tions, and rising concern about the prossmallest quarterly advance in several pects for profits; the initial estimate for years. that period showed real investment out- Investment in nonresidential struclays having fallen at an annual rate of tures rose substantially in 2000, about 1 Vi percent. \2Vi percent in all, after having declined Fixed investment in equipment and P/4 percent in 1999. Investment in facsoftware was up 9]/2 percent in 2000, tory buildings, which had fallen more with the bulk of the gain coming in the than 20 percent in 1999 in an apparent first half of the year. Spending slowed to reaction to the economic disruptions a rate of growth of about 5Vi percent abroad and the associated softness in in the third quarter and then declined in demand for U.S. exports, more than the fourth quarter. Business investment recouped that decline over the course of in motor vehicles fell roughly 15 per- 2000. Real outlays for office construccent, on net, during 2000, with the largtion, which had edged down in 1999 after several years of strong advance, Change in Real Business Fixed Investment got back on track in 2000, posting a gain Percent, annual rate of about 13^2 percent. Real investment in commercial buildings other than offices was little changed after moderate gains in the two previous years. Spending on structures used in drilling for energy strengthened in response to the surge in energy prices. Business inventory investment was subdued early in the year when final sales were surging; aggregate inventory- 1994 1998 2000 sales ratios, which have trended lower Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 11 in recent years as companies became Business debt expanded strongly over more efficient at managing stocks, edged the first half of 2000, propelled by down further. As sales moderated in robust capital spending as well as by subsequent months, production growth share repurchases and cash-financed did not decelerate quite as quickly, and merger activity. The high level of capiinventories began to rise more rapidly. tal expenditures outstripped internally Incoming information through the sum- generated funds by a considerable marmer suggested that some firms might be gin despite continued impressive profits. encountering a bit of backup in stocks To meet their borrowing needs, firms but that the problems were not severe tapped commercial paper, bank loans, overall. In the latter part of the year, and corporate bonds in volume in the however, inventory-sales ratios turned first quarter. The rapid pace of borrowup, indicating that more serious over- ing continued in the second quarter, hangs were developing. Responding to although borrowers relied more heavily the slowing of demand and the increases on bank loans and commercial paper to in stocks, manufacturers reduced output meet their financing needs in response in each of the last three months of the to a rise in longer-term interest rates. year. Businesses also began to clamp Business borrowing slowed appreciadown on the flow of imports. Despite bly in the second half of the year. As those adjustments, stocks in a number of economic growth moderated and profits domestic industries were likely well weakened, capital spending decelerated above desired levels as the year drew to sharply. In addition, firms held down a close. their borrowing needs by curbing their Business profits followed a pattern buildup of liquid assets, which had been much like that of other economic data. accumulating quite rapidly in previous After having risen at an annual quarters. Borrowing may have been rate of more than 16 percent in the deterred by a tightening of financial confirst half of the year, U.S. corporations' ditions for firms with lower credit rateconomic profits—that is, book profits ings, as investors and lenders apparently with inventory and capital consumption became more concerned about credit adjustments—slowed to less than a risk. Those concerns likely were exacer- 3 percent rate of growth in the third bated by indications that credit quality quarter. Profits from operations outside had deteriorated at some businesses. The the United States continued to increase default rate on high-yield bonds continrapidly in the third quarter. However, ued to climb in 2000, reaching its higheconomic profits from domestic opera- est level since 1991. Some broader meations edged down in that period, as solid sures of credit quality also slipped. The gains for financial corporations were amount of nonflnancial debt downmore than offset by a 4 percent rate of graded by Moody's Investor Services in decline in the profits of nonflnancial cor- 2000 was more than twice as large as porations. Profits of nonflnancial corpo- the amount upgraded, and the delinrations as a share of their gross nominal quency rate on business loans at comoutput rose about xh percentage point in mercial banks continued to rise over the the first half of 2000 but reversed part of year. But while some firms were clearly that gain in the third quarter. Earnings having financial difficulties, many other reports for the fourth quarter indicated firms remained soundly positioned to that corporate profits fell sharply in that service their debt. Indeed, the ratio of period. net interest payments to cash flow for all Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

12 87th Annual Report, 2000 nonfinancial firms moved only modestly The slowdown in borrowing in the latter above the relatively low levels of recent part of the year damped the growth of years. nonfinancial business debt over 2000, As concerns about risk mounted, although it still expanded an estimated lenders became more cautious about 83/4 percent. extending credit to some borrowers. An Growth in commercial mortgage increasingly large proportion of banks debt slowed in 2000 to an estimated reported firming terms and standards on rate of 9!/4 percent, and issuance of business loans over the course of the commercial-mortgage-backed securities year. In the corporate bond market, yield fell back from its 1999 pace. Spreads spreads on high-yield and lower-rated on lower-rated commercial-mortgageinvestment-grade bonds, measured rela- backed securities over swap rates widtive to the ten-year swap rate, began ened by a small amount late in the year, climbing sharply in September and by and banks on net reported tightening year-end were at levels well above those their standards on commercial real estate seen in the fall of 1998. Lower-rated credit over the year. Nevertheless, funcommercial paper issuers also had to damentals in the commercial real estate pay unusually large premiums late in market remained solid, and delinquency the year, particularly on paper spanning rates on commercial mortgages stayed the year-end. As financial conditions around their historic lows. became more stringent, issuance of high-yield debt was cut back sharply in The Government Sector the fourth quarter, although investmentgrade bond issuance remained strong. Real consumption and investment Bank lending to businesses was also expenditures of federal, state, and local light at that time, and net issuance of governments, the part of government commercial paper came to a standstill. spending that is included in GDP, rose In total, the debt of nonfinancial busi- only 1 lA percent in the aggregate during nesses expanded at an estimated 5 x/i per- 2000. The increase was small partly cent rate in the fourth quarter, less than because the consumption and investhalf the pace of the first half of the year. ment expenditures of the federal government had closed out 1999 with a large increase in advance of the century date Spreads of Corporate Bond Yields change. Federal purchases in the fourth over the Ten-Year Swap Rate quarter of 2000 were about 1 percent Percentage points below the elevated level at year-end 1999. Abstracting from the bumps in the spending data, the underlying trend in real federal consumption and investment outlays appears to have been mildly positive over the past couple of years. The consumption and investment expenditures of state and local governments rose about 2l/i percent in 2000 after an unusually large increase of AVA percent 1998 1999 2000 in 1999. The slowdown in spending was NOTE. The data are daily. The spreads compare the mainly a reflection of a downshift in yields on the Merrill Lynch AA, BBB, and 175 indexes government investment in structures, with the ten-year swap rate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 13 which can be volatile from year to year sonal income. Receipts from the taxaand had posted a large gain in 1999. tion of corporate profits also moved up Total federal spending, as reported in sharply in fiscal 2000, rebounding from the unified budget, rose 5 percent in a small decline the previous fiscal year. fiscal year 2000, the largest increase With federal receipts rising much faster in several years. A portion of the rise than spending, the surplus in the unified stemmed from shifts in the timing of budget rose to $236 billion in fiscal some outlays in a way that tended to 2000, nearly double that of fiscal 1999. boost the tally for fiscal 2000. But The on-budget surplus, which excludes even allowing for those shifts, the rise surpluses accumulating in the social in spending would have exceeded security trust fund, rose from essentially the increases of other recent years. Out- zero in fiscal 1999 to $86 billion in lays accelerated for most major func- fiscal 2000. Excluding net interest paytions, including defense, health, social ments, a charge resulting from past defisecurity, and income security. Of these, cits, the surplus in fiscal 2000 was about spending on health—about three- $460 billion. fourths of which consists of outlays Federal saving, which is basically for Medicaid—recorded the biggest the federal budget surplus adjusted to increase. Medicaid grants to the states conform to the accounting practices folwere affected in the fiscal year by lowed in the national income and prodincreased funding for the child health uct accounts, amounted to about 3Vi perinsurance initiative that was passed in cent of nominal GDP over the first three 1997 and by a rise in the portion of quarters of 2000. This figure has been Medicaid expenses picked up by the fed- rising roughly 1 percentage point a year eral government. Spending on agricul- over the past several years. Mainly ture rose very sharply for a third year because of that rise in federal saving, but not as rapidly as in fiscal 1999. The the national saving rate has been runongoing paydown of debt by the federal ning at a higher level in recent years government led to a decline of nearly than was observed through most of the 3 percent in net interest payments in 1980s and first half of the 1990s, even fiscal 2000 after a somewhat larger drop as the personal saving rate has plunged. in these payments in fiscal 1999. The rise in federal saving has kept inter- Federal receipts increased 103/4 per- est rates lower than they otherwise cent in fiscal year 2000, the largest would have been and has contributed, advance in more than a decade. The in turn, to the rapid growth of capital increase in receipts from taxes on the investment and the faster growth of the income of individuals amounted to more economy's productive potential. than 14 percent. In most recent years, The burgeoning federal budget surthese receipts have grown much faster plus allowed the Treasury to pay down than nominal personal income as mea- its debt in 2000 at an even faster pace sured in the national income and prod- than in previous years. As of the end uct accounts. One important factor in of fiscal 2000, the stock of marketable the difference is that rising levels of Treasury debt outstanding had fallen income and a changing distribution about $500 billion from its peak in 1997. have shifted more taxpayers into higher The existing fiscal situation and the tax brackets; another is an increase in anticipation that budget surpluses would revenues from taxes on capital gains and continue led the Treasury to implement other items that are not included in per- a number of debt management changes Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

14 87th Annual Report, 2000 Federal Government Debt smaller reopening of the previously auc- Held by the Public tioned security. At other maturities, the Percent of nominal GDP Treasury reduced the sizes of its twoyear notes and inflation-indexed securities and eliminated the April auction of the thirty-year inflation-indexed bond. In addition, the Treasury reduced the frequency of new offerings of one-year 35 bills in 2000. These reductions in the issuance of 25 Treasury securities caused the Federal Reserve to modify some of its procedures for obtaining securities at Trea- 1960 1970 1980 1990 2000 sury auctions, as described in detail NOTE. The data are as of the end of the fiscal year. below. The Treasury also announced Excludes debt held in federal government accounts and by the Federal Reserve System. changes in the rules for auction participation by foreign and international during 2000, many designed to preserve monetary authority (FIMA) accounts, the liquidity of its securities. In particu- which primarily include foreign central lar, the Treasury sought to maintain banks and governmental monetary entilarge and regular offerings of new secu- ties. The new rules, which were to go rities at some key maturities, because into effect on February 1, 2001, impose such attributes are thought to impor- limits on the size of noncompetitive bids tantly contribute to market liquidity. In from individual FIMA accounts and on part to make room for continued sizable the total amount of such bids that will auctions of new securities, the Trea- be awarded at each auction. These limits sury initiated a debt buyback program will leave a larger pool of securities through which it can purchase debt that available for competitive bidding at the it previously issued. In total, the Trea- auctions, helping to maintain the liquidsury conducted twenty buyback opera- ity and efficiency of the market. Moretions in 2000, repurchasing a total of over, FIMA purchases will be subtracted $30 billion par value of securities with from the total amount of securities maturities ranging from twelve years to offered, rather than being added on as twenty-seven years. Those operations they were in some previous instances, were generally well received and caused making the amount of funds raised at little disruption to the market. the auction more predictable. Despite conducting buybacks on that State and local government debt scale, the Treasury had to cut back con- increased little in 2000. Gross issuance siderably its issuance of new securities. of long-term municipal bonds was well To still achieve large sizes of individual below the robust pace of the past two issues at some maturities, the Treasury years. Refunding offerings were held implemented a schedule of regular down by higher interest rates through reopenings—in which it auctions addi- much of the year, and the need to raise tional amounts of a previously issued new capital was diminished by strong security instead of issuing a new one— tax revenues. Net issuance was also for its five-, ten-, and thirty-year instru- damped by an increase in the retirement ments. Under that schedule, every other of bonds from previous refunding activauction of each of those securities is a ity. Credit quality in the municipal mar- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 15 ket improved considerably in 2000, with sumer, and other goods. Based on data credit upgrades outnumbering down- for October and November, real exports grades by a substantial margin. The only were estimated to have declined in the notable exception was in the not-for- fourth quarter, reflecting in part a slowprofit health care sector, where down- ing of economic growth abroad. This grades predominated. decrease was particularly evident in exports of capital goods, automotive products, consumer goods, and agricul- The External Sector tural products. The quantity of imported goods and The current account deficit reached services expanded rapidly during the $452 billion (annual rate) in the third first three quarters of 2000, reflecting quarter of 2000, or 4.5 percent of GDP, the continuing strength of U.S. domestic compared with $331 billion and 3.6 perdemand and the effects of past dollar cent for 1999. In the financial account, appreciation on price competitiveness. the counterpart to the increased U.S. cur- Increases were widespread among trade rent account deficit in 2000 was an categories. Based on data for October increase in net capital inflows. and November, real imports of goods and services were estimated to have risen only slightly in the fourth quarter. Trade and the Current Account Moderate increases in imported con- Most of the expansion in the current sumer and capital goods were partly account deficit occurred in the balance offset by declines in other categories of of trade in goods and services. The defi- imports, particularly industrial supplies cit on trade in goods and services wid- and automotive products, for which ened to $383 billion (annual rate) in the domestic demand had softened. The third quarter from $347 billion in the price of non-oil imports was estimated first half of the year. Data for trade in to have increased by less than 1 percent October and November suggested that during 2000. the deficit may have increased further The price of imported oil rose nearly in the fourth quarter. Net payments on $7 per barrel over the four quarters of investments were a bit less during the 2000. During the year, oil prices generfirst three quarters of 2000 than in the ally remained high and volatile, with the second half of 1999 owing to a sizable spot price of West Texas intermediate increase in income receipts from direct (WTI) crude fluctuating between a low investment abroad. of $24 per barrel in April and a high U.S. exports of goods and services above $37 per barrel in September. rose an estimated 7 percent in real terms Strong demand—driven by robust world during 2000. Exports surged during the economic growth—kept upward presfirst three quarters, supported by a sure on oil prices even as world supply pickup in economic activity abroad that increased considerably. Over the course began in 1999. By market destination, of 2000, OPEC raised its official produc- U.S. exports were strongest to Mexico tion targets by 3.7 million barrels per and countries in Asia. About 45 per- day, reversing the production cuts made cent of U.S. goods exports were capital in the previous two years. Oil producequipment, 20 percent were industrial tion from non-OPEC sources rebounded supplies, and roughly 10 percent each as well. During the last several weeks of were agricultural, automotive, con- 2000, oil prices fell sharply as market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

16 87th Annual Report, 2000 participants became convinced that the and acquisition activity. Of the roughly U.S. economy was slowing. $200 billion in direct investment inflows in the first three quarters, about $100 billion was directly attributable to merger The Financial Account activity. Many of these mergers were As in 1999, U.S. capital flows in 2000 financed, at least in part, by an exchange reflected the relatively strong cyclical of equity, in which shares in the U.S. position of the U.S. economy for most of firm were swapped for equity in the the year and the global wave of corpo- acquiring firm. Although U.S. residents rate mergers. Foreign private purchases generally appear to have sold a portion of U.S. securities were exceptionally of the equity acquired through these robust—well in excess of the record set swaps, the swaps likely contributed sigin 1999. The composition of U.S. securi- nificantly to the $97 billion capital outties purchased by foreigners continued flow attributed to U.S. acquisition of the shift away from Treasuries as the foreign securities. U.S. direct investment U.S. budget surplus, and the attendant abroad was also boosted by merger decline in the supply of Treasuries, low- activity and totaled $117 billion in the ered their yield relative to other debt. first three quarters of 2000, a slightly Private foreigners sold, on net, about faster pace than that of 1999. $50 billion in Treasury securities in Capital inflows from foreign official 2000, compared with net sales of sources totaled $38 billion in 2000— $20 billion in 1999. Although sizable, a slight increase from 1999. Nearly all these sales were slightly less than what of the official inflows were attributable would have occurred had foreigners to reinvested interest earnings. Modest reduced their holdings in proportion to official sales of dollar assets associated the reduction in Treasuries outstanding. with foreign exchange intervention were The increased sale of Treasuries was offset by larger inflows from some nonfully offset by larger foreign purchases OPEC oil exporting countries, which of U.S. securities issued by government- benefited from the elevated price of oil. sponsored agencies. Net purchases of agency securities topped $110 billion, The Labor Market compared with the previous record of $72 billion set in 1999. In contrast to the Nonfarm payroll employment increased shrinking supply of Treasury securities, about 1 Vi percent in 2000, measured on U.S. government-sponsored agencies a December-to-December basis. The job accelerated the pace of their debt count had risen slightly more than 2 perissuance. Private foreign purchases of cent in 1999 and roughly 2l/i percent a U.S. corporate debt grew to $180 bil- year over the 1996-98 period. Over the lion, while net purchases of U.S. equi- first few months of 2000, the expansion ties ballooned to $170 billion compared of jobs proceeded at a faster pace than in with $108 billion in 1999. 1999, boosted both by the federal gov- The pace of foreign direct investment ernment's hiring for the decennial Ceninflows in the first three quarters of 2000 sus and by a somewhat faster rate of job also accelerated from the record pace creation in the private sector. Indications of 1999. As in the previous two years, of a moderation in private hiring started direct investment inflows were driven to emerge toward midyear, but because by foreign acquisition of U.S. firms, of volatility of the incoming data a slowreflecting the global strength in merger down could not be identified with some Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 17 confidence until late summer. Over the ing was scaled back as well over the remainder of the year monthly increases second half of the year. in private employment stepped down The slowing of the economy did not further. lead to any meaningful easing in the Employment rose moderately in the tightness of the labor market in 2000. private service-producing sector of the The household survey's measure of the economy in 2000, about 2 percent over- number of persons employed rose 1 perall after an increase of about 3 percent cent, about in line with the expansion of in 1999. In the fourth quarter, how- labor supply. On net, the unemployment ever, hiring in the services-producing rate changed little; its fourth-quarter sector was relatively slow, in large average of 4.0 percent was down a tenth part because of a sizable decline in the of a percentage point from the average number of jobs in personnel supply— unemployment rate in the fourth quarter a category that includes temporary help of 1999. The flatness of the rate through agencies. Employment in construction the latter half of 2000, when the econincreased about 2Vi percent in 2000 omy was slowing, may have partly after several years of gains that were reflected a desire of companies to hold considerably larger. The number of jobs on to labor resources that had been diffiin manufacturing was down for a third cult to attract and retain in the tight year, owing to reductions in factory labor market of recent years. employment in the second half of the Productivity continued to rise rapidly year, when manufacturers were adjust- in 2000. Output per hour in the nonfarm ing to the slowing of demand. Those business sector was up about 3l/z peradjustments in manufacturing may also cent over the year as a whole. Sizable have involved some cutbacks in the gains in efficiency continued to be eviemployment of temporary hires, which dent even as the economy was slowing would help to account for the sharp job in the second half of the year. Except for losses in personnel supply. The average 1999, when output per hour rose about length of the workweek in manufactur- 33/4 percent, the increase in 2000 was the largest since 1992, a year in which Measures of Labor Utilization the economy was in cyclical recovery Percent from the 1990-91 recession. Cutting through the year-to-year variations in measured productivity, the underlying Change in Output per Hour 1970 1975 1980 1985 1990 1995 2000 NOTE. The augmented unemployment rate is the number of unemployed plus those who are not in the labor force and want a job, divided by the civilian labor force plus those who are not in the labor force and want a job. The break in data at January 1994 marks the introduction of a redesigned survey; data from that point on are not 1990 1992 1994 1996 1998 2000 directly comparable with those of earlier periods. NOTE. Nonfarm business sector. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

18 87th Annual Report, 2000 trend still appeared to be tracing out a acceleration was attributable to the pattern of strong acceleration since the faster rate of increase in compensation middle part of the 1990s. Support for a per hour noted above. The remainder step-up in the trend came from increases stemmed from the small deceleration of in the amount of capital per worker— measured productivity. The labor cost especially high-tech capital—and from rise for the year was toward the high end organizational efficiencies that resulted of the range of the small to moderate in output rising faster than the combined increases that have prevailed over the inputs of labor and capital. past decade. Alternative measures of the hourly compensation of workers, while differ- Prices ing in their coverage and methods of construction, were consistent in show- Led by the surge in energy prices, the ing some acceleration in 2000. The aggregate price indexes snowed some employment cost index for private acceleration in 2000. The chain-type industry (ECI), which attempts to mea- price index for real GDP, the broadest sure changes in the labor costs of non- measure of goods and services produced farm businesses in a way that is free domestically, rose 2lA percent in 2000, from the effects of employment shifts roughly 3A percentage point more than among occupations and industries, rose in 1999. The price index for gross nearly 4V2 percent during 2000 after domestic purchases, the broadest meahaving increased about 3Vi percent in sure of prices for goods and services 1999. Compensation per hour in the purchased by domestic buyers, posted a nonfarm business sector, a measure that rise of almost 2Vi percent in 2000 after picks up some forms of employee com- having increased slightly less than 2 perpensation that the ECI omits but that cent the previous year. Prices paid by also is more subject to eventual revision consumers, as measured by the chainthan the ECI, showed hourly compensa- type price index for personal consumption advancing 53A percent in 2000, up tion expenditures, picked up as well, from a 1999 increase of about Axh per- about as much as the gross purchases cent. Tightness of the labor market was index. The consumer price index (CPI) likely one factor underlying the accel- continued to move up at a faster pace eration of hourly compensation in 2000, than the PCE index in 2000, and it with employers relying both on larger wage increases and more attractive Alternative Measures of Price Change benefit packages to attract and retain Percent workers. Compensation gains may also have been influenced to some degree by Price measure 1999 2000 the pickup of consumer price inflation since 1998. Rapid increases in the cost Chain-type of health insurance contributed impor- Gross domestic product 1.6 2.3 Gross domestic purchases 1.9 2.4 tantly to a sharp step-up in benefit costs. Personal consumption expenditures ... 2.0 2.4 Unit labor costs, the ratio of hourly Excluding food and energy 1.5 1.7 compensation to output per hour, Fixed-weight increased about 2lA percent in the non- Co E n x su c m lu e d r in p g r i f c o e o d in d a e n x d energy 2 2. . 1 6 2 3 . . 6 4 farm business sector in 2000 after having risen slightly more than Vz percent NOTE. Changes are based on quarterly averages and are measured to the fourth quarter of the year indicated in 1999. Roughly three-fourths of the from the fourth quarter of the preceding year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 19 exhibited slightly more acceleration—an Despite the spillover of energy effects increase of nearly 2>lh percent in 2000 into other markets, inflation outside the was 3/4 percentage point larger than the energy sector remained moderate over- 1999 rise. Price indexes for fixed invest- all. The ongoing rise in labor productivment and government purchases also ity helped to limit the step-up in labor accelerated. costs, and the slow rate of rise in the The prices of energy products pur- prices of non-oil imports meant that chased directly by consumers increased domestic businesses had to remain cauabout 15 percent in 2000, a few per- tious about raising their prices because centage points more than in 1999. In of the potential loss of market share. response to the rise in world oil prices, Rapid expansion of capacity in manuconsumer prices of motor fuels rose facturing prevented bottlenecks from nearly 20 percent in 2000, bringing the developing in the goods-producing seccumulative price hike for those products tor of the economy when domestic over the past two years to roughly demand was surging early in the year; 45 percent. Prices also rose rapidly for later on, an easing of capacity utilization home heating oil. Natural gas prices was accompanied by a softening of increased 30 percent, as demand for that prices in a number of industries. Inflafuel outpaced the growth of supply, pull- tion expectations, which at times in the ing stocks down to low levels. Prices past have added to the momentum of of natural gas were exceptionally high rising inflation, remained quiescent in toward year-end because of the added 2000. demand for heating that resulted from Against this backdrop, core inflation unusually cold weather in November remained low. Producer prices of interand December. Electricity costs jumped mediate materials excluding food and for some users, and prices nationally energy, after having accelerated through rose faster than in other recent years, the first few months of 2000, slowed about 2!/4 percent at the consumer thereafter, and their four-quarter rise of level. P/4 percent was only a bit larger than Businesses had to cope with rising the increase during 1999. Prices of crude costs of energy in production, transpor- materials excluding food and energy fell tation, and temperature control. In some moderately in 2000 after having risen industries that depend particularly about 10 percent a year earlier. At the heavily on energy inputs, the rise in consumer level, the CPI excluding food costs had a large effect on product and energy moved up 2lA percent in prices. Producer prices of goods such as 2000, an acceleration of slightly less industrial chemicals posted increases than XA percentage point from 1999 that were well above the average rates when put on a basis that maintains conof inflation in 2000, and rising prices sistency of measurement. The rise in the for natural gas sparked especially steep chain-type price index for personal conprice advances for nitrogen fertilizers sumption expenditures excluding food used in farming. Prices of some services and energy was P/4 percent, just a bit also exhibited apparent energy impacts: above the increases recorded in each of Producers paid sharply higher prices for the two previous years. transportation services via air and water, Consumer food prices rose 2lA perand consumer airfares moved up rapidly cent in 2000 after an increase of about for a second year, although not nearly as 2 percent in 1999. In large part, the much as in 1999. moderate step-up in these prices prob- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

20 87th Annual Report, 2000 ably reflected cost and price consider- the early part of the year as growth ations similar to those at work else- remained unsustainably strong and as where in the economy. Also, farm market participants anticipated a further commodity prices moved up, on net, tightening of monetary policy by the during 2000, after three years of sharp Federal Reserve. Later in the year, as it declines, and this turnabout likely became apparent that the pace of ecoshowed through to the retail level to nomic growth was slowing, market parsome extent. Meat prices, which are ticipants began to incorporate expectalinked more closely to farm prices than tions of significant policy easing into is the case with many other foods, asset prices, and most longer-term interrecorded increases that were apprecia- est rates fell sharply over the last several bly larger than the increases for food months of 2000. Over the course of the prices overall. year, investors became more concerned The chain-type price index for private about credit risk and demanded larger fixed investment rose about P/4 per- yield spreads to hold lower-rated corpocent in 2000, but that small increase rate bonds, especially once the growth amounted to a fairly sharp acceleration of the economy slowed in the second from the pace of the preceding few half. Banks, apparently having similar years, several of which had brought concerns, reported widening credit small declines in investment prices. spreads on business loans and tightening Although the price index for investment standards for lending to businesses. in residential structures slowed a little, Weakening economic growth and tighter to about a TtVi percent rise, the index for financial conditions in some sectors led nonresidential structures sped up from a to a slowing in the pace of debt growth 23A percent increase in 1999 to one of over the course of the year. 4Vi percent in 2000. Moreover, the price Stock markets had another volatile index for equipment and software ticked year in 2000. After touching record up slightly, after having declined 2 per- highs in March, stock prices turned cent or more in each of the four preced- lower, declining considerably over the ing years. To a large extent, that turn- last four months of the year. Valuations about was a reflection of a smaller rate in some sectors fell precipitously from of price decline for computers; they had high levels, and near-term earnings foredropped at an average rate of more than casts were revised down sharply late in 20 percent through the second half the year. On balance, the broadest stock of the 1990s but fell at roughly half indexes fell more than 10 percent in that rate in 2000. Excluding computers, 2000, and the tech-heavy Nasdaq was equipment prices increased slightly in down nearly 40 percent. 2000 after having declined a touch in 1999. Interest Rates The economy continued to expand at an U.S. Financial Markets exceptionally strong and unsustainable Financial markets in 2000 were influ- pace in the early part of 2000, promptenced by the changing outlook for the ing the Federal Reserve to tighten its U.S. economy and monetary policy and policy stance in several steps ending at by shifts in investors' perceptions of and its May meeting. Private interest rates attitudes toward risk. Private longer- and shorter-term Treasury yields rose term interest rates generally firmed in considerably over that period, reaching Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 21 a peak just after the May FOMC meet- yields plummeted over that period, paring. Investors apparently became more ticularly at shorter maturities: The twoconcerned about credit risk as well; year Treasury yield dropped more than spreads between rates on lower-rated 3/4 percentage point from mid-November corporate bonds and swaps widened in to the end of the year, moving below the the spring, adding to the upward pres- thirty-year yield for the first time since sure on private interest rates. Long-term early 2000. Yields on inflation-indexed Treasury yields, in contrast, remained securities also fell considerably, but by below their levels from earlier in the less than their nominal counterparts, year, as market participants became suggesting that the weakening of ecoincreasingly convinced that the supply nomic growth lowered expectations of of those securities would shrink consid- both real interest rates and inflation. erably in coming years and incorporated Although market participants had a "scarcity premium" into their prices. come to expect considerable policy eas- With the rapid expansion of economic ing over the first part of 2001, the timing activity showing few signs of letting up, and magnitude of the intermeeting cut in rates on federal funds and eurodollar the federal funds rate in early January futures, which can be used as a rough of that year was a surprise. In response, gauge of policy expectations, were investors built into asset prices anticipaindicating that market participants tions of a more rapid policy easing over expected additional policy tightening the near term. going forward. The prospect of a weakening in eco- Signs of a slowdown in the growth nomic growth, along with sizable of aggregate demand began to appear declines in equity prices and downward in the incoming data soon after the revisions to profit forecasts, apparently May FOMC meeting and continued to caused investors to reassess credit risks gradually accumulate over subsequent in the latter part of 2000. Spreads months. In response, market participants between rates on high-yield corporate became increasingly convinced that the FOMC would not have to tighten its policy stance further, which was Federal Funds Futures Rates and the reflected in a flattening of the term struc- Intended Federal Funds Rate ture of rates on federal funds and euro- Percent dollar futures. Interest rates on most corporate bonds declined gradually on the shifting outlook for the economy, and 6.5 by the end of August had fallen more than V2 percentage point from their peaks in May. i—-=lm1 tended federal iunds rute 5.5 Most market interest rates continued to edge lower into the fall, as the growth of the economy seemed to moderate further. Over the last couple months H VI A M J A S O N D J F M A of 2000, as it became apparent that 2000 2001 economic growth was slowing more NOTE. The thick line segments show the rates on fedabruptly, market participants sharply eral funds futures contracts on the day after the scheduled revised down their expectations for FOMC meetings in February, May, August, and November 2000 and after the January 3, 2001 cut in the intended future short-term interest rates. Treasury federal funds rate. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

22 87th Annual Report, 2000 bonds and swaps soared beginning in including interest rate swaps and debt September, pushing the yields on those securities issued by governmentbonds substantially higher. Concerns sponsored housing agencies and other about credit risk also spilled over into corporations—for some of the hedging the investment-grade sector, where yield and pricing functions historically prospreads widened considerably for lower- vided by Treasury securities. Fannie rated securities. For most investment- Mae and Freddie Mac continued to issue grade issuers, though, the effects of the large amounts of debt under their revised policy outlook more than offset Benchmark and Reference debt proany widening in risk spreads, resulting grams, which are designed to mimic in a decline in private interest rates in characteristics of Treasury securities— the fourth quarter. By year-end, yields such as large issue sizes and a regular on higher-rated investment-grade corpo- calendar of issuance—that are believed rate bonds had reached their lowest lev- to contribute to their liquidity. By the els since the first half of 1999. end of 2000, the two firms together had Although investors at times in late more than $300 billion of notes and 2000 appeared more concerned about bonds and more than $200 billion of credit risk than they were in the fall bills outstanding under those programs. of 1998, the financial environment dur- Trading volume and dealer positions ing the more recent period, by most in agency securities have risen considaccounts, did not resemble the market erably since 1998, and the market for turbulence and disruption of that earlier repurchase agreements in those securiepisode. The Treasury and investment- ties has reportedly become more active. grade corporate bond markets remained Also, several exchanges listed options relatively liquid, and the investment- and futures on agency debt securities. grade market easily absorbed the high The shrinking supply of Treasury volume of bond issuance over 2000. securities and the possibility of a con- Investors continued to show a height- sequent decline in market liquidity also ened preference for larger, more liquid pose challenges for the Federal Reserve. corporate issues, but they did not exhibit For many years, Treasury securities the extreme desire for liquidity that was have provided the Federal Reserve with apparent in the fall of 1998. For exam- an effective asset for System portfolio ple, the liquidity premium for the on- holdings and the conduct of monetary the-run ten-year Treasury note remained policy. The remarkable liquidity of well below the level of that fall. Treasury securities has allowed the Sys- Nonetheless, the Treasury market has tem to conduct sizable policy operations become somewhat less liquid than it was quickly and with little disruption to marseveral years ago. Moreover, in 2000, kets, while the safety of Treasury securiparticular segments of the Treasury ties has allowed the System to avoid market occasionally experienced bouts credit risk in its portfolio. However, of unusually low liquidity that appeared if Treasury debt continues to be paid related to actual or potential reductions down, at some point the amount outin the supply of individual securities. standing will be insufficient to meet the Given the possibility that liquidity could Federal Reserve's portfolio needs. Well deteriorate further as the Treasury con- before that time, the proportion of Treatinues to pay down its debt, market sury securities held by the System could participants reportedly increased their reach levels that would significantly reliance on alternative instruments— disrupt the Treasury market and make Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 23 monetary policy operations increasingly typically with maturities of twenty-eight difficult or costly. Recognizing this pos- days. sibility, the FOMC initiated, in 2000, a study to consider alternative approaches Equity Prices to managing the Federal Reserve's portfolio, including expanding the use of After having moved higher in the first the discount window and broadening quarter of 2000, equity prices reversed the types of assets acquired in the open course and finished the year with conmarket. As it continues to study various siderable declines. Early in the year, the alternatives, the FOMC will take into rapid pace of economic activity lifted consideration the effect that such corporate profits, and stock analysts approaches might have on the liquidity became even more optimistic about and safety of its portfolio and the poten- future earnings growth. In response, tial for distorting the allocation of credit most major equity indexes reached to private entities. record highs in March, with the Wilshire Meanwhile, some measures were 5000 rising 63/4 percent above its 1999 taken to prevent the System's holdings year-end level and the Nasdaq soaring of individual Treasury securities from 24 percent, continuing its rapid run-up reaching possibly disruptive levels and from the second half of 1999. Equity to help curtail any further lengthening prices fell from these highs during the of the average maturity of the Sys- spring, with a particularly steep drop in tem's holdings. On July 5, 2000, the the Nasdaq, as investors grew more con- Federal Reserve Bank of New York cerned about the lofty valuations of announced guidelines limiting the Sys- some sectors and the prospect of higher tem's holdings of individual Treasury interest rates. securities to specified percentages of Broader equity indexes recovered their outstanding amounts, depending much of those losses through August, on the remaining maturity of the issue. supported by the decline in market inter- Those limits range from 35 percent for est rates and the continued strength of Treasury bills to 15 percent for longer- earnings growth in the second quarter. term bonds. As a result, the System But from early September through the redeemed some of its holdings of Trea- end of the year, stock prices fell considsury securities on occasions when the amount of maturing holdings exceeded the amount that could be rolled over into Major Stock Price Indexes newly issued Treasury securities under Januarys 1999= 100 these limits. Redemptions of Treasury holdings in 2000 exceeded $28 billion, with more than $24 billion of the redemptions in Treasury bills. In addition, the Federal Reserve accommodated 60 a portion of the demand for reserves in 2000 by increasing its use of longer- 120 term repurchase agreements rather than by purchasing Treasury securities outright. The System maintained an aver- J FMAMJ J A S 0 ND J FMA M J J AS 0N D age of more than $15 billion of longer- 1999 2000 term repurchase agreements over 2000, NOTE. The data are daily. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

24 87th Annual Report, 2000 erably in response to the downshift in the elevated valuations of many compaeconomic growth, a reassessment of the nies in these sectors. The price-earnings prospects for some high-tech industries, ratio (calculated using operating earnand disappointments in corporate earn- ings expected over the next year) for the ings. Toward the end of 2000, equity technology component of the S&P 500 analysts significantly reduced their fore- index fell substantially from its peak in casts for year-ahead earnings for compa- early 2000, although it remained well nies in the S&P 500. However, analysts above the ratio for the S&P 500 index as apparently viewed the slowdown in a whole. For the entire S&P 500 index, earnings as short-lived, as long-run share prices fell a bit more in percentage earnings forecasts did not fall much terms than the downward revisions to and remained at very high levels, par- year-ahead earnings forecasts, leaving ticularly for the technology sector. the price-earnings ratio modestly below On balance, the Wilshire 5000 index its historical high. fell 12 percent over 2000—its first The volatility of equity price moveannual decline since 1994. The Nasdaq ments during 2000 was at the high end composite plunged 39 percent, leaving it of the elevated levels observed in recent at year-end more than 50 percent below years. In the technology sector, the magits record high and erasing nearly all of nitudes of daily share price changes its gains since the beginning of 1999. were at times remarkable. There were The broad decline in equity prices in twenty-seven days during 2000 in which 2000 is estimated to have lopped more the Nasdaq composite index moved up than $13A trillion from household or down by at least 5 percent; by comwealth, or more than 4 percent of the parison, such outsized movements were total net worth of households. Neverthe- observed on a total of only seven days less, the level of household net worth from 1990 to 1999. was still quite high—about 50 percent Despite the volatility of share price above its level at the end of 1995. Inves- movements and the large declines on tors continued to accumulate consider- balance over 2000, equity market conable amounts of equity mutual funds ditions were fairly orderly, with few over 2000, although they may have reports of difficulties meeting margin become increasingly discouraged by requirements or of large losses creating losses on their equity holdings toward problems that might pose broader systhe end of the year, when flows into temic concerns. The fall in share prices equity funds slumped. At that time, reined in some of the margin debt of money market mutual funds expanded equity investors. After having run up sharply, as investors apparently sought a sharply through March, the amount of refuge for financial assets amid the outstanding margin debt fell by about heightened volatility and significant 30 percent over the remainder of the drops in equity prices. year. At year-end, the ratio of margin Some of the most dramatic plunges in debt to total equity market capitalizashare prices in 2000 took place among tion was slightly below its level a year technology, telecommunications, and earlier. Internet shares. While these declines The considerable drop in valuations partly stemmed from downward revi- in some sectors and the elevated volatilsions to near-term earnings estimates, ity of equity price movements caused which were severe in some cases, they the pace of initial public offerings to were also driven by a reassessment of slow markedly over the year, despite a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 25 large number of companies waiting to households. Credit extended by comgo public. The slowdown was particu- mercial banks, after adjustment for larly pronounced for technology compa- mark-to-market accounting rules, nies, which had been issuing new shares increased 10 percent over 2000, well at a frantic pace early in the year. In above the pace for total nonfinancial total, the dollar amount of initial public debt. Bank credit expanded at a particuofferings by domestic nonfinancial com- larly brisk rate through late summer, panies tapered off in the fourth quarter when banks, given their ample capital to its lowest level in two years. base and solid profits, were willing to meet strong loan demand by households and businesses. Over the remainder of Debt and the Monetary the year, the growth of bank credit Aggregates declined appreciably, as banks became more cautious lenders and as several The aggregate debt of domestic nonbanks shed large amounts of governfinancial sectors increased an estimated ment securities. 5lA percent over 2000, a considerable Banks reported a deterioration of the slowdown from the gains of almost quality of their business loan portfolios 7 percent posted in 1998 and 1999. in 2000. Delinquency and charge-off Growth of the monetary aggregates, parrates on C&I loans, while low by histicularly M3, continued at a strong rate. torical standards, rose steadily, partly reflecting some repayment difficulties in banks' syndicated loan portfolios. Debt and Depository Intermediation Several large banks stated that the The expansion of nonfederal debt mod- uptrend in delinquencies was expected erated to 8V2 percent in 2000 from to continue in 2001. Higher levels of 91/2 percent in 1999; the slowing owed provisioning for loan losses and some primarily to a weakening of consumer narrowing of net interest margins conand business borrowing in the second tributed to a fallback of bank profits half of the year, as the growth of dura- from the record levels of 1999. In addibles consumption and capital expendi- tion, capitalization measures slipped tures fell off and financial conditions a bit in 2000. Nevertheless, by historitightened for some firms. Some of the cal standards banks remained quite profslowdown in total nonfinancial debt was itable overall and appeared to have also attributable to the federal govern- ample capital. In the aggregate, total ment, which paid down 63A percent of capital (the sum of tier 1 and tier 2 its debt in 2000, compared with 2V2 per- capital) remained above 12 percent of cent in 1999. In 1998 and 1999, domes- risk-weighted assets over the first three tic nonfinancial debt increased faster quarters of 2000, more than 2 perthan nominal GDP, despite the reduction centage points above the minimum in federal debt over those years. The level required to be considered wellratio of nonfinancial debt to GDP edged capitalized. down in 2000, however, as the federal In response to greater uncertainty debt paydown accelerated and nonfed- about the economic outlook and a eral borrowing slowed. reduced tolerance for risk, increasing Depository institutions continued to proportions of banks reported tightening play an important role in meeting the standards and terms on business loans demand for credit by businesses and during 2000, with the share reaching the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

26 87th Annual Report, 2000 highest level since 1990. The tightening The Monetary Aggregates became widespread for loans to large and middle-market firms. A consider- The monetary aggregates grew rather able portion of banks reported firming briskly in 2000. The expansion of the standards and terms on loans to small broadest monetary aggregate, M3, was businesses as well, consistent with sur- particularly strong over the first three veys of small businesses indicating that quarters of 2000, as the robust growth in a larger share of those firms had diffi- depository credit was partly funded culty obtaining credit in 2000 than in through issuance of the managed liabiliprevious years. With delinquency rates ties included in this aggregate, such as for consumer and real estate loans hav- large time deposits. M3 growth eased ing changed little, on net, in 2000, banks somewhat in the fourth quarter because did not tighten credit conditions signifi- the slowing of bank credit led deposicantly for loans to households over the tory institutions to reduce their reliance first three quarters of 2000. Later on, on managed liabilities. Institutional however, an increasing portion of banks money funds increased rapidly throughincreased standards and terms for con- out 2000, despite the tightening of polsumer loans other than credit cards, and icy early in the year, in part owing to some of the banks surveyed anticipated continued growth in their provision a further tightening of conditions on of cash management services for busiconsumer loans during 2001. nesses. For the year as a whole, M3 Growth of Money and Debt Percent Domestic Period Ml M2 M3 nonfinancial debt Annual1 1990 4.2 4.2 1.9 6.7 1991 7.9 3.1 1.2 4.5 1992 14.4 1.8 .6 4.5 1993 10.6 1.3 1.0 4.9 1994 2.5 .6 1.7 4.8 1995 .. -1.5 3.8 6.1 5.4 1996 -4.5 4.5 6.8 5.3 1997 -1.2 5.6 8.9 5.4 1998 2.2 8.4 10.9 6.9 1999 1.8 6.2 7.7 6.8 2000 -1.5 6.3 9.2 5.3 Quarterly (annual rate)2 2000-1 2.0 5.8 10.6 5.6 2 -1.8 6.4 9.0 6.2 3 -3.7 5.8 8.9 4.7 4 -2.7 6.6 7.1 4.1 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

Economic and Financial Developments 27 expanded 9lA percent, well above the ently in both domestic and foreign 73/4 percent pace in 1999. This advance demand. again outpaced that of nominal income, and M3 velocity—the ratio of nominal International Developments income to M3—declined for the sixth year in a row. In 2000, overall economic activity in M2 increased 6lA percent in 2000, foreign economies continued its strong about unchanged from its pace in 1999. performance of the previous year. How- Some slowing in M2 growth would have ever, in both industrial and developing been expected based on the rise in short- countries, growth was strongest early, term interest rates over the early part of and clear signs of a general slowing the year, which pushed up the "opportu- emerged later in the year. Among indusnity cost" of holding M2, given that the trial countries, growth in Japan in 2000 interest rates on many components of moved up to an estimated 2 percent, and M2 do not increase by the same amount growth in the euro area slowed slightly or as quickly as market rates. However, to 3 percent. Emerging market econowith the level of long-term rates close to mies in both Asia and Latin America that of short-term rates, investors had grew about 6 percent on average in much less incentive to shift funds out of 2000. For Asian developing economies, M2 assets and into assets with longer this represented a slowing from the tormaturities, which helped support M2 rid pace of the previous year, while growth. M2 was also boosted at times growth in Latin America, especially by households' increased preference for Mexico, picked up from 1999. safe and liquid assets during periods Average foreign inflation edged up of heightened volatility in equity mar- slightly to 3 percent, mainly reflecting kets. On balance over the year, the higher oil prices. Over the first part of growth of M2 slightly exceeded that of the year, monetary authorities moved to nominal income, and M2 velocity edged tighten conditions in many industrial down. countries, in reaction to continued The behavior of the components of strong growth in economic activity that M2 was influenced importantly by inter- was starting to impinge on capacity conest rate spreads. The depressing effect of straints, as well as some upward preshigher short-term market interest rates sures on prices. Interest rates on longwas most apparent in the liquid deposit term government securities declined on components, including checkable depos- balance in most industrial countries, its and savings accounts, whose rates especially toward year-end, when evirespond very sluggishly to movements dence of a slowdown in global ecoin market rates. Small time deposits and nomic growth started to emerge. retail money market mutual funds, Conditions in foreign financial marwhose rates do not lag market rates as kets were somewhat more unsettled than much, expanded considerably faster than in the previous year. Overall stock liquid deposits. Currency growth was indexes in the foreign industrial counheld down early in the year by a runoff tries generally declined, most notably of the stockpile accumulated in advance in Japan. As in the United States, of the century date change, and it technology-oriented stock indexes were remained surprisingly sluggish over the extremely volatile during the year. After balance of the year given the rapid pace reaching peaks in the first quarter, they of income growth, with weakness appar- started down while experiencing great Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

28 87th Annual Report, 2000 Foreign Equity Indexes Nominal U.S. Dollar Exchange Rate Indexes January 1998 = 100 January 1998 = 100 Developing Asia Europe 105 100 95 80 ,998 >•;•?) 20UU 1998 1999 NOTE. The data are monthly. NOTE. The data are monthly. Indexes are tradeweighted averages of the exchange value of the dollar against major currencies and against the currencies of a swings toward midyear, then fell sharply broader group of important U.S. trading partners. in the final quarter, resulting in net declines for the year of one-third or more. Stock prices in emerging market countries recorded a net increase of over economies were generally quite weak, 7 percent for the year as a whole. The especially in developing Asia, where dollar also strengthened nearly as much growth in recent years has depended on balance against the currencies of the heavily on exports of high-tech goods. most important developing country trad- Although there was no major default ing partners of the United States. or devaluation among emerging market economies, average risk spreads on Industrial Economies developing country debt still moved higher on balance over the course of the The dollar showed particular strength in year, as the threat of potential crises in 2000 against the euro, the common curseveral countries, most notably Argen- rency of much of Europe. During the tina and Turkey, heightened investor first three quarters of the year, the euro concerns. continued to weaken, and by late Octo- The dollar's average foreign ber had fallen to a low of just above exchange value increased over most of 82 cents, nearly one-third below its the year, supported by continued robust value when it was introduced in January growth of U.S. activity, rising interest 1999. The euro's decline against the dolrates on dollar assets, and market per- lar through most of 2000 appeared to be ceptions that longer-term prospects for due mainly to the vigorous growth of U.S. growth and rates of return were real GDP and productivity in the United more favorable than in other industrial States contrasted with steady but less countries. Part of the rise in the dollar's impressive improvements in Europe. In average value was reversed late in the addition, investors may have perceived year when evidence emerged that the that Europe was slower to adopt "new pace of U.S. activity was slowing much economy" technologies, making it a more sharply than had been expected. relatively less attractive investment Despite this decline, the dollar's average climate. foreign exchange value against the cur- In September, a concerted intervenrencies of other major foreign industrial tion operation by the monetary authori- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 29 ties of G-7 countries, including the the ceiling for most of the year. Real United States, was undertaken at the GDP in the euro area is estimated to request of European authorities to pro- have increased about 3 percent for 2000 vide support for the euro. The European as a whole, only slightly below the rate Central Bank also made intervention of the previous year, although activity purchases of euros on several occasions slowed toward the end of the year. acting on its own. Late in the year, the Growth was supported by continued euro abruptly changed course and strong increases in investment spending. started to move up strongly, reversing Net exports made only a modest contriover half of its decline of earlier in the bution to growth, as rapid increases in year. This recovery of the euro against exports were nearly matched by robust the dollar appeared to reflect mainly a imports. Overall activity was sufficiently market perception that, while growth strong to lead to a further decline in the was slowing in both Europe and the average euro-area unemployment rate to United States, the slowdown was much below 9 percent, a nearly 1 percentage sharper for the United States. For the point reduction for the year. year as a whole, the dollar appreciated, The dollar rose about 12 percent on net, about 7 percent against the euro. against the Japanese yen over the course The European Central Bank raised its of 2000, roughly reversing the decline policy interest rate target six times by a of the previous year. Early in the year, total of 175 basis points over the first the yen experienced periods of upward ten months of the year. These increases pressure on evidence of a revival of reflected concerns that the euro's depre- activity in Japan. On several of these ciation, tightening capacity constraints occasions, the Bank of Japan made and higher oil prices would put upward substantial intervention sales of yen. By pressure on inflation. While core August, signs of recovery were strong inflation—inflation excluding food and enough to convince the Bank of Japan to energy—remained well below the 2 per- end the zero interest rate policy that it cent inflation target ceiling, higher oil had maintained for nearly a year and a prices pushed the headline rate above half, and its target for the overnight rate was raised to 25 basis points. Later in the year, evidence emerged suggesting U.S. Dollar Exchange Rates against the Euro and the Japanese Yen that the nascent recovery in economic activity was losing steam, and in January 1998 = 100 response the yen started to depreciate sharply against the dollar. For the year as a whole, Japanese real 10 GDP is estimated to have increased about 2 percent, a substantial improvement from the very small increase of the previous year and the decline recorded in 1998. Growth, which was concentrated in the first part of the year, was led by private nonresidential investment. 1999 2000 In contrast, residential investment slack- NOTE. Foreign currency units per dollar. The data are ened as the effect of tax incentives monthly. Restated German mark is the mark-dollar waned. Consumption rebounded early in exchange rate rescaled by the official conversion factor between the mark and the euro. the year from a sharp decline at the end Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

30 87th Annual Report, 2000 of 1999 but then stagnated, depressed in Emerging Market Economies part by record-high unemployment and concerns that ongoing corporate restruc- In emerging market economies, the turing could lead to further job losses. average growth rate of economic activ- Public investment, which gave a major ity in 2000 remained near the very boost to the economy in 1999, remained strong 6 percent rate of the previous strong through the first half of 2000 but year. However, there was a notable and then fell off sharply, and for the year as widespread slowing near the end of the a whole the fiscal stance is estimated year, and results in a few individual to have been somewhat contractionary. countries were much less favorable. Inflation was negative for the second Growth in developing Asian economies consecutive year, with the prices of both slowed on average from the torrid pace consumer goods and real estate continu- of the previous year, while average ing to move lower. growth in Latin America picked up The dollar appreciated 4 percent rela- somewhat. No major developing countive to the Canadian dollar in 2000. try experienced default or devaluation in Among the factors that apparently con- 2000, but nonetheless, financial markets tributed to the Canadian currency's did undergo several periods of heightweakness were declines in the prices of ened unrest during the year. In the commodities that Canada exports, such spring, exchange rates and equity prices as metals and lumber, and a perception weakened and risk spreads widened in by market participants of unfavorable many emerging market economies at a differentials in rates of return and eco- time of a general heightening of finannomic growth prospects in Canada rela- cial market volatility and rising interest tive to the United States. For the year as rates in industrial countries, as well as a whole, real GDP growth in Canada increased political uncertainty in several is estimated to have been only slightly developing countries. After narrowing below the strong 5 percent rate of 1999, at midyear, risk spreads on emerging although, as in most industrial countries, market economy debt again widened there were signs that the pace of growth later in the year, reflecting a general was tailing off toward the end of the movement on financial markets away year. Domestic demand continued to be from riskier assets, as well as concerns robust, led by surging business invest- that Argentina and Turkey might be facment and solid personal consumption ing financial crises that could spread to increases. In the first part of the year, the other emerging market economies. sustained rapid growth of the economy Among Latin American countries, led Canadian monetary authorities to Mexico's performance was noteworthy. become increasingly concerned with a Real GDP rose an estimated 7 percent, buildup of inflationary pressures, and an acceleration from the already strong the Bank of Canada matched all of the result of the previous year. Growth was Federal Reserve's interest rate increases boosted by booming exports, especially in 2000, raising its policy rate by a total to the United States, favorable world of 100 basis points. By the end of the oil prices, and a rebound in domestic year, the core inflation rate had risen to demand. In order to keep inflation on a near the middle of the Bank of Canada's downward path in the face of surging 1 percent to 3 percent target range, while domestic demand, the Bank of Mexico higher oil prices pushed the overall rate tightened monetary conditions six times above the top of the range. in 2000, pushing up short-term interest Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Economic and Financial Developments 31 rates, and by the end of the year the rate ued to move lower, and short-term interof consumer price inflation had moved est rates declined. below the 10 percent inflation target. Growth in Asian developing coun- The run-up to the July presidential elec- tries in 2000 slowed from the previous tion generated some sporadic financial year, when they had still been experiencmarket pressures, but these subsided in ing an exceptionally rapid bounceback reaction to the smooth transition to the from the 1997-98 financial crises expenew administration. Over the course rienced by several countries in the of the year, the risk spread on Mexican region. In Korea, real GDP growth in debt declined on balance, probably 2000 is estimated to have been less than reflecting a favorable assessment by half of the blistering 14 percent rate market participants of macroeconomic of 1999. Korean exports, especially of developments and government policies, high-tech products, started to fade reinforced by rating upgrades of Mexi- toward the end of 2000. Rapid export can debt. During 2000, the peso depre- growth had been a prominent feature of ciated slightly against the dollar, but by the recovery of Korea and other Asian less than the excess of Mexican over developing economies following their U.S. inflation. financial crises. In addition, a sharp fall Argentina encountered considerable in Korean equity prices over the course financial distress in 2000. Low tax reve- of the year, as well as continued difficulnues due to continued weak activity ties with the process of financial and along with elevated political uncertainty corporate sector restructuring, tended to greatly heightened market concerns depress consumer and business confiabout the ability of the country to fund dence. These developments contributed its debt. Starting in October, domestic to the downward pressure on the won interest rates and debt risk spreads seen near the end of the year. soared amid market speculation that the Market concerns over heightened government might lose access to credit political instability were a major factor markets and be forced to abandon the behind financial pressures in 2000 in exchange rate peg to the dollar. Finan- Indonesia, Thailand, and the Philippines. cial markets began to recover after an In China, output continued to expand announcement in mid-November that an rapidly in 2000, driven by a combina- IMF-led international financial support tion of surging exports early in the year, package was to be put in place. Further sustained fiscal stimulus, and some improvement came in the wake of an recovery in private consumption. In conofficial announcement in December of a trast, growth in both Hong Kong and $40 billion support package. Taiwan slowed, especially in the latter Late in the year, Brazilian financial part of the year. In Taiwan, the exchange markets received some negative spill- rate and stock prices both came under over from the financial unrest in Argen- downward pressure as a result of the tina, but conditions did not approach slowdown in global electronics demand those prevailing during Brazil's finan- and apparent market concerns over revecial crisis of early 1999. For 2000 as a lations of possible weaknesses in the whole, the Brazilian economy showed banking and corporate sectors. several favorable economic trends. Real Turkey's financial markets came GDP growth increased to an estimated under severe strain in late November as 4 percent after being less than 1 percent international investors withdrew capital the previous two years, inflation contin- amid market worries about the health of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

32 87th Annual Report, 2000 Turkey's banks, the viability of the gov- the European Central Bank. The sales ernment's reform program and its crawl- were evenly divided between the U.S. ing peg exchange rate regime, and the Treasury and the Federal Reserve Syswidening current account deficit. The tem. No other intervention operations resulting liquidity shortage caused short- for the accounts of the System or of the term interest rates to spike up and led to Treasury were conducted during the a substantial decline in foreign exchange year. Reported net purchases of dollars reserves held by the central bank. Mar- by major foreign central banks were kets stabilized somewhat after it was $22 billion in 2000, versus net purannounced in December that Turkey had chases of $67 billion in 1999. been able to reach loan agreements with At the end of the year, the Federal the IMF, major international banks, and Reserve held the equivalent of the World Bank in an effort to provide $15,670 million, valued at current liquidity and restore confidence in the exchange rates, in euros and yen. Taking banking system. into account the dollar's appreciation against both the euro and the yen in 2000, the cumulative valuation gains Foreign Exchange Operations on System holdings of foreign currency On September 22 the U.S. monetary decreased $1,410 million, to $258 milauthorities sold $1,339 million for euros lion. The System sold no foreign curas part of a coordinated intervention rency in 2000 and thus realized no gains operation by G-7 members initiated by or losses on such sales. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

33 Monetary Policy Reports to the Congress Report submitted to the Congress on in productive potential, the Committee February 17, 2000, pursuant to the Full began to reverse that easing. Employment and Balanced Growth Act As the year progressed, foreign of 1978 economies, in general, recovered more quickly and displayed greater vigor than had seemed likely at the start of the year. Domestically, the rapid pro- Report of February 17, 2000 ductivity growth raised expectations of future incomes and profits and thereby helped keep spending moving Monetary Policy and the up at a faster clip than current pro- Economic Outlook ductive capacity. Meanwhile, prices of The U.S. economy posted another most internationally traded materials exceptional performance in 1999. The rebounded from their earlier declines; ongoing expansion appears to have this turnaround, together with a flattenmaintained strength into early 2000 as ing of the exchange value of the dollar it set a record for longevity, and—aside after its earlier appreciation, translated from the direct effects of higher crude into an easing of downward pressure on oil prices—inflation has remained sub- the prices of imports in general. Core dued, in marked contrast to the typical inflation measures generally remained experience during previous expansions. low, but with the labor market at its The past year brought additional evi- tightest in three decades and becoming dence that productivity growth has tighter, the risk that pressures on costs improved substantially since the mid- and prices would eventually emerge 1990s, boosting living standards while mounted over the course of the year. To helping to hold down increases in costs maintain the low-inflation environment and prices despite very tight labor that has been so important to the susmarkets. tained health of the current expansion, The Federal Open Market Commit- the FOMC ultimately implemented four tee's pursuit of financial conditions con- quarter-point increases in the intended sistent with sustained expansion and low federal funds rate, the most recent of inflation has required some adjustments which came at the beginning of this to the settings of monetary policy instru- month. In total, the federal funds rate ments over the past two years. In late has been raised 1 percentage point, 1998, to cushion the U.S. economy from although, at 53/4 percent, it stands only the effects of disruptions in world finan- lA point above its level just before the cial markets and to ameliorate some of autumn-1998 financial market turmoil. the resulting strains, money market con- At its most recent meeting, the FOMC ditions were eased. By the middle of last indicated that risks appear to remain on year, however, with financial markets the side of heightened inflation presresuming normal functioning, foreign sures, so it will need to remain espeeconomies recovering, and domestic cially attentive to developments in this demand continuing to outpace increases regard. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

34 87th Annual Report, 2000 Monetary Policy, Financial would be made public immediately. Markets, and the Economy over Members expected that, by making the 1999 and Early 2000 FOMC's concerns public earlier, such announcements would encourage finan- The first quarter of 1999 saw a further cial market reactions to subsequent unwinding of the heightened levels of information that would help stabilize perceived risk and risk aversion that had the economy. In practice, however, those afflicted financial markets in the autumn reactions seemed to be exaggerated and of 1998; investors became much more to focus even more than usual on poswilling to advance funds, securities issu- sible near-term Committee action. ance picked up, and risk spreads fell Over subsequent weeks, economic further—though not back to the unusu- activity continued to expand vigorously, ally low levels of the first half of 1998. labor markets remained very tight, and At the same time, domestic demand oil and other commodity prices rose remained quite strong, and foreign further. In this environment, the FOMC economies showed signs of rebounding. saw an updrift in inflation as a signifi- The FOMC concluded at its February cant risk in the absence of some policy and March meetings that, if these trends firming, and at the June meeting it raised were to persist, the risks of the eventual the intended level of the federal funds emergence of somewhat greater infla- rate V* percentage point. The Committee tion pressures would increase, and it also announced a symmetric directive, noted that a case could be made for noting that the marked degree of uncerunwinding part of the easing actions of tainty about the extent and timing of the preceding fall. However, the Com- prospective inflationary pressures meant mittee hesitated to adjust policy before that further firming of policy might having greater assurance that the recov- not be undertaken in the near term, but eries in domestic financial markets and that the Committee would need to be foreign economies were on firm footing. especially alert to emerging inflation By the May meeting, these recoveries pressures. Markets rallied on the were solidifying, and the pace of domes- symmetric-directive announcement, and tic spending appeared to be outstripping the strength of this response together the growth of the economy's potential, with market commentary suggested uneven allowing for an appreciable accel- certainty about the interpretation of the eration in productivity. The Committee language used to characterize possible still expected some slowing in the future developments and about the time expansion of aggregate demand, but period to which the directive applied. the timing and extent of any modera- In the period between the June and tion remained uncertain. Against this August meetings, the ongoing strength backdrop, the FOMC maintained an of domestic demand and further expanunchanged policy stance but announced sion abroad suggested that at least part immediately after the meeting that it of the remaining easing put in place the had chosen a directive tilted toward the previous fall to deal with financial marpossibility of a firming of rates. This ket stresses was no longer needed. Conannouncement implemented the dis- sequently, at the August meeting the closure policy adopted in December FOMC raised the intended level of 1998, whereby major shifts in the Com- the federal funds rate a further lA permittee's views about the balance of risks centage point, to SVA. percent. The Comor the likely direction of future policy mittee agreed that this action, along Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 35 with that taken in June, would substan- The broader range of collateral tially reduce inflation risks and again approved for repurchase transactions— announced a symmetric directive. In a mainly pass-through mortgage securities related action, the Board of Governors of government-sponsored enterprises approved an increase in the discount and STRIP securities of the U.S. rate to 43A percent. At this meeting the Treasury—would facilitate the Manag- Committee also established a working er's task of addressing what could be group to assess the FOMC's approach very large needs to supply reserves in to disclosing its view about prospective the succeeding months, primarily in developments and to propose procedural response to rapid increases in the modifications. demand for currency, at a time of poten- At its August meeting, the FOMC tially heightened demand in various took a number of actions that were markets for U.S. government securiaimed at enhancing the ability of the ties. The standby financing facility, Manager of the System Open Market authorizing the Federal Reserve Bank Account to counter potential liquidity of New York to auction the abovestrains in the period around the century mentioned options to the government date change and that would also help securities dealers that are regular counterensure the effective implementation parties in the System's open market of the Committee's monetary policy operations, would encourage marketobjectives. Although members believed making and the maintenance of liquid that efforts to prepare computer sys- financing markets essential to effective tems for the century date change had open market operations. The standby made the probability of significant facility was also viewed as a useful disruptions quite small, some aversion complement to the special liquidity to Y2K risk exposure was already evi- facility, which was to provide sound dent in the markets, and the costs that depository institutions with unrestricted might stem from a dysfunctional financ- access to the discount window, at a pening market at year-end were deemed alty rate, between October 1999 and to be unacceptably high. The FOMC April 2000. Finally, the decision to agreed to authorize, temporarily, (1) a extend the maximum maturity on repurwidening of the pool of collateral that chase and matched sale-purchase transcould be accepted in System open actions was intended to bring the terms market transactions, (2) the use of of such transactions into conformance reverse repurchase agreement account- with market practice and to enhance ing in addition to the currently avail- the Manager's ability over the followable matched sale-purchase transac- ing months to implement the unusually tions to absorb reserves temporarily, and large reserve operations expected to be (3) the auction of options on repur- required around the turn of the year. chase agreements, reverse repurchase Incoming information during the agreements, and matched sale-purchase period leading up to the FOMC's Octotransactions that could be exercised ber meeting suggested that the growth in the period around year-end. The of domestic economic activity had Committee also authorized a permanent picked up from the second quarter's extension of the maximum maturity on pace, and foreign economies appeared regular repurchase and matched sale- to be strengthening more than had been purchase transactions from sixty to anticipated, potentially adding pressure ninety days. to already-taut labor markets and possi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

36 87th Annual Report, 2000 bly creating inflationary imbalances issued after the meeting also highlighted that would undermine economic per- members' continuing concern about formance. But the FOMC viewed the inflation risks going forward and indirisk of a significant increase in inflation cated the Committee's intention to in the near term as small and decided to evaluate, as soon as its next meeting, await more evidence on how the econ- whether those risks suggested that furomy was responding to its previous ther tightening was appropriate. tightenings before changing its policy The FOMC also decided on some stance. However, the Committee antici- modifications to its disclosure propated that the evidence might well sig- cedures at the December meeting, at nal the need for additional tightening, which the working group mentioned and it again announced a directive that above transmitted its final report was biased toward restraint. and proposals. These modifications, Information available through mid- announced in January 2000, consisted November pointed toward robust growth primarily of a plan to issue a statement in overall economic activity and a fur- after every FOMC meeting that not only ther depletion of the pool of unem- would convey the current stance of polployed workers willing to take a job. icy but also would categorize risks to Although higher real interest rates the outlook as either weighted mainly appeared to have induced some soften- toward conditions that may generate ing in interest-sensitive sectors of the heightened inflation pressures, weighted economy, the anticipated moderation in mainly toward conditions that may genthe growth of aggregate demand did not erate economic weakness, or balanced appear sufficient to avoid added pres- with respect to the goals of maximum sures on resources, predominantly labor. employment and stable prices over the These conditions, along with further foreseeable future. The changes elimiincreases in oil and other commodity nated uncertainty about the circumprices, suggested a significant risk that stances under which an announcement inflation would pick up over time, given would be made; they clarified that the prevailing financial conditions. Against Committee's statement about future this backdrop, the FOMC raised the prospects extended beyond the intertarget for the federal funds rate an addi- meeting period; and they characterized tional lA percentage point in November. the Committee's views about future At that time, a symmetric directive was developments in a way that reflected adopted, consistent with the Commit- policy discussions and that members tee's expectation that no further pol- hoped would be more helpful to the icy move was likely to be considered public and to financial markets. before the February meeting. In a related Financial markets and the economy action, the Board of Governors came through the century date change approved an increase in the discount smoothly. By the February 2000 meetrate of V4 percentage point, to 5 percent. ing, there was little evidence that At the December meeting, FOMC demand was coming into line with members held the stance of policy potential supply, and the risks of inflaunchanged and, to avoid any misinter- tionary imbalances appeared to have pretation of policy intentions that might risen. At the meeting, the FOMC raised unsettle financial markets around the its target for the federal funds rate century date change, announced a sym- lA percentage point to 53/4 percent, and metric directive. But the statement characterized the risks as remaining on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 37 Economic Projections for 2000 Percent Federal Reserve governors and Reserve Bank presidents Indicator MEMO: 1999 actual Central Range tendency Change, fourth quarter to fourth quarter1 Nominal GDP 5.9 5-6 51/4-51/2 Real GDP2 . . 4.2 31/4-41/4 3V4-33/4 Consumer price index 2.0 l'/2-2i/2 13/4-2 Average level, fourth quarter Civilian unemployment rate 4.1 4-4'A 4-41/4 1. Change from average for fourth quarter of 1999 to 2. Chain-weighted. average for fourth quarter of 2000. the side of higher inflation pressures. In little to the low side of the energy-led a related action, the Board of Governors 2 percent rise posted in 1999.l Even approved a lA percentage point increase though futures markets suggest that in the discount rate, to 5V4 percent. energy prices may turn down later this year, prices elsewhere in the economy could be pushed upward by a combina- Economic Projections for 2000 tion of factors, including reduced restraint from non-oil import prices, The members of the Board of Governors wage and price pressures associated and the Federal Reserve Bank presiwith lagged effects of the past year's oil dents, all of whom participate in the price rise, and larger increases in costs deliberations of the FOMC, expect to see another year of favorable economic performance in 2000, although the risk of higher inflation will need to be 1. In past Monetary Policy Reports to the Conwatched especially carefully. The cen- gress, the FOMC has framed its inflation forecasts tral tendency of the FOMC participants' in terms of the consumer price index. The chaintype price index for PCE draws extensively on forecasts of real GDP growth from the data from the consumer price index but, while not fourth quarter of 1999 to the fourth entirely free of measurement problems, has sevquarter of 2000 is 3Vi percent to 33/4 per- eral advantages relative to the CPI. The PCE cent. A substantial part of the gain in chain-type index is constructed from a formula that reflects the changing composition of spending output will likely come from further and thereby avoids some of the upward bias assoincreases in productivity. Nonetheless, ciated with the fixed-weight nature of the CPI. In economic expansion at the pace that is addition, the weights are based on a more compreanticipated should create enough new hensive measure of expenditures. Finally, historijobs to keep the unemployment rate in a cal data used in the PCE price index can be revised to account for newly available information range of 4 percent to AXA percent, close and for improvements in measurement techniques, to its recent average. The central ten- including those that affect source data from the dency of the FOMC participants' infla- CPI; the result is a more consistent series over tion forecasts for 2000—as measured by time. This switch in presentation notwithstanding, the FOMC will continue to rely on a variety of the chain-type price index for personal aggregate price measures, as well as other inforconsumption expenditures—is l3/4 permation on prices and costs, in assessing the path of cent to 2 percent, a range that runs a inflation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

38 87th Annual Report, 2000 that might be forthcoming in another from the marked pickup in productivity year of tight labor markets. growth implies that the level of interest The performance of the economy— rates needed to align demand with both the rate of real growth and the rate potential supply may have increased of inflation—will depend importantly on substantially. Although the recent rise in the course of productivity. Typically, in interest rates may lead to some slowing past business expansions, gains in labor of spending, aggregate demand may productivity eventually slowed as rising well continue to outpace gains in potendemand placed increased pressure on tial output over the near term, an imbalplant capacity and on the workforce, and ance that contains the seeds of rising a similar slowdown from the recent inflationary and financial pressures that rapid pace of productivity gain cannot could undermine the expansion. be ruled out. But with many firms still In recent years, domestic spending in the process of implementing tech- has been able to grow faster than pronologies that have proved effective in duction without engendering inflation reorganizing internal operations or in partly because the external sector has gaining speedier access to outside re- provided a safety valve, helping to sources and markets, and with the tech- relieve the pressures on domestic nologies themselves still advancing rap- resources. In particular, the rapid growth idly, a further rise in productivity growth of demand has been met in part by huge from the average pace of recent years increases in imports of goods and seralso is possible. To the extent that rapid vices, and sluggishness in foreign productivity growth can be maintained, economies has restrained the growth aggregate supply can grow faster than of exports. However, foreign economies would otherwise be possible. have been firming, and if recovery of However, the economic processes that these economies stays on course, U.S. are giving rise to faster productivity exports should increase faster than they growth not only are lifting aggregate have in the past couple of years. Moresupply but also are influencing the over, the rapid rise of the real exchange growth of aggregate spending. With value of the dollar through mid-1998 firms perceiving abundant profit oppor- has since given way to greater stability, tunities in productivity-enhancing high- on average, and the tendency of the eartech applications, investment in new lier appreciation to limit export growth equipment has been surging and could and boost import growth is now diminwell continue to rise rapidly for some ishing. From one perspective, these extime. Moreover, expectations that the ternal adjustments are welcome because investment in new technologies will they will help slow the recent rapid rates generate high returns have been lifting of decline in net exports and the current the stock market and, in turn, helping to account. They also should give a boost maintain consumer spending at a pace in to industries that have been hurt by the excess of the current growth of real dis- export slump, such as agriculture and posable income. Impetus to demand some parts of manufacturing. At the from this source also could persist for a same time, however, the adjustments are while longer, given the current high lev- likely to add to the risk of an upturn in els of consumer confidence and the the inflation trend, because a strengthenlikely lagged effects of the large incre- ing of exports will add to the pressures ments to household wealth registered on U.S. resources and a firming of the to date. The boost to aggregate demand prices of non-oil imports will raise costs Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 39 directly and also reduce to some degree index to rise more rapidly than the the competitive restraints on the prices chain-type price index for personal conof U.S. producers. sumption expenditures. Domestically, substantial plant capacity is still available in some manufactur- Money and Debt Ranges for 2000 ing industries and could continue to exert restraint on firms' pricing deci- At its most recent meeting, the FOMC sions, even with a diminution of com- reaffirmed the monetary growth ranges petitive pressures from abroad. How- for 2000 that were chosen on a proever, an already tight domestic labor visional basis last July: 1 percent to market has tightened still further in 5 percent for M2, and 2 percent to 6 perrecent months, and bidding for workers, cent for M3. As has been the case for together with further increases in health some time, these ranges were chosen insurance costs that appear to be com- to encompass money growth under coning, seems likely to keep nominal hourly ditions of price stability and historical compensation costs moving up at a rela- velocity relationships, rather than to tively brisk pace. To date, the increases center on the expected growth of money in compensation have not had serious over the coming year or serve as guides inflationary consequences because they to policy. have been offset by the advances in Given continued uncertainty about labor productivity, which have held unit movements in the velocities of M2 and labor costs in check. But the pool of M3 (the ratios of nominal GDP to the available workers cannot continue to aggregates), the Committee still has shrink without at some point touching little confidence that money growth off cost pressures that even a favorable within any particular range selected for productivity trend might not be able to the year would be associated with the counter. Although the governors and economic performance it expected or Reserve Bank presidents expect pro- desired. Nonetheless, the Committee ductivity gains to be substantial again believes that money growth has some this year, incoming data on costs, prices, value as an economic indicator, and it and price expectations will be examined will continue to monitor the monetary carefully to make sure a pickup of infla- aggregates among a wide variety of ecotion does not start to become embedded nomic and financial data to inform its in the economy. policy deliberations. The FOMC forecasts are more opti- M2 increased 6lA percent last year. mistic than the economic predictions With nominal GDP rising 6 percent, M2 that the Administration recently released, but the Administration has noted Ranges for Growth of Monetary that it is being conservative in regard and Debt Aggregates to its assumptions about productivity Percent growth and the potential expansion of the economy. Relative to the Adminis- Aggregate 1998 1999 2000 tration's forecast, the FOMC is predicting a somewhat larger rise in real GDP M2 1-5 1-5 1-5 M3 2-6 2-6 2-6 in 2000 and a slightly lower unemploy- Debt 3-7 3-7 3-7 ment rate. The inflation forecasts are fairly similar, once account is taken NOTE. Change from average for fourth quarter of preceding year to average for fourth quarter of year of the tendency for the consumer price indicated. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

40 87th Annual Report, 2000 velocity fell a bit overall, although it tions. However, the increase in privaterose in the final two quarters of the year sector debt was partly offset by a subas market interest rates climbed relative stantial decline in federal debt. The to yields on M2 assets. Further increases Committee left the range for debt in market interest rates early this year growth in 2000 unchanged at 3 percent could continue to elevate M2 velocity. to 7 percent. After an aberrant period in Nevertheless, given the Committee's the 1980s during which debt expanded expectations for nominal GDP growth, much more rapidly than nominal GDP, M2 could still be above the upper end of the growth of debt has returned to its its range in 2000. historical pattern of about matching the M3 expanded IVi percent last year, growth of nominal GDP over the past and its velocity fell about \3A percent, a decade, and the Committee members much smaller drop than in the previous expect debt to remain within its range year. Non-M2 components again exhib- again this year. ited double-digit growth, with some of the strength attributable to long-term Economic and Financial trends and some to precautionary build- Developments in 1999 ups of liquidity in advance of the cenand Early 2000 tury date change. One important trend is the shift by nonfinancial businesses from The U.S. economy retained considerable direct holdings of money market instru- strength in 1999. According to the Comments to indirect holdings through merce Department's advance estimate, institution-only money funds; such the rise in real gross domestic product shifts boost M3 at the same time they over the four quarters of the year enhance liquidity for businesses. Money exceeded 4 percent for the fourth conmarket funds and large certificates of secutive year. The growth of household deposit also ballooned late in the year expenditures was bolstered by further as a result of a substantial demand substantial gains in real income, favorfor liquidity around the century date able borrowing terms, and a soaring change. Adjustments from the tem- stock market. Businesses seeking to porarily elevated level of M3 at the end maintain their competitiveness and profof 1999 are likely to trim that aggre- itability continued to invest heavily in gate' s fourth-quarter-to-fourth-quarter high-tech equipment; external financing growth this year, but not sufficiently to conditions in both debt and equity maroffset the downward trend in velocity. kets were quite supportive. In the public That trend, together with the Commit- sector, further strong growth of revenues tee's expectation for nominal GDP was accompanied by a step-up in the growth, will probably keep M3 above growth of government consumption and the top end of its range again this year. investment expenditures, the part of gov- Domestic nonfinancial debt grew ernment spending that enters directly 6V2 percent in 1999, near the upper end into real GDP. The rapid growth of of the 3 percent to 7 percent growth domestic demand gave rise to a further range the Committee established last huge increase in real imports of goods February. This robust growth reflected and services in 1999. Exports picked up large increases in the debt of businesses as foreign economies strengthened, but and households that were due to sub- the gain fell short of that for imports stantial advances in spending as well by a large margin. Available economic as to debt-financed mergers and acquisi- indicators for January of this year show Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 41 the U.S. economy continuing to expand, 1999 reflected sustained increases in with labor demand robust and the unem- employment and real hourly pay, ployment rate edging down to its lowest which bolstered the growth of real level in thirty years. disposable personal income. Added The combination of a strong U.S. impetus came from another year of economy and improving economic con- rapid growth in net worth, which, comditions abroad led to firmer prices in ing on top of the big gains of previous some markets this past year. Industrial years, led households in the aggregate to commodity prices turned up—sharply spend a larger portion of their current in some cases—after having dropped income than they would have otherwise. appreciably in 1998. Oil prices, respond- The personal saving rate, as measured ing both to OPEC production restraint in the national income and product and to the growth of world demand, accounts, dropped further, to an average more than doubled over the course of of about 2 percent in the final quarter the year, and the prices of non-oil of 1999; it has fallen about 4Vi perimports declined less rapidly than in centage points over the past five years, previous years, when a rising dollar, as a period during which yearly gains in well as sluggish conditions abroad, had household net worth have averaged pulled them lower. The higher oil prices more than 10 percent in nominal terms of 1999 translated into sharp increases and the ratio of household wealth to in retail energy prices and gave a notice- disposable personal income has moved able boost to consumer prices overall; up sharply. the chain-type price index for personal The strength of consumer spending consumption expenditures rose 2 per- this past year extended across a broad cent, double the increase of 1998. Out- front. Appreciable gains were reported side the energy sector, however, con- for most types of durable goods. Spendsumer prices increased at about the same ing on motor vehicles, which had surged low rate as in the previous year, even about 13]/2 percent in 1998, moved as the unemployment rate continued to up another 5!/2 percent in 1999. The edge down. Rapid gains in productivity inflation-adjusted increases for furniture, enabled businesses to offset a substan- appliances, electronic equipment, and tial portion of the increases in nominal other household durables also were quite compensation, thereby holding the rise large, supported in part by a strong of unit labor costs in check, and busi- housing market. Spending on services ness pricing policies continued to be advanced about 4]/2 percent in real driven to a large extent by the desire to terms, led by sizable increases for recremaintain or increase market share at the ation and personal business services. expense of some slippage in unit profits, Outlays for nondurables, such as food albeit from a high level. and clothing, also rose rapidly. Exceptional strength in the purchases of some nondurables toward the end of the year The Household Sector may have reflected precautionary buying by consumers in anticipation of the Personal consumption expenditures in- century date change; it is notable in this creased about 5Vi percent in real terms regard that grocery store sales were up in 1999, a second year of exception- sharply in December and then fell back ally rapid advance. As in other recent in January, according to the latest report years, the strength of consumption in on retail sales. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

42 87th Annual Report, 2000 Households also continued to boost part, financed by an expansion of housetheir expenditures on residential struc- hold debt estimated at 9Vi percent, the tures. After having surged 11 percent in largest increase in more than a decade. 1998, residential investment rose about Mortgage debt, which includes the 3!/4 percent over the four quarters of borrowing against owner equity that 1999, according to the advance estimate may be used for purposes other than from the Commerce Department. Mod- residential investment, grew a whoperate declines in investment in the sec- ping 1014 percent. Higher interest rates ond half of the year offset only part led to a sharp drop in refinancing activof the increases recorded in the first ity and prompted a shift toward the use half. As with consumption expenditures, of adjustable-rate mortgages, which over investment in housing was supported by the year rose from 10 percent to 30 perthe sizable advances in real income and cent of originations. Consumer credit household net worth, but this spending advanced 11A percent, boosted by heavy category was also tempered a little by demand for consumer durables and other a rise in mortgage interest rates, which big-ticket purchases. Credit supply conlikely was an important factor in the ditions were also favorable; commercial second-half downturn. banks reported in Federal Reserve sur- Nearly all the indicators of housing veys that they were more willing than in activity showed upbeat results for the the previous year or two to make conyear. Annual sales of new and existing sumer installment loans and that they homes reached new peaks in 1999, sur- remained quite willing to make mortpassing the previous highs set in 1998. gage loans. Although sales dropped back a touch in The household sector's debt-service the second half of the year, their level burden edged up to its highest level through year-end remained quite high since the late 1980s; however, with by historical standards. Builders' back- employment rising rapidly and asset logs also were at high levels and helped values escalating, measures of credit support new construction activity even quality for household debt generally as sales eased. Late in the year, reports improved in 1999. Delinquency rates that shortages of skilled workers were on home mortgages and credit cards delaying construction became less fre- declined a bit, and those on auto loans quent as building activity wound down fell more noticeably. Personal bankseasonally, but builders also continued ruptcy filings fell sharply after having to express concern about potential risen for several years to 1997 and worker shortages in 2000. For 1999 in remaining elevated in 1998. total, construction began on more than 1.3 million single-family dwellings, The Business Sector the most since the late 1970s; approximately 330,000 multifamily units also Private nonresidential fixed investment were started, about the same number increased 7 percent during 1999, extendas in each of the two previous years. ing by another year a long run of rapid House prices rose appreciably and, growth in real investment outlays. together with the new investment, fur- Strength in capital investment has been ther boosted household net worth in underpinned in recent years by the vigor residential real estate. of the business expansion, by the The increases in consumption and advance and spread of computer techresidential investment in 1999 were, in nologies, and by the ability of most busi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 43 nesses to readily obtain funding through and aircraft. By contrast, a sharp decline the credit and equity markets. in spending on industrial machinery Investment in high-tech equipment early in the year held the yearly gain for continued to soar in 1999. Outlays for that category to about 2 percent; over communications equipment rose about the final three quarters of the year, how- 25 percent over the course of the year, ever, outlays picked up sharply as indusboosted by a number of factors, includ- trial production strengthened. ing the expansion of wireless com- Private investment in nonresidential munications, competition in telephone structures fell 5 percent in 1999 accordmarkets, the continued spread of the ing to the advance estimate from the Internet, and the demand of Internet Commerce Department. Spending on users for faster access to it. Computer structures had increased in each of the outlays rose nearly 40 percent in real previous seven years, rather briskly at terms, and the purchases of computer times, and the level of investment, software, which in the national accounts though down this past year, remained are now counted as part of private fixed relatively high and likely raised the real investment, rose about 13 percent; stock of capital invested in structures for both computers and software the appreciably further. Real expenditures increases were roughly in line with the on office buildings, which have been annual average gains during previous climbing rapidly for several years, years of the expansion. moved up further in 1999, to the highest The timing of investment in high-tech level since the peak of the building equipment over the past couple of years boom of the 1980s. In contrast, investwas likely affected to some degree by ment in other types of commercial strucbusiness preparations for the century tures, which had already regained its date change. Many large businesses earlier peak, slipped back a little, on net, reportedly invested most heavily in new this past year. Spending on industrial computer equipment before the start of structures, which accounts for roughly 1999 to leave sufficient time for their 10 percent of total real outlays on strucsystems to be tested well before the start tures, fell for a third consecutive year. of 2000; a very steep rise in computer Outlays for the main types of instiinvestment in 1998—roughly 60 percent tutional structures also were down, in real terms—is consistent with those according to the initial estimates. Revireports. Some of the purchases in pre- sions to the data on nonresidential paration for Y2K most likely spilled structures often are sizable, and the over into 1999, but the past year also estimates for each of the three years brought numerous reports of businesses preceding 1999 have eventually shown wanting to stand pat with existing sys- a good bit more strength than was initems until after the turn of the year. tially reported. Growth in computer investment in the After increasing for two years at a final quarter of 1999, just before the rate of about 6 percent, nonfarm busicentury rollover, was the smallest in sev- ness inventories expanded more slowly eral quarters. this past year—about 3lA percent Spending on other types of equipment according to the advance GDP report. rose moderately, on balance, in 1999. During the year, some businesses indi- Outlays for transportation equipment cated that they planned to carry heavier increased substantially, led by advances stocks toward year-end to protect themin business purchases of motor vehicles selves against possible Y2K disruptions, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

44 87th Annual Report, 2000 and the rate of accumulation did in fact cent of the nominal output of these compick up appreciably in the fall. But busi- panies, compared with a quarterly peak ness final sales remained strong, and the of about 123/4 percent two years earlier. ratio of nonfarm stocks to final sales The borrowing needs of nonfinancial changed little, holding toward the lower corporations remained sizable in 1999. end of the range of the past decade. Capital spending outstripped internal With the ratio so low, businesses likely cash flow, and equity retirements that did not enter the new year with excess resulted from stock repurchases and stocks. a blockbuster pace of merger activity After slowing to a 1 percent rise in more than offset record volumes of both 1998, the economic profits of U.S. seasoned and initial public equity offercorporations—that is, book profits with ings. Overall, the debt of nonfinancial inventory valuation and capital con- businesses grew IOV2 percent, down sumption adjustments—picked up in only a touch from its decade-high 1998 1999. Economic profits over the first pace. three quarters of the year averaged about The strength in business borrowing 3!/2 percent above the level of a year was widespread across funding sources. earlier. The earnings of corporations Corporate bond issuance was robust, from their operations outside the United particularly in the first half of the States rebounded in 1999 from a brief year, though the markets' increased but steep decline in the second half of preference for liquidity and quality, 1998, when financial market disruptions amid an appreciable rise in defaults were affecting the world economy. The on 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 their record pace in up after having been slowed in 1998 by 1998. The receptiveness of the capital the financial turmoil; growth of these markets helped firms to pay down loans profits in 1999 would have been greater at banks—which had been boosted to but for a large payout by insurance com- an H3/4 percent gain in 1998 by the panies to cover damage from Hurricane financial market turmoil that year—and Floyd. The profits that nonfinancial growth in these loans 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 2l/i 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 averaging 13 percent at a com- generally continued to rise, albeit at a pound annual rate in the previous six slower pace than in 1998, and vacancy years. Nonfinancial corporations have rates generally remained near historical boosted volume substantially further lows. The mix of lending shifted back over the past two years, but profits to banks and life insurance companies per unit of output have dropped back from commercial mortgage-backed somewhat from their 1997 peak. As of securities, as conditions in the CMBS the third quarter of last year, economic market, especially investor appetites profits of nonfinancial corporations for lower-rated tranches, remained less amounted to slightly less than 11 Vi per- favorable than they had been before the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 45 credit market disruptions in the fall of not seen since the recession of 1990-91. 1998. Delinquency rates on C&I loans at com- Risk spreads on corporate bonds mercial banks ticked up in 1999, albeit seesawed during 1999. Over the early from very low levels, while the chargepart of the year, spreads reversed part off rate for those loans continued on its of the 1998 run-up as markets recov- upward trend of the past several years. ered. During the summer, they rose Business failures edged up last year but again in response to concerns about remained in a historically low range. market liquidity, expectations of a surge in financing before the century The Government Sector date change, and anticipated firming of monetary policy. Swap spreads, in Buoyed by rapid increases in receipts particular, exhibited upward pressure at and favorable budget balances, the comthis time. The likelihood of year-end bined real expenditures of federal, state, difficulties seemed to diminish in the and local governments on consumption fall, and spreads again retreated, ending and investment rose about 43A percent the year down on balance but generally from the fourth quarter of 1998 to the above the levels that had prevailed over fourth quarter of 1999. Annual data, the several years up to mid-1998. which smooth through some of the quar- Federal Reserve surveys indicated terly noise that is often evident in govthat banks firmed terms and standards ernment outlays, showed a gain in real for commercial and industrial loans a bit spending of more than 3J/2 percent this further, on balance, in 1999. In the syn- past year, the largest increase of the dicated loan market, spreads for lower- expansion. Federal expenditures on conrated borrowers also ended the year sumption and investment were up nearly higher, on balance, after rising substan- 3 percent in annual terms; real defense tially in 1998. Spreads for higher-rated expenditures, which had trended lower borrowers were fairly steady through through most of the 1990s, rose moder- 1998 and early 1999, widened a bit ately, and outlays for nondefense conaround midyear, and then fell back to sumption and investment increased end the year about where they had sharply. Meanwhile, the consumption started. and investment expenditures of state and The ratio of net interest payments local governments rose more than 4 perto cash flow for nonfinancial firms cent in annual terms; growth of these remained in the low range it has occu- outlays has picked up appreciably as the pied for the past few years, but many expansion has lengthened. measures of credit quality nonetheless At the federal level, expenditures in deteriorated in 1999. Moody's Investors the unified budget rose 3 percent in fis- Service downgraded more nonfinancial cal 1999, just a touch less than the debt issuers than it upgraded over the 3V4 percent rise of the preceding fiscal year, affecting a net $78 billion of debt. year. Faster growth of nominal spending The problems that emerged in the bond on items that are included in consumpmarket were concentrated mostly among tion and investment was offset in the borrowers in the junk sector, and partly most recent fiscal year by a deceleration reflected a fallout from the large volume in other categories. Net interest outlays of issuance and the generous terms fell more than 5 percent—enough to available in 1997 and early 1998; de- trim total spending growth about 3A perfault rates on junk bonds rose to levels centage point—and only small increases Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

46 87th Annual Report, 2000 were recorded in expenditures for social GDP in 1992 and 1993 to a range of insurance and income security, catego- about I8V2 percent to 19 percent over ries that together account for nearly half the past several quarters. of total federal outlays. In contrast, fed- Federal debt growth has mirrored the eral expenditures on Medicaid, after turnabout in the government's saving having slowed in 1996 and 1997, picked position. In the 1980s and early 1990s, up again in the past two fiscal years. borrowing resulted in large additions Spending on agriculture doubled in fis- to the volume of outstanding governcal 1999; the increase resulted both from ment debt. In contrast, with the budget a step-up in payments under farm safety in surplus the past two years, the Treanet programs that were retained in the sury has been paying down debt. With- "freedom to farm" legislation of 1996 out the rise in federal saving and the and from more recent emergency farm reversal in borrowing, interest rates in legislation. recent years likely would have been Federal receipts grew 6 percent in higher than they have been, and private fiscal 1999 after increases that averaged capital formation, a key element in the close to 9 percent in the two previous vigorous economic expansion, would fiscal years. Net receipts from taxes on have been lower, perhaps appreciably. individuals continued to outpace the The Treasury responded to its lower growth of personal income, but by less borrowing requirements in 1999 prithan in other recent years, and receipts marily by reducing the number of aucfrom corporate income taxes fell moder- tions of thirty-year bonds from three to ately. Nonetheless, with total receipts two and by trimming auction sizes for growing faster than spending, the sur- notes and Treasury inflation-indexed plus in the unified budget continued to securities (TIIS). Weekly bill volumes rise, moving from $69 billion in fiscal were increased from 1998 levels, how- 1998 to $124 billion this past fiscal year. ever, to help build up cash holdings as a Excluding net interest payments—a Y2K precaution. For 2000, the Treasury charge resulting from past deficits—the plans major changes in debt managefederal government recorded a surplus ment in an attempt to keep down the of more than $350 billion in fiscal 1999. average maturity of the debt and main- Federal saving, a measure that results tain sufficient auction sizes to support from a translation of the federal budget the liquidity and benchmark status of its surplus into terms consistent with the most recently issued securities, while national income and product accounts, still retiring large volumes of debt. amounted to 2lA percent of nominal Alternate quarterly refunding auctions GDP in the first three quarters of 1999, of five- and ten-year notes and semianup from IV2 percent in 1998 and Vi per- nual auctions of thirty-year bonds will cent in 1997. Before 1997, federal sav- now be smaller re-openings of existing ing had been negative for seventeen issues rather than new issues. Thirtyconsecutive years, by amounts exceed- year TIIS will now be auctioned once a ing 3 percent of nominal GDP in sev- year rather than twice, and the two auceral years—most recently in 1992. The tions of ten-year TIIS will be modestly change in the federal government's sav- reduced. Auctions of one-year Treasury ing position from 1992 to 1999 more bills will drop from thirteen a year to than offset the sharp drop in the personal four, while weekly bill volumes will rise saving rate and helped lift national sav- somewhat. Finally, the Treasury plans to ing from less than 16 percent of nominal enter the market to buy back in "reverse Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 47 auctions" as much as $30 billion of during the first half of the year was outstanding securities this year, begin- extended through the second half. The ning in March or April. expansion of real imports was fueled State and local government debt by the continued strong growth of U.S. expanded AlA percent in 1999, well off domestic expenditures. Declines in nonthe previous year's elevated pace. Bor- oil import prices through most of the rowing for new capital investment edged year, partly reflecting previous dollar up, but the roughly full-percentage-point appreciation, contributed as well. All rise in municipal bond yields over the major import categories other than airyear led to a sharp drop in advance craft and oil recorded strong increases. refundings, which in turn pulled gross While U.S. consumption of oil rose issuance below the 1998 level. Tax rev- about 4 percent in 1999, the quantity of enues continued to grow at a robust oil imported was about unchanged, and rate, improving the financial condition inventories were drawn down. of states and localities, as reflected in a Real exports of goods and services ratio of debt rating upgrades to down- rose an estimated 4 percent in 1999, a grades of more than three to one over somewhat faster pace than in 1998. Ecothe year. The surplus in the current nomic activity abroad picked up, paraccount of state and local governments ticularly in Canada, Mexico, and Asian in the first three quarters of 1999 developing economies. However, the amounted to about Vi percent of nomi- lagged effects of relative prices owing nal GDP, about the same as in 1998 but to past dollar appreciation held down otherwise the largest of the past several exports. An upturn in U.S. exports to years. Canada, Mexico, and key Asian emerging markets contrasted with a much flatter pace of exports to Europe, Japan, and The External Sector South America. Capital equipment composed about 45 percent of U.S. goods Trade and the Current Account exports, industrial supplies were 20 per- U.S. external balances deteriorated in cent, and agricultural, automotive, and 1999 largely because of continued consumer goods were each roughly declines in net exports of goods and 10 percent. services and some further weakening of net investment income. The nominal Capital Account trade deficit for goods and services widened more than $100 billion in 1999, to U.S. capital flows in 1999 reflected the an estimated $270 billion, as imports relatively strong cyclical position of expanded faster than exports. For the the U.S. economy and the global wave first three quarters of the year, the cur- of corporate mergers. Foreign purchases rent account deficit increased more than of U.S. securities remained brisk—near one-third, reaching $320 billion at an the level of the previous two years, in annual rate, or 7>Vi percent of GDP. In which they had been elevated by the 1998, the current account deficit was global financial unrest. The composition 2Vi percent of GDP. of foreign securities purchases in 1999 Real imports of goods and services showed a continued shift away from expanded strongly in 1999—about Treasuries, in part because of the US. 13 percent according to preliminary budget surplus and the decline in the estimates—as the rapid import growth supply of Treasuries relative to other Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

48 87th Annual Report, 2000 securities and, perhaps, to a general 1998 was fairly widespread, as many increased tolerance of foreign investors countries found their currencies under for risk as markets calmed after their unwanted downward pressure during the turmoil of late 1998. Available data indi- turmoil. By contrast, the increase in forcate that private foreigners sold on net eign official reserves in the United States about $20 billion in Treasuries, com- in 1999 was fairly concentrated in a pared with net purchases of $50 billion relatively few countries that experienced in 1998 and $150 billion in 1997. These unwanted upward pressure on their cursales of Treasuries were more than off- rencies vis-a-vis the U.S. dollar. set by a pickup in foreign purchases of their nearest substitute—government The Labor Market agency bonds—as well as corporate bonds and equities. As in other recent years, the rapid Foreign direct investment flows into growth of aggregate output in 1999 was the United States were also robust in associated with both strong growth of 1999, with the pace of inflows in the productivity and brisk gains in employfirst three quarters only slightly below ment. According to the initial estimate the record inflow set in 1998. As in for 1999, output per hour in the nonfarm 1998, direct investment inflows last year business sector rose 3V* percent over the were elevated by several large mergers, four quarters of the year, and historical which left their imprint on other parts of data were revised this past year to show the capital account as well. In the past stronger gains than previously reported two years, many of the largest mergers in the years preceding 1999. As the data have been financed by a swap of equity stand currently, the average rate of rise in the foreign acquiring firm for equity in output per hour over the past four in the U.S. firm being acquired. The years is about 23A percent—up from an Bureau of Economic Analysis estimates average of IV2 percent from the midthat U.S. residents acquired more than 1970s to the end of 1995. Some of the $100 billion of foreign equity through step-up in productivity growth since this mechanism in the first three quarters 1995 can be traced to high levels of of 1999. Separate data on market trans- capital spending and an accompanying actions indicate that US. residents made faster rate of increase in the amount of net purchases of Japanese equities. They capital per worker. Beyond that, the also sold European equities, probably causes are more difficult to pin down in an attempt to rebalance portfolios quantitatively but are apparently related in light of the equity acquired through to increased technological and organizastock swaps. U.S. residents on net pur- tional efficiencies. Firms are not only chased a small volume of foreign bonds expanding the stock of capital but are in 1999. U.S. direct investment in for- also discovering many new uses for the eign economies also reflected the global technologies embodied in that capital, wave of merger activity in 1999 and will and workers are becoming more skilled likely total something near its record at employing the new technologies. level of 1998. The number of jobs on nonfarm pay- Available data indicate a return to siz- rolls rose slightly more than 2 percent able capital inflows from foreign official from the end of 1998 to the end of 1999, sources in 1999, following a modest out- a net increase of 2.7 million. Annual flow in 1998. The decline in foreign job gains had ranged between 2lA perofficial assets in the United States in cent and 23/4 percent over the 1996-98 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 49 period. Once again in 1999, the private late into bigger increases in nominal service-producing sector accounted for hourly compensation. The employment most of the total rise in payroll employ- cost index for hourly compensation of ment, led by many of the same catego- workers in private nonfarm industries ries that had been strong in previous rose 3.4 percent in nominal terms during years—transportation and communica- 1999, little changed from the increase tions, computer services, engineering of the previous year, and an alternative and management, recreation, and per- measure of hourly compensation from sonnel supply. In the construction sec- the nonfarm productivity and cost data tor, employment growth remained quite slowed from a 5VA percent increase in brisk—more than 4 percent from the 1998 to a 4l/i percent rise this past year. final quarter of 1998 to the final quarter Compensation gains in 1999 probably of 1999. Manufacturing employment, were influenced, in part, by the very low influenced by spillover from the disrup- inflation rate of 1998, which resulted tions in foreign economies, continued to in unexpectedly large increases in decline sharply in the first half of the inflation-adjusted pay in that year and year, but losses thereafter were small as probably damped wage increments last factory production strengthened. Since year. According to the employment cost the start of the expansion in 1991, the index, the hourly wages of workers in job count in manufacturing has changed private industry rose 3Vi percent in little, on net, but with factory productiv- nominal terms after having increased ity rising rapidly, manufacturing output about 4 percent in each of the two prehas trended up at a brisk pace. vious years. The hourly cost to employ- In 1999, employers continued to face ers of the nonwage benefits provided to a tight labor market. Some increase employees also rose 3Vi percent in 1999, in the workforce came from the pool but this increase was considerably larger of the unemployed, and the jobless rate than those of the past few years. Much declined to an average of 4.1 percent in of the pickup in benefit costs came from the fourth quarter. In January 2000, the a faster rate of rise in the costs of health rate edged down to 4.0 percent, the low- insurance, which were reportedly driven est monthly reading since the start of up by several factors: a moderate accelthe 1970s. Because the unemployment eration in the price of medical care, the rate is a reflection only of the number of efforts of some insurers to rebuild profit persons who are available for work and margins, and the recognition by employactively looking, it does not capture ers that an attractive health benefits potential labor supply that is one step package was helpful in hiring and retainremoved—namely those individuals ing workers in a tight labor market. who are interested in working but are Because the employment cost index not actively seeking work at the current does not capture some forms of compentime. However, like the unemployment sation that employers have been using rate itself, an augmented rate that more extensively—for example, stock includes these interested nonparticipants options, signing bonuses, and employee also has declined to a low level, as more price discounts on in-store purchases—it individuals have taken advantage of has likely been understating the true size expanding opportunities to work. of workers' gains. The productivity and Although the supply-demand balance cost measure of hourly compensation in the labor market tightened further in captures at least some of the labor costs 1999, the added pressure did not trans- that the employment cost index omits, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

50 87th Annual Report, 2000 and this broader coverage may explain The acceleration in the prices of why the productivity and cost measure goods and services purchased was has been rising faster. However, it, too, driven in part by a reversal in import is affected by problems of measure- prices. In 1998, the chain-type price ment, some of which would lead to index for imports of goods and services overstatement of the rate of rise in had fallen 5 percent, but it rose 3 perhourly compensation. cent in 1999. A big swing in oil prices— With the rise in output per hour in the down in 1998 but up sharply in 1999— nonfarm business sector in 1999 offset- accounted for a large part of this turnting about three-fourths of the rise in the around. Excluding oil, the prices of productivity and cost measure of nomi- imported goods continued to fall in 1999 nal hourly compensation, nonfarm unit but, according to the initial estimate, labor costs were up just a shade more less rapidly than over the three previous than 1 percent. Unit labor costs had years, when downward pressure from increased slightly more than 2 percent in appreciation of the dollar had been conboth 1997 and 1998 and less than 1 per- siderable. The prices of imported matecent in 1996. Because labor costs are by rials and supplies rebounded, but the far the most important item in total unit prices of imported capital goods fell costs, these small increases have been sharply further. Meanwhile, the chaincrucial to keeping inflation low. type price index for exports increased 1 percent in the latest year, reversing a portion of the 2lA percent drop of 1998, Prices when the sluggishness of foreign econo- Rates of increase in the broader mea- mies and the strength of the dollar had sures of aggregate prices in 1999 were pressured U.S. producers to mark down somewhat larger than those of 1998. the prices charged to foreign buyers. The chain-type price index for GDP— Prices of domestically produced priwhich measures inflation for goods and mary materials, which tend to be espeservices produced domestically—moved cially sensitive to developments in up about 1 Vi percent, a pickup of l/i per- world markets, rebounded sharply in centage point from the increase of 1998. 1999. The producer price index for In comparison, acceleration in various crude materials excluding food and price measures for goods and services energy advanced about 10 percent after purchased amounted to 1 percentage having fallen about 15 percent in 1998, point or more: The chain-type price and the PPI for intermediate materials index for personal consumption expen- excluding food and energy increased ditures increased 2 percent, twice as about \lh percent, reversing a 1998 much as in the previous year, and the decline of about that same size. But chain-type price index for gross domes- further along in the chain of processing tic purchases, which measures prices of and distribution, the effects of these the aggregate purchases of consumers, increases were not very visible. The probusinesses, and governments, moved ducer price index for finished goods up close to 2 percent after an increase excluding food and energy rose slightly of just 3/4 percent in 1998. The con- less rapidly in 1999 than in 1998, and sumer price index rose more than the consumer price index for goods 2Vi percent over the four quarters of the excluding food and energy rose at about year after having increased IVi percent the same low rate that it had in 1998. in 1998. Large gains in productivity and a mar- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 51 gin of excess capacity in the industrial Falling equipment prices are one chansector helped keep prices of goods in nel through which faster productivity check, even as growth of domestic gains have been reshaping the economy demand remained exceptionally strong. in recent years; the drop in prices has "Core" inflation at the consumer contributed to high levels of investment, level—which takes account of the prices rapid expansion of the capital stock, of services as well as the prices of goods and a step-up in the growth of potential and excludes food and energy prices— output. changed little in 1999. The increase in the core index for personal consumption U.S. Financial Markets expenditures, Wi percent over the four quarters of the year, was about the same Financial markets were somewhat as the increase in 1998. As measured unsettled as 1999 began, with the disby the CPI, core inflation was 2 percent ruptions of the previous autumn still this past year, about VA percentage point unwinding and the devaluation of the lower than in 1998, but the deceleration Brazilian real causing some jitters was a reflection of a change in CPI around mid-January. However, market methodology that had taken place at the conditions improved into the spring, start of last year; on a methodologically evidenced in part by increased trading consistent basis, the rise in the core CPI volumes and narrowed bid-asked and was about the same in both years. credit spreads, as it became increasingly In the national accounts, the chain- evident that strong growth was continutype price index for private fixed invest- ing in the United States, and that economent edged up lA percent in 1999 after mies abroad were rebounding. In this having fallen about 3A percent in 1998. environment, market participants began With construction costs rising, the index to anticipate that the Federal Reserve for residential investment increased would reverse the policy easings of the 33/4 percent, its largest advance in sev- preceding fall, and interest rates rose. eral years. By contrast, the price index Nevertheless, improved profit expectafor nonresidential investment declined tions apparently more than offset the moderately, as a result of another drop interest rate increases, and equity prices in the index for equipment and software. continued to climb until late spring. From May into the fall, both equity prices and longer-term interest rates Alternative Measures of Price Change moved in a choppy fashion, while short- Percent term interest rates moved up with monetary policy tightenings in June, August, Price measure 1998 1999 and November. Worries about Y2K became pronounced after midyear, and Chain-type Gross domestic product 1.1 1.6 expectations of an acceleration of bor- Gross domestic purchases .7 1.9 rowing ahead of the fourth quarter Personal consumption expenditures 1.0 2.0 prompted a resurgence in liquidity and Excluding food and energy ... 1.4 1.5 credit premiums. In the closing months Fixed-weight of the year, however, the likelihood of Consumer price index 1.5 2.6 Excluding food and energy ... 2.3 2.0 outsized demands for credit and liquidity over the year-end subsided, causing NOTE. Changes are based on quarterly averages and spreads to narrow, and stock prices are measured to the fourth quarter of the year indicated surged once again. After the century from the fourth quarter of the preceding year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

52 87th Annual Report, 2000 date change passed without disruptions, to large premiums in private money liquidity improved and trading volumes market rates in the second half of 1999. grew, although both bond and equity During the summer, this "safe haven" prices have remained quite volatile so demand held down rates on Treasury far this year. bills maturing early in the new year, until the announcement in August that the Treasury was targeting an unusually Interest Rates large year-end cash balance, implying Over the first few months of 1999, short- that it would issue a substantial volume term Treasury rates moved in a nar- of January-dated cash management bills. row range, anchored by an unchanged Year-end premiums in eurodollar, comstance of monetary policy. Yields on mercial paper, term federal funds, and intermediate- and long-term Treasury other money markets—measured as the securities rose, however, as the flight to implied forward rate for a monthlong quality and liquidity of the preceding period spanning the turn relative to the fall unwound, and incoming data rate for a neighboring period—rose earpointed to continued robust economic lier and reached much higher levels than growth and likely Federal Reserve tight- in recent years. ening. Over most of the rest of the year, Those year-end premiums peaked in short-term Treasury rates moved late October and then declined substanbroadly in line with the three quarter- tially, as markets reflected increased point increases in the target federal confidence in technical readiness and funds rate; longer-term yields rose less, special assurances from central banks as markets had already anticipated some that sufficient liquidity would be availof those policy actions. able around the century date change. Bond and note yields moved sharply Important among these assurances were higher from early November 1999 to several of the Federal Reserve initiamid-January 2000, as Y2K fears dimin- tives described in the first section of ished, incoming data indicated surpris- this report. Securities dealers took paring economic vitality, and the century ticular advantage of the widened pools date change was negotiated without sig- of acceptable collateral for open marnificant technical problems. In recent ket operations and used large volumes weeks, long-term Treasury yields have of federal agency debt and mortgageretraced a good portion of that rise on backed securities in repurchase agreeexpectations of reduced supply stem- ments with the Open Market Desk in the ming from the Treasury's new buy- closing weeks of the year, which helped back program and reductions in the to relieve a potential scarcity of Treaamount of bonds to be auctioned. This sury collateral over the turn. Market rally has been mostly confined to the participants also purchased options on long end of the Treasury market; nearly $500 billion worth of repurchase long-term corporate bond yields have agreements under the standby financing fallen only slightly, and yields are facility and pledged more than $650 billargely unchanged or have risen a little lion of collateral for borrowing at the further at maturities of ten years or discount window. With the smooth rollless, where most private borrowing is over, however, none of the RP options concentrated. were exercised, and borrowing at the Concerns about liquidity and credit discount window turned out to be fairly risk around the century date change led light. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 53 Equity Prices ated around the historically low level of 4 percent even as real interest rates Nearly all major stock indexes ended rose. Meanwhile, the Nasdaq compos- 1999 in record territory. The Nasdaq ite index's earnings-price ratio (using composite index paced the advance by actual twelve-month trailing earnsoaring 86 percent over the year, and the ings) plummeted from an already-slim S&P 500 and Dow Jones Industrial VA percent to Vi percent, suggesting Average posted still-impressive gains that investors are pricing in expectations of 20 percent and 25 percent. Last year of tremendous earnings growth at techwas the fifth consecutive year that nology firms relative to historical norms. all three indexes posted double-digit returns. Most stock indexes moved up Debt and the Monetary Aggregates sharply over the first few months of the year and were about flat on net from Debt and Depository Intermediation May through August; they then declined into October before surging in the final The debt of domestic nonfinancial secmonths of the year. The Nasdaq index, tors is estimated to have grown 6V2 perin particular, achieved most of its annual cent in 1999 on a fourth-quarter-togains in November and December. fourth-quarter basis, near the upper end Stock price advances in 1999 were not of the FOMC's 3 percent to 7 percent very broad-based, however: More than range and about a percentage point half of the S&P 500 issues lost value faster than nominal GDP As was the over the year. So far in 2000, stock case in 1998, robust outlays on conprices have been volatile and mixed; sumer durable goods, housing, and busimajor indexes currently span a range ness investment, as well as substantial from the Dow's nearly 10 percent drop net equity retirements, helped sustain to the Nasdaq's 8 percent advance. nonfederal sector debt growth at rates Almost all key industry groups per- above 9 percent. Meanwhile, the draformed well. One exception was shares matically increased federal budget surof financial firms, which were flat, on plus allowed the Treasury to reduce its balance. Investor perceptions that rising outstanding debt about 2 percent. These interest rates would hurt earnings and, movements follow the pattern of recent possibly, concern over loan quality years whereby increases in the debt of apparently offset the boost resulting households, businesses, and state and from passage in the fall of legislation local governments relative to GDP have reforming the depression-era Glass- come close to matching declines in the Steagall constraints on combining com- federal government share, consistent mercial banking with insurance and with reduced pressure on available savinvestment banking. Small-cap stocks, ings from the federal sector facilitating which had lagged in 1998, also per- private borrowing. formed well; the Russell 2000 index After increasing for several years, climbed 20 percent over the year and the share of total credit accounted for finally surpassed its April 1998 peak in by depository institutions leveled out late December. in 1999. Growth in credit extended At large firms, stock price gains by those institutions edged down to about kept pace with expected earnings 6V2 percent from 63/4 percent in 1998. growth in 1999, and the S&P 500 one- Adjusted for mark-to-market accounting year-ahead earnings-price ratio fluctu- rules, bank credit growth retreated from Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

54 87th Annual Report, 2000 IO1A percent in 1998 to 5V6 percent last Growth of Money and Debt year, with a considerable portion of the Percent slowdown attributable to an unwinding of the surge in holdings of non-U.S. Domestic nongovernment securities, business loans, Period Ml M2 M3 financial and security loans that had been built debt up during the market disruptions in the Annual1 fall of 1998. Real estate loans consti- 1989 .6 5.2 4.1 7.4 tuted one of the few categories of bank 1990 4.2 4.2 1.9 6.7 credit that accelerated in 1999. By con- 1991 7.9 3.1 1.1 4.5 1992 14.4 1.8 .6 4.5 trast, thrift credit swelled 9 percent, up 1993 10.6 1.4 1.0 4.9 from a 4Vi percent gain in 1998, as 1994 2.5 .6 1.7 4.9 rising mortgage interest rates led bor- 1995 -1.5 3.9 6.1 5.5 rowers to opt more frequently for 1996 -4.5 4.5 6.8 5.4 1997 -1.2 5.6 8.9 5.2 adjustable-rate mortgages, which thrifts 1998 2.2 8.5 10.9 6.7 tend to keep on their books. The trend 1999 1.9 6.2 7.5 6.6 toward securitization of consumer loans Quarterly (annual rate) 2 continued in 1999: Bank originations of 1999:Q1 1.9 7.5 8.2 6.7 consumer loans were up about 5 per- Q2 2.2 6.0 6.0 6.9 cent, while holdings ran off at a \3A per- Q Q 3 4 -2 5 . . 0 3 5 5 . . 5 4 1 5 0 . . 1 0 6 6 . . 0 2 cent pace. NOTE. Ml consists of currency, travelers checks, demand deposits, and other checkable deposits. M2 consists of Ml plus savings deposits (including money market The Monetary Aggregates deposit accounts), small-denomination time deposits, and balances in retail money market funds. M3 consists of M2 Growth of the broad monetary aggreplus large-denomination time deposits, balances in institugates moderated significantly last year. tional money market funds, RP liabilities (overnight and Nevertheless, as was expected by the term), and eurodollars (overnight and term). Debt consists of the outstanding credit market debt of the U.S. FOMC last February and July, both M2 government, state and local governments, households and and M3 finished the year above their nonprofit organizations, nonfinancial businesses, and farms. annual price-stability ranges. M3 rose 1. From average for fourth quarter of preceding year to IV2 percent in 1999, somewhat outside average for fourth quarter of year indicated. the Committee's range of 2 percent 2. From average for preceding quarter to average for quarter indicated. to 6 percent but far below the nearly 11 percent pace of 1998. M3 growth agencies of foreign banks stepped up retreated early in 1999, as the surge in issuance of large certificates of deposit, depository credit in the final quarter of in part to augment the liquidity of their 1998 unwound and depository institu- head offices over the century date tions curbed their issuance of the man- change, apparently because it was aged liabilities included in that aggre- cheaper to fund in U.S. markets. Domesgate. At that time, the expansion of tic banks needed the additional funding institution-only money funds also because of strong loan growth and a slowed with the ebbing of heightened buildup in vault cash for Y2K continpreferences for liquid assets. However, gencies. Corporations apparently built M3 bulged again in the fourth quarter up year-end precautionary liquidity in of 1999, as loan growth picked up and institution-only money funds, which banks funded the increase mainly with provided a further boost to M3 late in large time deposits and other managed the year. Early in 2000, these effects liabilities in M3. U.S. branches and began to unwind. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 55 M2 increased 6lA percent in 1999, forward market, to provide sufficient somewhat above the FOMC's range of reserves and support market liquidity. 1 percent to 5 percent. Both the easing The public's demand for currency of elevated demands for liquid assets through year-end, though appreciable, that had boosted M2 in the fourth quar- remained well below the level for which ter of 1998 and a rise in its opportunity the banking system was prepared, and cost (the difference between interest vault cash at the beginning of January rates on short-term market instruments stood about $38 billion above its yearand the rates available on M2 assets) ago level. This excess vault cash, and tended to bring down M2 growth in other century date change effects in 1999. That rise in opportunity cost also money and reserve markets, unwound helped to halt the decline in M2 veloc- quickly after the smooth transition into ity that had begun in mid-1997, although the new year. the l3/4 percent (annual rate) rise in velocity over the second half of 1999 was not enough to offset the drop in the International Developments first half of the year. Within M2, currency demand grew briskly over the year Global economic conditions improved as a whole, reflecting booming retail in 1999 after a year of depressed growth sales and, late in the year, some precau- and heightened financial market instabiltionary buildup for Y2K. Money stock ity. Financial markets in developing currency grew at an annualized rate of countries, which had been hit hard by 28 percent in December and then ran off crises in Asia and Russia in recent years, in the weeks after the turn of the year. recovered last year. The pace of activity In anticipation of a surge in the pub- in developing countries increased, with lic's demand for currency, depository Asian emerging-market economies in institutions vastly expanded their hold- particular bouncing back strongly from ings of vault cash, beginning in the fall the output declines of the preceding to avoid potential constraints in the year. Real growth improved in almost ability of the armored car industry to all the major industrial economies as accommodate large currency shipments well. This strengthening of activity conlate in the year. Depositories' cash draw- tributed to a general rise in equity prices ings reduced their Federal Reserve bal- and a widespread increase in interest ances and drained substantial volumes rates. Despite stronger activity and of reserves, and, in mid-December, large higher prices for oil and other commodiprecautionary increases in the Trea- ties, average foreign inflation was lower sury's cash balance and in foreign cen- in 1999 than in 1998, as output remained tral banks' liquid investments at the Fed- below potential 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 of maturity repurchase agreements timed the August 1998 collapse of the ruble to mature early in 2000. The Desk also and the default on Russian government executed a large number of short-term 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

56 87th Annual Report, 2000 1999. The real, allowed to float, soon GDP in Mexico rose an estimated 6 perfell nearly 50 percent against the dol- cent in 1999, aided by higher oil prices lar, generating fears of a depreciation- and strong export growth to the United inflation spiral that could return Brazil States. The peso appreciated against to its high-inflation past. In addition, the dollar for the year as a whole, there were concerns that the government despite a Mexican inflation rate about might default on its domestic-currency 10 percentage points higher than in the and dollar-indexed debt, the latter total- United States. ing more than $50 billion. In the event, The recovery of activity last year in these fears proved unfounded. The turn- Asian developing countries was earlier, ing point appears to have come in March more widespread, and sharper than in when a new central bank governor Latin America, just as the downturn had announced that fighting inflation was a been the previous year. After a steep top priority and interest rates were sub- drop in activity in the immediate wake stantially raised to support the real. Over of the financial crises that hit several the remainder of the year, Brazilian Asian emerging-market economies in financial markets stabilized on balance, late 1997, the preconditions for a revival despite continuing concerns about the in activity were set by measures initigovernment's ability to reduce the fiscal ated to stabilize shaky financial markets deficit. Inflation, although accelerating and banking sectors, often in conjuncfrom the previous year, remained under tion with International Monetary Fund 10 percent. Brazilian economic activity programs that provided financial supalso recovered somewhat in 1999, after port. Once financial conditions had declining in 1998, as the return of confi- been stabilized, monetary policies dence allowed officials to lower short- turned accommodative in 1998, and this term interest rates substantially from stimulus, along with the shift toward their crisis-related peak levels of early fiscal deficits and an ongoing boost to in the year. net exports provided by the sharp depre- The Brazilian crisis triggered some ciations of their currencies, laid the renewed financial stress in other Latin foundation for last year's strong revival American economies, and domestic in activity. Korea's recovery was the interest rates and Brady bond yield most robust, with real GDP estimated spreads increased sharply from levels to have increased more than 10 percent already elevated by the Russian crisis. in 1999 after falling 5 percent the pre- However, as the situation in Brazil vious year. The government continued improved, financial conditions in the to make progress toward needed finanrest of the region stabilized relatively cial and corporate sector reform. Howrapidly. Even so, the combination of ever, significant weaknesses remained, elevated risk premiums and diminished as evidenced by the near collapse of access to international credit markets Daewoo, Korea's second largest contended to depress activity in much of glomerate. Other Asian developing the region in the first half of 1999. Prob- countries that experienced financial ably the most strongly affected was difficulties in late 1997 (Thailand, Argentina, where the exchange rate Malaysia, Indonesia, and the Philippeg to the dollar was maintained only at pines) also recorded increases in real the cost of continued high real interest GDP in 1999 after declines the previous rates that contributed to the decline year. Indonesian financial markets were in real GDP in 1999. In contrast, real buffeted severely at times during 1999 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 57 by concerns about political instability, last year. Net exports rose strongly, but the rupiah ended the year with a boosted by the lagged effect of the submodest net appreciation against the stantial real depreciation of the ruble in dollar. The other former crisis countries late 1998 and by higher oil prices. The also saw their currencies stabilize or inflation rate moderated to about 50 perslightly appreciate against the dollar. cent, somewhat greater than the depre- Inflation rates in these countries gener- ciation of the ruble over the course of ally declined, despite the pickup in the year. activity and higher prices for oil and The dollar's average foreign exother commodities. Inflation was held change value, measured on a tradedown by the elevated, if diminishing, weighted basis against the currencies of levels of excess capacity and unemploy- a broad group of important U.S. trading ment and by a waning of the inflation- partners, ended 1999 little changed from ary impact of previous exchange rate its level at the beginning of the year. depreciations. There appeared to be two main, roughly In China, real growth slowed moder- offsetting, pressures on the dollar last ately in 1999. Given China's exchange year. On the one hand, the continued rate peg to the dollar, the sizable depre- very strong growth of the U.S. economy ciations elsewhere in Asia in 1997 and relative to foreign economies tended 1998 led to a sharp appreciation of to support the dollar. On the other China's real effective exchange rate, hand, the further rise in U.S. external and there was speculation last year that deficits—with the U.S. current account the renminbi might be devalued. How- deficit moving up toward 4 percent of ever, with China's trade balance con- GDP by the end of the year—may have tinuing in substantial, though reduced, tended to hold down the dollar because surplus, Chinese officials maintained of investor concerns that the associated the exchange rate peg to the dollar last strong net demand for dollar assets year and stated their intention of extend- might prove unsustainable. So far this ing it through at least this year. After year, the dollar's average exchange the onset of the Asian financial crisis, value has increased slightly, boosted continuance of Hong Kong's currency- by new evidence of strong U.S. growth. board-maintained peg to the U.S. dollar Against the currencies of the major forwas also questioned. In the event, the eign industrial countries, the dollar's tie to the dollar was sustained, but only most notable movements in 1999 were at the cost of high real interest rates, a substantial depreciation against the which contributed to a decrease in out- Japanese yen and a significant appreciaput in Hong Kong in 1998 and early tion relative to the euro. 1999 and a decline of consumer prices The dollar depreciated 10 percent on over this period. However, real GDP balance against the yen over the course started to move up again later in the of 1999. In the first half of the year, the year, reflecting in part the strong revival dollar strengthened slightly relative to of activity in the rest of Asia. the yen, as growth in Japan appeared to In Russia, economic activity in- remain sluggish and Japanese monetary creased last year despite persistent and authorities reduced short-term interest severe structural problems. Real GDP, rates to near zero in an effort to jumpwhich had dropped nearly 10 percent in start the economy. However, around 1998 as a result of the domestic finan- midyear, several signs of a revival of cial crisis, recovered about half the loss activity—particularly the announcement Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

58 87th Annual Report, 2000 of unanticipated strong growth in real ery. However, the currency weakened GDP in the first quarter—triggered a again in the fall, and in early December depreciation of the dollar relative to the it reached parity with the dollar, about yen amid reports of large inflows of where it closed the year. The euro's foreign capital into the Japanese stock weakness late in the year was attributed market. Data releases showing that the in part to concerns about the pace of U.S. current account deficit had reached market-oriented structural reforms in record levels in both the second and continental Europe and to a political third quarters of the year also appeared wrangle over the proposed imposition to be associated with depreciations of of a withholding tax on investment the dollar against the yen. Concerned income. On balance, the dollar apprecithat a stronger yen could harm the ated 16 percent relative to the euro over fledgling recovery, Japanese monetary 1999. So far this year, the dollar has authorities intervened heavily to weaken strengthened 2 percent further against the yen on numerous occasions. So far the euro. Although the euro's foreign this year, the dollar has firmed about exchange value weakened in its first 7 percent against the yen. Japanese real year of operation, the volume of euro- GDP increased somewhat in 1999, fol- denominated transactions—particularly lowing two consecutive years of decline. the issuance of debt securities— Growth was concentrated in the first half expanded rapidly. of the year, when domestic demand In the eleven European countries surged, led by fiscal stimulus. Later in that now fix their currencies to the euro, the year, domestic demand slumped, as real GDP growth remained weak early the pace of fiscal expansion flagged. Net in 1999 but strengthened subsequently exports made virtually no contribution and averaged an estimated 3 percent rate to growth for the year as a whole. Japa- for the year as a whole. Net exports nese consumer prices declined slightly made a significant positive contribution on balance over the course of the year. to growth, supported by a revival of The new European currency, the euro, demand in Asia and Eastern Europe came into operation at the start of 1999, and by the effects of the euro's depreciamarking the beginning of stage three tion. The areawide unemployment rate of European economic and monetary declined, albeit to a still-high rate of union. The rates of exchange between nearly 10 percent. In the spring, the the euro and the currencies of the eleven European central bank lowered its polcountries adopting the new currency icy rate 50 basis points, to 2Vi percent. were set at the end of 1998; based on This decline was reversed later in the these rates, the value of the euro at its year in reaction to accumulating evicreation was just under $1.17. From a dence of a pickup in activity, and the technical perspective, the introduction rate was raised an additional 25 basis of the euro went smoothly, and on its points earlier this month. The euro-area first day of trading its value moved inflation rate edged up in 1999, boosted higher. However, the euro soon started by higher oil prices, but still remained to weaken against the dollar, influenced below the 2 percent target ceiling. by indications that euro-area growth Growth in the United Kingdom also would remain very slow. After moved higher on balance in 1999, with approaching parity with the dollar in growth picking up over the course of the early July, the euro rebounded, partly year. Along with the strengthening of on gathering signs of European recov- global demand, the recovery was stimu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, February 59 lated by a series of official interest rate summer but then reversed nearly all reductions, totaling 250 basis points, of this increase in late October and undertaken by the Bank of England over early November before moving up more the last half of 1998 and the first half of moderately in December. The sharp 1999. Later in 1999 and early this year, October-November decline in the yearthe policy rate was raised four times for changeover funding premium came in a total of 100 basis points, with officials response to a series of announcements citing the need to keep inflation below by major central banks that outlined and its 2Vi percent target level in light of the clarified the measures these institutions strength of consumption and the hous- were prepared to undertake to alleviate ing market and continuing tight condi- potential liquidity problems related to tions in the labor market. On balance, the century date change. For yen fundthe dollar appreciated slightly against ing, the century date change premium the pound over the course of 1999. moved in a different pattern, fluctuating In Canada, real growth recovered in around a relatively low level before 1999 after slumping the previous year spiking sharply for several days just in response to the global slowdown and before the year-end. The late-December the related drop in the prices of Cana- jump in the yen funding premium was dian commodity exports. Last year, partly in response to date change-related strong demand from the United States illiquidity in the Japanese government spurred Canadian exports while rising bond repo market that emerged in early consumer and business confidence sup- December and persisted into early Januported domestic demand. In the spring, ary. To counter these conditions, toward the Bank of Canada lowered its official the end of the year the Bank of Japan interest rate twice for a total of 50 basis infused huge amounts of liquidity into points in an effort to stimulate activity in its domestic banking system, which the context of a rising Canadian dollar. soon brought short-term yen funding This decline was reversed by 25-basis- costs back down to near zero. point increases near the end of the year Bond yields in the major foreign and earlier this month, as Canadian industrial countries generally moved inflation moved above the midpoint of higher on balance in 1999. Long-term its target range, the pace of output interest rates were boosted by mounting growth increased, and U.S. interest rates evidence that economic recovery was moved higher. Over the course of 1999, taking hold abroad and by rising expecthe U.S. dollar depreciated 6 percent on tations of monetary tightening in the balance against the Canadian dollar. United States and, later, in other indus- Concerns about liquidity and credit trial countries. Over the course of the risk related to the century date change year, long-term interest rates increased generated a temporary bulge in year-end on balance by more than 100 basis premiums in money market rates in the points in nearly all the major industrial second half of the year in some coun- countries. The notable exception was tries. For the euro, borrowing costs for Japan, where long-term rates were little short-term interbank funding over the changed. year changeover—as measured by the Equity prices showed strong and interest rate implied by the forward mar- widespread increases in 1999, as the ket for a one-month loan spanning the pace of global activity quickened and year-end relative to the rates for neigh- the threat from emerging-market finanboring months—started to rise in late cial crises appeared to recede. In the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

60 87th Annual Report, 2000 industrial countries equity prices on England and the Swiss National Bank, average rose sharply, extending the announced plans to sell a sizable porgeneral upward trend of recent years. tion of their reserves. The September The average percentage increase of announcement that fifteen European equity prices in developing countries central banks, including the two just was even larger, as prices recovered mentioned, would limit their aggregate from their crisis-related declines of the sales of bullion and curtail leasing previous year. The fact that emerging activities, saw the price of gold briefly Latin American and Asian equity mar- rise above $320 per ounce before turnkets outperformed those in industrial ing down later in the year. Recently, countries lends some support to the view the price has moved back up, to above that global investors increased their risk $300 per ounce. tolerance, especially during the last months of the year. Report forwarded to the Congress on Oil prices increased dramatically July 20, 2000. during 1999, fully reversing the declines in the previous two years. The average spot price for West Texas intermediate, Report of July 20, 2000 the U.S. benchmark crude, more than doubled, from around $12 per barrel Monetary Policy and the at the beginning of the year to more Economic Outlook than $26 per barrel in December. This rebound in oil prices was driven by a The impressive performance of the combination of strengthening world U.S. economy persisted in the first half demand and constrained world supply. of 2000 with economic activity expand- The strong U.S. economy, combined ing at a rapid pace. Overall rates of with a recovery of economic activity inflation were noticeably higher, largely abroad and a somewhat more normal as a result of steep increases in energy weather pattern, led to a 2 percent prices. The remarkable wave of new increase in world oil consumption. Oil technologies and the associated surge in production, on the other hand, declined capital investment have continued to 2 percent, primarily because of reduced boost potential supply and to help consupplies from OPEC and other key pro- tain price pressures at high levels of ducers. Starting last spring, OPEC con- labor resource use. At the same time, sistently held production near targeted rising productivity growth—working levels, in marked contrast to the wide- through its effects on wealth and conspread lack of compliance that charac- sumption, as well as on investment terized earlier agreements. So far this spending—has been one of the imporyear, oil prices have risen further on tant factors contributing to rapid inspeculation over a possible extension creases in aggregate demand that have of current OPEC production targets and exceeded even the stepped-up increases the onset of unexpectedly cold weather in potential supply. Under such circumin key consuming regions. stances, and with the pool of avail- The price of gold fluctuated sub- able labor already at an unusually low stantially in 1999. The price declined level, the continued expansion of aggreto near a twenty-year low of about gate demand in excess of the growth $250 per ounce at midyear as several in potential supply increasingly threatcentral banks, including the Bank of ened to set off greater price pressures. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 61 Because price stability is essential to Monetary Policy, Financial achieving maximum sustainable eco- Markets, and the Economy nomic growth, heading off these pres- over the First Half of 2000 sures has been critical to extending the extraordinary performance of the U.S. When the FOMC convened for its first economy. two meetings of the year, in February To promote balance between aggre- and March, economic conditions in the gate demand and potential supply and United States were pointing toward an to contain inflation pressures, the Fed- increasingly taut labor market as a coneral Open Market Committee (FOMC) sequence of a persistent imbalance took additional firming actions this year, between the growth rates of aggregate raising the benchmark federal funds demand and potential aggregate supply. rate 1 percentage point between Feb- Reflecting the underlying strength in ruary and May. The tighter stance of spending and expectations of tighter monetary policy, along with the ongoing monetary policy, market interest rates strength of credit demands, has led were rising, especially after the century to less accommodative financial con- date change passed without incident. ditions: On balance, since the beginning But, at the same time, equity prices were of the year, real interest rates have still posting appreciable gains on net. increased, equity prices have changed Knowing that the two safety valves that little after a sizable run-up in 1999, had been keeping underlying inflation and lenders have become more cau- from picking up until then—the econotious about extending credit, espe- my's ability to draw on the pool of cially to marginal borrowers. Still, available workers and to expand its trade households and businesses have con- deficit on reasonable terms—could not tinued to borrow at a rapid pace, and be counted on indefinitely, the FOMC the growth of M2 remained relatively voted for a further tightening in monerobust, despite the rise in market inter- tary policy at both its February and its est rates. The favorable outlook for March meetings, raising the target for the U.S. economy has contributed to a the overnight federal funds rate 25 basis further strengthening of the dollar, points on each occasion. In related despite tighter monetary policy and actions, the Board of Governors also rising interest rates in most other approved quarter-point increases in the industrial countries. discount rate in both February and Perhaps partly reflecting firmer finan- March. cial conditions, the incoming economic The FOMC considered larger policy data since May have suggested some moves at its first two meetings of 2000 moderation in the growth of aggregate but concluded that significant uncerdemand. Nonetheless, labor markets tainty about the outlook for the expanremained tight at the time of the FOMC sion of aggregate demand in relation to meeting in June, and it was unclear that of aggregate supply, including the whether the slowdown represented timing and strength of the economy's a decisive shift to more sustainable response to earlier monetary policy growth or just a pause. The Committee tightenings, warranted a more limited left the stance of policy unchanged but policy action. Still, noting that there had saw the balance of risks to the economic been few signs that the rise in interest outlook as still weighted toward rising rates over recent quarters had begun inflation. to bring demand in line with potential Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

62 87th Annual Report, 2000 supply, the Committee decided in both By the June FOMC meeting, the instances that the balance of risks going incoming data were suggesting that the forward was weighted mainly in the expansion of aggregate demand might direction of rising inflation pressures. be moderating toward a more sustain- In particular, it was becoming increas- able pace: Consumers had increased ingly clear that the Committee would their outlays for goods modestly during need to move more aggressively at a the spring; home purchases and starts later meeting if imbalances continued to appeared to have softened; and readings build and inflation and inflation expecta- on the labor market suggested that the tions, which had remained relatively pace of hiring might be cooling off. subdued until then, began to pick up.1 Moreover, much of the effects on Some readings between the March demand of previous policy firmings, and May meetings of the FOMC on including the 50 basis point tightening labor costs and prices suggested a pos- in May, had not yet been fully realized. sible increase of inflation pressures. Financial market participants interpreted Moreover, aggregate demand had con- signs of economic slowing as suggesttinued to grow at a fast clip, and markets ing that the Federal Reserve probably for labor and other resources were show- would be able to hold inflation in check ing signs of further tightening. Finan- without much additional policy firming. cial market conditions had firmed in However, whether aggregate demand response to these developments; the sub- had moved decisively onto a more modstantial rise in private borrowing rates erate expansion track was not yet clear, between March and May had been influ- and labor resource utilization remained enced by the buildup in expectations of unusually elevated. Thus, although the more policy tightening as market partici- FOMC decided to defer any policy pants recognized the need for higher action in June, it indicated that the balshort-term interest rates. Given all these ance of risks was still on the side of circumstances, the FOMC decided in rising inflation in the foreseeable May to raise the target for the overnight future.2 federal funds rate 50 basis points, to 6V2 percent. The Committee saw little Economic Projections risk in the more forceful action given for 2000 and 2001 the strong momentum of the economic expansion and widespread market ex- The members of the Board of Governors pectations of such an action. Even after and the Federal Reserve Bank presitaking into account its latest action, dents expect the current economic however, the FOMC saw the strength in spending and pressures in labor markets 2. At its June meeting, the FOMC did not as indicating that the balance of risks establish ranges for growth of money and debt remained tilted toward rising inflation. in 2000 and 2001. The legal requirement to establish and to announce such ranges had expired, and owing to uncertainties about the behavior of the velocities of debt and money, these ranges for 1. At its March and May meetings, the FOMC many years have not provided useful benchmarks took a number of actions that were aimed at for the conduct of monetary policy. Nevertheless, adjusting the implementation of monetary policy the FOMC believes that the behavior of money to actual and prospective reductions in the stock and credit will continue to have value for gauging of Treasury debt securities. These actions are economic and financial conditions, and this report described in the discussion of U.S. financial discusses recent developments in money and credit markets. in some detail. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 63 Economic Projections for 2000 and 2001 Percent Federal Reserve governors and Reserve Bank presidents Indicator Administration 1 Central Range tendency 2000 Change, fourth quarter to fourth quarter1 N Re o a m l i G na D l P G 2 DP 33 6 /4 - - 7 5 1 /4 61 4 /4 -4 -6 1 3 / / 2 4 6 3 . . 0 9 PCE prices3 2-23/4 21/2-23/4 3.23 Average level fourth quarter Civilian unemployment rate 4-41/4 About 4 4.1 2001 Change, fourth quarter to fourth quarter1 Nominal GDP 5-61/4 51/4-6 5.3 R PC ea E l p G r D ic P e 2 s3 2 P 1 / / 4 2- - 4 3 31/4 2 - - 3 2 3 1 / / 4 2 3 2 . . 2 53 Average level, fourth quarter Civilian unemployment rate 4-41/2 4-41/4 4.2 1. Change from average for fourth quarter of previous 2. Chain-weighted. year to average for fourth quarter of year indicated. 3. Chain-type price index. expansion to continue through next year, ditions may need to be adjusted further but at a more moderate pace than the to balance aggregate demand and potenaverage over recent quarters. For 2000 tial supply and to keep inflation low. as a whole, the central tendency of their Considerable uncertainties attend estiforecasts for the rate of increase in real mates of potential supply—both the rate gross domestic product (GDP) is 4 per- of growth and the level of the econocent to AV2 percent, measured as the my's ability to produce on a sustained change between the fourth quarter of non-inflationary basis. Business invest- 1999 and the fourth quarter of 2000. ment in new equipment and software Over the four quarters of 2001, the cen- has been exceptionally high, and given tral tendency forecasts of real GDP are the rapid pace of technological change, in the VA percent to 33/4 percent range. firms will continue to exploit opportu- With this pace of expansion, the civilian nities to implement more-efficient prounemployment rate should remain near cesses and to speed the flow of inforits recent level of 4 percent. Even with mation across markets. In such an the moderation in the pace of economic environment, a further pickup in proactivity, the Committee members and ductivity growth is a distinct possibility. nonvoting Bank presidents expect that However, a portion of the very rapid inflation may be higher in 2001 than in rise in measured productivity in recent 1999, and the Committee will need to be quarters may be a result of the cyclical alert to the possibility that financial con- characteristics of this expansion rather Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

64 87th Annual Report, 2000 than an indication of structural rates of expectation that the direct and indirect increase consistent with holding the effects of the boost to domestic inflation level of resource utilization unchanged. this year from the rise in the price of Current levels of labor resource utiliza- world crude oil will be partly reversed tion are already unusually high. To date, next year if, as futures markets suggest, this has not led to escalating unit labor crude oil prices retrace this year's costs, but whether such a favorable run-up by next year. Nonetheless, these performance in the labor market can be forecasts show consumer price inflation sustained is one of the important uncer- in 2001 to have moved above the rates tainties in the outlook. that prevailed over the 1997-98 period. On the demand side, the adjustments Such a trend, were it not to show signs in financial markets that have accompa- of quickly stabilizing or reversing, nied expected and actual tighter mone- would pose a considerable risk to the tary conditions may be beginning to continuation of the extraordinary ecomoderate the rise in domestic demand. nomic performance of recent years. As that process evolves, the substantial The economic forecasts of the FOMC impetus that household spending has are similar to those recently released by received in recent years from rapid the Administration in its Mid-Session gains in equity wealth should subside. Review of the Budget. Compared with The higher cost of business borrow- the forecasts available in February, the ing and more-restrictive credit supply Administration raised its projections conditions probably will not exert sub- for the increase in real GDP in 2000 stantial restraint on investment deci- and 2001 to rates that lie at the low end sions, particularly as long as the costs of the current range of central tendenand potential productivity payoffs of cies of Federal Reserve policymakers. new equipment and software remain The Administration also expects that attractive. The slowing in domestic the unemployment rate will remain spending will not be fully reflected in a close to 4 percent. Like the FOMC, the more moderate expansion of domestic Administration sees consumer price production. Some of the slowing will be inflation rising this year and falling absorbed in smaller increases in imports back in 2001. After accounting for the of goods and services, and given con- differences in the construction of the tinued recovery in economic activity alternative measures of consumer prices, abroad, domestic firms are expected to the Administration's projections of incontinue seeing a boost to demand and creases in the consumer price index to production from rising exports. (CPI) of 3.2 percent in 2000 and 2.5 per- Regarding inflation, FOMC partici- cent in 2001 are broadly consistent with pants believe that the rise in consumer the Committee's expectations for the prices will be noticeably larger this chain-type price index for personal conyear than in 1999 and that inflation will sumption expenditures. then drop back somewhat in 2001. The central tendency of their forecasts for Economic and Financial the increase in the chain-type index Developments in 2000 for personal consumption expenditures is 2Vz percent to 23A percent over the The expansion of U.S. economic activity four quarters of 2000 and 2 percent to maintained considerable momentum 2x/2 percent during 2001. Shaping the through the early months of 2000 contour of this inflation forecast is the despite the firming in credit markets Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 65 that has occurred over the past year. 1999, and some of that acceleration may Only recently has the pace of real activ- be attributable to the indirect effects of ity shown signs of having moderated higher energy costs on the prices of core from the extremely rapid rate of increase goods and services. Sustained strong that prevailed during the second half gains in worker productivity have kept of 1999 and the first quarter of 2000. increases in unit labor costs minimal Real GDP increased at an annual rate of despite the persistence of a historically 5Vz percent in the first quarter of 2000. low rate of unemployment. Private domestic final sales, which had accelerated in the second half of 1999, The Household Sector were particularly robust, rising at an annual rate of almost 10 percent in the Consumer Spending first quarter. Underlying that surge in domestic spending were many of the Consumer spending was exceptionally same factors that had contributed to vigorous during the first quarter of 2000. the considerable strength of outlays in Real personal consumption expenditures the second half of 1999. The ongoing rose at an annual rate of 73A percent, the influence of substantial increases in real sharpest increase since early 1983. At income and wealth continued to fuel that time, the economy was rebounding consumer spending, and business invest- from a deep recession during which ment, which continues to be undergirded households had deferred discretionary by the desire to take advantage of new, purchases. In contrast, the first-quarter cost-saving technologies, was further surge in consumption came on the heels buoyed by an acceleration in sales and of two years of very robust spending profits late last year. Export demand during which real outlays increased at posted a solid gain during the first quar- an annual rate of more than 5 percent, ter while imports rose even more rap- and the personal saving rate dropped idly to meet booming domestic demand. sharply. The available data, on balance, point to Outlays for durable goods, which rose another solid increase in real GDP in the at a very fast pace in 1998 and 1999, second quarter, although they suggest accelerated during the first quarter to an that private household and business annual rate of more than 24 percent. fixed investment spending likely slowed Most notably, spending on motor vehinoticeably from the extraordinary first- cles, which had climbed to a new high quarter pace. Through June, the expan- in 1999, jumped even further in the first sion remained brisk enough to keep quarter of 2000 as unit sales of light labor utilization near the very high lev- motor vehicles soared to a record rate of els reached at the end of 1999 and to 18.1 million units. In addition, houseraise the factory utilization rate to close holds' spending on computing equipto its long-run average by early spring. ment and software rebounded after the Inflation rates over the first half of turn of the year; some consumers appar- 2000 were elevated by an additional ently had postponed their purchases of increase in the price of imported crude these goods in late 1999 before the cenoil, which led to sharp hikes in retail tury date change. Outlays for nonduraenergy prices early in the year and again ble goods posted a solid increase of around midyear. Apart from energy, 53/4 percent in the first quarter, marked consumer price inflation so far this year by a sharp upturn in spending on clothhas been somewhat higher than during ing and shoes. Spending for consumer Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

66 87th Annual Report, 2000 services also picked up in the first quar- less than 1 percent during the first five ter, rising at an annual rate of 5Vi per- months of the year. cent. Spending was quite brisk for a After having boosted the ratio of number of non-energy consumer ser- household net worth to disposable vices, ranging from recreation and tele- income to a record high in the first quarphone use to brokerage fees. Also con- ter, stock prices have fallen back, sugtributing to the acceleration was a gesting less impetus to consumer spendrebound in outlays for energy services, ing going forward. In addition, smaller which had declined in late 1999, when employment gains and the pickup in weather was unseasonably warm. energy prices have moderated the rise In recent months, the rise in consumer in real income of late. Although these spending has moderated considerably developments left some imprint on confrom the phenomenal pace of the first sumer attitudes in June, households quarter, with much of the slowdown in remained relatively upbeat about their outlays for goods. At an annual rate of prospective financial situation, accord- 17V4 million units in the second quarter, ing to the results of the University of light motor vehicles sold at a rate well Michigan Survey Research Center below their first-quarter pace. Nonethe- (SRC) survey. However, they became a less, that level of sales is still histori- bit less positive about the outlook for cally high, and with prices remaining business conditions and saw a somedamped and automakers continuing to what greater likelihood of a rise in use incentives, consumers' assessments unemployment over the coming year. of the motor vehicle market continue to be positive. The information on retail Residential Investment sales for the April-to-June period indicate that consumer expenditures for Housing activity stayed at a high level other goods rose markedly slower in the during the first half of this year. Homesecond quarter than in the first quarter, builders began the year with a conat a pace well below the average rate of siderable backlog of projects that had increase during the preceding two years. developed as the exceptionally strong In contrast, personal consumption ex- demand of the previous year strained penditures for consumer services contin- capacity. As a result, they maintained ued to rise relatively briskly in April and starts of new single-family homes at May. an annual rate of 1.33 million units, Real disposable personal income on average, through April—matching increased at an annual rate of about 1999's robust pace. Households' 3 percent between December and demand for single-family homes was May—slightly below the 1999 pace of supported early in the year by ongoing 33/4 percent. However, the impetus to gains in jobs and income and the earlier spending from the rapid rise in house- run-up in wealth; those forces apparhold net worth was still considerable, ently were sufficient to offset the effects labor markets remained tight, and confi- that higher mortgage interest rates had dence was still high. As a result, house- on the affordability of new homes. Sales holds continued to allow their spending of new homes were particularly robust, to outpace their flow of current income, setting a new record by March; but sales and the personal saving rate, as mea- of existing units slipped below their sured in the national income and prod- 1999 high. As a result of the continued uct accounts, dropped further, averaging strength in sales, the homeownership Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 67 rate reached a new high in the first Apparently, a favorable outlook for quarter. income and employment, along with ris- By the spring, higher mortgage inter- ing wealth, made households feel confiest rates were leaving a clearer mark dent enough to continue to spend and on the attitudes of both consumers and take on debt. Despite rising mortgage builders. The Michigan SRC survey and consumer loan rates, household reported that households' assessments debt increased at an annual rate of nearly of homebuying conditions dropped 8 percent in the first quarter, and prebetween April and June to the lowest liminary data point to a similar increase level in more than nine years. Survey in the second quarter. respondents noted that, besides higher Mortgage debt expanded at an annual financing costs, higher prices of homes rate of 7 percent in the first quarter, were becoming a factor in their less boosted by the high level of housing positive assessment of market condi- activity. Household debt not secured by tions. Purchases of existing homes were real estate—including credit card ballittle changed, on balance, in April and ances and auto loans—posted an impres- May from the first-quarter average; sive 10 percent gain in the first quarter however, because these sales are re- to help finance a large expansion in outcorded at the time of closing, they tend lays for consumer durables, especially to be a lagging indicator of demand. motor vehicles. The moderation in the Sales of new homes—a more current growth of household debt this year has indicator—fell back in April and May, been driven primarily by its mortgage and homebuilders reported that sales component: Preliminary data for the secdropped further in June. Perhaps a sign ond quarter suggest that, although conthat softer demand has begun to affect sumer credit likely decelerated from the construction, starts of new single-family first quarter, it still grew faster than in homes slipped to a rate of VA million 1999. units in May. That level of new home- Debt in margin accounts, which is building, although noticeably slower largely a household liability and is not than the robust pace that characterized included in reported measures of credit the fall and winter period, is only a bit market debt, has declined, on net, in below the elevated level that prevailed recent months, following a surge from throughout much of 1998, when single- late in the third quarter of 1999 through family starts reached their highest level the end of March 2000. There has been in twenty years. Starts of multifamily no evidence that recent downdrafts in housing units, which also had stepped share prices this year caused serious up sharply in the first quarter of the year, repayment problems at the aggregate to an annual rate of 390,000 units, level that might pose broader systemic settled back to a 340,000 unit rate in concerns. April and May. The combination of rapid debt growth and rising interest rates has pushed the household debt-service burden to levels Household Finance not reached since the late 1980s. None- Fueled by robust spending, especially theless, with household income and net early in the year, the expansion of worth both having grown rapidly, and household debt remained brisk during employment prospects favorable, very the first half of 2000, although below few signs of worsening credit problems the very strong 1999 growth rate. in the household sector have emerged, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

68 87th Annual Report, 2000 and commercial banks have reported in ness processes. The ability of firms to recent Federal Reserve surveys that they take advantage of these emerging develremain favorably disposed to make con- opments has been supported by the sumer installment and mortgage loans. strength of domestic demand and by Indeed, financial indicators of the house- generally favorable conditions in credit hold sector have remained mostly posi- and equity markets. In addition, because tive: The rate of personal bankruptcy these high-technology goods can be profilings fell in the first quarter to its low- duced increasingly efficiently, their est level since 1996; delinquency rates prices have continued to decline steeply, on home mortgages and auto loans providing additional incentive for rapid remained low; and the delinquency rate investment. The result has been a sigon credit cards edged down further, nificant rise in the stock of capital in use although it remained in the higher range by businesses and an acceleration in the that has prevailed since the mid-1990s. flow of services from that capital as However, delinquency rates may be held more-advanced vintages of equipment down, to some extent, by the surge in replace older ones. The payoff from the new loan originations in recent quarters prolonged period during which firms because newly originated loans are less have upgraded their plant and equiplikely to be delinquent than seasoned ment has increasingly shown through in ones. the economy's improved productivity performance. Real outlays for business equipment The Business Sector and software shot up at an annual rate of nearly 25 percent in the first quarter of Fixed Investment this year. That jump followed a modest The boom in capital spending extended increase in the final quarter of 1999 and into the first half of 2000 with few put spending for business equipment indications that businesses' desire to and software back on the double-digit take advantage of more-efficient tech- uptrend that has prevailed throughout nologies is diminishing. Real business the current economic recovery. Confixed investment surged at an annual cerns about potential problems with the rate of almost 24 percent in the first century date change had the most noticequarter of the year, rebounding sharply able effect on the patterns of spending from its lull at the end of 1999, when for computers and peripherals and for firms apparently postponed some communications equipment in the fourth projects because of the century date and first quarters; expenditures for softchange. In recent months, the trends in ware were also affected, although less new orders and shipments of non- so. For these categories of goods overdefense capital goods suggest that all, the impressive resurgence in busidemand has remained solid. ness purchases early this year left little Sustained high rates of investment doubt that the underlying strength in spending have been a key feature shap- demand for high-tech capital goods ing the current economic expansion. had been only temporarily interrupted Business spending on new equipment by the century date change. Indeed, and software has been propelled impor- nominal shipments of office and comtantly by ongoing advances in computer puting equipment and of communiand information technologies that can cation devices registered sizable be applied to a widening range of busi- increases over the April-May period. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 69 In the first quarter, business spending declined in 1999. Both last year's weakon computers and peripheral equipment ness and this year's sudden and widewas up almost 40 percent from a year spread revival are difficult to explain earlier—a pace in line with the trend of fully. Nonetheless, the higher levels of the current expansion. Outlays for com- spending on office buildings, other communications equipment, however, accel- mercial facilities, and industrial builderated; the first-quarter surge brought ings recorded early this year would seem the year-over-year increase in spending to accord well with the overall strength to 35 percent, twice the pace that pre- in aggregate demand. However, the funvailed a year earlier. Expanding Internet damentals in this sector of the economy usage has been driving the need for new are mixed. Available information sugnetwork architectures. In addition, cable gests that property values for offices, companies have been investing heavily retail space, and warehouses have been in preparation for their planned entry rising more slowly than they were sevinto the markets for residential and com- eral years ago. However, office vacancy mercial telephony and broad-band Inter- rates have come down, which suggests net services. that, at least at an aggregate level, the Demand for business equipment out- office sector is not overbuilt. The side of the high-tech area was also vacancy rate for industrial buildings strong at the beginning of the year. In has also fallen, but in only a few industhe first quarter, outlays for industrial tries, such as semiconductors and other equipment rose at a brisk pace for a electronic components, are capacity third consecutive quarter as the recovery pressures sufficiently intense to induce of the manufacturing sector from the significant expansion of production effects of the Asian crisis gained facilities. momentum. In addition, investment in farm and construction machinery, which Inventory Investment had fallen steadily during most of 1999, turned up, and shipments of civilian air- The ratio of inventories to sales in many craft to domestic customers increased. nonfarm industries moved lower early More recent data show a further rise in this year. Those firms that had accumuthe backlog of unfilled orders placed lated some additional stocks toward the with domestic firms for equipment and end of 1999 as a precaution against dismachinery (other than high-tech items ruptions related to the century date and transportation equipment), suggest- change seemed to have little difficulty ing that demand for these items has been working off those inventories after well maintained. However, business pur- the smooth transition to the new year. chases of motor vehicles are likely to Moreover, the first-quarter surge in final drop back in the second quarter from the demand may have, to some extent, very high level recorded at the begin- exceeded businesses' expectations. In ning of the year. In particular, demand current-cost terms, non-auto manufacfor heavy trucks appears to have been turing and trade establishments built adversely affected by higher costs of inventories in April and May at a somefuel and shortages of drivers. what faster rate than in the first quarter Real investment in private non- but still roughly in line with the rise in residential structures jumped at an their sales. As a result, the ratio of annual rate of more than 20 percent in inventories to sales, at current cost, for the first quarter of the year after having these businesses was roughly unchanged Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

70 87th Annual Report, 2000 from the first quarter. Overall, the ongo- On balance, businesses have altered ing downtrend in the ratios of inven- the composition of their funding this tories to sales during the past several year to rely more on shorter-term years suggests that businesses increas- sources of credit and less on the bond ingly are taking advantage of new tech- market, although the funding mix has nologies and software to implement fluctuated widely in response to changbetter inventory management. ing market conditions. After the pass- The swing in inventory investment ing of year-end, corporate borrowers in the motor vehicle industry has been returned to the bond market in volume more pronounced recently. Dealer stocks in February and March, but subsequent of new cars and light trucks were drawn volatility in the capital market in April down during the first quarter as sales and May prompted a pullback. In addiclimbed to record levels. Accordingly, tion, corporate bond investors have auto and truck makers kept assemblies been less receptive to smaller, less liquid at a high level through June in order offerings, as has been true for some to maintain ready supplies of popular time. models. Even though demand appears In the investment-grade market, bond to have softened and inventories of a issuers have responded to investors' few models have backed up, sched- concerns about the interest rate and uled assemblies for the third quarter credit outlook by shortening the maturiare above the elevated level of the first ties of their offerings and by issuing half. more floating-rate securities. In the below-investment-grade market, many of the borrowers who did tap the bond Business Finance market in February and March did so The economic profits of nonfinancial by issuing convertible bonds and other U.S. corporations posted another solid equity-related debt instruments. Subincrease in the first quarter. The profits sequently, amid increased equity market that nonfinancial corporations earned on volatility and growing investor uncertheir domestic operations were 10 per- tainty about the outlook for prospective cent above the level of a year earlier; borrowers, credit spreads in the corthe rise lifted the share of profits in porate bond market widened, and issuthis sector's nominal output close to its ance in the below-investment-grade 1997 peak. Nonetheless, with invest- market dropped sharply in April and ment expanding rapidly, businesses' May. Conditions in the corporate bond external financing requirements, mea- market calmed in late May and June, sured as the difference between capital and issuance recovered to close to its expenditures and internally generated first-quarter pace. funds, stayed at a high level in the As the bond market became less hosfirst half of this year. Businesses' credit pitable in the spring, many businesses demands were also supported by cash- evidently turned to banks and to the financed merger and acquisition activity. commercial paper market for financing. Total debt of nonfinancial businesses Partly as a result, commercial and indusincreased at a \Wi percent clip in the trial loans at banks have expanded first quarter, close to the brisk pace of briskly, even as a larger percentage of 1999, and available information sug- banks have reported in Federal Reserve gests that borrowing remained strong surveys that they have been tightening into the second quarter. standards and terms on such loans. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 71 Underscoring lenders' concerns about $225 billion to $230 billion, $100 bilthe creditworthiness of borrowers, the lion higher than in the preceding year. ratio of liabilities of failed businesses That outcome would likely place the to total liabilities has increased further surplus at more than 2x/4 percent of so far this year, and the default rate GDP, which would exceed the most on outstanding junk bonds has risen recent high of 1.9 percent, which further from the relatively elevated occurred in 1951. level reached in 1999. Through mid- The swing in the federal budget from year, Moody's Investors Service has deficit to surplus has been an important downgraded, on net, more debt in the factor in maintaining national saving. nonfinancial business sector than it has The rise in federal saving as a percentupgraded, although it has placed more age of gross national product from debt on watch for future upgrades than -3.5 percent in 1992 to 3.1 percent in downgrades. the first quarter of this year has been Commercial mortgage borrowing has sufficient to offset the drop in personal also expanded at a robust pace over the saving that occurred over the same first half of 2000, as investment in office period. As a result, gross saving by and other commercial building strength- households, businesses, and governened. Extending last year's trend, bor- ments has stayed above 18 percent rowers have tapped banks and life insur- of GNP since 1997, compared with ance companies as the financing sources 16!/2 percent over the preceding seven of choice. Banks, in particular, have years. The deeper pool of national reported stronger demand for commer- saving, along with the continued willcial real estate loans this year even as ingness of foreign investors to finance they have tightened standards a bit for our current account deficit, remains an approving such loans. In the market for important factor in containing increases commercial mortgage-backed securi- in the cost of capital and sustaining the ties, yields have edged higher since the rapid expansion of domestic investbeginning of the year. ment. With longer-run projections showing a rising federal government surplus over the next decade, this source The Government Sector of national saving could continue to expand. Federal Government The recent good news on the fed- The incoming information regarding eral budget has been primarily on the the federal budget suggests that the receipts side of the ledger. Nonwithsurplus in the current fiscal year will held tax receipts were very robust this surpass last year's by a considerable spring. Both final payments on personal amount. Over the first eight months of income tax liabilities for 1999 and final fiscal year 2000—the period from Octo- corporate tax payments for 1999 were ber to May—the unified budget recorded up substantially. So far this year, the a surplus of about $120 billion, com- withheld tax and social insurance conpared with $41 billion during the com- tributions on this year's earnings of parable period of fiscal 1999. The Office individuals have also been strong. As of Management and Budget and the a result, federal receipts during the first Congressional Budget Office are now eight months of the fiscal year were forecasting that, when the fiscal year almost 12 percent higher than they were closes, the unified surplus will be around during the year-earlier period. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

72 87th Annual Report, 2000 While receipts have accelerated, fed- new five- and ten-year notes and only eral expenditures have been rising only one new thirty-year bond each year. The a little faster than during fiscal 1999 and auctions of five- and ten-year notes will continue to decline as a share of nomi- remain quarterly, alternating between nal GDP. Nominal outlays for the first new issues and smaller reopenings, eight months of the current fiscal year and the bond auctions will be semiwere 5Vi percent above the year-earlier annual, also alternating between new period. Increases in discretionary spend- and smaller reopened offerings. The ing have picked up a bit so far this Treasury also announced that it was year. In particular, defense spending has reducing the frequency of its one-year been running higher in the wake of the bill auctions from monthly to quarterly increase in budget authority enacted last and cutting the size of the monthly year. The Congress has also boosted two-year note auctions. In addition, the agricultural subsidies in response to the Treasury eliminated the April auction of weakness in farm income. While non- the thirty-year inflation-indexed bond discretionary spending continues to be and indicated that the size of the tenheld down by declines in net interest year inflation-indexed note offerings payments, categories such as Medicaid would be modestly reduced. Meanwhile, and other health programs have been anticipation of even larger surpluses rising more rapidly of late. in the wake of the surprising strength As measured by the national income of incoming tax receipts so far in 2000 and product accounts, real federal led the Treasury to announce, in May, expenditures for consumption and gross that it was again cutting the size of investment dropped sharply early this the monthly two-year note auctions. year after having surged in the fourth The Treasury also noted that it is considquarter of 1999. These wide quarter- ering additional changes in its auction to-quarter swings in federal spending schedule, including the possible eliminaappear to have occurred because the tion of the one-year bill auctions and a Department of Defense speeded up its reduction in the frequency of its twopayments to vendors before the cen- year note auctions. tury date change; actual deliveries of Early in the year, the Treasury defense goods and services were likely unveiled the details of its previously smoother. On average, real defense announced reverse-auction, or debt buyspending in the fourth and first quarters back, program, whereby it intends to was up moderately from the average retire seasoned, less liquid, debt securilevel in fiscal 1999. Real nondefense ties with surplus cash, enabling it to outlays continued to rise slowly. issue more "on-the-run" securities. The With current budget surpluses com- Treasury noted that it would buy back as ing in above expectations and large much as $30 billion this year. The first surpluses projected to continue for the operation took place in March, and in foreseeable future, the federal govern- May the Treasury announced a schedule ment has taken additional steps aimed of two operations per month through at preserving a high level of liquidity the end of July of this year. Through in the market for its securities. Expand- midyear, the Treasury has conducted ing on efforts to concentrate its declin- eight buyback operations, redeeming a ing debt issuance in fewer highly liquid total of $15 billion. Because an imporsecurities, the Treasury announced in tant goal of the buyback program is February its intention to issue only two to help forestall further increases in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 73 the average maturity of the Treasury's year. The current account deficit reached publicly held debt, the entire amount an annual rate of $409 billion in the redeemed so far has corresponded to first quarter of 2000, or A1 A percent of securities with remaining maturities at GDP, compared with $372 billion and the long end of the yield curve (at least 4 percent in the second half of 1999. fifteen years). Net payments of investment income were a bit less in the first quarter than State and Local Governments in the second half of last year owing to a sizable increase in income receipts In the state and local sector, real confrom direct investment abroad. Most of sumption and investment expenditures the expansion in the current account registered another strong quarter at the deficit occurred in trade in goods and beginning of this year. In part, the services. In the first quarter, the deficit unseasonably good weather appears to in trade in goods and services widened have accommodated more construction to an annual rate of $345 billion, a conspending than usually occurs over the siderable expansion from the deficit of winter. However, some of the recent rise $298 billion recorded in the second half is an extension of the step-up in spendof 1999. Trade data for April suggest ing that emerged last year, when real that the deficit may have increased furoutlays rose 5 percent after having averther in the second quarter. aged around 3 percent for the preceding U.S. exports of real goods and serthree years. Higher federal grants for vices rose at an annual rate of 6lA perhighway construction have contributed cent in the first quarter, following a to the pickup in spending. In addition, strong increase in exports in the second many of these jurisdictions have experihalf of last year. The pickup in ecoenced solid improvements in their fiscal nomic activity abroad that began in conditions, which may be allowing them 1999 continued to support export deto undertake new spending initiatives. mand and partly offset negative effects The improving fiscal outlook for state on price competitiveness of U.S. prodand local governments has affected both ucts from the dollar's past appreciation. the issuance and the quality of state and By market destination, U.S. exports to local debt. Borrowing by states and Canada, Mexico, and Europe increased municipalities expanded sluggishly in the most. By product group, export the first half of this year. In addition to expansion was concentrated in capital the favorable budgetary picture, rising equipment, industrial supplies, and coninterest rates have reduced the demand sumer goods. Preliminary data for April for new capital financing and subsuggest that growth of real exports stantially limited refunding issuance. remained strong. Credit upgrades have outnumbered The quantity of imported goods and downgrades by a substantial margin in services continued to expand rapidly in the state and local sector. the first quarter. The increase in imports, at an annual rate of 11% percent, was the same in the first quarter as in the The External Sector second half of 1999 and reflected both the continuing strength of U.S. domestic Trade and Current Account demand and the effects of past dollar The deficits in U.S. external balances appreciation on price competitiveness. have continued to get even larger this Imports of consumer goods, automotive Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

74 87th Annual Report, 2000 products, semiconductors, telecommuni- corporate mergers. Foreign private cations equipment, and other machinery purchases of U.S. securities remained were particularly robust. Data for April brisk—well above the record pace set suggest that the second quarter got off last year. In addition, the mix of U.S. to a strong start. The price of non-oil securities purchased by foreigners in goods imports rose at an annual rate of the first quarter showed a continuation PA percent in the first quarter, the sec- of last year's trend toward smaller holdond consecutive quarter of sizable price ings of U.S. Treasury securities and increases following four years of price larger holdings of U.S. agency and cordeclines; non-oil import prices in the porate securities. Private-sector foreignsecond quarter posted only moderate ers sold more than $9 billion in Treasury increases. securities in the first quarter while pur- A number of developments affecting chasing more than $26 billion in agency world oil demand and supply led to a bonds. Despite a mixed performance of further step-up in the spot price of West U.S. stock prices, foreign portfolio pur- Texas intermediate (WTI) crude this chases of US. equities exceeded $60 bilyear, along with considerable volatility. lion in the first quarter, more than half of In the wake of the plunge of world the record annual total set last year. U.S. oil prices during 1998, the Organization purchases of foreign securities remained of Petroleum Exporting Countries strong in the first quarter of 2000. (OPEC) agreed in early 1999 to pro- Foreign direct investment flows duction restraints that, by late in the into the United States were robust in year, restored prices to their 1997 level the first quarter of this year as well. of about $20 per barrel. Subsequently, As in the past two years, direct investcontinued recovery of world demand, ment inflows have been elevated by combined with some supply disruptions, the extraordinary level of cross-border caused the WTI spot price to spike merger and acquisition activity. Portabove $34 per barrel during March of folio flows have also been affected this year, the highest level since the by this activity. For example, in recent Gulf War more than nine years earlier. years, many of the largest acquisitions Oil prices dropped back temporarily have been financed by swaps of equity in April, but in May and June the price in the foreign acquiring firm for equity of crude oil moved back up again, as in the U.S. firm being acquired. The demand was boosted further by strong Bureau of Economic Analysis estimates global economic activity and by rebuild- that US. residents acquired $123 biling of oil stocks. In late June, despite an lion of foreign equities in this way last announcement by OPEC that it would year. Separate data on market transboost production, the WTI spot price actions indicate that U.S. residents made reached a new high of almost $35 per net purchases of Japanese equities but barrel, but by early July the price had sold European equities. The latter sales settled back to about $30 per barrel. likely reflect a rebalancing of portfolios after stock swaps. U.S. direct investment in foreign economies has also Financial Account remained strong, exceeding $30 billion Capital flows in the first quarter of in the first quarter of 2000. Again, a 2000 continued to reflect the relatively significant portion of this investment strong performance of the U.S. economy was associated with cross-border merger and transactions associated with global activity. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 75 Capital inflows from foreign official a bit slower than the rapid pace that sources in the first quarter of this year prevailed from 1996 to 1999. However, were sizable—$20 billion, compared employment gains in the services induswith $43 billion for all of 1999. As was try, particularly in business and health the case last year, the increase in foreign services, were smaller in the second official reserves in the United States in quarter than in the first while job cutthe first quarter was concentrated in a backs occurred in finance, insurance, relatively few countries. Partial data for and real estate after four and one-half the second quarter of 2000 show a small years of steady expansion. Nonetheless, official outflow. strong domestic demand for consumer durables and business equipment, along with support for exports from the pickup The Labor Market in economic activity abroad, led to a leveling off in manufacturing employ- Employment and Labor Supply ment over the first half of 2000 after The labor market in early 2000 contin- almost two years of decline. And, with ued to be characterized by substantial consumer spending brisk, employment job creation, a historically low level of at retail establishments, although flucunemployment, and sizable advances in tuating widely from month to month, productivity that have held labor costs remained generally on a solid uptrend in check. The rise in overall nonfarm over the first half. payroll employment, which totaled more The supply of labor increased slowly than Wi million over the first half of in recent years relative to the demand the year, was swelled by the federal for workers. The labor force particigovernment's hiring of intermittent pation rate was unchanged, on average, workers to conduct the decennial cen- at 67.1 percent from 1997 to 1999; sus. Apart from that temporary boost, that level was just 0.6 percentage point which accounted for about one-fourth of higher than at the beginning of the the net gain in jobs between December expansion in 1990. The stability of and June, nonfarm payroll employment the participation rate over the 1997-99 increased an average of 190,000 per period was somewhat surprising because month, somewhat below the robust pace the incentives to enter the workforce of the preceding four years. seemed powerful: Hiring was strong, Monthly changes in private payrolls real wages were rising more rapidly were uneven at times during the first than earlier in the expansion, and indihalf of the year, but, on balance, the viduals perceived that jobs were plentipace of hiring, while still solid, appears ful. However, the robust demand for to have moderated between the first and new workers instead led to a substantial second quarters. In some industries, decline in unemployment, and the civilsuch as construction, the pattern appears ian jobless rate fell from 5V* percent at to have been exaggerated by unseason- the beginning of 1997 to just over 4 perably high levels of activity during the cent at the end of 1999. winter that accelerated hiring that typi- This year, the labor force particically would have occurred in the spring. pation rate ratcheted up sharply over After a robust first quarter, construction the first four months of the year before employment declined between April and dropping back in recent months as June; on average, hiring in this industry employment slowed. The spike in parover the first half of the year was only ticipation early this year may have been Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

76 87th Annual Report, 2000 a response to ready availability of job cost series, which has shown higher opportunities, but Census hiring may rates of increase than the ECI in recent also have temporarily attracted some years, slowed in the first quarter of this individuals into the workforce. On net, year. For the nonfarm business sector, growth of labor demand and supply have compensation per hour in the first quarbeen more balanced so far this year, and ter was AVA percent higher than a year the unemployment rate has held near earlier; in the first quarter of 1999, the its thirty-year low of 4 percent. At mid- four-quarter change was 514 percent.3 year, very few signs of a significant Part of the acceleration in the ECI easing in labor market pressures have in the first quarter was the result of a surfaced. Employers responding to vari- sharp step-up in the wage and salary ous private surveys of business condi- component of compensation change. tions report that they have been unable While higher rates of straight-time pay to hire as many workers as they would were widespread across industry and like because skilled workers are in short occupational groups, the most striking supply and competition from other firms increase occurred in the finance, insuris keen. Those concerns about hiring ance, and real estate industry where the have persisted even as new claims for year-over-year change in wages and unemployment insurance have drifted salaries jumped from about 4 percent for up from very low levels in the past the period ending in December 1999 to several months, suggesting that some almost 8J/2 percent for the period ending employers may be making workforce in March of this year. The sudden spike adjustments in response to slower eco- in wages in that sector could be related nomic activity. to commissions that are tied directly to activity levels in the industry and, thus, would not represent a lasting influence Labor Costs and Productivity on wage inflation. For other industries, Reports by businesses that workers are wages and salaries accelerated moderin short supply and that they are under ately, which might appear plausible in pressure to increase compensation to light of reports that employers are expebe competitive in hiring and retaining riencing shortages of some types of employees became more intense early skilled workers. However, the uptrend this year. However, the available statisti- in wage inflation that surfaced in the cal indicators are providing somewhat first-quarter ECI has not been so readily mixed and inconsistent signals of apparent in the monthly data on average whether a broad acceleration in wage hourly earnings of production or nonand benefit costs is emerging. Hourly supervisory workers, which are availcompensation, as measured by the able through June. Although average employment cost index (ECI) for pri- hourly earnings increased at an annual vate nonfarm businesses, increased rate of 4 percent between December and sharply during the first quarter to a level June, the June level of hourly wages more than AV2 percent above a year earlier. Before that jump, year-over-year changes in the ECI compensation series 3. The figures for compensation per hour in had remained close to 3V2 percent for the nonfinancial corporate sector are similar: an increase of about 4 percent for the year ending in three years. However, an alternative the first quarter of this year compared with almost measure of compensation per hour, cal- 5Vi percent for the year ending in the first quarter culated as part of the productivity and of 1999. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 11 stood 33/4 percent higher than a year compensation may capture more of the earlier, the same as the increase between non-wage costs that employers incur, June 1998 and June 1999. but even for that series, the best esti- While employers in many industries mates of employer compensation costs appear to have kept wage increases are available only after business reports moderate, they may be facing greater for unemployment insurance and tax pressures from rising costs of employee records are tabulated and folded into the benefits. The ECI measure of benefit annual revisions of the national income costs rose close to 2>Vi percent during and product accounts. 1999, a percentage point faster than dur- Because businesses have realized ing 1998; these costs accelerated sharply sizable gains in worker productivity, further in the first quarter of this year to compensation increases have not gena level 5Vi percent above a year earlier. erated significant pressure on overall Much of last year's pickup in benefit costs of production. Output per hour costs was associated with faster rates of in the nonfarm business sector posted increase in employer contributions to another solid advance in the first quarhealth insurance, and the first-quarter ter, rising to a level 33/4 percent above ECI figures indicated another step-up in a year earlier and offsetting much of this component of costs. Private survey the rise in hourly compensation over information and available measures of the period. For nonfinancial corprices in the health care industry suggest porations, the subset of the nonfarm that the upturn in the employer costs of business sector that excludes types of health care benefits is associated with businesses for which output is measured both higher costs of health care and less directly, the 4 percent year-overemployers' willingness to offer attrac- year increase in productivity held unit tive benefit packages in order to com- labor costs unchanged. pete for workers in a tight labor market. With the further robust increases in Indeed, employers have been reporting labor productivity recently, the average that they are enhancing compensation rise in output per hour in the nonfarm packages with a variety of benefits in business sector since early 1997 has order to hire and retain employees. stepped up further to 3 percent from the Some of these offerings are included 2 percent pace of the 1995-97 period. in the ECI; for instance, the ECI report What has been particularly impressive is for the first quarter noted a pickup in that the acceleration of productivity in supplemental forms of pay, such as the past several years has exceeded the overtime and nonproduction bonuses, pickup in output growth over the period and in paid leave. However, other bene- and, thus, does not appear to be simply a fits cited by employers, including stock cyclical response to more rapidly rising options, hiring and retention bonuses, demand. Rather, businesses are likely and discounts on store purchases, are realizing substantial and lasting paynot measured in the ECI.4 The pro- offs from their investment in equipment ductivity and costs measure of hourly and processes that embody the technological advances of the past several years. 4. Beginning with publication of the ECI for June 2000, the Bureau of Labor Statistics plans to expand the definition of nonproduction bonuses in and salary measure underlying the data on comthe ECI to include hiring and retention bonuses. pensation per hour calculated for the productivity These payments are already included in the wage and cost series. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

78 87th Annual Report, 2000 Prices sonal consumption expenditures (PCE) jumped at an annual rate of 35 percent Rates of increase in the broader mea- in the first quarter of 2000; the firstsures of prices moved up further in early quarter rise in the energy component of 2000. After having accelerated from the CPI was similar. 1 percent during 1998 to IV2 percent Swings in energy prices continued to last year, the chain-type price index for have a noticeable effect on overall mea- GDP—prices of goods and services that sures of consumer prices in the second are produced domestically—increased quarter. After world oil prices dropped at an annual rate of 3 percent in the back temporarily in the spring, the first quarter of this year. The upswing domestic price of motor fuel dropped in in inflation for goods and services April and May, and consumer prices for purchased by consumers, businesses, energy, as measured by the CPI, retraced and governments has been somewhat some of the first-quarter increase. As a greater: The chain-type price index for result, the overall CPI was little changed gross domestic purchases rose at an over the two months. However, with annual rate of V/2 percent in the first prices of crude oil having climbed again, quarter after having increased about the bounceback in prices of motor fuel 2 percent during 1999 and just 3A per- led to a sharp increase in the CPI for cent during 1998. energy in June. In addition, with strong The pass-through of the steep rise in demand pressing against available supthe cost of imported crude oil that began plies, consumer prices of natural gas in early 1999 and continued into the first continued to rise rapidly in the second half of this year has been the principal quarter. In contrast to the steep rise factor in the acceleration of the prices in energy prices, the CPI for food has of goods and services purchased. The risen slightly less than other non-energy effect of higher energy costs on domes- prices so far this year. tic prices has been most apparent in Higher petroleum costs also fed indexes of prices paid by consumers. through into higher producer costs for After having risen 12 percent during a number of intermediate materials. Ris- 1999, the chain-type price index for ing prices for inputs such as chemicals energy items in the price index for per- and paints contributed importantly to Alternative Measures of Price Change Percent, annual rate 1997:Q4 1998:Q4 1999:Q4 Price measure to to to 1998:Q4 1999:Q4 2000.-Q1 Chain-type Gross domestic product 1.0 1.6 3.0 Gross domestic purchases .7 1.9 3.5 Personal consumption expenditures .9 2.0 3.5 Excluding food and energy 1.3 1.5 2.2 Fixed-weight Consumer price index 1.5 2.6 4.0 Excluding food and energy 2.4 2.1 2.3 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

Monetary Policy Reports, July 79 the acceleration in the producer price half of this year. The CPI continued to index for intermediate materials exclud- register steep declines for household ing food and energy from about 13A per- electronic goods and computers, but cent during 1999 to an annual rate of prices of other types of consumer dura- 3!/2 percent over the first half of this bles have increased, on net, so far this year. Upward pressure on input prices year. The rate of increase in the prices was also apparent for construction of non-energy consumer services has materials, although these have eased also been somewhat faster; the CPI for more recently. Prices of imported indus- these items increased at an annual trial supplies also picked up early this rate of 3V2 percent during the first two year owing to higher costs of petroleum quarters of this year compared with a inputs. rise of 23A percent in 1999. Larger Core consumer price inflation has also increases in the CPI measures of rent been running a little higher so far this and of medical services have contribyear. The chain-type price index for per- uted importantly to this acceleration. sonal consumption expenditures other Another factor has been a steeper rise than food and energy increased at an in airfares, which have been boosted in annual rate of 2lA percent in the first part to cover the higher cost of fuel. quarter compared with an increase of In addition to slightly higher core IV2 percent during 1999. Based on the consumer price inflation, the national monthly estimates of PCE prices in income and product accounts measure April and May, core PCE price inflation of prices for private fixed investment looks to have been just a little below goods shows that the downtrend in its first-quarter rate. After having risen prices for business fixed investment just over 2 percent between the fourth items has been interrupted. Most notaquarter of 1998 and the fourth quarter bly, declines in the prices of computing of 1999, the CPI excluding food and equipment became much smaller in the energy increased at an annual rate of final quarter of last year and the first 2lA percent in the first quarter of 2000 quarter of this year. A series of disrupand at a 23A percent rate in the second tions to the supply of component inputs quarter. In part, the rise in core inflation to computing equipment has combined likely reflects the indirect effects of with exceptionally strong demand to higher energy costs on the prices of a cut the rate of price decline for comvariety of goods and services, although puters, as measured by the chain-type these effects are difficult to quantify with price index, to an annual rate of 12 perprecision. Moreover, prices of non-oil cent late last year and early this year— imported goods, which had been declin- half the pace of the preceding three and ing from late 1995 through the middle one-half years. At the same time, prices of last year, continued to trend up early of other types of equipment and softthis year. ware continued to be little changed, The pickup in core inflation, as mea- and the chain-type index for nonresidensured by the CPI, has occurred for both tial structures investment remained on consumer goods and services. Although a moderate uptrend. In contrast, the furprice increases for nondurable goods ther upward pressure on construction excluding food and energy moderated, costs at the beginning of the year conprices of consumer durables, which tinued to push the price index for resihad fallen between 1996 and 1999, were dential construction higher; after having little changed, on balance, over the first accelerated from 3 percent to 3lA per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

80 87th Annual Report, 2000 cent between 1998 and 1999, this index have occasionally dampened flows in increased at an annual rate of 4V4 per- the corporate bond market and have cent in the first quarter of 2000. weighed on the equity market, which Although actual inflation moved a has, at times, experienced considerable bit higher over the first half of 2000, volatility. Through mid-July, the broadinflation expectations have been little based Wilshire 5000 equity index was changed. Households responding to the up approximately 3 percent for the Michigan SRC survey in June were year. sensitive to the adverse effect of higher energy prices on their real income but Interest Rates seemed to believe that the inflationary shock would be short-lived. The median As the year began, with worries related of their expected change in CPI infla- to the century date change out of the tion over the coming twelve months was way, participants in the fixed-income 2.9 percent. Moreover, they remained market turned their attention to the signs optimistic that inflation would remain of continued strength in domestic labor at about that rate over the longer run, and product markets, and they quickly reporting a 2.8 percent median of priced in the possibility of a more expected inflation during the next five aggressive tightening of monetary polto ten years. In both instances, their icy. Both private and Treasury yields expectations are essentially the same rose considerably. In the latter part of as at the end of 1999, although the year- January, however, Treasury yields plumahead expectations are above the lower meted, especially those on longer-dated levels that had prevailed in 1997 and securities, as the announced details of early 1998. the Treasury's debt buy back program and upwardly revised forecasts of federal budget surpluses led investors U.S. Financial Markets to focus increasingly on the prospects Conditions in markets for private credit for a diminishing supply of Treasury firmed on balance since the end of 1999. securities. A rise in both nominal and Against a backdrop of continued eco- inflation-indexed Treasury yields in nomic vitality in the United States and response to strong economic data and a tighter monetary policy stance, pri- tighter monetary policy in April and vate borrowing rates are higher, on net, May was partly offset by supply factors particularly those charged to riskier and by occasional safe haven flows from borrowers. In addition, banks have the volatile equity market. Since late tightened terms and standards on most May, market interest rates have declined types of loans. Higher real interest as market participants have interpreted rates—as measured based on inflation the incoming economic data as evidence expectations derived from surveys and that monetary policy might not have from yields on the Treasury's inflation- to be tightened as much as had been indexed securities—account for the bulk previously expected. On balance, while of the increase in interest rates this Treasury bill rates and yields on shorteryear, with short-term real rates having dated notes have risen 15 to 80 basis increased the most. Rising market inter- points since the beginning of the year, est rates and heightened uncertainties intermediate- and long-term Treasury about corporate prospects, especially yields have declined 5 to 55 basis points. with regard to the high-tech sector, In the corporate debt market, by con- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 81 trast, bond yields have risen 10 to yields over the yield on the ten-year 70 basis points so far this year. Treasury note would suggest that con- Forecasts of steep declines in the ditions in the corporate bond market so supply of longer-dated Treasuries have far in 2000 are worse than those during combined with tighter monetary policy the financial market turmoil of 1998. In conditions to produce an inverted Trea- contrast, the spread of the BBB yield sury yield curve, starting with the two- over the ten-year swap rate paints a very year maturity. In contrast, yield curves different picture, with spreads up this elsewhere in the U.S. fixed-income mar- year but below their peaks in 1998. ket generally have not inverted. In the Although the swap market is still not as interest rate swap market, for instance, liquid as the Treasury securities market, the yield curve has remained flat to and swap rates are occasionally subject upward sloping for maturities as long to supply-driven distortions, such disas ten years, and the same has been true tortions have been less pronounced and for yield curves for the most actively more short-lived than those affecting the traded corporate bonds.5 Nonetheless, Treasury securities market of late, makprivate yield curves are flatter than ing swap rates a better benchmark for usual, suggesting that, although supply judging the behavior of other corporate considerations have played a potentially yields. important role in the inversion of the Aware that distortions to Treasury Treasury yield curve this year, inves- yields are likely to become more protors' forecasts of future economic con- nounced as more federal debt is paid ditions have also been a contributing down, market participants have had factor. In particular, private yield curves to look for alternatives to the pricing are consistent with forecasts of a mod- and hedging roles traditionally played eration in economic growth and expecta- by Treasuries in U.S. financial martions that the economy will be on a kets. In addition to interest rate sustainable, non-inflationary track, with swaps, which have featured promilittle further monetary policy tightening. nently in the list of alternatives to The disconnect between longer-term Treasuries, debt securities issued by the Treasury and private yields as a con- three government-sponsored housing sequence of supply factors in the Trea- agencies—Fannie Mae, Freddie Mac, sury market is distorting readings from and the Federal Home Loan Banks— yield spreads. For instance, taken at have been used in both pricing and face value, the spread of BBB corporate hedging. The three housing agencies have continued to issue a substantial volume of debt this year in an attempt to 5. A typical interest rate swap is an agreement between two parties to exchange fixed and vari- capture benchmark status, and the introable interest rate payments on a notional principal duction in March of futures and options amount over a predetermined period ranging from contracts based on five- and ten-year one to thirty years. The notional amount itself is notes issued by Fannie Mae and Freddie never exchanged. Typically, the variable interest Mac may help enhance the liquidity of rate is the London Interbank Offered Rate (LIBOR), and the fixed interest rate—called the the agency securities market. Nonetheswap rate—is determined in the swap market. The less, the market for agency debt has overall credit quality of market participants is been affected by some uncertainty this high, typically A or above; those entities with year regarding the agencies' special credit ratings of BBB or lower are generally either rejected or required to adopt credit-enhancing relationship with the government. Both mechanisms, typically by posting collateral. the Treasury and the Federal Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

82 87th Annual Report, 2000 have suggested that it would be appro- age maturity of its portfolio while conpriate for the Congress to consider tinuing to meet long-run reserve needs whether the special standing of these to the greatest extent possible through institutions continues to promote the outright purchases of Treasury securipublic interest, and pending legislation ties.6 The SOMA will cap the rollover would, among other things, restructure of its existing holdings at Treasury aucthe oversight of these agencies and reex- tions and will engage in secondary maramine their lines of credit with the U.S. ket purchases according to a schedule Treasury. that effectively will result in a greater The implementation of monetary pol- percentage of holdings of shorter-term icy, too, has had to adapt to the antici- security issues than of longer-dated pated paydowns of marketable federal ones. The schedule ranges from 35 perdebt. Recognizing that there may be cent of an individual issue for Treasury limitations on its ability to rely as much bills to 15 percent for longer-term as previously on transactions in Trea- bonds. These changes were announced sury securities to meet the reserve needs to the public on July 5, replacing a proof depositories and to expand the supply cedure in which all maturing holdings of currency, the FOMC decided at its were rolled over and in which coupon March 2000 meeting to facilitate until purchases were spread evenly across the its first meeting in 2001 the Trading yield curve. Desk's ability to continue to accept a broader range of collateral in its repur- Equity Prices chase transactions. The initial approvals Major equity indexes have posted small to help expand the collateral pool were gains so far this year amid considergranted in August 1999 as part of the able volatility. Fluctuations in tech- Federal Reserve's efforts to better mannology stocks have been particularly age possible disruptions to financial pronounced: After having reached a markets related to the century date record high in March—24 percent above change. its 1999 year-end value—the Nasdaq At the March 2000 meeting, the Comcomposite index, which is heavily mittee also initiated a study to consider weighted toward technology shares, alternative asset classes and selection swung widely and by mid-July was criteria that could be appropriate for the up 5 percent for the year. Given its System Open Market Account (SOMA) surge in the second half of 1999, the should the size of the Treasury securimid-July level of the Nasdaq was ties market continue to decline. For the about 60 percent above its mid-1999 period before the completion and review reading. The broader S&P 500 and of such a study, the Committee discussed, at its May meeting, some changes in the management of the Sys- 6. The FOMC prefers a portfolio with a short tem's portfolio of Treasury securities in average maturity because the higher turnover rate an environment of decreasing Treasury of such a portfolio gives it greater flexibility to debt. The changes aim to prevent the redeem securities in times of financial market System from coming to hold high and stress, which may require substancial decreases in rising proportions of new Treasury debt the securities portfolio over a relatively short period, such as during an acute banking crisis issues. They will also help the SOMA to that invovles heavy lending through the discount limit any further lengthening of the aver- window. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 83 Wilshire 5000 indexes have risen close Debt and the Monetary Aggregates to 3 percent since the beginning of the year and are up about 10 percent Debt and Depository Intermediation and 13 percent, respectively, from mid- 1999. The total debt of the U.S. household, Corporate earnings reports have, for government, and nonfinancial business the most part, exceeded expectations, sectors is estimated to have increased at and projections of future earnings con- close to a 5V2 percent annual rate in the tinue to be revised higher. However, first half of 2000. Outside the federal the increase in interest rates since the government sector, debt expanded at beginning of the year likely has an annual rate of roughly 9!/2 percent, restrained the rise in equity prices. In buoyed by strength in household and addition, growing unease about the business borrowing. Continued declines lofty valuations reached by technology in federal debt have helped to ease the shares and rising default rates in the pressure on available savings and have corporate sector may have given some facilitated the rapid expansion of noninvestors a better appreciation of the federal debt outstanding: The federal risks of holding stocks in general. government paid down $218 billion Reflecting the uncertainty about the of debt over the first half of 2000, future course of the equity market, compared with paydowns of $56 bilexpected and actual volatilities of stock lion and $101 billion in the first six returns rose substantially in the spring. months of calendar years 1998 and 1999 At that time, volatility implied by respectively. options on the Nasdaq 100 index sur- Depository institutions have continpassed even the elevated levels reached ued to play an important role in meeting during the financial market turmoil of the strong demands for credit by busi- 1998. nesses and households. Adjusted for Higher volatility and greater investor mark-to-market accounting rules, credit caution had a marked effect on public extended by commercial banks rose equity offerings. The pace of initial UVi percent in the first half of 2000. public offerings has fallen off consider- This advance was paced by a brisk ably in recent months from its brisk expansion of loans, which grew at an first-quarter rate, with some offerings annual rate of nearly 13 percent over being canceled or postponed and others this period. Bank credit increased in part being priced well short of earlier expec- because some businesses sought bank tations. On the other hand, households' loans as an alternative to a less receptive enthusiasm for equity mutual funds, corporate bond market. In addition, especially those funds that invest in the the underlying strength of household technology and international sectors, spending helped boost the demand for remains relatively high, although it consumer and mortgage loans. Banks' appears to have faded some after the holdings of consumer and mortgage run-up in stock market volatility in the loans were also supported by a slower spring. Following a first-quarter surge, pace of securitizations this year. In the net inflows to stock funds moder- housing sector, for instance, the rising ated substantially in the second quarter interest rate environment has kept the but still were above last year's average demand for adjustable-rate mortgages pace. relatively elevated, and banks tend to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

84 87th Annual Report, 2000 hold these securities on their books and have restrained flows into M2 in rather than securitize them. favor of longer-term mutual funds and Banks have tightened terms and stan- direct holdings of market instruments. dards on loans further this year, espe- M3 expanded at an annual rate of cially in the business sector, where some 9 percent in the first half of 2000, up lenders have expressed concerns about a from IVi percent for all of 1999. The more uncertain corporate outlook. Bank robust expansion of bank credit underregulators have noted that depository lies much of the acceleration in M3 this institutions need to take particular care year. Depository institutions have issued in evaluating lending risks to account large time deposits and other managed for possible changes in the overall liabilities in volume to help fund the macroeconomic environment and in expansion of their loan and securities conditions in securities markets. portfolios. In contrast, flows to institutional money funds slowed from the rapid pace of late 1999 after the height- The Monetary Aggregates ened preference for liquid assets ahead Growth of the monetary aggregates of the century date change ebbed. over the first half of 2000 has been As has been the case since 1994, buffeted by several special factors. The depository institutions have continued unwinding of the buildups in liquidity to implement new retail sweep prothat occurred in late 1999 before the grams over the first half of 2000 in century date change depressed growth order to avoid having to hold nonin the aggregates early this year. Sub- interest-bearing reserve balances with sequently, M2 rebounded sharply in the Federal Reserve System. As a result, anticipation of outsized tax payments required reserve balances are still dein the spring and then ran off as those clining gradually, adding to concerns payments cleared. On net, despite the that, under current procedures, low cumulative firming of monetary policy balances might adversely affect the since June 1999, M2 expanded at a implementation of monetary policy by relatively robust, 6 percent, annual rate eventually leading to increased volatilduring the first half of 2000—the same ity in the federal funds market. The pace as in 1999—supported by the rapid pending legislation that would allow expansion of nominal spending and the Federal Reserve to pay interest on income. balances held at Reserve Banks would M2 velocity—the ratio of nominal likely lead to a partial unwinding over income to M2—has increased over the time of the ongoing trend in retail sweep first half of this year, consistent with programs. its historical relationship with the interest forgone ("opportunity cost") from International Developments holding M2. As usual, rates offered on many of the components of M2 have not In the first half of 2000, economic activtracked the upward movement in market ity in foreign economies continued the interest rates, and the opportunity cost strong overall performance that was regof holding M2 has risen. In response, istered last year. With a few exceptions, investors have reallocated some of most emerging-market countries contintheir funds within M2 toward those ued to show signs of solid recoveries components whose rates adjust more from earlier recessions, supported by quickly—such as small time deposits— favorable financial market conditions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 85 Average real GDP in the foreign indus- continued to make good gains, German trial countries accelerated noticeably stocks did less well, and U.K. stocks in the first half of this year after a mild slipped. Japanese shares also were down slowdown in late 1999. The pickup substantially, even though the domestic reflected in large part better performance economy showed some signs of firmer of Japanese domestic demand (although activity. In general, price volatility its sustainability has been questioned) of foreign high-tech stocks or stock and further robust increases in Europe indexes weighted toward technologyand Canada. In many countries, eco- intensive sectors was quite high and nomic slack diminished, heightening exceeded that of corresponding broader concern about inflation risks. Higher oil indexes. prices bumped up broad measures of The dollar continued to strengthen inflation almost everywhere, but mea- during most of the first half of the sures of core inflation edged up only year. It appeared to be supported mainly modestly, if at all. by continuing positive news on the per- Monetary conditions generally were formance of the U.S. economy, higher tightened in foreign industrial countries, U.S. short-term interest rates, and for as authorities removed stimulus by rais- much of the first half, expectations of ing official rates. Yield curves in several further tightening of monetary policy. key industrial countries tended to flat- Early in the year, the attraction of high ten, as interest rates on foreign long- rates of return on U.S. equities may have term government securities declined been an additional supporting factor, but on balance after January, reversing an the dollar maintained its upward trend upward trend seen since the second even after U.S. stock prices leveled off quarter of 1999. Yields on Japanese near the end of the first quarter and then government long-term bonds edged declined for a while. In June, the dollar upward slightly, but at midyear still eased back a bit against the currencies were only about PA percent. of some industrial countries amid signs Concerns in financial markets at the that U.S. growth was slowing. Nevertheend of last year about potential disrup- less, for the year so far, the dollar is up tions during the century date change on balance about 53A percent against dissipated quickly, and global markets the major currencies; against a broader in the early months of this year returned index of trading-partner currencies, the to the comparatively placid conditions dollar has appreciated about 3 3A percent seen during most of 1999. Starting in on balance. mid-March, however, global financial The dollar has experienced a particumarkets were jolted by several episodes larly large swing against the euro. The of increased volatility set off typically euro started this year already down more by sudden downdrafts in U.S. Nasdaq than 13 percent from its value against prices. At that time, measures of market the dollar at the time when the new risk for some emerging-market coun- European currency was introduced in tries widened, but they later retraced January 1999, and it continued to depremost of these increases. The perfor- ciate during most of the first half of mances of broad stock market indexes 2000, reaching a record low in May. in the industrial countries were mixed, During this period, the euro seemed but they generally tended to reflect their to be especially sensitive to news and respective cyclical positions. Stocks in public commentary by officials about Canada, France, and Italy, for example, the strength of the expansion in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

86 87th Annual Report, 2000 euro area, the pace of economic reform, Compared with its fluctuations and the appropriate macroeconomic against the euro, the dollar's value was policy mix. Despite a modest recovery more stable against the Japanese yen in recent weeks, the euro still is down during the first half of 2000. In late against the dollar almost 7 percent on 1999, private domestic demand in Japan balance for the year so far and about slumped badly, even though the Bank of 33/4 percent on a trade-weighted basis. Japan continued to hold its key policy The euro's persistent weakness posed rate at essentially zero. Several times a challenge for authorities at the Euro- during the first half of this year, the yen pean Central Bank as they sought to experienced strong upward pressure, implement a policy stance consistent often associated with market percepwith their official inflation objective tions that activity was reviving and with (2 percent or less for harmonized con- speculation that the Bank of Japan soon sumer prices) without threatening the might abandon its zero-interest-rate poleuro area's economic expansion. Sup- icy. This upward pressure was resisted ported in part by euro depreciation, eco- vigorously by Japanese authorities on nomic growth in the euro area in the first several occasions with sales of yen in half of 2000 was somewhat stronger foreign exchange markets. The Bank of than the brisk 3 percent pace recorded Japan continued to hold overnight interlast year. Investment was robust, and est rates near zero through the first half indexes of both business and consumer of 2000. sentiment registered record highs. The The Japanese economy, in fact, did average unemployment rate in the area show signs of stronger performance continued to move down to nearly 9 per- in the first half. GDP rose at an annual cent, almost a full percentage point rate of 10 percent in the first quarter, lower than a year earlier. At the end of with particular strength in private the first half, the euro-area broad mea- consumption and investment. Industrial sure of inflation, partly affected by production, which had made solid higher oil prices, was above 2 percent, gains last year, continued to expand while core inflation had edged up to at a healthy pace, and surveys indi- WA percent. Variations in the pace of cated that business confidence had economic expansion and the intensity picked up. Demand from the houseof inflation pressures across the region hold sector was less robust, however, added to the complexity of the situation as consumer confidence was held back confronting ECB policymakers even by historically high unemployment. A though Germany and Italy, two coun- large and growing outstanding stock of tries that had lagged the euro-area aver- public debt (estimated at more than age expansion of activity in recent years, 110 percent of GDP) cast increasing showed signs that they were beginning doubt about the extent to which authorito move ahead more rapidly. After hav- ties might be willing to use addiing raised its refinancing rate 50 basis tional fiscal stimulus to boost demand. points in November 1999, the ECB fol- Even though some additional governlowed with three 25-point increases in ment expenditure for coming quarters the first quarter and another 50-point was approved in late 1999, governincrease in June. The ECB pointed to ment spending did not supply stimprice pressures and rapid expansion of ulus in the first quarter. With core monetary aggregates as important con- consumer prices moving down at an siderations behind the moves. annual rate that reached almost 1 per- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Monetary Policy Reports, July 87 cent at midyear, deflation also remained with heightened financial market volatila concern. ity and rising interest rates in the indus- Economic activity in Canada so far trial countries. In general, financial this year slowed a bit from its very markets now appear to be identifying strong performance in the second half and distinguishing those emergingof 1999, but it still was quite robust, market countries with problems more generating strong gains in employment effectively than they did several years and reducing the remaining slack in the ago. economy. The expansion was supported In emerging Asia, the strong bounceby both domestic demand and spillovers back of activity last year from the crisisfrom the U.S. economy. Higher energy related declines of 1998 continued into prices pushed headline inflation to near the first half of this year. Korea, which the top of the Bank of Canada's 1 per- recorded the strongest recovery in the cent to 3 percent target range; core infla- region last year with real GDP rising tion remained just below Wi percent. at double-digit rates in every quarter, The Canadian dollar weakened some- has seen some moderation so far in what against the U.S. dollar in the first 2000. However, with inventories still half of the year even though the Bank being rebuilt, unemployment declining of Canada raised policy interest rates rapidly, and inflation snowing no signs 100 basis points, matching increases in of accelerating, macroeconomic con- U.S. rates. In the United Kingdom, the ditions remained generally favorable, Bank of England continued a round of and the won came under upward prestightening that started in mid-1999 by sure periodically in the first half of this raising official rates 25 basis points year. Nonetheless, the acute financial twice in the first quarter. After March, difficulties of Hyundai, Korea's largest indications that the economy was slow- industrial conglomerate, highlighted ing and that inflation pressures might the lingering effect on the corporate be ebbing under the effect of the and financial sectors of the earlier crisis tighter monetary stance and strength of and the need for further restructuring. sterling—especially against the euro— Economic activity in other Asian develallowed the Bank to hold rates con- oping countries that experienced diffistant. In recent months, sterling has culties in 1997 and 1998 (Thailand, depreciated on balance as official inter- Indonesia, Malaysia, Singapore, and the est rates have been raised in other major Philippines) also continued to firm this industrial countries. year, but at varying rates. Nonetheless, In developing countries, the strong financial market conditions have deterecovery of economic activity last year riorated in recent months for some counin both developing Asia and Latin tries in the region. In Indonesia and the America generally continued into the Philippines, declines in equity prices first half of 2000. However, after a fairly and weakness in exchange rates appear placid period that extended into the to have stemmed from heightened marfirst few months of this year, financial ket concerns over political instability market conditions in some developing and prospects for economic reform. Outcountries became more unsettled in the put in China increased at near double- April-May period. In some countries, digit annual rates in the second half of exchange rates and equity prices last year and remained strong in the first weakened and risk spreads widened, as half of this year, boosted mainly by increased political uncertainty interacted surging exports. In Hong Kong, real Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

88 87th Annual Report, 2000 GDP rose at an annual rate of more cent, boosted by strong exports to the than 20 percent in the first quarter of this United States, soaring private investyear after a strong second half in 1999. ment, and increased consumer spending. Higher consumer confidence appears Mexican equity prices and the peso to have boosted private consumption, encountered some downward pressure and trade flows through Hong Kong, in the approach of the July 2 national especially to and from China, have election, but once the election was perincreased. ceived to be fair and the transition of The general recovery seen last year power was under way, both recovered in Latin America from effects of the substantially. In Argentina, the pace of emerging-market financial crisis ex- recovery appears to have slackened in tended into the first part of this year. the early part of this year, as the gov- In Brazil, inflation was remarkably well ernment's fiscal position and, in particucontained, and interest rates were low- lar, its ability to meet the targets of ered, but unemployment has remained its International Monetary Fund prohigh. An improved financial situation gram remained a focus of market conallowed the Brazilian government to cern. Heightened political uncertainty in repay most of the funds obtained under Venezuela, Peru, Colombia, and Ecuaits December 1998 international sup- dor sparked financial market pressures port package. However, Brazilian finan- in recent months in those countries, too. cial markets showed continued volatility In January, authorities in Ecuador this year, especially at times of height- announced a program of "dollarizaened market concerns over the status of tion," in which the domestic currency fiscal reforms, and risk premiums wid- would be entirely replaced by U.S. dolened in the first half of 2000 on balance. lars. The program, now in the process of In Mexico, activity has been strong so implementation, appears to have helped far this year. In the first quarter, real stabilize financial conditions there. • GDP surged at an annual rate of 11 per- 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

91 Consumer and Community Affairs In 2000 the Board continued its work (www.federalreserve.gov/pubs/leasing). in several key areas of consumer The program provides consumers with and community affairs—preparing and a basic understanding of how leasing interpreting consumer banking-related works and a means for calculating how issues; providing information to audi- lease terms affect the cost of the ences that include consumers, commu- monthly lease payment. nity groups, financial institutions, and small businesses; and supervising state member banks for compliance with the Regulatory Matters federal consumer banking and civil The Board has responsibility for rights laws. In conjunction with these implementing federal laws concerning activities, the Board worked to impleconsumer financial services and fair ment various provisions of the Grammlending. In addition to rulemakings Leach-Bliley (GLB) Act. involving Regulations C (Home Mort- Regulatory efforts to implement the gage Disclosure) and Z (Truth in Lend- GLB Act included issuing two new ing), the Board issued new regulations regulations and revising one. The new implementing provisions of the GLB rules, Regulations P and G, deal respec- Act, in cooperation with other federal tively with the privacy of consumers' regulatory agencies. financial information and the reporting In June the Board published Regulaand disclosing of certain agreements tion P, which governs the privacy of under the legislation's Community Reinconsumer financial information under vestment Act (CRA) "sunshine" provi- title V of the GLB Act.1 Regulation P sion. Revisions to Regulation H target requires a financial institution to provide the adoption of consumer protection notice to customers about its privacy rules for the retail sale of insurance and policies and practices and describes the annuities by state member banks. Nonconditions under which a financial instiregulatory efforts to implement the GLB tution may disclose nonpublic personal Act included the extension of the CRA information about consumers to nonexamination frequency for small banks. affiliated third parties. Also, under the The Board also engaged in significant regulation, consumers may direct a efforts in other areas. One of these financial institution not to disclose that efforts was related to the predatory lendinformation to most nonaffiliated third ing hearings the Board held in several parties by "opting out," subject to cercities around the country (see box). tain exceptions. Another was a System initiative to help In September the Board published revitalize an important business corridor revisions to Regulation Z to revise the in the District of Columbia (see box). Additionally, to promote consumer financial education, the Board created 1. The other federal bank and thrift regulatory agencies—together with the Securities and a computer-based program on vehicle Exchange Commission, the National Credit leasing that may be downloaded Union Administration, and the Federal Trade from the Board's Internet web site Commission—issued comparable rules. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

92 87th Annual Report, 2000 Abusive Practices in Home Equity Lending Abusive practices in home equity lending prepayment penalties). HOEPA also proreceived significant attention from the hibits creditors from engaging in a pattern Board and other regulatory agencies during or practice of making high-cost loans withthe year. Information about abusive lend- out regard to the borrower's ability to make ing practices is essentially anecdotal, but the scheduled payments. the frequency of reports from a wide range The volume of home equity lending has of sources clearly suggests that a problem increased significantly in the past few exists. The reports indicate that abusive years. Much of this increased lending practices are frequently targeted at elderly, can be ascribed to the rapid growth of the female, or minority borrowers and can subprirne mortgage market, which provides result in the consumer's losing much of the access to credit to consumers who do not equity in the home or even the home itself. meet underwriting criteria for "prime'* "Predatory lending" consists of a vari- loans. Based on data reported under the ety of practices that typically involve at Home Mortgage Disclosure Act, the numleast one of the following abuses: (1) mak- ber of loans made by lenders that specialing loans based on the borrower's equity in ize in subprime loans increased about the home rather than on the borrower's six-fold between 1994 and 1999—from ability to repay the debt, (2) inducing a 138,000 to roughly 856,000. The greater borrower to refinance a loan repeatedly, availability of credit to subprime borrowers charging high fees each time, and (3) using is a positive development, but continuing fraud or deception to conceal the true reports of abusive practices raise concerns nature of the loan obligation from an that there has been a corresponding unsuspecting or unsophisticated borrower. increase in predatory loans. To address abusive practices in high-cost During the summer of 2000, the Board home equity loans, the Congress in 1994 held public hearings in Charlotte, Boston, enacted the Home Ownership and Equity Chicago, and San Francisco to consider Protection Act (HOEPA) as part of the how it might use its regulatory authority to Truth in Lending Act. HOEPA requires deter predatory practices in home equity additional disclosures for home equity lending. The hearings focused on expandloans bearing rates or fees above a certain ing the scope of mortgage loans covered by percentage or amount and also imposes HOEPA, prohibiting specific acts and praclimitations on certain terms (for example, tices that lead to abuses, improving conrestricting short-term balloon notes and sumer disclosures, and educating consumdisclosure requirements for credit and type and must appear under a separate charge cards. Under the Fair Credit and heading from other APRs that may Charge Card Disclosure Act of 1988, apply, such as penalty rates. Disclosures direct mail and other solicitations and must be in a reasonably understandable applications to open card accounts must form readily noticeable to consumers, disclose the annual percentage rate and they must include the APRs for cash (APR) and other cost information, gen- advances and balance transfers as well erally in the form of a table. Under the as balance transfer fees. Board's revised rules, the APR for In November the Board revised Regpurchases must be in at least 18-point ulation H to adopt consumer protec- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 93 ers. The Board received testimony from loans to strengthen HOEPA s prohibiinvited panelists and comments from mem- tion against loans made without regard bers of the public. to the consumer's ability to repay, and During the hearings and in the comment (4) enhance disclosures provided to conletters, most creditors and others involved sumers before closing certain HOEPAin mortgage lending generally opposed covered loans. expanding the scope of mortgage loans Other initiatives are under way to covered by HOEPA. They expressed con- address predatory lending: cern about the potential for reducing the availability of credit in the subprime mar- • Bills have been introduced in the Conket if more loans become subject to gress, and several states have enacted or HOEPA and to additional restrictions. are considering legislation or regulations On the other hand, consumer repre- • A federal task force of ten federal agensentatives and community development cies and offices is working to establish a organizations, supported a broadening of coordinated approach to deter abusive HOEPAs scope. These commenters recom- and predatory practices and to enforce mended that the Board ban certain acts or existing laws that address such practices practices associated with predatory loans, • HUD and Treasury held five public such as prepayment penalties and balloon forums on predatory lending and issued a payments, single premium credit insurance, report in June 2000. The report contained and kioan flipping/' recommendations to the Congress for On December 26, 2000, the Board pub- legislative action and to the Board for lished proposed amendments to its Regu- using its regulatory authority lation Z to address high-cost loans. The • Fannie Mae and Freddie Mac developed amendments would (1) adjust the price guidelines to avoid purchasing predatory triggers used to determine HOEPA cover- loans and are working to develop conage and thereby expand the number of sumers' awareness of their credit options mortgage loans subject to HOEPA, (2) pro- • The Board is considering other strategies hibit certain acts and practices in home- to address predatory lending concerns, secured loans—for example, creditors such as community outreach and concould not engage in repeated refinancings sumer education. The Federal Reserve of their own HOEPA loans over a short has worked actively with financial institime period unless the transactions are tutions, consumer and community orgain the borrower's interest, (3) generally nizations, and other federal agencies to require creditors to document and verify discuss issues and identify possible steps a consumer's income for HOEPA-covered for mitigation of the problems. tion rules for the retail sale of insurance that the insurance or annuity is not a and annuities by state member banks, deposit or obligation of the depository thereby implementing section 305 of the institution and is not FDIC insured and GLB Act. The rules require depository that the depository institution may not institutions (and any person selling or condition an extension of credit on the offering insurance products or annuities consumer's purchase of insurance or an to consumers at an office of, or on behalf annuity from the financial institution or of, a depository institution), to make any of its affiliates. The disclosure must certain disclosures before completing a also note any investment risk associated sale. The disclosures inform consumers with the insurance product or annuity. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

94 87th Annual Report, 2000 The Upper Georgia Avenue Corridor: Economic Gateway to the District Let's not lose sight of the myriad of important activities of the vast majority of small businesses, especially in neighborhoods such as this [Georgia Avenue}, where they provide vital services to help the community prosper and grow. Alan Greenspan, Chairman, Board of Governors at the Georgia Avenue Business Resource Center Grand Opening August 10. 2000 Expanding the private sector ranks high est north-south thoroughfares and a major among ways to stimulate economic growth link between the District of Columbia and in the District of Columbia. District offi- Maryland. District and Maryland establishcials recognize the importance of the pri- ments with strong historical and employvate sector not only in the downtown cen- ment ties to the region border the corridor; ters but also in neighborhoods with small, they include the Walter Reed Army Medicommunity-based businesses that add sta- cal Center, a suburban Maryland central bility to the local economy. Accordingly, business district, sixty small businesses, the process of developing small businesses and colleges and universities. has brought new dimensions and new par- Over time, however, cross-border busiticipants to revitalization efforts in District ness issues, physical blight, and safety communities. concerns had diminished the corridor's Meetings hosted in 1999 by the Federal redevelopment potential. Not even the Reserve laid the groundwork for a variety combination of favorable regional access, of public-private partnerships, the type high transit volume, and a strong homeof cooperative effort that is vital to attract- ownership base could reverse or even ing investment and development in target stay the economic downturn of Georgia neighborhoods like the Georgia Avenue Avenue. corridor. By the fall of 2000, collaboration District officials studied the area's redeamong stakeholders produced the Georgia velopment needs and recommended that Avenue Business Resource Center; created partnerships across jurisdictions, including technical-assistance partnerships with the cooperative agreements with area lenders, District of Columbia, the U.S. Small Busi- businesses, universities, and neighborhoods ness Administration (SBA), and area uni- in Maryland and the District, were the key versities including the masters in business to successfully restoring upper Georgia administration (MBA) programs of George Avenue's status as the gateway to the Washington University, the University of District. the District of Columbia, Howard University, and Southeastern University; and A Meeting of the Minds established lending relationships with Riggs Bank, City First Bank (a certified In 1999 the Federal Reserve System began Community Development Financial Insti- participating in the District's planning for tution), and other local lenders. overall business development—before tne planning focused specifically on Georgia Avenue—and brought other major stake- Why Georgia Avenue? holders into the process. The upper Georgia Avenue commercial Alice M. Rivlin, then Vice Chair of corridor, in the Northwest quadrant of the Federal Reserve Board, and J. Alfred Washington, D.C., is one of the city's busi- Broaddus, Jr., President of the Federal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 95 Reserve Bank of Richmond, convened a Let the Record Show meeting in June 1999 to encourage privatesector participation in the District's busi- The business, government, and community ness development process. Among the par- linkages led relatively quickly to signifiticipants were the chief executive officers cant activity along the upper Georgia and senior officials of local governmental, Avenue corridor. The Georgia Avenue academic, community, and private-sector Business Resource Center was launched in organizations integral to community devel- 2000, with Federal Reserve Board Chairopment. At that meeting, Federal Reserve man Alan Greenspan joining local officials officials secured commitments from CEOs at the opening ceremonies on August 10. to take an active role in helping the District The resource center will be the first Dismeet its business development and financ- trict satellite office of the U.S. Small Busiing needs. ness Administration's One-Stop Capital The CEOs and other supporters next Shop. Developed through a joint venture attended a business forum hosted by the between the SBA and the District of Federal Reserve in July 1999. The forum Columbia, the One-Stop Capital Shop highlighted nationwide best practices and helps small businesses in the District obtain approaches to inner-city commercial rede- financial and technical assistance. The Disvelopment that could be adapted for use trict contributed initial funding for the in the District, including the Access to center's staff jointly with the District of Capital project in Cleveland. The Access to Columbia Chamber of Commerce. Capital project, facilitated by the Federal Volunteers and SBA representatives visit Reserve Bank of Cleveland, was under- the center weekly to discuss SBA loan taken to improve the success rate of the guarantee programs and support services city's new and growing businesses by for small businesses. Loan officers from matching resource providers to business local banks conduct seminars on financial needs. services and meet with clients on bank In the fall Richmond Reserve Bank products and programs. Clients that are president Broaddus and Federal Reserve initially unbankable receive assistance in Board Member Edward Gramlich, who business planning, marketing, grant writchairs the Federal Reserve Board's Over- ing, and other business development areas sight Committee on Consumer and Com- from MBA students at area universities. munity Affairs, met with District leaders to By winter 2001 the DC Chamber of discuss a project based on the Cleveland Commerce plans to launch a mentorship model. At this meeting, District officials program that will match new, growing, or and their partners decided to focus initial troubled businesses with established busirecovery efforts on Georgia Avenue, and ness members of the Chamber for ongoing all agreed to start with the small businesses technical assistance. The Georgia Avenue that once contributed significantly to the Business Resource Center also plans economic health of the community. to partner with the Foundation for Inter- The discussions were the catalyst that national Community Assistance, another brought to life the small-business features Community Development Financial Instiof the District's economic resurgence plan. tution, to provide micro-loan support and The resulting public-private partnerships credit counseling. helped the District identify ways to make The Upper Georgia Avenue project illuscapital available to community-based and trates the extent to which local revitalizaemerging businesses in general and along tion initiatives can benefit from efforts to the Georgia Avenue corridor in particular. mobilize all elements of the community. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

96 87th Annual Report, 2000 In December the Board published • Requiring lenders to report home Regulation G to implement the sunshine equity lines of credit requirements; comparable rules were • Expanding coverage of nondepository issued by the other federal bank and lenders thrift regulatory agencies. The GLB Act • Requiring lenders to report additional established annual reporting and public data about loans and applications disclosure requirements for certain writ- (such as the annual percentage rate ten agreements that are made in connec- and whether the application involves a tion with the CRA and that are entered manufactured home). into between insured depository institutions or their affiliates and nongovern- The proposed amendments to HOEPA mental entities or persons. Among other include the following elements: things, the regulation identifies the types of covered agreements and describes • Extending coverage to more loans how the parties to those agreements will in two ways: by lowering the APR make them available to the public and threshold and by expanding the closthe appropriate agencies. ing cost trigger In addition the Board took the follow- • Addressing "flipping" (frequent refiing regulatory and interpretive actions nancings) by prohibiting certain refiduring the year: nancings unless the transaction is in the borrower's interest • Strengthening the rules regarding veri- • Revised the official staff commentary fication of a consumer's ability to to Regulation Z to clarify that shortrepay a loan. term cash advances commonly called "payday loans" are credit transactions covered by the regulation Consumer Advisory Council • Adjusted the dollar amount of points The Board's Consumer Advisory Counand fees that triggers additional cil convened in March, June, and Octorequirements for certain mortgage ber 2000 to advise the Board on matters loans under the Home Ownership concerning laws related to consumer and Equity Protection Act of 1994 financial services. The council's mem- (HOEPA) bers come from consumer and commu- • Increased to $31 million the exempnity organizations, the financial services tion threshold for depository instituindustry, academic institutions, and tions required to collect data in the state agencies. Council meetings are year 2001 under the Home Mortgage open to the public. Disclosure Act. The CRA sunshine provisions of the GLB Act was a major topic at all three The Board also proposed amendments meetings. In March and June, council to Regulation C and to the HOEPA promembers discussed the language in the visions of Regulation Z. The Regulastatute concerning what CRA agreetion C proposal includes the following ments should be covered and how they elements: should be reported to the federal banking agencies. Some members suggested • Requiring lenders to report requests that a CRA agreement should exist for preapprovals that meet certain only when contacts had been made with conditions executive management within a finan- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 97 cial institution. In October members (HMDA). The members discussed posdiscussed actions regulators could take sible changes to the regulation intended to clarify requirements in the proposed to improve the usefulness of the data regulation. that mortgage lenders are required to The Board's proposed privacy regula- disclose. Members expressed differing tion, Regulation P, was discussed at the views on potential changes, such as March meeting. Council members com- modifying the definition of "refinancmented on methods for handling opt-out ing," adding the collection of loan pricnotices, situations permitting financial ing information, and expanding coverinstitutions to share customer informa- age of nondepository lenders. Despite tion with nonaffiliated third parties, and opposing viewpoints and recognition of alternatives for defining "publicly avail- some data limitations, members generable information." Members noted the ally viewed the HMDA data as a valucomplexity involved in preparing rules able tool for both regulators and the that cover a broad range of financial public. services and products. Disclosure requirements for credit and charge card solicitations and appli- Applications cations were a key topic at the March and June meetings. Council members During 2000 the Board of Governors provided views on whether the cost dis- considered applications for several sigclosures in the required table were clear nificant banking mergers. and conspicuous and whether the table was in a prominent location. In June, • In May the Board approved an applicouncil members discussed the proposed cation by the Charles Schwab Coramendments to Regulation Z, aimed poration, San Francisco, to become a at providing consumers with more bank holding company by acquiring noticeable and easier-to-understand cost U.S. Trust Corporation, New York. information. The simultaneous declaration by Predatory lending—and in particular, Charles Schwab to become a financial how the Board might use its rule writing holding company was the first appliauthority under HOEPA to help deter cation by a brokerage firm to acquire a abusive practices in home equity banking company since the enactment lending—was addressed at the June and of the GLB Act. October meetings. In June, council • In September the Board approved members identified issues for the Board related applications by North Fork to raise in public hearings that were to Bancorporation, Melville, New York, be held that summer. At the October to acquire Dime Bancorp, Inc., New meeting, members discussed changes to York, and by FleetBoston Financial Regulation Z to implement the HOEPA Corporation, Boston, to acquire up rules. These changes focused primarily to 9 percent of the voting shares of on addressing concerns about loan flip- North Fork. ping, foreclosure notices, and the points • In October the Board approved an and fee triggers that define HOEPA application by Wells Fargo & Comloans. pany, San Francisco, the seventh In October the council discussed largest commercial banking organiza- Regulation C, which implements the tion in the United States, to acquire Home Mortgage Disclosure Act First Security Corporation, Salt Lake Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

98 87th Annual Report, 2000 City, the thirty-ninth largest banking sessions of a comprehensive two-week organization. training course. In addition, the Board developed two specialized courses. The Comments received on these applica- first of these is a week-long program tions raised a variety of concerns rang- that provides community affairs staff ing from allegations of predatory lend- members, who are not examiners, with ing to the inadequacy of banking credit an overview of fair lending concepts. and services provided in low- and The second is a one-week course for fair moderate-income communities. In each lending examiners that concentrates of these applications, the Board found on commercial lending concepts and that the CRA records of the depository practices. institutions involved were consistent The Federal Reserve uses a two-stage with approval. statistical regression analysis to help In addition, the Board in 2000 acted assess fair lending compliance by largeon twelve bank and bank holding com- volume mortgage lenders. In the first pany applications that involved protests stage, the program analyzes HMDA data by members of the public concerning to identify banks with loan denial rates the performance under the CRA of for racial and ethnic minority applicants insured depository institutions. The that are significantly different from those Board also reviewed two applications for nonminority applicants.3 In the that involved institutions having less second stage, the program is applied to than satisfactory CRA ratings and extensive additional information taken another thirty-seven applications involv- from a sample of the loan files of the ing other issues related to CRA, fair banks identified in the first stage. lending, or compliance with consumer In 2000 the Board again hosted a credit protection laws.2 Systemwide conference to enable Reserve Bank users of the regression analysis program to discuss their accu- Fair Lending mulated experiences with Board staff Under the Equal Credit Opportunity members. Those discussions resulted Act, the Board refers to the Department in proposals to add gender-based analyof Justice all violations that it has rea- sis capabilities and to permit racial disson to believe constitute a "pattern or crimination analyses even when the practice" of discrimination. The Board number of denied applicants is quite referred two cases in 2000. One small. involved a policy and practice of unlawfully requiring the signatures of the HMDA Data and spouses of loan applicants on debt Mortgage Lending Patterns instruments; the other involved a practice of discriminatory loan pricing on The Home Mortgage Disclosure Act the prohibited basis of age. requires mortgage lenders covered by During 2000 the Board continued to the act to collect and make public cerprepare examiners to conduct fair lend- tain data about their home purchase, ing examinations by offering regular home improvement, and refinancing loan transactions. Depository institu- 2. In addition, two applications involving adverse CRA ratings and two involving other CRA 3. See the next section for a discussion of the or compliance issues were withdrawn in 2000. collection of HMDA data. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 99 tions generally are covered if they were containing aggregate data for all lenders located in metropolitan areas and met in a given metropolitan area were made the asset threshold at the end of the available at central depositories in preceding year. For 1999, the asset the nation's approximately 330 metrothreshold for depository institutions was politan areas. These data are used by $29 million. Mortgage companies are HUD and the Department of Justice as covered if, at the end of the preceding one component of their fair lending year, they were located in or made loans reviews, by the FFIEC's member agenin metropolitan areas and had assets of cies, the reporting institutions, and the more than $10 million (when combined public; HUD also uses the data in its with the assets of any parent company). oversight of Fannie Mae and Freddie They are also covered, regardless of Mac. In addition, the data assist HUD, asset size, if they originated 100 or more the Department of Justice, and state and home purchase loans in the preceding local agencies in responding to allegayear. tions of lending discrimination and in In 2000 a total of 6,730 depository targeting lenders for further inquiry.5 institutions and affiliated mortgage com- The 1999 data that were reported in panies and 1,103 independent mortgage 2000 covered 22.9 million loans and companies reported HMDA data for applications, a decrease of about 7 percalendar year 1999 to their supervisory cent from 1998 data. The decrease was agencies. These lenders submitted infor- due primarily to a decline of about mation about the geographic location of 18 percent in refinancing activity. When the properties related to their loans and compared with 1998, the number of applications, the disposition of loan home purchase loans extended in 1999 applications, and, in most cases, the race increased 44 percent for Native Amerior national origin, income, and sex of can applicants, 18 percent for Hispanic, applicants and borrowers. 16 percent for Asian, 11 percent for The Federal Financial Institutions black, and 2 percent for white appli- Examination Council (FFIEC) pro- cants. Over the seven years from 1993 cessed the data and produced disclosure through 1999, the number of home statements on behalf of the Department purchase loans extended increased of Housing and Urban Development 121 percent for Hispanics, 119 percent (HUD) and the FFIEC's member agen- for Native Americans, 91 percent for cies.4 The FFIEC prepared individual blacks, 70 percent for Asians, and disclosure statements for each lender 34 percent for whites. that reported data—one statement for The number of home purchase loans each metropolitan area in which the extended to applicants in all income lender had offices and reported loan categories increased in 1999 compared activity. For 1999 data, the FFIEC pre- with the preceding year. The number of pared 56,966 disclosure statements. such loans extended to lower-income In July 2000 each institution made its applicants increased 14 percent, while disclosure statement public; and reports 5. On behalf of the nation's seven active pri- 4. The member agencies of the FFIEC are the vate mortgage insurance (PMI) companies, the Board, the Federal Deposit Insurance Corporation FFIEC also compiles information on applications (FDIC), the National Credit Union Administration for PMI similar to the information on home mort- (NCUA), the Office of the Comptroller of the gage lending collected under HMDA. Lenders Currency (OCC), and the Office of Thrift Super- typically require PMI for conventional mortgages vision (OTS). that involve small down payments. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

100 87th Annual Report, 2000 the number extended to upper-income designed to increase consumers' finanapplicants increased 4 percent. Over cial literacy. Work is progressing on the seven years from 1993 to 1999, education resources to help consumers the number of home purchase loans avoid abusive lending practices. extended to lower-income applicants One significant education effort increased 86 percent, and the number involved the development of a computer extended to upper-income applicants program on vehicle leasing that the increased 51 percent. public can download from the Board's In 1999, 31 percent of Hispanic and Internet web site. This program answers 24 percent of black applicants for home three key questions: purchase loans sought governmentbacked mortgages; the comparable • How is leasing different from buying? figures for white, Native American, • What are the upfront, ongoing, and and Asian applicants were 14 percent, end of lease costs? 12 percent, and 10 percent respectively. • How do you compare lease offers and Twenty-four percent of lower-income negotiate lease terms? applicants for home purchase loans applied for government-backed loans in 1999, compared with 10 percent of Included in the program are a checklist upper-income applicants. to use when shopping for a lease, infor- Overall, the denial rate for conven- mation on how to read lease ads, sample tional home purchase loans was 28 per- leasing disclosure forms, and a calcucent in 1999. The denial rate had been lator that can be used to show how increasing over the past several years changing a term in the lease agreebut fell slightly (about 1 percentage ment changes the cost of the monthly point) from 1998 to 1999. In 1999, payment. denial rates for conventional home During 2000 the Board released the purchase loans (those not backed by a thirteenth edition of the Consumer government guarantee of repayment) Handbook to Credit Protection Laws. were 49.0 percent for black, 42.1 per- This publication provides consumers cent for Native American, 35.0 percent with information on the Truth in Lendfor Hispanic applicants, 25.5 percent for ing Act, the Fair Credit Billing Act, the white, and 11.8 percent for Asian appli- Fair Credit Reporting Act, the Equal cants. Except for Asian applicants, each Credit Opportunity Act, the Consumer of these rates was lower, by a small Leasing Act, and the Electronic Fund margin, than the comparable rate for Transfer Act. 1998. The Board hosted a forum on "Best Practices in Consumer Credit Education," with participation from a wide Consumer Policies range of public- and private-sector con- Through its consumer policies pro- sumer educators. The goals of the forum gram, the Board conducts research and were to develop a list of best practices, explores ways to protect consumers, focusing on effective tools and techother than by regulation, in the area of niques, and to identify strategies to fosretail financial services. In 2000 the ter effective credit education. Board worked with other agencies and The Board's consumer policies prowith public- and private-sector organiza- gram received an award from the Coltions to develop education materials lege for Financial Planning for research Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 101 on how consumers search for informa- In 2000 the Board published a tion in mortgage shopping, as well as directory of the community develnational recognition for research on opment corporations owned by bank banking relationships of underserved holding companies and state member consumers. Electronic banking contin- banks throughout the country and ued to be a topic for research by staff sponsored a training program on fair members, who use data from the Uni- lending for Reserve Bank staff memversity of Michigan Survey Research bers that was instrumental in devel- Center and from consumer focus groups. oping and launching a national community affairs Internet site linking the web sites of the twelve Reserve Community Affairs Banks. The Federal Reserve's Community Concern for the relatively limited Affairs Offices sponsor activities that availability of technology to low-income communicate the availability of inner city and rural households was the resources and strategies for community focus of a conference sponsored by economic development. The twelve the Federal Reserve Bank of New York. Reserve Banks target the information This issue was also discussed at a and development needs of their Dis- community reinvestment conference tricts. The Board's Community Affairs hosted by the Federal Reserve Bank of Office offers a national perspective, San Francisco. engaging in projects that have broad The Federal Reserve Bank of Boston implications for public policy or that convened a meeting to present strategies promote issues that are industrywide in and tools for faith-based groups that are scope. Through these programs, the Fed- working to address critical community eral Reserve during 2000 provided tech- development issues. nical assistance, conducted nearly 1,600 In response to concerns regarding the outreach meetings, sponsored 288 con- effect of credit scoring on the availabilferences and workshops, and distributed ity of credit to underserved populations, about 2000,000 publications related to a collaboration of staff members from community development. the Board and the Boston, Chicago, In 2000 the System's community Cleveland, and San Francisco Reserve affairs function began planning—in Banks initiated a five-part report explorcollaboration with research colleagues ing various aspects and effects of credit at the Board and the Reserve Banks— scoring. a research conference for early 2001 During 2000, Community Affairs devoted to the effect of changing finan- Program officers continued working on cial markets on the delivery of financial affordable housing. Board staff memservices to low-income populations and bers advised a national community communities. The agenda for the sym- development organization on the issue posium, entitled "Changing Financial as well as the Rural Home Loan Partner- Markets and Community Develop- ship (RHLP), an interagency partnership ment," will feature research that resulted committed to providing affordable housfrom a call for papers. It will focus ing in rural communities. The Federal on the Community Reinvestment Act, Reserve Bank of Dallas hosted a financpredatory lending, credit scoring, wealth ing workshop for the RHLP, and comcreation, and alternative financial munity affairs staff members at the services. Atlanta Reserve Bank provided signifi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

102 87th Annual Report, 2000 cant assistance for an RHLP meeting in the average monthly number of ATM Orlando, Florida. transactions increased to 1.1 billion, Given the many challenges in rural from 907.4 million for 1999, and the and Native American communities, number of installed ATMs rose about public-private partnerships are critical 20 percent, to 273,000. to successful community development. Direct deposit is another widely used To promote such collaborations in rural EFT service. About 60 percent of U.S. communities, the Federal Reserve Bank households have funds deposited of Kansas City sponsored a series of directly into their transaction accounts roundtables in cooperation with the (checking or savings). Use of the service Atlanta, Chicago, Cleveland, Dallas, is particularly common in the public sec- Minneapolis, and San Francisco Reserve tor, accounting for 77 percent of social Banks. These sessions focused on iden- security payments, 92 percent of fedtifying the strengths and challenges eral salary and retirement payments, unique to rural areas; findings of these and 29 percent of federal income tax meetings and resulting policy recom- refunds. mendations were published by the Kan- A less widely used EFT payment sas City Reserve Bank. Similarly, the mechanism is direct bill paying. About Federal Reserve Bank of San Francisco 36 percent of U.S. households have payconvened task force meetings among ments automatically deducted from their various tribal leaders to explore ways of accounts. overcoming the barriers to credit faced About one-third of U.S. households by residents and business owners on have debit cards, which consumers use Native American reservations. at merchant terminals to debit their transaction accounts. These point-ofsale (POS) systems account for a fairly Economic Effects of the small share of electronic transactions, Electronic Fund Transfer Act but their use continued to grow rapidly in 2000. The average monthly number As required by the Electronic Fund of POS transactions rose about 28 per- Transfer Act (EFTA), the Board moni- cent, from 202.3 million in 1999 to tors the effects of the act on the com- 258.9 million in 2000, and the number pliance costs and consumer benefits of POS terminals rose about 19 percent related to electronic fund transfer (EFT) to 2.8 million. services. The incremental costs associated The proportion of U.S. households with the EFTA are difficult to quantify using EFT services has grown over because no one knows how industry the past decade at an annual rate of practices would have evolved in the about 2 to 3 percent, according to absence of statutory requirements. The consumer surveys (the most recent in benefits of the EFTA are also difficult to 1998). Approximately 85 percent of measure because they cannot be isolated households have one or more EFT from consumer protections that would features on their accounts at financial have been provided in the absence of institutions. regulation. The available evidence sug- Automated teller machines (ATMs) gests no serious consumer problems remain the most widely used EFT ser- with EFTA (see "Agency Reports on vice. About two-thirds of U.S. house- Compliance with Consumer Regulaholds have an ATM card. During 2000 tions" below). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 103 Compliance of the Board's compliance program. Hence, the type and timeliness of train- The Federal Reserve System's coming opportunities are important. Reserve pliance activities in 2000 included con- Bank examiners with little or no field ducting and overseeing examinations of experience attend a two-week basic state member banks; training System compliance course; and examiners with compliance examiners; and participatsix to eighteen months of field expeing in the compliance activities of the rience attend a two-week advanced Federal Financial Institutions Examinacourse, a two-week course in techniques tion Council (FFIEC). The System also for fair lending examinations, and a continued its implementation of riskone-week course in CRA examination focused examination procedures, which techniques. enhance the efficiency and effectiveness In addition, in 2000 the System introof System compliance examinations. duced a new course on commercial lending essentials for consumer affairs com- Compliance Examinations pliance examiners. The course is taught by safety and soundness examiners and The Federal Reserve System's compliby other Board staff members who have ance examination program ensures that previous experience as commercial state member banks and foreign banking lenders. organizations subject to Federal Reserve During the 2000 reporting period, 204 examination comply with federal laws individuals attended eleven compliance protecting consumers in the proviexamination schools. The schools sion of financial services. During the included two sessions of the System's 2000 reporting period (July 1, 1999, basic compliance course, two of the through June 30, 2000), the Federal advanced compliance course, three in Reserve conducted 526 examinations for fair lending examination techniques, and compliance with consumer protection three in CRA examination techniques. laws: 408 examinations of state member banks and 118 of foreign banking organizations.6 Participation in FFIEC Activities Through the cooperation of its member Examiner Training agencies, the FFIEC develops uniform examination principles, standards, and Examiners who are well versed in the report forms.7 In 2000 the member agenconsumer protection laws, fair lending cies continued working to improve coorlaws, and the Community Reinvestment dination of consumer compliance and Act (CRA) are critical to the success CRA examination activities. Actions to promote uniformity among the federal 6. The foreign banking organizations examined supervisors of financial institutions by the Federal Reserve are organizations operating included issuing new interagency under section 25 or 25 (a) of the Federal Reserve examination procedures for the Home- Act (Edge Act and agreement corporations) and state-chartered commercial lending companies owners Protection Act of 1998, which owned or controlled by foreign banks. These insti- requires lenders or servicers to provide tutions are not subject to the Community Reinvest- information about private mortgage ment Act and, in comparison with state member banks, they typically engage in relatively few activities that are covered by consumer protection 7. For the member agencies of the FFIEC, see laws. note 4. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

104 87th Annual Report, 2000 insurance (PMI) on loans secured by the examinations. Of the banks examined, consumer's primary residence. 52 were rated "outstanding" in meeting In addition, the FFIEC is currently community credit needs, 202 were rated developing interagency examination "satisfactory," 5 were rated "needs to procedures for the agencies' privacy improve," and 1 was rated as being in regulations. The privacy regulations "substantial noncompliance." contain notice requirements and place Fewer banks were examined during restrictions on a financial institution's the 2000 reporting period than during disclosure of nonpublic personal infor- the 1999 reporting period because the mation about consumers to nonaffiliated GLB Act, which became law in Novemthird parties. The FFIEC is also develop- ber 1999, extended the length of time ing interagency examination procedures between CRA examinations for finanfor the Children's Online Privacy Pro- cial institutions with assets of less than tection Act of 1998, which addresses $250 million and a CRA rating of satisthe collection, disclosure, and use of factory or outstanding. With few exceppersonal information about children tions, the law requires that banks rated obtained through an Internet web site or satisfactory for CRA performance be other online service. examined no more than once every forty-eight months (up from once every twenty-four months) and that banks Community Reinvestment Act rated outstanding be examined no more The Federal Reserve assesses the CRA than once every sixty months (up from performance of state member banks once every thirty-six months). through compliance examinations. In addition, the Board considers CRA rat- Agency Reports on Compliance ings (as well as other factors) when actwith Consumer Regulations ing on applications from state member banks and bank holding companies for The Board reports annually on agency mergers, acquisitions, and certain other compliance with Regulation B (which actions. The Federal Reserve's program implements the Equal Credit Opportufor fostering better bank performance nity Act); Regulation E (Electronic Fund under the CRA includes the following Transfer Act); Regulation M (Consumer tasks: Leasing Act); Regulation Z (Truth in Lending Act); Regulation CC (Expe- • Examining institutions to assess com- dited Funds Availability Act); Regulapliance with the CRA tion DD (Truth in Savings Act); and • Disseminating information on com- Regulation AA (Unfair or Deceptive munity development techniques to Acts or Practices). The Board assembles bankers and the public through com- compliance data from the Reserve munity affairs offices at the Reserve Banks and also collects data from the Banks FFIEC agencies and from other federal • Performing CRA analyses in con- supervisory agencies.8 nection with applications from state member banks and bank holding companies. 8. The agencies use different methods to compile compliance data. Accordingly, the data presented here regarding percentages of financial During the 2000 reporting period, the institutions supervised or examined support only Federal Reserve conducted 260 CRA general conclusions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 105 A summary of the reported compli- The OTS issued four formal enforceance data for the 2000 reporting period ment actions that contained provisions (July 1, 1999 through June 30, 2000) relating to Regulation B; the FDIC follows. In general, the overall level of issued one. compliance in 2000 was similar to that In 2000 the Federal Trade Comin 1999. As in past years, the level of mission (FTC), in conjunction with varicompliance varied considerably from ous other agencies, obtained consent regulation to regulation. orders against a subprime mortgage lender and a subprime finance company for alleged violations of the Equal Regulation B Credit Opportunity Act (ECOA). The (Equal Credit Opportunity) alleged violations included, among The FFIEC agencies reported that others, failing to provide applicants 81 percent of the institutions examined with written notice of adverse action during the 2000 reporting period were on credit applications and failing in compliance with Regulation B, com- to provide adequate notices of adverse pared with 78 percent for the 1999 action to loan applicants. Under the reporting period. Of the institutions not consent decrees, the defendants agreed in compliance, 68 percent had one to to the entry of a permanent injuncfive violations. The most frequent viola- tion and agreed to pay civil money tions involved the failure to take one or penalties. more of the following actions: The FTC also continued litigation against a mortgage lender for violations • Provide a written notice of credit of the ECOA. The allegation included, denial or other adverse action contain- among others, failure to take written ing a statement of the action taken, applications for mortgage loans, failure the name and address of the creditor, to collect monitoring information on a Regulation B notice of rights, and mortgage loan applicants, and providthe name and address of the federal ing inadequate notices of adverse action agency that enforces compliance to loan applicants. The FTC is seeking • Provide a statement of reasons for civil money penalties and injunctive credit denial or other adverse action relief. that is specific and indicates the prin- The other agencies that enforce the cipal reasons for the credit denial or ECOA—the Farm Credit Administraother adverse action tion (FCA); the Department of Trans- • Collect information for monitoring portation (DOT); the Securities and purposes about the race or national Exchange Commission (SEC); the Small origin, sex, marital status, and age of Business Administration; and the Grain applicants seeking credit primarily for Inspection, Packers and Stockyards the purchase or refinancing of a prin- Administration of the Department of cipal residence Agriculture—reported substantial com- • Notify the credit applicant of the pliance among the entities they superaction taken within the time frames vise. The FCA's examination and specified in the regulation enforcement activities revealed certain • Refrain from requesting the race, violations of ECOA, most of them due national origin, or sex of an applicant to creditors' failure to collect informain transactions not covered by the tion for monitoring purposes and failure monitoring requirements. to comply with rules regarding adverse Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

106 87th Annual Report, 2000 action notices; however, no formal ure to adhere to specific disclosure actions were initiated. requirements. The FTC issued final decisions and orders in two cases involving decep- Regulation E tive motor vehicle promotions on the (Electronic Fund Transfers) Internet. The complaints in these cases charged two companies and their chief The FFIEC agencies reported that executive officers with running decepapproximately 94 percent of the institive advertisements. The complaints tutions examined during the 2000 alleged that the companies failed to disreporting period were in compliance close, or failed to disclose adequately, with Regulation E, compared with the additional costs in the lease offers 95 percent for the 1999 reporting period. and that a security deposit was required. Financial institutions most frequently Also, key cost terms were provided in failed to comply with the following inconspicuous or unreadable fine print requirements: in violation of the Consumer Leasing Act (CLA). The orders in these cases • Investigate an alleged error promptly bar the companies and their chief execuafter receiving a notice of the error tives from, among other things, misrep- • Determine whether an error occurred resenting the costs or terms of vehicle and transmit the results of the investileasing. gation and determination to the con- In addition, the FTC issued final decisumer within ten business days sions and orders concerning deceptive • Credit the customer's account in the vehicle lease advertisements in six cases amount of the alleged error within ten involving dealerships in Pennsylvania. business days of receiving the error The orders in these six cases require the notice. dealerships to make clear and accurate cost disclosures in lease and credit The OTS issued one formal enforceadvertisements and to comply with all ment action that contained provisions provisions of the CLA. relating to Regulation E. In 2000 the FTC continued its consumer and business education efforts. Regulation Z The SEC reported that no violations (Truth in Lending) of Regulation E were detected in The FFIEC agencies reported that examinations of registered broker- 77 percent of the institutions examined dealers conducted by self-regulatory during the 2000 reporting period were organizations. in compliance with Regulation Z, compared with 74 percent for the 1999 reporting period. The Board, the OTS, Regulation M the FDIC, and the NCUA reported an (Consumer Leasing Act) increase in compliance, while the OCC The FFIEC agencies reported substan- reported an unchanged level of complitial compliance with Regulation M ance. The FFIEC agencies indicated that for the 2000 reporting period. As in of the institutions not in compliance, 1999, more than 99 percent of the insti- 64 percent were in the lowest-frequency tutions examined were in compliance. category (having one to five violations) The few violations noted involved fail- compared with 63 percent in 1999. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 107 The violations of Regulation Z most loans involving alleged violations of often observed were TILA • Issued consent judgments against several companies and their principals in • Inaccurate disclosure of the finance a case involving violations of TILA in charge, payment schedule, annual perconnection with payday loans centage rate, security interest in collat- • Continued to litigate a complaint the eral, and amount financed FTC had filed in federal district court • Failure to disclose the annual percentin 1998. The complaint charged a age rate on a periodic statement using mortgage lender in the Washington, the term "Annual Percentage Rate" D.C., area and its owner with violat- • Failure to provide disclosures within ing TILA in connection with alleged three business days of receiving a resideceptive and unfair practices in home dential mortgage application covered mortgage lending. A trial date has not under the Real Estate Settlement been set for this case Procedures Act • Filed and amended a complaint in • Failure to ensure that disclosures federal district court charging a comreflect the terms of the legal obligapany that sold vacation travel packtion between the parties. ages with violating TILA by failing to issue credits to consumers in credit The OTS issued five formal enforcecard transactions after telling the ment actions subject to provisions of consumers that the credit would be Regulation Z; the FDIC and OCC each provided. issued one. With respect to disclosure of the During 2000 the FTC issued a conannual percentage rate or finance sumer publication Payday Loans— charge, the statute requires reimburse- Costly Cash and updated various other ment for certain inaccuracies. Altopublications. In addition, the FTC is gether, a total of 137 institutions superreviewing the effect on TILA and the vised by the Federal Reserve, the FDIC, CLA of the Electronic Signatures in or the OTS were required, under the Global and National Commerce Act (the Interagency Enforcement Policy on E-Sign Act) and has commenced a study Regulation Z, to refund about $784,000 in conjunction with the Department of to consumers in 2000 because of Commerce regarding the consumer conimproper disclosures. sent provisions of the E-Sign Act. In 2000 the FTC obtained consent The DOT is currently investigating judgments against two mortgage compaone potential TILA-related case involvnies for alleged violations of the Home ing an air carrier's timeliness in process- Ownership and Equity Protection Act ing customer requests for credit card and the Truth in Lending Act (TILA). In refunds. In 2000 the DOT continued to other enforcement actions the FTC prosecute a cease-and-desist consent order issued in 1993 against a travel • Obtained a consent judgment pertain- agency and a charter operator. The coming to credit accident and health insur- plaint alleged that the two organizations ance against a finance company and violated Regulation Z by routinely failits owner ing to send credit statements for refund • Issued a final order against a finance requests to credit card issuers within company regarding debt consolidation seven days of receiving fully docu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

108 87th Annual Report, 2000 merited credit refund requests from • Follow special procedures for excepcustomers. tions for large dollar deposits • Provide exception notices about funds availability, including all required Regulation AA information. (Unfair or Deceptive Acts or Practices) No formal enforcement actions for The three bank regulators with responsi- violations of the regulation were issued bility for enforcing Regulation AA's during the period. Credit Practices Rule—the Federal Reserve, the FDIC, and the OCC— reported that 99 percent of the institu- Regulation DD tions examined during the 2000 report- (Truth in Savings) ing period were in compliance. The The FFIEC agencies reported that most frequent violations were 88 percent of institutions examined during the 2000 reporting period • Failure to provide a clear, conspicuous were in full compliance with Reguladisclosure regarding a cosigner's liation DD. Institutions most frequently bility for a debt failed to comply with the following • Entering into a consumer credit conrequirements: tract that contains a nonpossessory security interest in household goods • Use advertisements that are accurate other than a purchase money security and not misleading interest. • State the rate of return as an annual percentage yield in an advertisement The FDIC issued one formal enforce- • State required additional information ment action that contained provisions in advertisements containing the relating to Regulation AA. annual percentage yield • Provide all applicable information on Regulation CC account disclosures. (Availability of Funds and Collection of Checks) Consumer Complaints The FFIEC agencies reported that 90 percent of institutions examined dur- The Federal Reserve investigates coming the 2000 reporting period were in plaints against state member banks and compliance with Regulation CC, com- forwards to the appropriate enforcement pared with 91 percent for the 1999 agency complaints that involve other reporting period. Of the institutions not creditors and businesses (see table). The in compliance, 67 percent had one to Federal Reserve also monitors and five violations. Institutions most fre- analyzes complaints about unregulated quently failed to comply with the fol- practices. lowing requirements: During 2000 the Board developed a letter-generating system that uses data- • Make funds from certain checks, both base information to produce uniform local and nonlocal, available for with- letters of acknowledgment to complaindrawal within the times prescribed by ants. The system is a new component to the regulation Complaints Analysis Evaluation System Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 109 Consumer Complaints against State Member Banks and Other Institutions Received by the Federal Reserve System, 2000 State member Other Subject Total banks institutions' Regulation B (Equal Credit Opportunity) 57 45 102 Regulation E (Electronic Fund Transfers) 55 67 122 Regulation M (Consumer Leasing) 12 24 36 Regulation Q (Payment of Interest) 0 1 1 Regulation Z (Truth in Lending) 374 438 812 Regulation BB (Community Reinvestment) .. 0 1 1 Regulation CC (Expedited Funds Availability) 24 36 60 Regulation DD (Truth in Savings) 65 40 105 Fair Credit Reporting Act 144 286 430 Fair Debt Collection Practices Act 8 15 23 Fair Housing Act 5 2 7 Flood insurance 2 7 9 Regulations T, U, and X 0 1 1 Real Estate Settlement Procedures Act 7 41 48 Unregulated practices 1,659 1,539 3,198 Total 2,412 2,543 4,955 1. Complaints against these institutions were referred to the appropriate regulatory agencies. and Reports (CAESAR), which tracks residence), or the release or use of concomplaints and inquiries. The letters sumers' credit information. Thirty persystem was implemented at the Federal cent of the complaints against state Reserve Bank of New York in Decem- member banks involved disputes about ber 2000 and is expected to be fully interest on deposits and general deposit implemented at all the Reserve Banks account practices; the remaining 11 perby midyear 2001. cent concerned disputes about electronic Throughout 2000 the Reserve Banks fund transfers, trust services, or other continued to send staff members to the practices. Board for several weeks at a time to During 2000 the System completed gain familiarity with operations in the investigation of about 200 com- Washington for handling complaints. plaints that were pending at year-end 1999 against state member banks, finding six violations of regulations. In Complaints against most cases, Reserve Bank investigations State Member Banks found that banks had correctly handled In 2000 the Federal Reserve received customer accounts. Nonetheless, the about 5,000 complaints—by mail, by banks chose to reimburse or otherwise telephone, in person, and electronically accommodate the consumer in nearly via the Internet. About half of the com- half of these situations. plaints were against state member banks The Federal Reserve received approxi- (see tables). Of these, almost 60 per- mately 1,900 inquiries about consumer cent involved loan functions: 3 percent credit and banking policies and pracalleged discrimination on a prohibited tices. In responding to these inquiries, basis; and 56 percent concerned a vari- the Board and Federal Reserve Banks ety of credit practices, such as credit gave explanations of laws and bankdenial on a basis not prohibited by law ing practices and provided relevant (for example, credit history or length of publications. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

110 87th Annual Report, 2000 Consumer Complaints Received by the Federal Reserve System, by Subject of Complaint, 2000 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 u o rs e re m im en - t re m im e b n u t r o s r efrom to consumer or other other consumer accommo- accommodation dation Loans Discrimination alleged Real estate loans 21 1 0 6 2 0 Credit cards 21 1 0 1 11 3 Other loans 15 1 0 2 3 0 Other type of complaint Real estate loans 190 8 5 13 63 27 Credit cards 981 40 15 18 275 521 Other loans 184 8 3 19 80 20 Deposits 734 30 20 96 299 106 Electronic fund transfers 55 2 2 3 14 12 Trust services 42 2 3 17 12 2 Other 169 7 10 12 78 18 Total . . 2,412 100 58 187 837 709 Unregulated Practices plaints involved credit cards: penalty charges (161), interest rates and terms As required by section 18(f) of the Fed- (130), and varied other problems (158). eral Trade Commission Act, the Board The fourth category involved complaints monitors complaints about banking about charges and procedures for checkpractices that are not subject to existing ing accounts with insufficient funds regulations and identifies those that (137). Among the wide range of other concern possible unfair or deceptive issues raised were check-cashing probpractices. In 2000 the Board received lems encountered by individuals who complaints about a wide range of did not have an account at the institution unregulated practices. Three of the four and consumer dissatisfaction with fees categories that received the most com- for bank loans or deposit accounts. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Consumer and Community Affairs 111 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 1 0 2 0 10 19 40 0 0 0 0 0 6 8 29 0 0 0 2 2 6 18 33 3 52 6 2 8 11 380 570 2 69 4 5 0 72 789 1,770 1 37 7 0 8 9 371 555 0 115 26 2 14 56 596 1,330 0 13 0 5 1 5 67 122 0 3 1 0 4 0 12 54 8 27 2 0 8 6 283 452 14 317 46 18 45 181 2,543 4,955 Complaint Referrals to HUD cies. Investigations were completed for nine of the seventeen complaints. Seven In 2000 the Federal Reserve referred of the nine investigations revealed no seventeen complaints to HUD that evidence of illegal discrimination. In the alleged state member bank violations of other two cases, the parties were seeking the Fair Housing Act. The referrals were resolution through the courts; the Fedmade in accordance with a memoran- eral Reserve does not intervene in such dum of understanding between HUD matters. • and the federal bank regulatory agen- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

113 Banking Supervision and Regulation U.S. bank earnings remained strong in had expanded into these newly autho- 2000, although they were off slightly rized activities by year-end 2000, more from the record performance in 1999. than 480 bank holding companies had Credit weaknesses, revealed as the econ- sought and received authority to do so omy slowed, required slightly higher by meeting the legal standards to be loss provisions, while continued price declared a financial holding company competition and slow deposit growth (FHC). compressed net interest margins for Although the future actions of FHCs many banks. Noninterest income, an may depend heavily on what specific important source of growth in industry opportunities banking organizations find revenue in recent years, also slipped as in the years to come, this demonstrated a result of reduced income from pri- interest in becoming an FHC suggests vate equity investments, lower trading that many organizations, both large and income, and reduced investment man- small, are likely to expand into new agement fees, all of which mostly areas of financial services. As the affected large banks. Nonperform- "umbrella supervisor" of all FHCs, the ing loans and foreclosed real estate Federal Reserve must rely to the greatincreased 33 percent from historically est extent possible on the supervisory low levels. The annual interagency efforts of an institution's primary superreview of large syndicated loans showed visor and functional regulator to ensure that most of the deterioration was in that nonbank activities do not present an commercial loans, particularly in the unacceptable risk to affiliated banks. financial services and manufacturing Given the greater need for interagency sectors. Nonetheless, the volume of non- work, the Federal Reserve has increased performing assets remained well below its coordination and information sharing the heights (associated with problems in with, among others, the Securities and the commercial real estate market) that Exchange Commission, which oversees were reached in the early 1990s. activities of registered broker-dealers Although challenged by a slowing and other firms engaged in securities economy and changing business prac- activities, and with the state insurance tices and conditions, the U.S. banking commissions. system remains sound. Problems with In recent years, the Federal Reserve credit quality have increased, but the has actively sought to encourage banks industry's overall portfolio quality, earn- to maintain strong underwriting stanings, and capital levels remain strong by dards and has warned them to improve nearly any historical measure. their processes for measuring and In 2000 the Federal Reserve imple- managing credit risk. Despite such mented provisions of the Gramm- encouragement and warning, recently Leach-Bliley Act. The act, passed in announced credit losses have been November 1999, removed long-standing largely attributable to an undue relaxbarriers between commercial banking ation of lending standards during the and securities and insurance underwrit- 1997-99 period. Banks have tightened ing. Although relatively few institutions their standards, but much work remains Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

114 87th Annual Report, 2000 to be done by them in evaluating expo- organizations, the Federal Reserve prisures, not only when a loan is first marily seeks to promote their safe and approved but under a range of simulated sound operation and their compliance stressful conditions. Under the terms of with laws and regulations, including the existing guidance for proper risk man- Bank Secrecy Act and consumer and agement, the Federal Reserve super- civil rights laws.1 visory and examination staff has been The Federal Reserve also has responlooking more closely at banks' internal sibility for the supervision of all Edge systems for rating loans and for evaluat- Act and agreement corporations; the ing capital adequacy. international operations of state member The Federal Reserve's emphasis on banks and U.S. bank holding companies; advancing sound risk management prac- and the operations of foreign banking tices has contributed to important initia- companies in the United States.2 tives being undertaken on an inter- The Federal Reserve exercises impornational scale by the Basel Committee tant regulatory influence over entry into on Banking Supervision, which operates the U.S. banking system and the strucunder the auspices of the Bank for ture of the system through its adminis- International Settlements, in Basel, tration of the Bank Holding Company Switzerland. The committee has been Act, the Bank Merger Act (for state developing a new capital standard for member banks), the Change in Bank internationally active banks that is far Control Act (for bank holding compamore risk sensitive than the current stan- nies and state member banks), and the dard (see box). The new approach builds International Banking Act. The Federal on an institution's internal credit risk Reserve is also responsible for imposing models and its own calculations of margin requirements on securities transhow much capital it needs. The Federal actions. In carrying out these responsi- Reserve staff assisted the committee in bilities, the Federal Reserve coordinates the development of the proposal, which its supervisory activities with other fedwas issued for public comment in Janu- eral banking agencies, state agencies, ary 2001. Although its implementation is several years away, this proposal and its accompanying risk management stan- 1. The Board's Division of Consumer and Community Affairs is responsible for coordinating dards should improve the ability of the Federal Reserve's supervisory activities with supervisors and banking organizations regard to the compliance of banking organizations to detect and control risks within the with consumer and civil rights laws. To carry out banking system. this responsibility, the Federal Reserve trains a number of its bank examiners to evaluate institutions with regard to such compliance. The chapter Scope of Responsibilities for of this volume covering consumer and community affairs describes these regulatory responsibilities. Supervision and Regulation Compliance with other banking statutes and regulations, which is treated in this chapter, is the The Federal Reserve is the federal responsibility of the Board's Division of Banksupervisor and regulator of all U.S. bank ing Supervision and Regulation and the Federal holding companies (including financial Reserve Banks, whose examiners also check for holding companies formed under the safety and soundness. authority of the Gramm-Leach-Bliley 2. Edge Act corporations, chartered by the Federal Reserve, and agreement corporations, char- Act) and of state-chartered commercial tered by the states, provide all segments of the banks that are members of the Federal U.S. economy with a means of financing interna- Reserve System. In overseeing these tional trade, especially exports. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 115 and the bank regulatory agencies of tem. These banks represented approxiother nations. mately 12.0 percent of all insured U.S. commercial banks and held approximately 26.7 percent of all insured com- Supervision for Safety mercial bank assets in the United States. and Soundness The guidelines for Federal Reserve To ensure the safety and soundness examinations of state member banks of banking organizations, the Federal are fully consistent with section 10 of Reserve conducts on-site examinations the Federal Deposit Insurance Act, as and inspections and off-site surveillance amended by section 111 of the Federal and monitoring. It also undertakes Deposit Insurance Corporation Improveenforcement and other supervisory ment Act of 1991 and by the Riegle actions. Community Development and Regulatory Improvement Act of 1994. A fullscope, on-site examination of these Examinations and Inspections banks is required at least once a year; certain well-capitalized, well-managed The Federal Reserve conducts examinainstitutions having assets of less than tions of state member banks, branches $250 million may be examined once and agencies of foreign banks, Edge Act every eighteen months. corporations, and agreement corpora- During 2000 the Federal Reserve tions; in a process distinct from exami- Banks conducted 589 examinations nations, it conducts inspections of of state member banks (some of holding companies and their nonbank them jointly with state agencies), and subsidiaries. Pre-examination planning state banking departments conducted and on-site review of operations are 273 independent examinations of state integral parts of ensuring the safety member banks. and soundness of financial institutions. Whether an examination or an inspection, the review entails (1) an assess- Bank Holding Companies ment of the quality of the processes in At year-end 2000 the number of place to identify, measure, monitor, and top-tier U.S. bank holding companies control risks, (2) an appraisal of the totaled 5,109. These organizations quality of the institution's assets, (3) an had 6,483 subsidiary banks and held evaluation of management, including an approximately 93 percent of all comassessment of internal policies, procemercial bank assets. dures, controls, and operations, (4) an Federal Reserve guidelines call for assessment of the key financial factors annual inspections of large bank holding of capital, earnings, liquidity, and sensicompanies as well as smaller companies tivity to market risk, and (5) a review that have significant nonbank assets. In for compliance with applicable laws and judging the financial condition of subregulations. sidiary banks, Federal Reserve examiners consult the examination reports of State Member Banks the federal and state banking authorities At the end of 2000, 990 state-chartered that have primary responsibility for the banks (excluding nondepository trust 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 organi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

116 87th Annual Report, 2000 The New Basel Capital Accord Getting the proposed risk-based capital numbers correct, both in science and as an art, is especially critical for most complex organizations. The current one-sizefits-all regulatory capital regime, as you know, has led increasingly to a gaming of the regulatory requirements. Laurence H. Meyer, Member, Board of Governors June 1,2000 On January 16, 2001, the Basel Committee Pillar 3 is market discipline. Market dison Banking Supervision issued its second cipline has the potential to reinforce capital proposal on the New Basel Capital Accord. regulation and other supervisory efforts The proposal describes several methods by to ensure the safety and soundness of the which banks could determine their mini- banking system. Accordingly, the commitmum regulatory capital requirements. tee is proposing a wide range of disclosure The new accord has three mutually initiatives designed to make the risk and reinforcing "pillars" that make up the capital positions of a bank more transframework for assessing capital adequacy parent. As a bank begins to use the more in a bank. Pillar 1 is the minimum regu- advanced methodologies, such as the IRB latory capital charge. The pillar 1 capital approach, the new accord will require a requirement includes both a standardized significant increase in the level of discloapproach, updated since the 1988 Basel sure. In essence, the trade-off for greater Capital Accord, and the new, internal-risk- reliance on a bank's own assessment of based (IRB) approach. capital adequacy is greater transparency. Pillar 2 is supervisory review. It is The revised standardized approach intended to ensure that banks have ade- under pillar 1 enhances the "risk bucketquate capital to support all the risks in ing" approach of the 1988 accord by their business and to encourage banks to providing greater, though still limited, risk develop better techniques for monitoring sensitivity. To create an even more riskand managing these risks. Pillar 2 encour- sensitive framework, the proposal includes ages supervisors to assess banks' internal additional features: the refinement and approaches to capital allocation and inter- addition of risk buckets; the use of external nal assessments of capital adequacy and, credit ratings, where present, to determine subject to national discretion, provides an risk weights for sovereigns, banks, and coropportunity for the supervisor to indicate porate exposures; and a broader recogniwhere such approaches do not appear to tion of types of financial collateral and be sufficient. Seen another way, pillar 2 guarantees. The proposal also removes the helps focus supervisors on other means of 50 percent cap on risk weights for derivaaddressing risks in a bank's portfolio, such tives contracts and increases to 20 percent as improving overall risk management the credit conversion factor for busitechniques and internal controls. ness commitments of less than one year. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 117 To use the IRB approach, banks must key factors affecting credit risk, provided meet an extensive set of eligibility stan- they meet the minimum requirements and dards. The standards embody sound risk receive supervisory approval to use their management practices and are necessary estimates in calculating regulatory capital to provide supervisors with adequate con- requirements. fidence in banks' internal risk estimates. The new accord is intended to provide Because the requirements are qualitative, banks with incentives to evolve toward the national supervisors will need to evaluate advanced IRB framework while ensuring compliance with them to determine which that banking organizations remain competibanks may apply the new framework. The tive and adequately capitalized, regardless requirements vary by type of exposure as of the technique used. Sophisticated methwell by whether the bank uses the "founda- ods of risk measurement and management tion" or "advanced" IRB framework. are particularly important for large, com- To calculate the amount of capital neces- plex banking organizations because such sary to support a bank's economic risks, organizations, should they encounter diffithe IRB approach builds on internal credit culties, could pose systemic risk. risk practices of banks and on the internal One of the most significant changes in processes used by some leading institu- the new accord is the proposal for an operations. For each credit exposure, the IRB tional risk charge. The charge, which is approach requires the following informa- expected to represent, on average, about tion: the amount at risk in the event of 20 percent of the minimum regulatory capidefault, the borrower's probability of tal charge, is based upon the following default, the loss to the bank that would concept of operational risk: the risk of occur in the event of default, and the credit direct or indirect loss to the institution facility's remaining maturity. resulting from shortcomings of internal The foundation IRB framework uses processes, people, and systems or from conservative supervisory judgments to external events. Although the focus of specify the amount at risk and the loss in operational risk is on the pillar 1 capital the event of default. In effect, in exchange charge, it also brings in elements of pillar 2 for less detailed bank-specific information (strong control environment), and pillar 3 and burden, the capital charges are less (disclosure). bank-specific and more standardized. The deadline for comment on the New The advanced IRB framework has been Basel Capital Accord is May 3>\, 20(31, and designed to provide banks with maxi- the committee plans to release a final vermum flexibility in calculating their regu- sion by year-end 2001. On the basis of that latory capital requirements, subject to release date, the implementation date has the constraints of prudential regulation, been set for 2004 to allow for domestic current banking practices and capabilities, rulemaking processes and to allow banks and the ne&d for sufficiently compatible and supervisors time to prepare. standards among countries to maintain The 1988 accord applied to all banks in competitive equity among banking organi- the United States. The extent to which the zations worldwide. The advanced frame- new accord will be applied will be decided work would permit banks to apply their on the basis of public comment and further own data and judgments regarding most refinement of the proposal. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

118 87th Annual Report, 2000 zations. In 2000, Federal Reserve exam- who extend credit subject to the Board's iners conducted 1,247 bank holding margin regulations. company inspections, of which 1,109 With the passage of the Grammwere on-site and 138 were off-site, and Leach-Bliley Act, the Federal Reserve state examiners conducted 70 indepen- ceased conducting routine annual dent inspections. examinations of securities underwriting Small, non-complex bank holding and dealing activities through so-called companies—those that have less than section 20 subsidiaries of bank holding $1 billion in consolidated assets, do not companies. Under the Gramm-Leachhave debt outstanding to the public, and Bliley Act, the Federal Reserve is generdo not engage in significant nonbank ally required to rely upon the superactivities—are subject to a special visory activities of the "functional supervisory program that became effec- regulator" for broker-dealer subsiditive in 1997. The program permits a aries unless the Board has cause to more flexible approach to supervising believe that a broker-dealer poses a those entities in a risk-focused environ- material risk to an insured depository ment. Each such holding company is affiliate. No such examinations were subject to off-site review once during conducted for cause during 2000. the examination cycle for the compa- The Federal Reserve has developed a ny's lead bank. In 2000 the Federal series of case studies to educate System Reserve conducted 2,474 reviews of supervisory personnel about communithese companies. cations with, and reliance on, the supervisory activities of functional regulators (for securities, commodities, and insur- Financial Holding Companies ance regulators) for nonbank activities. As of year-end 2000, 463 domestic bank holding companies and 21 foreign bank- Information Technology ing organizations had received financial holding company status. Of the The Federal Reserve reviews the infordomestic institutions, 32 financial hold- mation technology activities of the ing companies had consolidated assets banking institutions it examines, and it of $15 billion or more, 59 between gives the same review to certain inde- $1 billion and $15 billion, 34 between pendent data centers that provide infor- $500 million and $1 billion, and 338 mation technology services to these with less than $500 million. institutions. During 2000 the Federal Reserve was the lead agency in two examinations of large, multiregional Specialized Examinations data processing servicers examined in cooperation with the other federal bank- The Federal Reserve conducts special- ing agencies. These examinations are ized examinations of banking organiza- conducted in recognition of the importions in the areas of information technol- tance of information technology to safe ogy, fiduciary activities, transfer agent and sound operations in the financial activities, and government and munici- industry. pal securities dealing and brokering. The During 2000, information technology Federal Reserve also conducts special- reviews at banking organizations were ized examinations of certain entities, integrated within the overall process other than banks, brokers, or dealers, of supervision, and thus all safety Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 119 and soundness examinations are now Government and Municipal Securities expected to include a review of informa- Dealers and Brokers tion technology risks and activities. The Federal Reserve is responsible for examining state member banks and foreign banks for compliance with the Gov- Fiduciary Activities ernment Securities Act of 1986 and with The Federal Reserve has supervi- regulations of the Department of the sory responsibility for institutions that Treasury governing dealing and brokertogether hold more than $15 trillion ing in government securities. Thirtyof assets in various fiduciary capacities. nine state member banks and nine state During on-site examination of an insti- branches of foreign banks have notified tution's fiduciary activities, examiners the Board that they are government review its compliance with laws, regula- securities dealers or brokers not exempt tions, general fiduciary principles, and from Treasury's regulations. During potential conflicts of interest; and they 2000 the Federal Reserve conducted evaluate the institution's management 7 examinations of broker-dealer activiand operations, including its asset and ties in government securities at these account management, risk management, institutions. and audit and control procedures. In The Federal Reserve is also respon- 2000, Federal Reserve examiners con- sible for ensuring compliance with the ducted 141 on-site trust examinations. Securities Act Amendments of 1975 by the thirty-two state member banks that acted as municipal securities dealers in Transfer Agents and 2000. Eight of these institutions were Securities Clearing Agencies examined in 2000. As directed by the Securities Exchange Act of 1934, the Federal Reserve con- Securities Credit Lenders ducts specialized examinations of those state member banks and bank holding Under the Securities Exchange Act of companies that are registered with the 1934, the Federal Reserve Board is Board as transfer agents. Among other responsible for regulating credit in certhings, transfer agents countersign and tain transactions involving the purchase monitor the issuance of securities, reg- or carrying of securities. In addition to ister the transfer of securities, and examining banks under its jurisdiction exchange or convert securities. On-site for compliance with the Board's margin examinations focus on the effective- regulations as part of its general examiness of operations and compliance with nation program, the Federal Reserve relevant securities regulations. During maintains a registry of persons other 2000, Federal Reserve examiners con- than banks, brokers, and dealers who ducted on-site examinations at 32 of the extend credit subject to the Board's mar- 117 state member banks and bank hold- gin regulations. The Federal Reserve ing companies that were registered as may conduct specialized examinations transfer agents. Also during the year the of these lenders if they are not already Federal Reserve examined one state subject to supervision by the Farm member limited-purpose trust com- Credit Administration, the National pany that acted as a national securities Credit Union Administration, or the depository. Office of Thrift Supervision. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

120 87th Annual Report, 2000 At the end of 2000, 828 lenders other main objective of these initiatives has than banks, brokers, or dealers were been to sharpen the focus on (1) those registered with the Federal Reserve; business activities posing the greatest of these, 640 were under the Federal risk to banking organizations and (2) the Reserve's supervision. The Federal organizations' management processes Reserve regularly inspects 219 of these for identifying, measuring, monitoring, lenders either biennially or triennially, and controlling their risks. according to the type of credit they extend; 112 of the 219 were inspected in Large and Regional Banking 2000 for compliance with Regulation U. Organizations The remaining 421 lenders were exempt The risk-focused supervision program from periodic on-site inspections by the for large and regional banking organiza- Federal Reserve but were monitored tions applies to institutions with a functhrough the filing of periodic regulatory tional management structure, a broad reports. array of products, and operations that span multiple supervisory jurisdictions. Enforcement Actions The supervisory program for these instiand Civil Money Penalties tutions may be implemented with a point-in-time inspection for the smaller In 2000 the Federal Reserve initiated institutions and a series of targeted 31 enforcement cases involving 44 separeviews for the larger institutions. For rate actions, such as cease-and-desist the largest, most complex institutions, orders, written agreements, removal and the process is continuous, as described prohibition orders, and civil money penin the following section. To minimize alties. The Board of Governors collected the burden on the institution, work is $310,000 in civil money penalties. performed off-site to the greatest extent All final enforcement orders issued possible. In addition, to reduce the numby the Board of Governors and all ber of requests made to the institution written agreements executed by the Fedfor information, examiners continually eral Reserve Banks in 2000 are availreview public and regulatory financial able to the public and can be accessed reports, market data, information from from the Board's public web site surveillance screens, and internal man- (www.federalreserve.gov/boarddocs/ agement reports. enforcement). In addition to formal enforcement Large, Complex Banking Organizations actions, the Federal Reserve Banks and supervised institutions in 2000 The Federal Reserve applies a riskcompleted 128 informal enforcement focused supervision program to large, actions, such as resolutions by boards complex banking organizations of directors and memorandums of (LCBOs).3 The key features of the understanding. LCBO supervision program are (1) identifying those LCBOs that, based on their Risk-Focused Supervision Over the past several years the Federal 3. For an overview of the Federal Reserve's LCBO program, see Lisa M. DeFerrari and Reserve has created a number of pro- David E. Palmer, "Supervision of Large Complex grams aimed at enhancing the effective- Banking Organizations," Federal Reserve Bulleness of the supervisory process. The tin, vol. 97 (February 2001), pp. 47-57. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 121 shared risk characteristics, present the risks associated with financial activities highest level of supervisory risk to the generally cut across legal entities and Federal Reserve System, (2) maintain- business lines and that most large ing continual supervision of these and sophisticated financial services institutions to keep current the Federal companies take a consolidated, or Reserve's assessment of each organiza- organization-wide, approach to managtion's condition, (3) assigning to each ing their risks. LCBO a supervisory team composed of Reserve Bank staff members who have Community Banks skills appropriate for the organization's The risk-focused supervision program risk profile (the team leader is the cenfor community banks emphasizes that tral point of contact, has responsibility certain elements are critical to the sucfor only one LCBO, and is supported by cess of the risk-focused process. These specialists skilled in evaluating the risks elements include adequate planning of LCBO business activities and functions), and (4) promoting Systemwide time, completion of a pre-examination and interagency information-sharing visit, preparation of a detailed scopethrough an automated system. of-examination memorandum, thorough documentation of the work done, and An important element of the propreparation of an examination report taigram is the sharing of resources across lored to the scope of the examination. the System. Several initiatives are The framework for risk-focused superunder way to better deploy supervisory vision of community banks was develresources Systemwide and to develop oped jointly with the Federal Deposit risk assessments across groups of insti- Insurance Corporation (FDIC) and has tutions to identify emerging trends. been adopted by the Conference of State In addition, work continued during Bank Supervisors. 2000 on the first two stages of phase I of the Banking Organization National Desktop (BOND) application. BOND Surveillance and Risk Assessment facilitates real-time, secure information sharing and collaboration across the To supplement on-site examinations, the Federal Reserve System and with cer- Federal Reserve uses automated screentain other federal and state regulators ing systems to monitor the financial to support the risk-focused supervision condition and performance of banking of domestic and foreign LCBOs. It also organizations. The screening systems improves the Federal Reserve's ability analyze supervisory data and regulatory to manage knowledge and data concern- financial reports to identify companies ing these complex banking organi- that appear to be weak or deterioratzations. For example, BOND includes ing. The analysis helps to direct examireports that address cross-border expo- nation resources to institutions exhibitsures of LCBOs. ing higher risk profiles. Screening The approach used by the Federal systems also assist in the planning of Reserve under the LCBO program is examinations by identifying companies fully consistent with the process pre- that are engaging in new or complex scribed by the Gramm-Leach-Bliley activities. Currently, separate surveil- Act for supervising financial holding lance programs are run quarterly for companies. Umbrella supervision under state member banks, small shell bank the act reflects the reality that the holding companies, and the large and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

122 87th Annual Report, 2000 more complex bank holding companies. holding companies principally at the The Federal Reserve also produces U.S. head offices of these organizations, and distributes a quarterly report, "The where the ultimate responsibility for Bank Holding Company Performance their foreign offices lies. In 2000 the Report," to assist supervisory staff in Federal Reserve examined eight foreign evaluating individual companies. branches of state member banks and During 2000 the Federal Reserve eighteen foreign subsidiaries of Edge implemented a watchlist program cover- Act corporations and bank holding coming state member banks. This program panies. The examinations abroad were refines the previous bank surveillance conducted with the cooperation of the program and sets forth quarterly moni- supervisory authorities of the countries toring procedures for weak and poten- in which they took place; when approtially weak state member banks. priate, the examinations were coordi- The Federal Reserve also works with nated with the Office of the Comptroller the other federal banking agencies to of the Currency. Also, examiners made enhance and coordinate surveillance 13 visits to the overseas offices of U.S. activities through the Task Force on Sur- banks to obtain financial and operating veillance Systems of the Federal Finan- information and, in some instances, to cial Institutions Examination Council evaluate their compliance with correc- (FFIEC).4 tive measures or to test their adherence to safe and sound banking practices. International Activities Foreign Branches of Member Banks The Federal Reserve supervises foreign At the end of 2000, 70 member banks branches of member banks; overseas were operating 953 branches in foreign investments by member banks, Edge countries and overseas areas of the Act and agreement corporations, and United States; 39 national banks were bank holding companies; and investoperating 741 of these branches, and ments by bank holding companies in 31 state member banks were operating export trading companies. It also superthe remaining 212 branches. In addition, vises the activities that foreign banking 21 nonmember banks were operating organizations conduct through entities 45 branches in foreign countries and in the United States, including branches, overseas areas of the United States. agencies, representative offices, and subsidiaries. Edge Act and Agreement Corporations Foreign-Office Operations Edge Act corporations are international of US. Banking Organizations banking organizations chartered by the Board to provide all segments of the The Federal Reserve examines the inter- U.S. economy with a means of financnational operations of state member ing international business, especially banks, Edge Act corporations, and bank exports. Agreement corporations are similar organizations, state chartered or 4. The member agencies of the FFIEC are the federally chartered, that enter into an Board of Governors of the Federal Reserve Sys- agreement with the Board to refrain tem, the Federal Deposit Insurance Corporation, from exercising any power that is the National Credit Union Administraton, the not permissible for an Edge Act Office of the Comptroller of the Currency, and the Office of Thrift Supervision. corporation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 123 Under sections 25 and 25 (A) of the granted financial holding company Federal Reserve Act, Edge Act and status. agreement corporations may engage in Altogether, these U.S. offices of forinternational banking and foreign finan- eign banks at the end of 2000 controlled cial transactions. These corporations, approximately 19 percent of U.S. comwhich in most cases are subsidiaries mercial banking assets. These foreign of member banks, may (1) conduct a banks also operated 111 representative deposit and loan business in states other offices; an additional 94 foreign banks than that of the parent, provided that the operated in the United States solely business is strictly related to interna- through a representative office. tional transactions and (2) make foreign State-licensed and federally licensed investments that are broader than those branches and agencies are examined onof member banks because they may site at least once every eighteen months, invest in foreign financial organizations, either by the Federal Reserve or by such as finance companies and leasing a state or other federal regulator; in companies, as well as in foreign banks. most cases, on-site examinations are Edge Act and agreement corporations conducted at least once every twelve numbered 76 and operated 24 branches months, but the period may be extended at year-end 2000. These corporations are to eighteen months if the branch or examined annually. agency meets certain criteria. The Federal Reserve conducted or participated with state and federal regulatory US. Activities of Foreign Banks authorities in 288 examinations during The Federal Reserve has broad authority 2000. to supervise and regulate the U.S. activities of foreign banks that engage in Joint Program for banking and related activities in the Supervising the U.S. Operations of United States through branches, agen- Foreign Banking Organizations cies, representative offices, commercial lending companies, Edge Act corpora- In 1995 the Federal Reserve, in cooperations, commercial banks, and certain tion with the other federal banking agennonbank companies. Foreign banks con- cies and with state banking agencies, tinue to be significant participants in the formally adopted a joint program for U.S. banking system. supervising the U.S. operations of As of year-end 2000, 220 foreign foreign banking organizations. The probanks from 58 countries operated gram has two main parts. One part 295 state licensed branches and agen- focuses on the examination process for cies (of which 13 were insured by the those foreign banking organizations that FDIC) as well as 53 branches licensed have multiple U.S. operations and is by the Office of the Comptroller of the intended to improve coordination among Currency (of which 6 had FDIC insur- the various U.S. supervisory agencies. ance). These foreign banks also directly The other part is a review of the finanowned 18 Edge Act corporations and cial and operational profile of each orga- 3 commercial lending companies; in nization to assess its general ability addition, they held an equity interest to support its U.S. operations and to of at least 25 percent in 79 U.S. com- determine what risks, if any, the mercial banks. Further, 21 foreign banks organization poses through its U.S. and certain of their affiliates were operations. Together, these two pro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

124 87th Annual Report, 2000 cesses provide critical information to Capital Adequacy Standards U.S. supervisors in a logical, uniform, During 2000 the Federal Reserve, and timely manner. During 2000 the together with the FDIC and the Office of program was refined further in light of the Comptroller of the Currency (OCC), experience in using it over the past five issued an interim final rule that amended years. the capital standards for securities borrowing transactions. The federal bank- Technical Assistance ing agencies—the Federal Reserve, the In 2000 the Federal Reserve System FDIC, the OCC, and the Office of Thrift continued to provide technical assis- Supervision (OTS)—also issued three tance on bank supervisory matters to proposals to amend the capital standards foreign central banks and supervi- for recourse and direct credit substitutes, sory authorities. Technical assistance residual interests, and securities firms. involves visits by System staff mem- Furthermore, the agencies issued an bers to foreign authorities as well as advance notice of proposed rulemaking consultations with foreign supervisors on the possible development of a simpliwho visit the Board or the Reserve fied capital framework for non-complex Banks. Technical assistance in 2000 banking organizations. was concentrated in Latin America, the Far East, and former Soviet bloc Securities Borrowing Transactions countries. On December 5 the Federal Reserve, During the year, the Federal Reserve together with the FDIC and the OCC, offered supervision training courses issued an interim rule to revise the capiin Washington, D.C., and in a number tal treatment of cash collateral that is of foreign jurisdictions exclusively for posted in connection with securities foreign supervisory authorities. System borrowing transactions. The effect of the staff also took part in technical assisrule is to more appropriately align the tance and training missions led by the capital requirements for these transac- International Monetary Fund, the World tions with the risk involved and to pro- Bank, the Inter-American Development vide a capital treatment for U.S. banking Bank, the Asian Development Bank, the organizations that is more in line with Basel Committee on Banking Superthe capital treatment applied to their vision, and the Financial Stability domestic and foreign competitors.5 Institute. Recourse and Direct Credit Substitutes Supervisory Policy On February 17 the Federal Reserve issued a joint proposal with the FDIC, Within the supervisory policy function, the OCC, and the OTS that would the Federal Reserve develops guidance for examiners and financial institutions as well as regulations for financial insti- 5. Specifically, receivables arising from the tutions under the supervision of the Fed- posting of cash collateral associated with securieral Reserve. Staff members also partici- ties borrowing can be treated as collateralized pate in international supervisory forums by the market value of the securities borrowed; the rule permits banking organizations operating and provide support for the work of the under the market risk rules to exclude such receiv- Federal Financial Institutions Examinaables from risk-weighted assets, subject to certain tion Council. conditions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 125 amend the agencies' risk-based capital risk weight in line with a 1998 revision standards to address the regulatory capi- to the Basel Capital Accord. Qualifying tal treatment of recourse obligations U.S. securities firms would be brokerand direct credit substitutes that expose dealers registered with the Securities banks, bank holding companies, and and Exchange Commission (SEC); the thrift institutions to credit risk. The pro- firms must be subject to, and comply posed revisions would use credit ratings with, the SEC's net capital rules and be to match the risk-based capital assess- subject to the margin and other regulament more closely to an institution's tory requirements applicable to regisrelative risk of loss in certain asset tered broker-dealers.6 securitizations. The Basel Committee on Banking Supervision has requested Simplified Capital Framework for comment on making some of the same Non-Complex Institutions revisions to the Basel Capital Accord. On November 3 the Federal Reserve, along with the other federal banking Residual Interests agencies, issued an advance notice of proposed rulemaking on the possible On September 27 the Federal Reserve, development of a simplified capital the FDIC, the OCC, and the OTS jointly framework for non-complex banking issued a proposed rule to amend their organizations. The options outlined in respective risk-based and leverage capithe proposal include a simplified risktal standards for the treatment of certain based framework, a leverage-ratio-only residual interests in asset securitizations approach, and a modified-leverage-ratio or other transfers of financial assets. The approach. The goal is to potentially proposed rule would require that a bankrelieve the regulatory burden associing organization hold risk-based capital ated with the existing capital rules for in an amount equal to the amount of the many non-complex domestic banking residual interest that is retained on the institutions. balance sheet in a securitization or other transfer of financial assets. The proposal also would limit the amount of residual Integration of Information interests, together with nonmortgage Technology Examinations servicing assets and purchased credit In February the Federal Reserve issued card relationships, that may be included a new policy governing information in regulatory capital, to 25 percent of technology examinations and banking tier 1 capital. organizations. Previously, the Federal Reserve separately examined informa- Claims on Securities Firms tion technology systems of all institu- On December 6 the federal banking agencies proposed to reduce from 6. Qualifying securities firms incorporated in 100 percent to 20 percent the risk other OECD countries would be those subject to weight accorded to claims on, and consolidated supervision and regulation, including claims guaranteed by, qualifying securi- risk-based capital requirements, in a manner conties firms in countries that are mem- sistent with the Basel Capital Accord. All qualifying securities firms, or their consolidated parents, bers of the Organisation for Ecomust have an issuer or debt rating in one of the nomic Co-operation and Development three highest ratings from a nationally recognized (OECD). The proposal would bring the statistical rating organization. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

126 87th Annual Report, 2000 tions conducting in-house processing. In on bank risk exposures and risk managerecognition of the importance of infor- ment practices. mation technology to banking opera- The Federal Reserve's goals in these tions and to risk management, the new activities are to advance sound superpolicy directs examiners to integrate the visory policies for banking institutions review of information technology activi- and to improve the stability of the interties within the safety and soundness national banking system. examination process for all institutions. Separate information technology exami- Capital Adequacy nations will no longer be routinely The Federal Reserve contributed to the conducted. consultative papers that constitute the proposed New Basel Capital Accord, Outsourcing issued for comment by the Basel committee in January 2001. The Federal In February the Federal Reserve issued Reserve also helped develop a number guidance to banks on outsourcing of of supervisory policy papers, reports, information and transaction processing and recommendations that were issued activities. The guidance directs banks to by the Basel committee: establish a program for monitoring and managing risks in such outsourcing • Two papers, released in January 2000, arrangements. This guidance formed on the committee's proposed amendthe basis of interagency guidance on the ments to the 1988 Basel Capital same topic, which the federal banking Accord agencies issued in November. The interagency guidance reinforces the Federal The first, A New Capital Adequacy Reserve's outsourcing guidance and Framework: Pillar 3, Market Disciincludes supplemental information that pline, urges a larger role for market banks should consider in establishing discipline in promoting bank capital and managing outsourcing relationships. adequacy by proposing guidelines for bank disclosures.7 The committee stated that supervisors have a strong Development of International interest in facilitating transparency as Guidance on Supervisory Policies a lever to strengthen the safety and soundness of the banking system. As a member of the Basel Committee The second paper, Range of Pracon Banking Supervision, the Federal tice in Banks' Internal Rating Sys- Reserve participated in negotiations to tems, assesses the current state of propose revisions to the international practice in banks' internal rating syscapital regime and aided the developtems and processes. ment of international supervisory guidance, including supervisory guidance on • A revision, issued in September, of internal control, accounting, and disclothe committee's guidance for supersure practices among banking organizations. The objectives of this guidance are to promote market discipline through 7. The title refers to the three pillars, or main greater transparency in financial state- sources, of safety and soundness that were articuments, to encourage sound risk man- lated in a paper issued by the Basel committee in June 1999; the other two pillars are minimum agement, and to improve disclosures of capital requirements and supervisory review (see qualitative and quantitative information box "The New Basel Capital Accord"). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 127 visors on managing the settlement mittee at international meetings on the risk arising from foreign exchange issues addressed by these groups. In transactions particular, the Federal Reserve in The guidance stresses that foreign 2000 represented the Basel committee exchange settlement risk is a form of in meetings of the unit of the Internacredit risk that banks should manage, tional Accounting Standards Commitlike other credit risks of similar size tee (IASC) that works on improved and duration, through a formal pro- accounting guidance for financial cess of measurement and control that instruments. This effort resulted in four includes active oversight by senior proposals and final implementation management. It also suggests that guidance for IAS 39, the IASC's comsupervisors focus on whether a bank prehensive accounting standard for has evaluated netting and other financial instruments. private-sector initiatives for their During 2000 the Federal Reserve also potential to reduce settlement risk. contributed to several policy papers on control, accounting, and disclosure that • A revision, also issued in September, were issued by the Basel committee: of the committee's guidance on credit risk management and disclosure, Prin- • Internal Audit in Banking Organizaciples for the Management of Credit tions and the Relationship of the Risk Supervisory Authorities with Internal The guidance addresses four topics: and External Auditors (July) (1) establishing an appropriate credit The paper sets out objectives and risk environment, (2) operating under principles for an effective bank intera sound credit-granting process, nal audit function, the role of internal (3) maintaining an appropriate system audit, and the banking supervisors' of credit administration, measurement, view on ways to strengthen the relaand monitoring, and (4) ensuring ade- tionship between banking supervisors quate controls over credit risk. and internal and external auditors. • The Electronic Banking Group Initia- • Best Practices for Credit Risk Disclotives and White Papers, issued in sure (September) October, which provides background Encourages banks to provide marinformation and an overview of super- ket participants and the public with visory and international issues relat- the information they need to make ing to electronic banking. meaningful assessments of bank credit risk profiles. Internal Control, Accounting, and • Report to G7 Finance Ministers and Disclosure Central Bank Governors on Interna- The Federal Reserve maintains a direct tional Accounting Standards (April) dialogue with representatives of inter- The report's recipients had asked national banking associations on sig- the Basel committee to review the nificant accounting policy issues. The standards of the IASC that have a Federal Reserve also participates in significant effect on banks. Supportthe Basel committee's Task Force on ive, overall, of the IASC's standards, Accounting Issues and its Transparency the report also summarizes super- Group and represents the Basel com- visory concerns raised by certain Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

128 87th Annual Report, 2000 standards and recommends improve- between the Federal Reserve's relations ments based, in part, on the Basel with regulators of depository institucommittee's efforts to enhance bank tions and functional regulators, which transparency. include those for insurance, securities, and commodities. Gramm-Leach-Bliley Act Umbrella Supervision of The Gramm-Leach-Bliley (GLB) Act Financial Holding Companies repeals those provisions of the Glass- On August 15 the Federal Reserve Steagall Act and the Bank Holding issued a framework for its supervision Company Act that restrict the ability of FHCs. The framework covers the purof bank holding companies (BHCs) to pose and scope of the Federal Reserve's affiliate with securities firms and insursupervision and the requirements of the ance companies. The provisions of the GLB Act for working with the primary GLB Act—and the Federal Reserve's and functional regulators. final rule, published in December The Federal Reserve's role as the 2000—establish conditions that a BHC supervisor of FHCs is to concentrate or a foreign bank must meet to be on a consolidated or group-wide analydeemed a financial holding company sis of each organization to ensure that (FHC) and to engage in expanded the holding company does not threaten activities. the viability of its depository institu- In addition to controlling depository tion subsidiaries. Umbrella supervision institutions, permissible activities for should create minimal, if any, noticeable FHCs include conducting securities change in the well-established relationunderwriting and dealing, serving as an ships between the Federal Reserve as insurance agent and insurance under- BHC (including FHC) supervisor and writer, acting as a futures commission bank and thrift supervisors (federal and merchant, and engaging in merchant state). The Federal Reserve's relationbanking. Permissible activities also ships with functional regulators will, include those that the Board and the in practice, depend upon the extent to Secretary of the Treasury jointly deterwhich an FHC is engaged in functionmine to be financial in nature or incially regulated activities and also will dental to financial activities; and they be influenced by already established include those that the Federal Reserve arrangements for coordination and infordetermines are complementary to a mation sharing. financial activity and do not pose a substantial risk to the safety and soundness Merchant Banking Activities of depository institutions or the financial system generally. On March 17 the Federal Reserve and Under the GLB Act, the Federal the U.S. Department of the Treasury Reserve has supervisory oversight jointly issued for comment an interim authority and responsibility for BHCs, rule implementing the merchant bankincluding BHCs that operate as FHCs. ing provisions of the GLB Act.8 At The statute streamlines the Federal Reserve's supervision for all BHCs and 8. In merchant banking, a financial institution invests in a corporation, taking up to a full ownersets forth parameters for the relationship ship position and usually a seat on the board of between the Federal Reserve and other directors, but does not engage in its day-to-day regulators. The statute differentiates management. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 129 the same time, the Federal Reserve also ket discipline and foster stable financial released a proposal to set minimum markets. Effective market discipline regulatory capital standards for the can provide an important complement equity investments of BHCs and FHCs. to bank supervision and regulation. The proposal, which was subject to pub- The more informative the information lic comment, applied to merchant bank- released by financial institutions, the ing activities as well as other equity better will be the evaluation of counterinvestments made under authorization party risks that market participants can granted outside the GLB Act.9 make and the better will be their adjust- On June 22 the Federal Reserve ments to the availability and pricing of issued supervisory guidance on sound funds. Thus, transparency can promote risk management practices for equity efficiency in financial markets and sound investments and merchant banking practices by banks. The Federal Reserve activities. To improve its allocation also seeks to strengthen audit and conof supervisory resources, the Federal trol standards for banks; the quality of Reserve in 2000 established a "compe- management information and financial tency center" of examiners specializing reporting is dramatically affected by in equity investments and merchant internal control systems, including interbanking. nal audit programs, and external audit programs. Information Security Standards To advance these objectives, the Federal Reserve works with other regu- Under section 501(b) of the GLB Act, lators, the accounting profession, and the federal banking agencies are a wide variety of market participants, required to issue information security both domestically and (see above) standards. In December the agencies internationally. issued Interagency Guidelines Establishing Standards for Safeguarding Customer Information after soliciting public Interagency Guidance on the comment on a June 2000 proposal. The Allowance for Loan Losses Board's guidelines are effective July 1, During 2000 the Federal Reserve, the 2001, and require banks and holding SEC, and the other federal banking companies to establish a written inforagencies continued to develop joint mation security program and to control guidance regarding the allowance for the risk of unauthorized access or other loan losses. In September the Federal threats to the security and confidential- Reserve and the other federal banking ity of customer information. agencies, under the auspices of the FFIEC, issued for public comment a Efforts to Enhance Transparency proposed policy statement on appropriate methodologies and documentation The Federal Reserve has long supported for the allowance for loan and lease sound accounting policies and meanlosses. The proposal reflects the ageningful public disclosure by banking and cies' view that the boards of directors financial organizations to improve marand management of financial institutions are ultimately responsible for these 9. The interim rule was made final as of Febru- matters. Institutions must have controls ary 2, 2001. The capital proposal was substantially in place to maintain an appropriate revised and reproposed on February 14, 2001, with comment due by April 16, 2001. allowance level and to ensure that Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

130 87th Annual Report, 2000 the allowance process incorporates cur- and supervisory policies. The Federal rent judgments about the credit quality Reserve also uses the reports to respond of the loan portfolio in a manner that is to requests from the Congress and the thorough, disciplined, and consistently public for information on bank holdapplied. ing companies and their nonbank The proposal also emphasizes that subsidiaries. institutions should maintain and support The FR Y-9 series of reports provides the allowance with documentation that standardized financial statements for the is consistent with their stated policies consolidated bank holding company and and procedures and appropriately tai- its parent. These reports are used to lored to the complexity of their loan detect emerging financial problems, portfolio. The SEC is planning to pro- review performance and conduct previde parallel guidance on this topic in a inspection analysis, monitor and evaluseparate document. ate risk profiles and capital adequacy, evaluate proposals for bank holding Private-Sector Working Group on company mergers and acquisitions, and Public Disclosure analyze the holding company's overall financial condition. In April 2000 the Federal Reserve, with The FR Y-ll series of reports aids the participation of the OCC and the the Federal Reserve in determining the SEC, established the Working Group on condition of bank holding companies Public Disclosure. The group was made that are engaged in nonbanking activiup of senior executives from major ties and in monitoring the volume, domestic and foreign banking organizanature, and condition of their nonbanktions and securities firms and was led ing subsidiaries. by Walter Shipley, retired chairman of The Federal Reserve made no revi- Chase Manhattan Bank. In January 2001 sions to the FR Y-9 and FR Y-ll series the working group released a report of reports for 2000 to allow the industry recommending enhanced and more to focus on readying its computer sysfrequent public disclosure of financial tems for the century date change. The information by banking and securities Federal Reserve did, however, implefirms. Private-sector efforts, such as ment an ad hoc supplement to the those of the working group, and official FR Y-9C and FR Y-9SP reports during regulatory initiatives can help foster a the first quarter of 2000. The suppleconsensus and advance thinking on what ment, the FR Y-9CS, is being used to constitutes sound or best practice collect summary financial data from regarding public disclosure. financial holding companies that are engaging in new activities permissible under the Gramm-Leach-Bliley Act. In Bank Holding Company Regulatory addition, the Federal Reserve com- Financial Reports pletely revised the FR Y-8 report, which The Federal Reserve requires periodic governs certain transactions between an regulatory financial reports from U.S. insured depository institution and its bank holding companies. These reports, affiliates. the FR Y-9 series and the FR Y-ll In light of the Gramm-Leach-Bliley series, provide information essential Act and increased activity by banking to the supervision of the organizations organizations in merchant banking and and to the formulation of regulations equity investment in nonfinancial com- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 131 panies, the Federal Reserve announced more relevant to the evolving financial work on the FR Y-12 report, which will services environment; the new Call track these activities. The report is Report will also complement the agenscheduled to be released for comment in cies' emphasis on risk-focused supermid-2001. vision. The modifications include the collection of new data on asset securitizations and a new trust activities sched- Federal Financial Institutions ule. The revisions also address certain Examination Council aspects of section 307 of the Riegle During the year, the Federal Finan- Community Development and Regucial Institutions Examination Council latory Improvement Act of 1994 by (FFIEC) issued major revisions to the improving the uniformity of Call Report Call Report and handled two issues forms and instructions and by eliminatregarding retail credit.10 ing certain reporting requirements that are not warranted by safety and sound- Bank Call Reports ness or other public policy purposes. As the federal supervisor of state member banks, the Federal Reserve, acting Reporting to Credit Bureaus in concert with the other federal banking On January 18 the federal banking agenagencies through the FFIEC, requires cies issued an advisory letter regarding banks to submit quarterly Reports of the practice at some financial institu- Condition and Income (the Call Report). tions of not reporting customer credit The Call Report is one of the primary lines or high credit balances to credit sources of data for the supervision and bureaus. The agencies advised financial regulation of banks and for the ongoing institutions that if they do not modify assessment of the overall soundness of their management processes to compenthe nation's financial structure. Call sate for data omitted in credit bureau Report data, which also serve as benchreports, they could inadvertently expose marks for the financial information themselves to increased credit risk. required in many other Federal Reserve regulatory financial reports, are widely used by state and local governments, Uniform Retail Credit Classification state banking supervisors, the banking and Account Management Policy industry, securities analysts, and the aca- On June 12 the FFIEC issued a revised demic community. For the 2000 report- Uniform Retail Credit Classification and ing period, the FFIEC deferred the Account Management Policy, which implementation of changes to the Call became effective on December 31, 2000. Report and other supervisory reports to Among other things, the revised policy allow banks to focus their resources on clarifies provisions regarding exten- Year 2000 readiness. sions, deferrals, renewals, and rewrites On November 2, 2000, after considerof closed-end loans and the re-aging of ation of public comments, the FFIEC open-end accounts. The revisions also announced significant revisions deinclude additional examiner guidance signed to make the 2001 Call Report in the classification of retail portfolios and modifications to the treatment of specific categories of loans, such as 10. For the membership of the FFIEC, see note 4. loans with collateral, loans secured Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

132 87th Annual Report, 2000 by residential real estate, and loans in paring a project manager's handbook, bankruptcy. which draws on the best practices in private industry and the government, as part of its project management training Supervisory Information for Reserve Bank and Board staff. Technology The Supervisory Information Technol- Enhancements to the National ogy (SIT) function within the Board's Information Center Division of Banking Supervision and Regulation facilitates management of The National Information Center (NIC) information technology within the Fed- is the Federal Reserve's comprehensive eral Reserve's supervision function. Its repository for supervisory, financial, goals are to ensure that and banking structure data. NIC also includes the National Examination Data • IT initiatives support a broad range of (NED) system, software that provides supervisory activities without duplica- supervisory personnel and state banking tion or overlap authorities with access to NIC data. A • The underlying IT architecture fully new version of NED is planned for supports those initiatives mid-2001. • The supervision function's use of The proposed new reporting forms technology takes advantage of the for collecting structure data for NIC, systems and expertise available more the Y-10 and Y-lOf, are scheduled for broadly within the Federal Reserve release on June 1, 2001. System. The process of transfering structure and financial data and supervisory infor- SIT works through assigned staff at mation among the FFIEC agencies was the Board of Governors and the Reserve automated in 2000 to cover the Federal Banks and through a committee struc- Reserve, the FDIC, and the OCC. In ture that ensures that key staff members 2001 this process will be expanded to throughout the Federal Reserve System include the OTS. participate in identifying requirements In 2000, NIC was enhanced with a and setting priorities for IT initiatives. repository for supervisory documents SIT also houses the management of including examination and inspection the National Information Center (NIC), documents, enforcement-event docua comprehensive repository for vital ments, and other products associated supervision information. with a region of the United States or a Federal Reserve District (for domestic bank holding companies), a country (for SIT Activities foreign banking organizations), or risk In 2000 SIT developed an operating plan profiles. Development of the repository for the ongoing approval and reassess- for possible other uses is ongoing. ment of IT projects. In an effort to support a broad range of supervisory activ- Staff Training ities throughout the System without duplication or overlap, SIT is also The System Staff Development Program assessing the costs and benefits of pos- trains staff members with supervisory sible centralization of System products, and regulatory responsibilities at the projects, and support. It also is pre- Reserve Banks, at the Board of Gover- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 133 Number of Sessions of Training Programs for Banking Supervision and Regulation, 2000 Program Total Regional Schools or seminars conducted by the Federal Reserve Core schools Banking and supervision elements 7 5 Operations and analysis 6 5 Bank management 4 1 Report writing 17 17 Management skills 11 9 Conducting meetings with management 16 16 Other schools Loan analysis 7 Examination management 3 Real estate lending seminar 4 Specialized lending seminar 3 Senior forum for current banking and regulatory issues 4 Banking applications 1 Basic entry-level trust 2 Advanced trust 1 Commercial essentials for consumer affairs 1 Consumer compliance examinations I 2 Consumer compliance examinations II 2 CRA examination techniques 3 Fair lending examination techniques 3 Foreign banking organizations 5 Information systems continuing education 2 Capital markets seminars 10 Technology risk integration 5 Leadership dynamics 5 GLBA case studies 2 Seminar for senior supervisors of foreign central banks' 1 Other agencies conducting courses 2 Federal Financial Institutions Examination Council 43 The Options Institute 1 1. Conducted jointly with the World Bank. .. . Not applicable. 2. Open to Federal Reserve employees. nors, and at state banking departments. FFIEC and by certain other regulatory The program's goals are in part to pro- agencies. The System's involvement vide a higher degree of cross-training includes developing and implementing in the agencies. Students from foreign basic and advanced training in various supervisory authorities attend the train- emerging issues as well as in specialized ing sessions on a space-available basis. areas such as trust activities, interna- The program provides training at the tional banking, information technology, basic, intermediate, and advanced levels municipal securities dealing, capital for the four disciplines of bank supervi- markets, payment systems risk, white sion: bank examinations, bank holding collar crime, and real estate lending. In company inspections, surveillance and addition, the System co-hosts the World monitoring, and applications analysis. Bank Seminar for students from devel- Classes are conducted in Washing- oping countries. ton, D.C., as well as at other locations The Federal Reserve conducts a variand are sometimes held jointly with ety of schools and seminars, and staff other regulators. members participate in courses offered The Federal Reserve System also par- by or cosponsored with other agencies, ticipates in training offered by the as shown in the accompanying table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

134 87th Annual Report, 2000 Student Examination Results, First Track, 2000 Specialty Core Result proficiency Safety and Consumer Trust Information soundness affairs technology Passed 74 30 15 2 1 Failed 15 9 8 1 0 Total 89 39 23 3 1 Note. These examinations are for examiners hired before February 28, 1998. In 2000 the Federal Reserve trained management information systems, the 2,890 students in System schools, 754 concept of risk as it applies to banking, in schools sponsored by the FFIEC, and and the key supervisory issues related to 32 in other schools, for a total of 3,676, integrated supervision. including 314 representatives from for- A staff member seeking an examineign central banks. The number of train- er's commission follows one of two ing days in 2000 were 19,318. training tracks: The first track, for staff The Federal Reserve System also members hired before February 28, gave scholarship assistance to the states 1998, involves a "core proficiency for training their examiners in Federal examination" as well as a specialty Reserve and FFIEC schools. Through examination of the student's choice— this program 449 state examiners safety and soundness, consumer affairs, were trained—286 in Federal Reserve or information technology. Examiners courses, 160 in FFIEC programs, and on this track should complete their 3 in other courses. commissioning requirements by Decem- In 2000 the System completed the ber 31, 2001. In 2000, 74 examiners work begun in 1997 to revise the core passed the core proficiency examination training that leads to the commissioning (see table). of assistant examiners. The project was The second track, for examiners hired undertaken to ensure that course materi- after February 27, 1998, involves a als provide examiners with a greater "first proficiency examination" as well understanding of risk-focused examina- as a "second proficiency examination" tion concepts, the components of sound in one of the three specialty areas. In internal controls, the importance of 2000, 159 examiners passed the first Student Examination Results, Second Track, 2000 Second proficiency First Result proficiency Safety and Consumer Trust Information soundness affairs technology Passed 159 11 14 1 0 Failed 1 12 0 0 Total 160 12 16 1 0 Note. These examinations are for examiners hired after February 27, 1998. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 135 proficiency examination (see table). eral Reserve approval in advance of In the second proficiency examination, their commencement. 11 examiners passed the safety and The Board has previously identified soundness examination, and 14 exam- those nonbank activities that are closely iners passed the consumer affairs related to banking and therefore generexamination. ally permissible for bank holding com- During 2000 the Federal Reserve panies. Since 1996 the act has permitted eliminated the separate commission for well-run bank holding companies that trust examiners because of the small satisfy certain criteria to commence number of examiners choosing that some of those nonbank activities on a specialty as well as the need for strong de novo basis without first obtaining general training in banking supervision Federal Reserve approval; and since for all examiners, regardless of their 1996 the act also has provided an expeultimate specialty. dited prior-notice procedure for the remaining permissible nonbank activi- Regulation of the ties and for small bank and nonbank U.S. Banking Structure acquisitions. Other recent amendments to the act are discussed in the next The Board of Governors administers the section. Bank Holding Company Act, the Bank When reviewing an application or Merger Act, the Change in Bank Connotice that requires advance approval, trol Act, and the International Banking the Federal Reserve must consider the Act in relation to bank holding compafinancial and managerial resources of nies, financial holding companies, memthe applicant, the future prospects ber banks, and foreign banking organiof both the applicant and the firm to be zations. In doing so, the Federal Reserve acquired, the convenience and needs of acts on a variety of proposals that the community to be served, the potendirectly or indirectly affect the structure tial public benefits, the competitive of U.S. banking at the local, regional, effects of the proposal, and the appliand national levels; the international cant's ability to make available to the operations of domestic banking organi- Board information deemed necessary to zations; and the U.S. banking operations ensure compliance with applicable law. of foreign banks. In the case of a foreign banking organization seeking to acquire control of a Bank Holding Company Act U.S. bank, the Federal Reserve also con- Under the Bank Holding Company Act, siders whether the foreign bank is suba corporation or similar organization ject to comprehensive supervision or must obtain the Federal Reserve's regulation on a consolidated basis by its approval before becoming a bank hold- home country supervisor. Data on deciing company through the acquisition of sions regarding domestic and internaone or more banks in the United States. tional applications in 2000 are shown in Any holding company must receive the accompanying table. Federal Reserve approval before acquiring or establishing additional banks. The Recent Amendments to the act also identifies other activities per- Bank Holding Company Act missible for a bank holding company; depending on the circumstances, these The Bank Holding Company Act (BHC activities may or may not require Fed- Act) was significantly amended on Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

136 87th Annual Report, 2000 decisions by the Federal Reserve on Domestic and International Applications, 2000 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 18 0 0 0 0 i 165 77 261 Merger of bank holding company 7 0 0 0 0 9 44 24 84 Acquisition or retention of bank 18 0 0 0 0 6 128 55 207 Acquisition of nonbank 0 1 50 0 0 47 0 203 301 Merger of bank 6 0 0 0 0 11 131 0 148 Change in control Establishment of a 0 0 0 0 0 1 0 133 134 branch, agency, or representative office by a foreign bank 18 0 10 0 0 13 0 32 Other 243 0 29 23 0 129 1,475 166 2,065 Total 310 1 80 23 0 204 1,956 658 3,232 March 11, 2000, when certain provi- related to banking under section 4(c)(8) sions of the Gramm-Leach-Bliley Act of the BHC Act. A bank holding combecame effective. Title I of the GLB Act pany that is not a financial holding comrepealed provisions of the BHC Act and pany remains subject to the restrictions of the Glass-Steagall Act that had pre- that were in effect before the GLB Act's viously restricted the ability of bank March 2000 amendments to the BHC holding companies to engage in certain Act. nonbanking activities. The GLB Act Financial holding companies do not authorized the creation of a special type have to obtain the Board's advance of bank holding company called a finan- approval to engage in or acquire a comcial holding company. The law also pany engaged in new financial activities. made major changes in the list of activi- Instead, the financial holding company ties in which financial organizations are must notify the Board within thirty days permitted to engage, allowing the affilia- after commencing a new activity or tion of banks with securities firms and acquiring a company engaged in a new insurance companies and authorizing activity. A financial holding company certain merchant banking activities. also may engage in certain other activi- Bank holding companies that do not ties that have been determined to be meet the eligibility criteria to become a financial in nature or incidental to a financial holding company may engage financial activity or that are deteronly in those activities that the Board mined to be complementary to a finanhad previously determined to be closely cial activity. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 137 A bank holding company must file Change in Bank Control Act a written declaration with the Federal The Change in Bank Control Act Reserve System to become a finanrequires persons (including certain comcial holding company. Such declarations panies) seeking control of a U.S. bank are usually acted upon by a Reserve or bank holding company to obtain Bank or senior Board official under approval from the appropriate federal authority delegated by the Board, or by banking agency before completing the the Board itself. In 2000, 463 domestic transaction. The Federal Reserve is financial holding company declarations responsible for reviewing changes in the and 21 foreign bank declarations were control of state member banks and bank approved. holding companies. In doing so, the Federal Reserve reviews the financial position, competence, experience, and integ- Bank Merger Act rity of the acquiring person; considers the effect of the proposal on the finan- The Bank Merger Act requires that all cial condition of the bank or bank holdproposed mergers of insured depository ing company to be acquired; determines institutions be acted on by the approthe effect of the proposal on competition priate federal banking agency. If the in any relevant market; assesses the institution surviving the merger is a state completeness of information submitted member bank, the Federal Reserve has by the acquiring person; and considers primary jurisdiction. Before acting on a whether the proposal would have an proposed merger, the Federal Reserve adverse effect on the federal deposit considers the financial and managerial insurance funds. As part of this process, resources of the applicant, the future the Federal Reserve may contact other prospects of the existing and combined regulatory or law enforcement agencies institutions, the convenience and needs for information about each acquiring of the community to be served, and the person. competitive effects of the proposal. It The appropriate federal banking agenalso considers the views of certain other cies are required to publish notice of agencies regarding the competitive faceach proposed change in control and to tors involved in the transaction. Durinvite public comment, particularly from ing 2000 the Federal Reserve approved persons located in the markets served by 148 merger applications. the institution to be acquired. When the FDIC, the OCC, or the In 2000 the Federal Reserve approved OTS has jurisdiction over a merger, the 134 proposed changes in control of Federal Reserve is asked to comment on state member banks and bank holding the competitive factors to ensure comcompanies. parable enforcement of the antitrust provisions of the Bank Merger Act. The Federal Reserve and those agencies International Banking Act have adopted standard terminology for assessing competitive factors in merger The International Banking Act, as cases to ensure consistency in adminis- amended by the Foreign Bank Supervitering the act. The Federal Reserve sion Enhancement Act of 1991, requires submitted 625 reports on competitive foreign banks to obtain Federal Reserve factors to the other federal banking approval before establishing branches, agencies in 2000. agencies, commercial lending company Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

138 87th Annual Report, 2000 subsidiaries, or representative offices in The Federal Reserve also has authorthe United States. ity to act on proposals involving Edge In reviewing proposals, the Federal Act and agreement corporations, which Reserve generally considers whether the are established by banking organizaforeign bank is subject to comprehen- tions to provide a means of engaging in sive supervision or regulation on a con- international business. In 2000 the Fedsolidated basis by its home country eral Reserve approved two applications supervisor. The Federal Reserve may to establish a new Edge Act corporation also consider whether the home country and three applications to establish a new supervisor has consented to the estab- agreement corporation. lishment of the U.S. office; the financial condition and resources of the foreign Applications by Member Banks bank and its existing U.S. operations; the managerial resources of the foreign State member banks must obtain Fedbank; whether the home country super- eral Reserve approval to establish visor shares information regarding the domestic branches, and member banks operations of the foreign bank with other (including national banks) must obtain supervisory authorities; whether the for- Federal Reserve approval to estabeign bank has provided adequate assur- lish foreign branches. When reviewances that information concerning its ing proposals for domestic branches, operations and activities will be made the Federal Reserve considers the available to the Board, if deemed neces- scope and character of the proposed sary to determine and enforce compli- banking activities to be conducted. ance with applicable law; and the record When reviewing proposals for foreign of the foreign bank with respect to com- branches, the Federal Reserve considpliance with U.S. law. ers, among other things, the condition of In 2000 the Federal Reserve approved the bank and the bank's experience in thirty-two applications by foreign banks international banking. Once a member to establish branches, agencies, and rep- bank has received authority to open a resentative offices in the United States. branch in a particular foreign country, the member bank may open additional branches in that country without prior Overseas Investments by approval from the Federal Reserve. U.S. Banking Organizations Excluding proposals relating to recent With the authorization of the Federal large domestic mergers, the Federal Reserve, U.S. banking organizations Reserve in 2000 acted on new and may engage in a broad range of activi- merger-related branch proposals for ties overseas. Most foreign investments 1,697 domestic branches and granted may be made under general consent pro- advance approval for the establishment cedures that involve only an after-the- of 14 foreign branches. fact notification to the Board; significant investments must be reviewed in Stock Repurchases by advance by the Board. Excluding pro- Bank Holding Companies posals relating to recent large domestic mergers, the Board in 2000 approved A bank holding company may repurforty-one proposals for significant chase its own shares from its shareoverseas investments by U.S. banking holders. When the company borrows organizations. money to buy the shares, the trans- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 139 action increases the company's debt time period established for final action and decreases its equity. The Federal ranges from twelve days to sixty days, Reserve may object to stock repurchases depending on the type of application or by holding companies that fail to meet notice. In 2000, 89 percent of decisions certain standards, including the Board's were made within the established time capital guidelines. In 2000 the Federal period.11 Reserve reviewed thirty-three proposed stock repurchases by bank holding com- Delegation of Applications panies, all of which were approved by a Reserve Bank under delegated authority. 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 applica- Federal Reserve Decisions tions, to the Reserve Banks, to the Most decisions by the Federal Reserve Director of the Board's Division of that involve a bank holding company, a Banking Supervision and Regulation, bank merger, a change in control, or the and to the Secretary of the Board. In establishment of a new U.S. banking 2000, 88 percent of the applications propresence by a foreign bank are effected cessed were handled under delegated by an order or an announcement. Orders authority. state the decision, the essential facts of the application or notice, and the Enforcement of basis for the decision; announcements Other Laws and Regulations state only the decision. All orders and announcements are made public imme- The Board's enforcement responsibilidiately; they are subsequently reported ties also cover financial disclosures of in the Board's weekly H.2 statistical state member banks; securities credit; release and in the monthly Federal and efforts, under the Bank Secrecy Act, Reserve Bulletin. The H.2 release also to counter money laundering. contains announcements of applications and notices received by the Federal Financial Disclosures of State Reserve but not yet acted on. For each Member Banks pending application and notice, the related H.2A contains the deadline for State member banks that issue securities comments. The Board's public web site registered under the Securities Exchange (www.federalreserve.gov) continued to Act of 1934 must disclose certain inforbe expanded in 2000 to include more mation of interest to investors, including information relevant to the applications annual and quarterly financial reports process. and proxy statements. By statute, the Board's financial disclosure rules must be substantially similar to those of the Timely Processing of Applications Securities and Exchange Commission. The Federal Reserve maintains internal At the end of 2000, twenty-three state target dates and procedures for the processing of applications. The setting 11. If the data were adjusted for multiple of target dates promotes efficiency at related applications filed in connection with sevthe Board and the Reserve Banks and eral larger merger proposals, the percentage would reduces the burden on applicants. The be 94 percent. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

140 87th Annual Report, 2000 member banks, most of them small or securities. In 2000 the foreign list was medium sized, were registered with the revised in March and September (see Board under the Securities Exchange www.federalreserve.gov/boarddocs/ Act. foreignmargin). Securities Credit Regulations Deterring Money Laundering Under the Securities Exchange Act of The Department of the Treasury's regu- 1934, the Board is responsible for regu- lation (31 CFR 103) implementing the lating credit in certain transactions Currency and Foreign Transactions involving the purchase or carrying of Reporting Act (the Bank Secrecy Act), securities. The Board's Regulation T requires banks and other types of finanlimits the amount of credit that may cial institutions to file certain reports be provided by securities brokers and and maintain certain records. The act is dealers when the credit is used to trade a primary tool in the fight against money debt and equity securities. The Board's laundering, and its requirements inhibit Regulation U limits the amount of credit money laundering by creating a paper that may be provided by lenders other trail of financial transactions that helps than brokers and dealers when the credit law enforcement and regulators identify is used to purchase or carry publicly and trace the proceeds of illegal activity. held equity securities if the loan is The Federal Reserve monitors comsecured by those or other publicly held pliance with the Bank Secrecy Act and equity securities. The Board's Regula- related Federal Reserve regulations (in tion X applies these credit limitations, or the Board's Regulation H) by the bankmargin requirements, to certain borrow- ing organizations under its supervision. ers and to certain credit extensions, such Pursuant to section 208.62 of Reguas credit obtained from foreign lenders lation H, banking organizations are by U.S. citizens. required to report suspicious activity Several regulatory agencies enforce related to possible violations of federal the Board's securities credit regulations. law, including money laundering and The SEC, the National Association other financial crimes. In addition, purof Securities Dealers, and the national suant to section 208.63 of Regulation H, securities exchanges examine brokers each banking organization supervised and dealers for compliance with Regu- by the Federal Reserve must develop a lation T. The federal banking agencies written program for compliance with examine banks under their respective the Bank Secrecy Act that is formally jurisdictions for compliance with Regu- approved by the institution's board of lation U. The Farm Credit Administra- directors. The compliance program must tion, the National Credit Union Admin- (1) establish a system of internal conistration, and the Office of Thrift trols to ensure compliance with the act, Supervision examine lenders under their (2) provide for independent compliance respective jurisdictions for compliance testing, (3) identify individuals responwith Regulation U; the Federal Reserve sible for coordinating and monitoring examines other Regulation U lenders. day-to-day compliance, and (4) provide Since 1990 the Board has published training for appropriate personnel. a list of foreign stocks that are eligible In 2000 the Federal Reserve continfor margin treatment at broker-dealers ued to provide expertise and guidance to on the same basis as domestic margin the Bank Secrecy Act Advisory Group, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Banking Supervision and Regulation 141 a committee of government and industry may involve the proceeds of foreign representatives that the Congress estab- official corruption. lished at the Department of the Treasury Through the Special Investigations to seek measures to reduce unnecessary Section of the Division of Banking burdens created by the act and to Supervision and Regulation, the Federal increase the utility of data gathered Reserve has assisted in the investigation under the act to aid regulators and law of money laundering activities involvenforcement. As part of that effort, an ing a number of foreign banking organiinteragency group led by the Federal zations. The section has also provided Reserve issued a revised Suspicious anti-money-laundering training to staff Activity Report in June 2000. members at Reserve Banks, to the In a related project during 2000, the domestic banking sector through trade Federal Reserve chaired a working association conferences and seminars, group on improving the reporting of sus- and to representatives of law enforcepicious activity; the group consisted of ment agencies. federal law enforcement and regulatory Internationally, the section has personnel as well as financial services assisted the State Department by providrepresentatives. The result was a mecha- ing anti-money-laundering training and nism for providing feedback to financial technical assistance to countries in Asia; institutions on suspicious activity report- in eastern Europe, including the newly ing (SAR). A document released by the independent states; in South and Central group in October, The SAR Activity America; and in the Caribbean. Federal Review: Trends, Tips, and Issues, pre- Reserve staff members have also parsents SAR statistics, patterns and trends ticipated in numerous multilateral antiof suspicious activity, and tips and guid- money-laundering initiatives sponsored ance for financial institutions on the by the Group of 7, the Financial Action preparation and filing of the SAR form. Task Force, and the Asia Pacific Work- In addition, the Federal Reserve par- ing Group on Money Laundering. ticipates in the effort to deter money laundering announced by the Depart- Loans to Executive Officers ment of Treasury in the "National Money Laundering Strategy for 2000- Under section 22(g) of the Federal 2001." For that program, the Federal Reserve Act, a state member bank must Reserve developed guidance on include in its quarterly Call Report enhanced scrutiny for transactions that information on all extensions of credit Loans by State Member Banks to their Executive Officers, 1999 and 2000 Range of interest Period Number Amount (dollars) rates charged (percent) 1999 October 1-December 31 695 82,050,000 3.0-18.0 2000 January 1-March 31 696 53,011,000 2.0-21.0 April 1-June 30 755 52,119,000 6.0-20.8 July 1-September 30 739 62,815,000 3.9-20.8 SOURCE. Call Reports. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

142 87th Annual Report, 2000 by the bank to its executive officers since the date of the preceding report. The accompanying table summarizes this information. Federal Reserve Membership At the end of 2000, 3,164 banks were members of the Federal Reserve System and were operating 47,722 offices. At year-end, member banks accounted for about 38 percent of all commercial banks in the United States and approximately 70 percent of all commercial banking offices. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

143 Federal Reserve Banks The Federal Reserve Banks devoted sig- ing the entire initiative, with oversight nificant attention in 2000 to standardiz- by the Board of Governors. Teams coning hardware and software platforms for sisting of staff members from several check processing and adjustments, insti- Reserve Banks oversee each of the four tuting check imaging and a check image projects. archive, and developing an Internet The largest of the four projects, at delivery platform for check services. 80 percent of the budget, is check stan- This chapter describes those efforts, dardization, which will provide comknown collectively as "check mod- mon check-processing software at all ernization," as well as other activities forty-five processing sites (see box). affecting the Reserve Banks. Currently, check-processing services throughout the System run on two different software platforms, and each District has further customized its software Check Modernization Project to offer additional services. These varia- The Federal Reserve Banks began a tions reduce the ability of the Reserve five-year check modernization initiative Banks to provide uniform services to install uniform software and hard- nationwide at a time when depository ware for check processing, imaging, and institutions increasingly expect uniform adjustments in forty-five Reserve Bank services across Districts, especially as offices, and to provide web access to banks consolidate across state lines. check services. The project's operating After completing the check standardizaexpenses of approximately $250 million tion project, the Reserve Banks will are expected to be recovered, over the use a new, centrally managed checklong run, by enabling more efficient processing software platform that will operations and additional service offer- enable the Reserve Banks to offer a ings to depository institutions. uniform set of services nationwide and The check modernization project is to add new uniform services more one of the most significant operational efficiently. efforts the Federal Reserve Banks have The second project, enterprise-wide ever undertaken. It will directly affect adjustments, will result in a uniform, about 5,500 Federal Reserve employees nationally linked platform for researchand 8,000 depository institutions and ing and resolving bank adjustment will substantially alter the infrastructure requests. Such requests arise because of the Reserve Banks' check service. of exceptions discovered through bank The schedule calls for implementing reconcilement processes—such as missnew technology and retraining the entire ing or extra checks or checks processed check services staff in less than four for the wrong dollar amount. The new years. system will streamline the adjustments The check modernization effort con- process and will allow backlogged sists of four interrelated projects. A cen- adjustment cases in any Reserve Bank tral management team under the Reserve office to be processed at any other Banks' Retail Payments Office is lead- Reserve Bank office. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

144 87th Annual Report, 2000 Check Standardization The Federal Reserve Banks process checks independence of each Reserve Bank has using multiple hardware and software plat- resulted in a large number of software forms. Currently, seven Reserve Banks applications, each with District-specific use a Unisys check-processing platform at variations, which make providing uniform twenty-six sites, and five Reserve Banks services even more difficult. These many use an IBM check-processing platform at challenges make the effort to implement nineteen sites. As check-processing tech- a standard check-processing platform the nology has advanced, vendors have begun most significant component of the check to discontinue support for older equipment modernization initiative. and software that some of the Reserve The check standardization project will Banks use. At the same time, as the market replace the current network of twelve relahas changed, depository institutions have tively independent check-processing sysdemanded greater uniformity in Reserve tems with a standard platform in all twelve Bank products and services. The Reserve Banks. The key to accomplishing this goal Banks' current check-processing infra- lies in the check-processing software. The structure, however, hampers their ability core components of a check-processing to implement new technologies rapidly and system are check sorters, which electroniroll out new national products to meet cus- cally capture data from checks as the tomer demand. In addition, the historical checks are physically sorted, and software. The third project, the image services banks a secure connection to Reserve system, will integrate current image pro- Bank computer networks for services duction from many nonstandard hard- such as wire transfers, automated clearware and software platforms into a con- inghouse transactions, and access to sistent production environment for the electronic check presentment files and capture and archiving of check images. account balance information. With the Banks use check images for a variety of new platform, banks will have the applications, including creating image option of using "FedLine for the Web," statements, researching exceptions, and a collection of services providing elecproviding account holders access to their tronic access to and delivery of check check images via CD-ROM or the Inter- services from almost any location, and net. When completed, this project will Reserve Banks will be able to provide allow Reserve Banks to offer depository new services over the Internet. institutions check images and image The Reserve Banks' Retail Payments retrieval services in a standard format Office manages this multiyear initiative nationwide. This project is also designed for the System. In addition, each of to facilitate electronic check present- the Reserve Banks has appointed a Disment by providing access to images of trict transition manager, who is responchecks and reducing reliance on paper sible for coordinating interdependencies checks. among the four projects within that Dis- The fourth project, electronic access trict. This structure is designed to proand delivery, will convert the current vide consistent communication of key DOS-based FedLine service to web- issues and to mitigate some of the risks based applications. FedLine provides in managing such a large initiative. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 145 which drives the sorters and manages the ization projects and is expected to take captured data. The software is the primary nearly four years to complete, with the last driver of a platform's functionality and its site converting to the standard platform in ability to interface with other applications. 2003. Capital outlays for the project are Although the Reserve Banks currently use expected to total approximately $60 milonly two basic types of check-processing lion, and expenses are expected to total system, each Reserve Bank uses a variety slightly more than $200 million through of software packages to enhance the func- the end of the project in 2004. Concurrent tionality of these systems. with the project, the Reserve Banks will be In the check standardization project, required to upgrade many of their highstandard check-processing software will be speed check sorters as vendors discontinue installed at all forty-five processing sites. support for older models. Although these The check-processing system used at these upgrades will be coordinated with the sites will be centrally managed and will check standardization project, they are not support a uniform set of products nation- included in the project budget because the wide. Once they have converted to the upgrades would have been necessary even standard platform, the Reserve Banks will without the check modernization initiative. be able to operate multiple types of check- For several Reserve Banks, these upgrades sorting hardware using the same software. will constitute a significant portion of their The check standardization project is the 2001 capital expenditures. most complex of the lour check modern- Developments in Federal Reserve Banks have recovered Federal Reserve Priced Services 100.8 percent of their priced services costs, including the PSAF (see table). The Monetary Control Act of 1980 Overall, fees charged in 2000 for requires that the Federal Reserve set priced services increased approximately fees for providing "priced services" to 5.0 percent from 1999.2 Revenue from depository institutions that, over the priced services was $881.5 million, long run, recover all the direct and indiother income related to priced services rect costs of providing the services as was $41.3 million, and costs related to well as the imputed costs, such as the priced services were $814.5 million, income taxes that would have been resulting in net revenue of $108.3 milpaid and the pretax return on equity lion and a recovery rate of 101.1 percent that would have been earned had the of costs, including the PSAF.3 services been provided by a private firm. The imputed costs and imputed the Board of Governors that are related to priced profit are collectively referred to as services; in the pro forma statements at the end of the private-sector adjustment factor this chapter, Board expenses are included in oper- (PSAF).1 Over the past ten years, the ating expenses, and Board assets are part of longterm assets. 2. Based on a chained Fisher ideal price index 1. In addition to income taxes and the return on not adjusted for quality changes. equity, the PSAF is made up of three imputed 3. Financial data reported throughout this costs: interest on debt, sales taxes, and assess- chapter—revenue, other income, cost, net revements for deposit insurance from the Federal nue, and income before taxes—can be linked to Deposit Insurance Corporation. Also allocated to the pro forma statements at the end of this chapter. priced services are assets and personnel costs of Other income is revenue from investment of clear- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

146 87th Annual Report, 2000 Priced Services Cost Recovery, 1991-2000 Millions of dollars except as noted Operating Revenue from Targeted return Total Cost recovery Year services• im ex p p u e t n e s d e s c a o n st d s2 on equity expenses (percent)3 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 57.2 833.0 104.2 2000 922.8 814.5 98.4 912.9 101.1 1991-2000 8,082.8 7,568.6 447.0 8,015.6 100.8 NOTE. In this and the following tables, components taxes of $275.3 million for the ten-year period. Also, may not sum to totals or yield percentages shown because the effect of one-time accounting changes of $74.1 milof rounding. lion and $19.4 million is included for 1993 and 1995 1. Includes revenue from services of $7,836.2 million respectively. and other income and expense (net) of $246.6 million for 3. Revenue from services divided by total expenses. the ten-year period. 2. Includes operating expenses of $6,652.9 million, imputed costs of $546.9 million, and imputed income Check Collection according to paying bank—declined 10.7 percent, compared with a 6.3 per- Federal Reserve Bank operating cent decrease in 1999. The volume of expenses and imputed costs for checks deposited that required processcommercial check services in 2000 ing by the Reserve Banks increased totaled $675.9 million, compared with 1.1 percent. $649.8 million in 1999. Revenue from The Reserve Banks continued to check operations totaled $728.6 milencourage the use of electronic check lion, and other income amounted to products that make the collection sys- $34.7 million. Net income from check tem more efficient. In 2000 the percentservices was $87.4 million in 2000, a age of all checks presented electroni- $29.9 million or 52.0 percent increase cally by the Reserve Banks to paying compared with 1999 income. banks was 20.4 percent (approximately The Reserve Banks handled 17.0 bil- 3.5 billion checks), compared with lion checks in 2000, a decrease of 18.9 percent in 1999. The Reserve 0.5 percent from 1999 (see table). The Banks captured images of 7.2 percent of volume of fine-sort checks—checks that the checks they collected, compared are presorted by the depositing banks with 5.2 percent in 1999. The New York Reserve Bank's Utica office continued a pilot project to assess the operational ing balances, net of earnings credits, an amount implications of capturing check images termed net income on clearing balances. Total cost is the sum of operating expenses, imputed costs on high-speed sorters, while the Minne- (interest on debt, interest on float, sales taxes, and apolis Bank's Helena Branch continued the Federal Deposit Insurance Corporation assess- to evaluate the cost savings and operment), imputed income taxes, and the targeted ational implications of using check return on equity. Net revenue is revenue plus other income minus total cost. images to expedite check returns. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks \A1 Activity in Federal Reserve Priced Services, 2000, 1999, and 1998 Thousands of items Percentchange Service 2000 1999 1998 1999 to 2000 1998 to 1999 Commercial checks 16,993,800 17,075,008 16,573,463 -.5 3.0 Funds transfers 111,175 105,408 100,609 5.5 4.8 Securities transfers 5,666 5,147 5,115 10.1 .6 Commercial ACH 3,812,191 3,343,615 2,965,739 14.0 12.7 Noncash collection 519 613 755 -15.3 -18.8 Cash transportation 19 18 18 5.6 1.0 NOTE. Activity in commercial checks is the total num- items processed; in noncash collection, the number of ber of commercial checks collected, including processed items on which fees are assessed; and in cash transportaand fine-sort items; in funds transfers and securities trans- tion, the number of registered mail shipments and FRBfers, the number of transactions originated on line and off arranged armored carrier stops. line; in commercial ACH, the total number of commercial Fedwire Funds Transfer and Net 2000 the off-line funds transaction sur- Settlement charge increased from $13.00 to $15.00 to reflect more accurately the costs of Reserve Bank operating expenses and off-line processing. imputed costs for Fedwire funds transfer and net settlement services totaled Net Settlement $56.8 million in 2000. Revenue from these operations totaled $61.9 mil- The Federal Reserve allows particilion, and other income amounted to pants in private clearing arrangements $2.7 million, resulting in net income of to exchange and settle transactions $7.7 million. on a net basis through reserve- or clearing-account balances. Users of net Funds Transfer settlement services include check clearinghouse associations, automated clear- The Fedwire funds transfer system inghouse networks, credit card proallows depository institutions to draw cessors, automated teller machine on their reserve or clearing balances at networks, and funds transfer and securithe Reserve Banks and transfer funds ties transfer networks. The Federal to other institutions in the United States. Reserve offers three types of settlement The number of Fedwire funds transfers service: the settlement sheet service, the originated by depository institutions Fedwire-based settlement service, and increased 5.5 percent in 2000, to the enhanced net settlement service.4 111.2 million. In April 2000 the Reserve The Reserve Banks provide settle- Banks reduced the transfer fees for all ment services to approximately ninety volume tiers (table). local and national private-sector clear- Depository institutions that do not ing and settlement arrangements. In have an electronic connection to the Fedwire funds transfer system can originate transfers via "off-line" telephone 4. The settlement sheet service is being phased instructions. Off-line Fedwire operations out, and all participating arrangements will be are consolidated at the Federal Reserve required to move to the enhanced service by year- Banks of Boston and Kansas City. In end 2001. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

148 87th Annual Report, 2000 Fees Paid by Depository Institutions for $13.00 to $15.00 to reflect more accu- Selected Federal Reserve Priced Services, rately the costs of off-line processing. 1999-2000 Dollars Fedwire Book-Entry Securities Item 1999 2000 The Fedwire book-entry securities trans- FEDWIRE FUNDS TRANSFERS, fer system allows depository institutions BY VOLUME TIER1 to transfer Treasury and agency securi- Tier ties electronically to other institutions in (number of transfers per month) 1 (1 to 2,500) .34 .33 the United States. Reserve Bank operat- 2 (2,501 to 80,000) .27 .24 ing expenses and imputed costs for the 3 (80,001 and more) .21 .17 Fedwire book-entry securities service NET SETTLEMENT, totaled $15.9 million in 2000. Revenue BY TYPE OF SERVICE Settlement sheet from these operations totaled $17.8 mil- Entries, each .95 .95 lion, and other income amounted to Files, each 12.00 12.00 Minimum per month 60-175 60-175 $0.8 million, resulting in net income of $2.6 million. The Reserve Banks pro- Fedwire-based Entries, each .95 .95 cessed 5.7 million transfers of govern- Files, each 12.00 12.00 ment agency securities on the Fedwire Minimum per month 100-175 100-175 book-entry securities transfer system Enhanced during the year, an increase of 10.1 per- Entries, each .95 .95 Files, each 12.00 12.00 cent from 1999.5 Minimum per month 60 60 Although the monthly account- BOOK-ENTRY SECURITIES maintenance fees were held steady Account maintenance in 2000, the basic per-transfer fee for Per issue .45 .45 Per account 15.00 15.00 book-entry securities transfers origi- Transfers, each2 .85 .70 nated and received by a depository institution was reduced in April (table). As NONCASH COLLECTION it was for funds transfers, the surcharge Bonds, each 50.00 40.00 Deposit envelopes for off-line securities transactions was (per envelope of coupons)3 increased. The Federal Reserve operates 1-5 4.75 4.75 6-50 3.00 2.50 a service at the Federal Reserve Bank of Chicago to facilitate the purchase and Cash letters (flat fee, by number of sale of Treasury and government agency envelopes of coupons)3 1-5 7.50 7.50 securities by depository institutions in 6-50 15.00 15.00 Return items, each 15.00 15.00 5. The revenues, expenses, and volumes reported here are for transfers of securities issued NOTE. Rates for 2000 are as of April 3. 1. Rates apply only to their specified volume tiers. by federal government agencies, government- 2. Originated and received. sponsored enterprises, and international institu- 3. Deposits and cash letters may contain no more than tions such as the World Bank. The Fedwire book- 50 envelopes of coupons. entry securities service also provides custody, transfer, and settlement services for U.S. Treasury securities. The Reserve Banks act as fiscal agents 2000 the Reserve Banks processed more of the United States when they provide transfer than 424,000 settlement entries for these and safekeeping of U.S. Treasury securities, and the Treasury Department assesses fees on deposiarrangements, and fees were held steady tory institutions for some of these services. For (table). The off-line settlement sur- more detail, see the section "Fiscal Agency Sercharge, however, was increased from vices" later in this chapter. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 149 the secondary market. The transaction Branch processed 519,000 noncash colfee for this service was held steady in lection transactions. 2000. Reserve Bank operating expenses and imputed costs for noncash collection services totaled $2.0 million in 2000. Automated Clearinghouse Revenue from noncash operations Reserve Bank operating expenses and totaled $2.3 million, and other income imputed costs for commercial automated amounted to $0.1 million, resulting in clearinghouse (ACH) services totaled net income of $0.4 million. Two non- $61.6 million in 2000. Revenue from cash collection fees were reduced in ACH operations totaled $68.8 mil- 2000, and the others remained the same. lion, and other income amounted to $2.9 million, resulting in net income of $10.2 million, a $1.7 million or Special Cash Services 14.3 percent decrease compared with 1999. The Reserve Banks processed The Reserve Banks charge fees for spe- 3.8 billion commercial ACH transac- cial cash services and nonstandard tions, an increase of 14.0 percent from access.6 Special cash services represent 1999. a very small portion (less than 1 per- In 2000 the Board approved a new cent) of the cost of overall cash services approach to pricing ACH transac- provided by the Reserve Banks to tions that the Federal Reserve Banks depository institutions. The Helena exchange with intermediaries that are Branch of the Minneapolis Reserve Bank provides wrapped coin and coin in defined as operators under the operating nonstandard packages; the Chicago Disrules of the National Automated Cleartrict provides currency in nonstandard ing House Association. As part of that packages; and the El Paso Branch of the approach, the Board authorized the Dallas Reserve Bank provides nonstand- Reserve Banks to initiate discussions ard packaging of same-day express cash with the private-sector ACH operators orders. In addition, the Boston, Kansas (PSOs) to negotiate the structure and City, and San Francisco Districts and the level of fees that the Reserve Banks will Helena and El Paso Branches provide charge for processing interoperator cash transportation by registered mail. transactions as well as the fees that the Reserve Banks will pay the PSOs. Reserve Bank operating expenses and imputed costs for special cash services totaled $2.1 million in 2000. Revenue Noncash Collection from cash operations totaled $2.1 mil- The Federal Reserve provides a service lion, and other income amounted to for the collection and processing of $0.1 million, resulting in net income of municipal bearer bonds and coupons. $0.1 million. These securities, issued by local governments and states, are referred to as 6. Nonstandard access refers to provisions of "noncash" items. Customer service for the Uniform Cash Access Policy that authorize the noncash program has been central- Reserve Banks to charge fees to financial instituized at the Federal Reserve Bank of tions when the number of weekly orders for currency or deposits of currency exceeds a uniform Atlanta's Jacksonville Branch, which standard. Because nonstandard access is not conmaintains a database of more than 3,500 sidered a priced service, the fees are treated as a paying agents. In 2000 the Jacksonville recovery of expenses rather than as revenue. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

150 87th Annual Report, 2000 Float increased production, the Reserve Banks had enhanced their management of Federal Reserve float increased in 2000 inventory, and banks had reduced their to a daily average of $774.2 million, orders for Golden Dollars, the Federal from a daily average of $584.4 million Reserve's supply of the new coins was in 1999. The Federal Reserve recovers more than adequate to meet demand. the cost of float associated with priced Early evidence suggests that the Golden services as part of the fees for those Dollars are not widely circulated but are services. collected by the public as commemorative coins. In May the Department of the Trea- Developments in sury introduced the new-design $5 and Currency and Coin $10 notes, thereby concluding the rede- Depository institutions held larger-than- sign that began in 1996 with the intronormal amounts of vault cash in prepa- duction of the new-design $100 note. ration for the public's potential need for The new-design $5 and $10 notes conadditional cash during the period around tain the same features as the other 1996 the year 2000 (Y2K) date change. Series notes, except that the $5 note Because the Y2K event went smoothly, does not include color-shifting ink. banks were eager to return the extra There are no plans to redesign the vault cash to the Reserve Banks in Janu- $1 note. ary 2000. To accommodate this large flowback of currency, Reserve Banks Developments in extended dock hours to receive currency Fiscal Agency and deposits and worked extra shifts to pro- Government Depository Services cess deposits. In January 2000, Reserve Banks received 4.0 billion notes, 61 per- The Federal Reserve Act provides that, cent more than the 2.5 billion notes when required by the Secretary of the received in January 1999 and 12 percent Treasury, Reserve Banks will act as fisof the entire year's receipts. These cal agents and depositories of the United extraordinary cash flows surrounding States. In this capacity, Reserve Banks Y2K required close coordination among provide debt-related services, collect cash operations staff and economists and disburse funds on behalf of the fedresponsible for open market operations eral government, and provide similar to ensure that the large volume of cur- services for several domestic and interrency in circulation was appropriately national government agencies. collateralized. For example, as fiscal agents and In January 2000 the U.S. Mint issued depositories of the United States, a new Golden Dollar, promoting the Reserve Banks collect federal taxes for coin as a convenient alternative to the the Treasury, maintain a cash account $1 note. The Mint distributed Golden for the Treasury to meet its immediate Dollars directly to selected retailers cash needs, and invest excess Treasury and through the Federal Reserve to the balances with depository institutions. banking industry. Initially, the banking The Federal Reserve adjusts the total industry's demand for Golden Dollars Treasury balances at depository instiexceeded the Mint's production capac- tutions according to the Treasury's cash ity and the Federal Reserve's inven- needs and depository institutions' willtories. By midyear, after the Mint had ingness and ability to collateralize Trea- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 151 Expenses of Federal Reserve Banks for Fiscal Agency and Depository Services, 2000, 1999, and 1998 Thousands of dollars Agency and service 2000 1999 1998 DEPARTMENT OF THE TREASURY Bureau of the Public Debt Savings bonds 70,786.7 70,285.8 71,401.8 Treasury Direct 41,259.3 40,446.2 35,859.1 Commercial book entry 13,924.6 15,744.2 17,880.4 Marketable Treasury issues 14,224.3 13,715.1 15,530.5 Definitive securities and Treasury coupons ... 1,069.3 4,886.7 3,734.2 Other services 132.5 100.4 83.7 Total 141,404.7 145,178.4 144,489.7 Financial Management Service Treasury tax and loan and Treasury general account 38,649.0 34,971.0 35,428.2 Government check processing 31,866.9 33,365.4 34,096.4 Automated clearinghouse 10,799.1 11,263.4 11,716.0 Government agency check deposits 2,218.8 2,422.7 2,731.0 Fedwire funds transfers 182.9 187.7 186.3 Other services 27,015.4 20,423.5 16,045.2 Total 110,732.2 102,633.7 100,203.1 Other Treasury Total 10,362.8 7,786.8 6,237.6 Total, Treasury 262,499.7 255,598.9 250,930.4 OTHER FEDERAL AGENCIES Department of Agriculture Food coupons 16,463.7 18,643.9 24,452.4 U.S. Postal Service Postal money orders 9,213.5 6,623.3 5,275.3 Miscellaneous agencies Other services 13,747.1 13,983.0 16,850.6 Total, other agencies 39,424.3 39,250.2 46,578.3 Total reimbursable expenses 301,924.0 294,849.1 297,508.7 sury investments. Since October 2000 reduced the number of Treasury auction the Federal Reserve has been conduct- review sites as well. ing these activities under the new, cen- The total cost of providing fiscal tralized Treasury Investment Program agency and depository services to the (TIP). Treasury amounted to $262.5 million, In 2000 the Reserve Banks focused compared with $255.6 million in 1999 on the consolidation of several fiscal (table). The cost of providing services agency and depository operations to to other government agencies was improve the efficiency and quality of $39.4 million, compared with $39.3 milservice provided to the Treasury and its lion in 1999. The Reserve Banks estabcustomers. In addition to the implemen- lish uniform and consistent practices for tation of TIP (see the discussion below, accounting for, reporting of, and billing under "Federal Tax Payments"), the for the full costs of providing fiscal Reserve Banks completed the consolida- agency and depository services to the tion of Treasury Direct customer service U.S. government. In 2000 the Reserve operations and improved telephone ser- Banks requested reimbursement by the vice. The Reserve Banks and the Trea- Treasury and other government agensury's Bureau of the Public Debt cies of $301.9 million in fiscal agency Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

152 87th Annual Report, 2000 and depository expenses, an increase of The Reserve Banks operate two book- $7.1 million from 1999. entry securities systems for Treasury securities: the Fedwire system, which provides custody and transfer, and Treasury Direct, which provides custody Fiscal Agency Services services only.7 Almost all book-entry As fiscal agents, Reserve Banks provide Treasury securities, 97.2 percent of the the Department of the Treasury with total par value outstanding at year-end services related to the federal debt. For 2000, were maintained on Fedwire; the example, they issue, transfer, reissue, remainder were maintained on Treasury exchange, and redeem marketable Trea- Direct. sury securities and savings bonds; they The Reserve Banks in 2000 processed also process secondary market transfers 7.7 million Fedwire transfers of Treainitiated by depository institutions. The sury securities, a 5.0 percent decline approximately 10,000 depository institu- from 1999. They also processed tions that handle Treasury deposits are 27.6 million interest and principal payrequired to pledge to the Treasury collat- ments for Treasury and government eral sufficient to protect the uninsured agency securities, an increase of 3.9 perportion of Treasury tax proceeds and the cent from 1999. full value of Treasury investments held. Treasury Direct, operated by the The Reserve Banks monitor the collat- Philadelphia Reserve Bank, is a system eral pledged by depository institutions of book-entry securities accounts for to the federal government. If the value institutions and individuals planning to of collateral is insufficient, the Federal hold their Treasury securities to matu- Reserve removes the unprotected Trea- rity. The Treasury Direct system holds sury funds from that institution and more than 669,000 accounts. During invests them elsewhere. 2000 the Reserve Banks processed nearly 190,000 tenders for Treasury Direct customers seeking to purchase Marketable Treasury Securities Treasury securities at Treasury auctions Reserve Bank operating expenses for and handled 0.7 million reinvestment activities related to marketable Treasury requests. The number of tenders was securities in 2000 (Treasury Direct, 20.5 percent lower than in 1999, and the commercial book entry, marketable number of reinvestment requests was issues, definitive securities, and Trea- 11.0 percent higher. The Philadelphia sury coupons) totaled $70.5 million, Reserve Bank issued 6.0 million paya 5.8 percent decrease from 1999. ments for discounts, interest, and Banks processed nearly 220,000 com- redemption proceeds; the Treasury mercial tenders for government securi- Direct facility was also used to origities in Treasury auctions, a 13.0 per- nate 2.7 million payments for savings cent decline from 1999. The New York bonds and more than 36,000 interest Reserve Bank handles commercial tenders that come from within its Dis- 7. The Fedwire book-entry securities mechatrict for government securities in Trea- nism is also used for safekeeping and transfer of sury auctions, including those from all securities issued by federal government agencies, primary dealers. The Bureau of the Pub- government-sponsored enterprises, and international institutions. For more details, see the section lic Debt assumed the processing of all "Fedwire Book-Entry Securities" earlier in this other commercial tenders. chapter. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 153 payments for definitive (paper) Treasury tion, reissue, and exchange transactions, issues. a 3.0 percent increase from 1999. The The Reserve Banks completed the Reserve Banks responded to 1.6 million consolidation of Treasury Direct cus- service calls from owners of savings tomer service activities on schedule. bonds, approximately the same number All individual applications to purchase, as in 1999. reinvest, and redeem matured Treasury The Reserve Banks continued to securities are handled by one of three enhance the automation aspects of sav- Reserve Banks: Boston, Minneapolis, or ings bond processing. All savings bond Dallas. As part of the consolidation, the processing sites have implemented elec- Reserve Banks implemented a toll-free tronic scanning of paper applications customer contact center for Treasury submitted by banks. Work also contin- Direct customers. The center routes calls ued on plans to replace several mainto a variety of electronic services avail- frame computer programs with distribable from the Treasury and connects the uted (personal computer) programs. call to the next available agent at one of Savings bond operations are conthe three Reserve Banks, regardless of ducted at five Reserve Bank offices: the caller's location. Buffalo (New York District), Pittsburgh As a service to Treasury Direct inves- (Cleveland District), Richmond, Minnetors, the Chicago Reserve Bank, through apolis, and Kansas City. All five offices the Sell Direct program, continued to process transactions, but only the Pittssell investors' Treasury securities on burgh and Kansas City offices print and the secondary market for a fee. In 2000 mail savings bonds. the Bank sold more than 16,000 securities worth $655.8 million, compared with more than 16,000 securities worth Depository Services $581.2 million in 1999. The Bank col- The Reserve Banks maintain the Trealected almost $557,000 in fees on behalf sury's funds account, accept deposits of of the Treasury, an increase of 4.1 perfederal taxes and fees, pay checks drawn cent from the almost $535,000 in fees on the Treasury's account, and make collected in 1999. electronic payments on behalf of the Treasury. Savings Bonds Federal Tax Payments Reserve Bank operating expenses for savings bond activities totaled Reserve Bank operating expenses $70.8 million in 2000, an increase of related to federal tax payment activi- 0.7 percent from 1999. The Banks ties in 2000 totaled $38.6 million. The printed and mailed 36.6 million savings Banks processed approximately 3.8 milbonds on behalf of the Treasury's lion electronic and 16,000 paper advices Bureau of the Public Debt, a 9.6 percent of credit from depository institutions decline from 1999. The Reserve Banks handling tax payments for businesses processed 2.3 million original-issue and individuals. Advices of credit are transactions for the Series I (inflation notices from depository institutions to indexed) savings bond and 27.9 mil- the Federal Reserve and the Treasury lion original-issue transactions for the that summarize taxes collected on a Series EE savings bond. They also pro- given day. From 1999 to 2000 the volcessed approximately 568,000 redemp- ume of tax payments submitted elec- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

154 87th Annual Report, 2000 tronically decreased 20.0 percent, and time to invest Treasury funds, monitor the volume of paper advices of credit the value of collateral pledged, and declined 64.0 percent. The Reserve withdraw invested balances that are not Banks also received a small number of fully collateralized. TIP, which is opertax payments directly. ated by the St. Louis Reserve Bank, also Depository institutions that receive improves upon the investment capatax payments remit the funds to the bilities that had been available to the Reserve Banks electronically through Treasury under the TT&L system. the Treasury's Electronic Federal Tax Along with TIP, the St. Louis Reserve Payment System (EFTPS). Businesses Bank implemented a separate applicathat know their tax liability in advance tion, the paper tax processing system, of the tax due date authorize their that converts paper tax payments to elecdepository institutions to debit their tronic form and truncates the paper tax accounts for the tax they owe. On the coupons. due date, the depository institution sends In a related matter, the Board moditax payment information to one of two fied its policy statement on payments commercial banks that serve as the system risk by establishing posting Treasury's EFTPS financial agents. times for TIP transactions. The financial agents assemble the taxpayment information received and for- Payments Processed for the Treasury ward it to the Federal Reserve, which debits the taxpayer's depository institu- Reserve Bank operating expenses tion account and places the money in the related to government payment opera- Treasury's account. Because some busi- tions in 2000 (check processing, ACH, ness taxpayers cannot determine their agency check deposits, and Fedwire) tax liability until the day their taxes are amounted to $45.1 million. The Treadue, the Minneapolis Reserve Bank sury continued to encourage electronic operates another automated system payments: ACH transactions processed that allows depository institutions to for the Treasury amounted to 853.3 milmake same-day tax payments on behalf lion, an increase of 3.6 percent from of taxpayers directly to the Federal 1999. Most government ACH trans- Reserve; in 2000, the Minneapolis actions are payments for social security, Bank's same-day electronic system pro- pensions, and salaries; some are paycessed approximately 247,000 tax pay- ments to vendors. All recurring Treaments, totaling $262.8 billion, from sury Direct payments and many defini- 9.4 million taxpayers. tive securities interest payments are The Reserve Banks made significant ACH transactions. improvements to the electronic tax pay- In support of the Treasury's effort to ments process in 2000. They worked make payments electronically, the Fedduring the year to implement TIP, which eral Reserve Bank of Dallas continreplaced the Treasury tax and loan ued to operate the Electronic Transfer (TT&L) system in October. The Reserve Accounts program. This program helps Banks moved from twelve TT&L appli- individuals who do not have bank cations to one centralized TIP applica- accounts find low-cost transaction tion and database, which offers several accounts at federally insured depository advantages. Unlike TT&L, which held institutions so that they can receive their all transactions and processed them at federal benefit payments electronically. the end of each day, TIP operates in real The Dallas Bank enrolls depository Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 155 institutions that want to provide these accounts for some government agenaccounts and helps payment recipients cies, and (6) provide various payment and others locate these institutions. services. The Treasury continues to reduce the One such service is the provision number of payments it makes by paper of food coupon services for the U.S. check. The Reserve Banks processed Department of Agriculture. Reserve 262.0 million paper government checks Bank operating expenses for food couin 2000, a decrease of 9.0 percent from pon services in 2000 totaled $16.5 mil- 1999. The Banks also issued nearly lion, 11.7 percent lower than in 1999. 524,000 paper fiscal agency checks, a The Banks redeemed 685.7 billion decrease of 14.0 percent from 1999. Fis- food coupons, a decrease of 40.8 percal agency checks are used primarily to cent from 1999. The Department of pay semiannual interest on registered, Agriculture's program to provide benedefinitive Treasury notes and bonds and fits electronically is expected to conon Series H and HH savings bonds; tinue reducing the volume of paper food some were used to pay the principal of coupons redeemed by the Reserve matured securities and coupons and to Banks. make discount payments to first-time As fiscal agents of the United States, purchasers of government securities the Reserve Banks also process all through Treasury Direct. postal money orders deposited by banks for collection. The Reserve Banks processed 230.1 million postal money Services Provided to Other Entities orders in 2000, 1.9 percent more than in 1999. Much of this work is centralized The Reserve Banks provide fiscal at the St. Louis Reserve Bank. In midagency and depository services to other 2000 the St. Louis Reserve Bank impledomestic and international agencies mented an image-capture service for when they are required to do so by the Secretary of the Treasury or when paid postal money orders (similar to the they are required or permitted to do so service provided for Treasury checks) by federal statute. Depending on the to facilitate the U.S. Postal Service's authority under which the services are accounting, reconcilement, and claims provided, the Reserve Banks may processes. (1) maintain book-entry accounts of government agency securities and Information Technology handle their transfer,8 (2) provide custody for the stock of unissued defin- In 2000 the Federal Reserve made sigitive securities, (3) maintain and nificant progress on its strategic initiaupdate balances of outstanding book- tive to implement frame relay technolentry and definitive securities for issu- ogy on Fednet, the telecommunications ers, (4) perform various other securities- network that supports both external servicing activities, (5) maintain funds electronic connections between the Federal Reserve and depository institutions and internal communications among 8. The Federal Reserve tracks the transfer and Reserve Banks. Once complete, the new account maintenance of agency securities as a network will provide improved speed, priced service to depository institutions. The agen- reliability, and performance for deposicies are not charged for the Federal Reserve's tory institutions' electronic connections expenses in providing these services to depository institutions. during contingencies and the capacity Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

156 87th Annual Report, 2000 and flexibility to support new electronic institutions use to access priced serservices using web-based technologies. vices; the Banks allocate costs and reve- The Federal Reserve completed equip- nue associated with electronic access to ment installation at the three automated the various priced services. The monthly operations centers supporting national cost of a Fednet connection ranged from network services and began installing $75 to $2,000, depending on the type both internal and external frame relay and speed of the connection. connections. Approximately 1,500 telecommunications connections will be Financial Examinations of converted to frame relay technology Federal Reserve Banks through 2002. Improvements in the security of the Section 21 of the Federal Reserve Act new FedLine for Windows platform requires the Board of Governors to order continued in 2000. The security an examination of each Federal Reserve enhancements authenticate FedLine for Bank at least once a year. The Board Windows operators, encrypt informa- engages a public accounting firm to pertion, and facilitate the connection of the form an annual audit of the combined FedLine for Windows terminal with the financial statements of the Reserve administrative systems of depository Banks (see the chapter later in this volinstitutions. In 2000 the vendors build- ume, "Federal Reserve Bank Combined ing the enhancements completed the Financial Statements"). The public software development and integrated the accounting firm also audits the annual Fedline for Windows security compo- financial statements of each of the nents. A complete Fedline for Windows twelve Banks. The Reserve Banks use package for depository institutions was the framework established by the Comprepared and tested in anticipation of mittee of Sponsoring Organizations of converting dial customers from the Fed- the Treadway Commission (COSO) in eral Reserve's current DOS FedLine assessing their internal controls over platform to the new FedLine for Win- financial reporting, including the safedows platform in 2001. Conversion will guarding of assets. Within this framecontinue through the end of 2002. work, each Reserve Bank provides an Reserve Banks continue to make sig- assertion letter to its board of directors nificant progress in using the World annually confirming adherence to the Wide Web as a delivery channel for COSO standards, and a public accountfinancial services. In 2000 the Fed- ing firm certifies management's assereral Reserve successfully implemented tion and issues an attestation report to a public-key infrastructure to enable the Bank's board of directors and to the secure access to certain services through Board of Governors. web browsers; collectively, these ser- In 2000 the Congress amended the vices are known as FedLine for the Web. Federal Reserve Act to codify the prac- The Federal Reserve currently offers tice of engaging an external accounting web-based applications for check imag- firm. The new Federal Reserve Act secing, cash ordering, and savings bonds, tion 11B states, "The Board shall order and plans to launch other new services an annual independent audit of each on FedLine for the Web over the next Federal Reserve Bank and the Board." several years. In 2000 the attention of the Board's The Reserve Banks charge fees for Division of Reserve Bank Operations the electronic connections depository and Payment Systems at the Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 157 Banks focused on assessing the ade- Reserve's Federal Open Market Comquacy of internal controls at each Bank, mittee (FOMC), the division examines using a format consistent with the inte- the accounts and holdings of the System grated COSO framework. The scope of Open Market Account at the Federal these examinations included compre- Reserve Bank of New York and the forhensive reviews of each Bank's internal eign currency operations conducted by control system in terms of the five that Bank. In addition, a public account- COSO control components: control ing firm certifies the schedule of parenvironment, risk assessment, control ticipated asset and liability accounts activities, information and communica- and the related schedule of participated tion, and monitoring. income accounts at year-end. Division The firm engaged for the audits of the personnel follow up on the results of individual and combined financial state- these audits. The FOMC receives the ments of the Reserve Banks for 2000 external audit reports and the report on was PricewaterhouseCoopers LLP the division's follow-up. (PwC). Fees for these services totaled $1.4 million. PwC also audited the Fed- Income and Expenses eral Reserve System's pension plan and thrift savings plan, the fees for which The accompanying table summarizes the totaled $0.2 million. In addition, the income, expenses, and distributions of Board and the Reserve Banks engaged net earnings of the Federal Reserve PwC for management consulting ser- Banks for 1999 and 2000. vices. Fees for these services, totaling Income in 2000 was $33,964 million, $1.5 million in 2000, are not considered compared with $29,347 million in 1999. incompatible with the services provided Total expenses were $2,595 million by PwC as an independent auditor. ($1,586 million in operating expenses, Each year, to assess compliance with $385 million in earnings credits granted the policies established by the Federal to depository institutions, and $188 mil- Income, Expenses, and Distribution of Net Earnings of Federal Reserve Banks, 2000 and 1999 Millions of dollars Item 2000 1999 Current income 33,964 29,347 Current expenses 1,972 1,852 Operating expenses' 1,586 1,532 Earnings credits granted 385 321 Current net income 31,992 27,495 Net additions to (deductions from, - ) current net income -1,492 -526 Cost of unreimbursed services to Treasury o Q Assessments by the Board of Governors 624 699 For expenditures of Board 188 214 For cost of currency 436 485 Net income before payments to Treasury 29,868 26,262 Dividends paid 410 374 Transferred to surplus 4,115 479 Payments to Treasury2 25,344 25,410 1. Includes a net periodic credit for pension costs of 2. Interest on Federal Reserve notes. $393 million in 2000 and $367 million in 1999. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

158 87th Annual Report, 2000 lion in assessments for expenditures from $25,410 million in 1999; the payby the Board of Governors). The cost ments equal net income after the deducof new currency was $436 million. tion of dividends paid and of the amount Revenue from priced services was necessary to bring the surplus of the $881.5 million. Unreimbursed expenses Reserve Banks to the level of capital for services provided to the Treasury paid in. and other government entities amounted In the "Statistical Tables" chapter of to $8 million.9 this volume, table 5 details the income The profit and loss account showed a and expenses of each Federal Reserve net loss of $1,492 million. The loss was Bank for 2000, and table 6 shows a due primarily to unrealized losses on condensed statement for each Bank for assets denominated in foreign curren- the years 1914 through 2000. A detailed cies revalued to reflect current market account of the assessments and expendiexchange rates. Statutory dividends paid tures of the Board of Governors appears to member banks totaled $410 million, in the chapter "Board of Governors $36 million more than in 1999; the rise Financial Statements." reflects an increase in the capital and surplus of member banks and a consequent increase in the paid-in capital Holdings of Securities and Loans stock of the Reserve Banks. The Reserve Banks' average daily hold- Payments to the Treasury in the form ings of securities and loans during 2000 of interest on Federal Reserve notes amounted to $528,139 million, an totaled $25,344 million in 2000, down increase of $32,533 million from 1999 (see table). Holdings of U.S. govern- 9. The Reserve Banks bill the Treasury and ment securities increased $32,390 milother government entities for the cost of certain lion, and holdings of loans increased services, and the portions of the bills that are not $144 million. paid are reported as unreimbursed expenses. Securities and Loans of FederalReserve Banks, 1998-2000 Millions of dollars except as noted US. Item and year Total government Loans 2 securities1 Average daily holdings 3 1998 447,095 446,933 161 1999 495,606 495,384 221 2000 528,139 527,774 365 Earnings 1998 26,851 26,842 9 1999 28,227 28,216 11 2000 32,760 32,737 23 Average interest rate (percent) 1998 . 6.01 6.01 5.44 1999 5.70 5.70 5.02 2000 6.20 6.20 6.27 1. Includes federal agency obligations. 3. Based on holdings at opening of business. 2. Does not include indebtedness assumed by the Federal Deposit Insurance Corporation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks 159 The average rate of interest earned Chicago's Midway Airport. Leasehold on the Reserve Banks' holdings of gov- improvements to prepare the space for ernment securities rose to 6.20 percent, the Bank's operations continued. from 5.7 percent in 1999, and the aver- Leases were renewed for checkage rate of interest earned on loans rose processing centers in Charleston, West to 6.27 percent from 5.02 percent. Virginia, for the Richmond Bank, and Peoria, Illinois, for the Chicago Bank. In the New York District, the multi- Volume of Operations year program of improvements to the Table 8 in the "Statistical Tables" chap- new leased offices in New York City ter shows the volume of operations in continued. Work also continued on the the principal departments of the Federal multiyear renovation of the interior of Reserve Banks for the years 1997 the headquarters building and on the through 2000. cleaning and repair of the building's exterior stonework; in addition, work began on improvements to the build- Federal Reserve Bank ing's main chiller plant. Premises Development of a project program In 2000 the construction of the Atlanta and analysis of site development options Bank's new headquarters building for the Dallas Bank's new Houston continued and the construction of its Branch building continued. new Birmingham Branch building was The Kansas City Bank analyzed completed. Construction began on the expansion options for its headquarters San Francisco Bank's new Phoenix facility, and the Chicago Bank analyzed cash-processing center. long-term planning options for its The Board approved the Chicago Detroit Branch. Bank's request to move its check- The Richmond Bank continued the processing function from its head- installation of exterior security enhancequarters building to leased space near ments to its headquarters building. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

160 87th Annual Report, 2000 Pro Forma Financial Statements for Federal Reserve Priced Services Pro Forma Balance Sheet for Priced Services, December 31, 2000 and 1999 Millions of dollars Item 2000 1999 Short-term assets (Note 1) Imputed reserve requirements on clearing balances 667.0 777.2 Investment in marketable securities ... 6,002.6 6,994.8 Receivables . . .. 74.9 78.2 Materials and supplies 3.2 4.2 Prepaid expenses 35.2 24.4 Items in process of collection 4,094.6 3,747.8 Total short-term assets 10,877.4 11,626.5 Long-term assets (Note 2) Premises 471.9 431.7 Furniture and equipment 171.2 146.5 Leases and leasehold improvements .. 65.3 59.5 Prepaid pension costs 659.9 542.8 Total long-term assets 1,368.3 1,180.5 Total assets 12,245.7 12,807.0 Short-term liabilities Clearing balances and balances arising from early credit of uncollected items 6,891.2 7,996.3 Deferred-availability items 3,872.9 3,523.5 Short-term debt 113.2 106.7 Total short-term liabilities 10,877.4 11,626.5 Long-term liabilities Obligations under capital leases .0 .0 Long-term debt 443.0 237.2 Postretirement/postemployment benefits obligation 243.9 231.2 Total long-term liabilities 686.9 468.5 Total liabilities 11,564.3 12,095.0 Equity 681.4 712.0 Total liabilities and equity (Note 3).. 12,245.7 12,807.0 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 161 Pro Forma Income Statement for Federal Reserve Priced Services, 2000 and 1999 Millions of dollars Item 2000 1999 Revenue from services provided to depository institutions (Note 4) ... 881.5 835.9 Operating expenses (Note 5) 711.1 692.7 Income from operations 170.5 143.2 Imputed costs (Note 6) Interest on float 12.8 8.7 Interest on debt 31.5 18.5 Sales taxes 9.3 9.8 FDIC insurance .0 53.6 2.7 39.7 Income from operations after imputed costs 116.8 103.5 Other income and expenses (Note 7) Investment income 411.8 337.3 Earnings credits -370.5 41.3 -305.5 31.7 Income before income taxes 158.1 135.3 Imputed income taxes (Note 8) 49.8 43.3 Net income 108.3 92.0 MEMO: Targeted return on equity (Note 9) 98.4 57.2 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, 2000 Millions of dollars Com- Funds Book- Commercial transfer Noncash Cash Item Total entry mercial check and net collection ACH collection settlement Revenue from services (Note 4) 881.5 728.6 61.9 17.8 68.8 2.3 2.1 Operating expenses (Note 5) 711.1 590.0 49.6 14.0 53.6 hi 2A Income from operations 170.5 138.6 12.3 3.8 15.2 .6 .0 Imputed costs (Note 6) 53.6 45.7 3.7 .7 3.3 .2 .0 Income from operations after imputed costs 116.9 92.9 8.6 3.0 11.9 Other income and expenses, net (Note 7) 41.3 34.7 2.7 .8 2.9 .1 Income before income taxes .. 158.1 127.6 11.3 3.8 14.8 .5 Imputed income taxes (Note 8) 49.8 40.2 3.5 1.2 4.7 .2 Net income 108.3 87.4 7.7 2.6 10.2 .4 .1 MEMO: Targeted return on equity (Note 9) 98.4 80.8 7.5 1.9 8.0 .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

162 87th Annual Report, 2000 FEDERAL RESERVE BANKS NOTES TO PRO FORMA FINANCIAL STATEMENTS FOR PRICED SERVICES (1) SHORT-TERM ASSETS short-term liabilities include clearing balances maintained at Reserve Banks and deposit balances arising from float. The imputed reserve requirement on clearing balances Other long-term liabilities consist of accrued postemployheld at Reserve Banks by depository institutions reflects a ment and postretirement benefits costs and obligations on treatment comparable to that of compensating balances capital leases. held at correspondent banks by respondent institutions. The reserve requirement imposed on respondent balances must be held as vault cash or as non-earning balances (4) REVENUE maintained at a Reserve Bank; thus, a portion of priced Revenue represents charges to depository institutions for services clearing balances held with the Federal Reserve priced services and is realized from each institution is shown as required reserves on the asset side of the through one of two methods: direct charges to an institubalance sheet. The remainder of clearing balances is tion's account or charges against its accumulated earnassumed to be invested in three-month Treasury bills, ings credits. shown as investment in marketable securities. Receivables are (1) amounts due the Reserve Banks for (5) OPERATING EXPENSES priced services and (2) the share of suspense-account and difference-account balances related to priced services. Operating expenses consist of the direct, indirect, and Materials and supplies are the inventory value of short- other general administrative expenses of the Reserve term assets. Banks for priced services plus the expenses for staff Prepaid expenses include salary advances and travel members of the Board of Governors working directly on advances for priced-service personnel. the development of priced services. The expenses for Items in process of collection is gross Federal Reserve Board staff members were $4.2 million in 2000 and cash items in process of collection (CIPC) stated on a $3.4 million in 1999. 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 2000 and 1999 as follows (in millions): CIPC during the period (the difference between gross CIPC and deferred-availability items, which is the portion 2000 1999 of gross CIPC that involves a financing cost), valued at the federal funds rate. Check 40.3 38.7 ACH 3.7 3.6 Funds transfer 4.3 4.7 (2) LONG-TERM ASSETS Book entry 1.1 1.0 Consists of long-term assets used solely in priced ser- Noncash collection .1 .0 vices, the priced-services portion of long-term assets Special cash services .1 .0 shared with nonpriced services, and an estimate of the Total 49.6 48.0 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 sendees, the amortization expenses of $115.5 million in 2000 and $105.5 million in of the initial effect of implementation is reflected only at 1999 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 securities, noncash collection, ACH, and funds transfers. holding companies, which are used in the model for the Interest is imputed on the debt assumed necessary to private-sector adjustment factor (PSAF). The PSAF con- finance 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

Federal Reserve Banks 163 Float costs are based on the actual float incurred for (7) OTHER INCOME AND EXPENSES each priced service. Other imputed costs are allocated among priced services according to the ratio of operating Consists of investment income on clearing balances and expenses less shipping expenses for each service to the the cost of earnings credits. Investment income on cleartotal expenses for all services less the total shipping ing balances represents the average coupon-equivalent expenses for all services. yield on three-month Treasury bills applied to the total clearing balance maintained, adjusted for the effect of The following list shows the daily average recovery of reserve requirements on clearing balances. Expenses for actual float by the Reserve Banks for 2000 in millions of earnings credits granted to depository institutions on their dollars: clearing balances are derived by applying the average Total float 774.2 federal funds rate to the required portion of the clearing Unrecovered float 100.5 balances, adjusted for the net effect of reserve requirements on clearing balances. Float subject to recovery 673.7 Because clearing balances relate directly to the Federal Sources of recovery of float Reserve's offering of priced services, the income and cost Income on clearing balances 67.5 associated with these balances are allocated to each ser- As-of adjustments 470.8 vice based on each service's ratio of income to total Direct charges 322.7 Per-itemfees (187.3) Unrecovered float includes float generated by services (8) INCOME TAXES to government agencies and by other central bank services. Float recovered through income on clearing bal- Imputed income taxes are calculated at the effective tax ances is the result of the increase in investable clearing rate derived from the PSAF model (see note 3). balances; the increase is produced by a deduction for float for cash items in process of collection, which reduces (9) RETURN ON EQUITY imputed reserve requirements. The income on clearing The after-tax rate of return on equity that the Federal balances reduces the float to be recovered through other Reserve would have earned had it been a private business means. As-of adjustments and direct charges refer to float firm, as derived from the PSAF model (see note 3). This that is created by interterritory check transportation and the observance of non-standard holidays by some deposi- amount is adjusted to reflect the recovery of $1.2 million tory institutions. Such float may be recovered from the of automation consolidation costs for 1999. The Reserve depository institutions through adjustments to institution Banks had recovered these amounts, along with a finance reserve or clearing balances or by billing institutions charge, by the end of 1999. directly. Float recovered through direct charges and peritem fees is valued at the federal funds rate; credit float recovered through per-item fees has been subtracted from the cost base subject to recovery in 2000. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

165 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). The mission statement of the Federal Reserve Board and a summary of the goals and objec- Strategic and Performance Plans tives set forth in the strategic and perfor- The Board sent its strategic plan for the mance plans are given below. period 1997-2002 to the Congress in October 1997. The document states the Mission Board's mission, articulates major goals for the period, outlines strategies for The mission of the Federal Reserve achieving those goals, and discusses Board is to foster the stability, integrity, the environment and other factors that and efficiency of the nation's monetary, could affect their achievement. It also financial, and payment systems so as addresses issues that cut across agency to promote optimal macroeconomic jurisdictional lines, identifies key quan- performance. titative measures of performance, and discusses performance evaluation. The Goals and Objectives strategic plan for the period 2002-05 is being prepared; the mission, goals, and The Federal Reserve has three primary other elements of the plan will remain goals with interrelated and mutually essentially unchanged. reinforcing elements: In September 1998 the Board sent to the Congress a performance plan for its 1998-99 budget.1 Except for the mone- Goal tary policy function, the plan set forth To conduct monetary policy toward the achievement of maximum sustainable long-term growth and stable prices 1. The act requires that a performance plan be submitted for each fiscal year beginning with Objectives fiscal 1999. The Board budget covers two calendar years. The budget for 2000-01 was approved in • Stay abreast of recent developments September 1999. The budget and the informal and prospects in the U.S. economy performance plan for the 2000-01 period focused on management and human resource issues. and financial markets and in those Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

166 87th Annual Report, 2000 abroad, so that monetary policy deci- • Promote sound practices for mansions will be well informed aging risk at banking organizations • Enhance our knowledge of the struc- to provide for strong internal contural and behavioral relationships in trols, active boards of directors, and the macroeconomic and financial senior management oversight and markets, and improve the quality of accountability the data used to gauge economic • Promote sound banking and effective performance, through developmental supervisory practices among develresearch activities oped and emerging countries through • Implement monetary policy effec- ongoing coordination with internatively in rapidly changing economic tional supervisory bodies and through circumstances and in an evolving training programs for international financial market structure supervisors and bankers • Contribute to the development of U.S. • Heighten the positive effect of market international policies and procedures, discipline on banking organizations by in cooperation with the Department of encouraging improved disclosures, the Treasury and other agencies accounting standards, risk measure- • Promote understanding of Federal ment, and overall market transparency Reserve policy among other govern- • Harness benefits of technology in carment policy officials and the general rying out responsibilities to improve public. supervisory efficiency and to reduce burden on banking organizations • Maintain an understanding of the Goal effect of financial innovation and To promote a safe, sound, competitive, technology (for example, new powers and accessible banking system and and products, new risk management stable financial markets and measurement methodologies, and electronic banking) on the operations and risk profile of banking organiza- Objectives tions and the payment system; ensure • Provide comprehensive and effective that supervisory programs accommosupervision of U.S. banks, bank and date prudent advances that benefit financial holding companies, U.S. consumers and businesses or improve operations of foreign banking organi- risk management zations, and related entities • Remove unnecessary banking restric- • Promote overall financial stability, tions and refine or eliminate unnecmanagement, and containment of sys- essary or ineffective policies; procetemic risk and ensure that emerging dures, regulations, or restrictions to financial crises are identified early ensure that reforms are effectively and successfully resolved by focusing implemented, all in a manner consissupervisory efforts and resources on tent with the safety and soundness of areas of highest risk to individual banking organizations organizations and the financial sys- • Assure fair access to financial services tem as a whole, and by developing for all Americans through vigorous effective regulations to promote a safe enforcement of the Equal Credit and sound banking environment Opportunity, Fair Housing, Commu- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

The Board of Governors and the Government Performance and Results Act 167 nity Reinvestment, and Home Mort- Interagency Coordination gage Disclosure Acts and by encour- Interagency coordination helps focus aging state member bank involvement efforts to eliminate redundancy and in community development activities lower costs. As required by the Govern- Administer and ensure compliance ment Performance and Results Act and with consumer protection statutes in conformance with past practice, the relating to consumer financial trans- Board has worked closely with other actions (such as the Truth in Lending, federal agencies to consider plans and Truth in Savings, Consumer Leasing, strategies for programs, such as bank and Electronic Fund Transfer Acts) to supervision, that cross jurisdictional carry out congressional intent, striking lines. In particular, coordination with the the proper balance between protection Department of the Treasury and other of consumers and regulatory burden agencies is evident throughout both the to the industry strategic and performance plans. Implement appropriate rules, regula- Much of the Board's formal effort to tions, and policies to comply with the plan jointly has been made through the Gramm-Leach-Bliley Act, which was Federal Financial Institutions Examinaenacted in November 1999. tion Council (FFIEC), a group made up of the five federal agencies that regulate depository institutions.2 In addition, Goal a coordinating committee of represen- Provide high-quality professional sup- tatives of the chief financial officers of port to the Board in overseeing Reserve the five agencies has been created to Bank operations and in fostering the address and report on strategic planning integrity, efficiency, and accessibility of issues of mutual concern. This working U.S. payment and settlement systems. group has been meeting since June 1997. These and similar planning efforts can significantly lower the government's Objectives • Develop sound, effective policies 2. The FFIEC consists of the Board of Goverand regulations that foster payment nors of the Federal Reserve System, the Federal system integrity, efficiency, and Deposit Insurance Corporation, the National accessibility Credit Union Administration, the Office of the Comptroller of the Currency, and the Office of • Produce high-quality assessments of Thrift Supervision. It was established in 1979 pur- Federal Reserve operations, projects, suant to title X of the Financial Institutions Reguand initiatives that assist Federal latory and Interest Rate Control Act of 1978. The Reserve management to foster and FFIEC is a formal interagency body empowered to strengthen sound internal control prescribe uniform principles, standards, and report forms for the federal examination of financial systems and efficient and effective institutions and to make recommendations to properformance mote uniformity in the supervision of financial • Conduct research and analysis that institutions. The FFIEC also provides uniform contribute to policy development and/ examiner training and has taken a lead in developing standardized software needed for major data or increase the Board's and others' collection programs to support the requirements of understanding of payment system the Home Mortgage Disclosure Act and the Comdynamics and risk. munity Reinvestment Act. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

168 87th Annual Report, 2000 costs for data processing and other institution costs for complying with fedactivities as well as lower depository eral regulations. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

169 Federal Legislative Developments The following federal laws enacted dur- Commodity Futures ing 2000 affect the Federal Reserve Sys- Modernization Act of 2000 tem and the institutions it regulates: the The Commodity Futures Modernization American Homeownership and Eco- Act of 2000, Public Law 106-102, nomic Opportunity Act of 2000; the enacted on December 21, 2000, amends Commodity Futures Modernization Act the Commodity Exchange Act, as well of 2000; and the Electronic Signatures as other federal banking and securities in Global and National Commerce Act. laws, to reform the regulatory framework for both over-the-counter (OTC) and exchange-traded derivatives. The American Homeownership and act resolves issues about the enforce- Economic Opportunity Act ability of OTC derivatives transactions, of 2000 including those that involve commercial The American Homeownership and banks, by excluding most of such trans- Economic Opportunity Act of 2000, actions from the coverage of the Com- Public Law 106-569, enacted on modity Exchange Act. December 27, 2000, amends the Federal In addition, two parts of the act spe- Reserve Act to reinstate and make per- cifically affect the Board's authority to manent certain economic reports from regulate derivatives transactions. First, the Board of Governors to the Congress. multilateral clearing organizations for Under these amendments, the Chairman derivatives transactions must be reguof the Board of Governors is required lated either as federally regulated finanto appear semiannually before the Con- cial institutions, such as state member gress to report on the activities of the banks, or as clearing organizations Federal Open Market Committee registered with the Securities and (FOMC), the Board's conduct of mone- Exchange Commission (SEC) or the tary policy, and the status of economic Commodity Futures Trading Commisdevelopment. Furthermore, the act pre- sion. Second, the act amends the Comserves the Board's obligation under modity Exchange Act and the federal section 10 of the Federal Reserve Act securities laws to permit trading of to annually provide the Congress with a "security futures products." The act written report on the activities and requires the Board to prescribe margin records of the FOMC. In addition, the requirements for security futures prodact amends the Federal Reserve Act to ucts or to delegate this authority to the permit the Board to acquire an addi- CFTC and the SEC jointly. tional site or building that will support the performance of the functions of the Electronic Signatures in Global Board, and raises the Chairman's posiand National Commerce Act tion of Board Chairman to Level I in the federal Executive Schedule and raises The Electronic Signatures in Global and the position of Governor to Level II. National Commerce Act, Public Law Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

170 87th Annual Report, 2000 106-229, was enacted on June 30, 2000. sumer affirmatively consents to receive The act generally provides that a con- such records in electronic form and does tract or other record relating to a transac- not withdraw that consent. This legislation may be provided in electronic form tion applies to consumer disclosures and and may not be denied legal effect or transactional records, such as monthly validity solely because it is in electronic account activity statements, that finanform. For cases where information is cial institutions provide. The act prerequired to be provided to consumers in serves certain other legal requirements writing, however, the act authorizes the such as those governing the content and use of electronic records only if the con- timing of consumer disclosures. • Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

171 Regulatory Simplification In 1978 the Board of Governors estab- tory institutions to collect, report, and lished a program of regulatory review to disclose data about applications for help minimize the burden of regulation home mortgage and home improvement on banking organizations. The objec- loans and about originations and purtives of the program are to ensure that chases of such loans. Data reported all regulations, existing and proposed, include the type, purpose, and amount represent the best course of action; to of the loan; the race or national origin, afford interested parties the opportunity sex, and income of the loan applicant; to participate in the design of regula- and the location of the property. tions and to comment on them; and to The Board began the process of ensure that regulations are written in reviewing the regulation by issuing an simple, clear language. Staff members advance notice of proposed rulemaking regularly review Federal Reserve reg- in 1998.The proposed revisions take into ulations for their adherence to these account comments received at that time objectives and their consistency with the as well as a wide range of discussions Regulatory Flexibility Act, which also and special hearings held in 2000 on requires that consideration be given to possible changes in the enforcement of the economic consequences of regula- the Home Ownership and Equity Protection on small business. In its review tion Act (HOEPA). process, the Board also follows the man- In proposing changes to the HMDA dates of section 303 of the Riegle Com- reporting requirements, the Board aimed munity Development and Regulatory to improve the quality and utility of the Improvement Act. resulting data. The Board also hoped the In 2000 the Board, as part of this changes would enhance public underreview process, proposed revisions to standing of the home mortgage market Regulation C. It also issued an advance generally, and the subprime market in notice of rulemaking regarding capital particular, and would improve fair lendfor small banks. ing analysis. At the same time, the Board attempted to minimize the increase in the data collection and reporting burden Revisions Proposed to by limiting proposed changes to those Regulation C likely to have significant benefit. In November the Federal Reserve The proposed changes to Regularequested comment on proposed revi- tion C would sions to Regulation C, which implements the Home Mortgage Disclosure • Expand coverage of nondepository Act (HMDA). The purposes of HMDA lenders by adding a dollar-volume include helping determine whether threshold of $50 million to the current financial institutions are serving the loan-percentage test housing needs of their communities and • Simplify the definitions of "refinancassisting in fair lending enforcement. ing" and "home improvement loan" The act requires depository institu- to generate more consistent and accutions and certain for-profit nondeposi- rate data Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

172 87th Annual Report, 2000 • Require lenders to report home equity nations are revising the accord to prolines of credit (such reporting is now vide a more refined assessment of the optional) capital requirements for large, complex, • Require lenders to report certain appli- internationally active banks. cations for credit received through As part of the revision process, agenpreapproval programs cies are considering simplified capital • Require lenders to report the annual frameworks for non-complex banking percentage rate of the loan, whether organizations. The simplified framework the loan is subject to HOEPA, and would conform to the underlying prinwhether the loan involves a manufac- ciples of a revised Basel accord and tured home. maintain the principles of prudential supervision while relieving unnecessary regulatory burden, particularly that asso- Simplified Capital Framework ciated with regulatory capital calculafor Non-Complex Institutions tions. The agencies have suggested cri- In November the federal bank regula- teria that could be used to determine tory agencies requested public comment eligibility for a simplified capital frameon an advance notice of proposed rule- work, such as the nature of a bank's making that considers the establish- activities, its asset size, and its risk proment of a simplified regulatory capital file. In the advance notice, the agencies framework for non-complex banking sought comment on possible minimum organizations. regulatory capital requirements for non- Banking organizations are required to complex institutions, including a simplimaintain minimum levels of capital set fied risk-based ratio, a simple leverage by U.S. regulators under an international ratio, or a leverage ratio modified to framework established by the 1988 incorporate certain off-balance-sheet Basel Capital Accord. Regulatory agen- exposures. • cies in the United States and other Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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175 Record of Policy Actions of the Board of Governors Regulation D zero percent reserve requirement on the Reserve Requirements of first $2 million of an institution's reserv- Depository Institutions able liabilities. The act also provides for annual adjustments to that exemption November 16, 2000—Amendments amount based on increases in reservable liabilities at depository institutions. The Board amended Regulation D to Recent growth in reservable liabilities decrease the amount of net transaction warranted an increase in the amount accounts at depository institutions to exempted from reserve requirements which a lower reserve requirement to $5.5 million, and the Board amended applies (low reserve tranche), and to Regulation D accordingly. increase the amount of reservable liabili- For institutions reporting weekly, the ties that is exempt from reserve requireamendments are effective with the ments (reserve exemption level) for reserve computation period beginning 2001, effective for the reserve computa- November 28, 2000, and the corretion period beginning November 28, sponding reserve maintenance period 2000, for institutions reporting weekly. beginning December 28, 2000. For insti- Votes for this action: Messrs. Greenspan, tutions reporting quarterly, the amend- Ferguson, Kelley, Meyer, and Gramlich. ments are effective with the reserve computation period beginning Decem- Under the Monetary Control Act of ber 19, 2000, and the corresponding 1980, depository institutions, Edge Act reserve maintenance period beginning corporations, agreement corporations, January 18,2001. and U.S. agencies and branches of To reduce the reporting burden on foreign banks are subject to reserve small institutions, depository institutions requirements set by the Board. The act having total deposits below specified directs the Board to adjust annually the levels are required to report their deposamount of the low reserve tranche to its and reservable liabilities quarterly or reflect changes in net transaction less frequently, while larger institutions accounts at depository institutions. must report weekly. To reflect increases Recent declines in net transaction in the growth rate of total deposits at accounts warranted a decrease in the all depository institutions, the Board low reserve tranche to $42.8 million, increased the deposit cutoff levels used and the Board amended Regulation D in determining the frequency and detail accordingly. of depository reporting to $101 million The Garn-St Germain Depository for nonexempt depository institutions, Institutions Act of 1982 establishes a beginning in September 2001. In July 2000 the Board eliminated the exempt deposit cutoff and discontinued NOTE. In voting records throughout this chapthe quarterly report associated with that ter, Board members, except the Chairman and Vice Chairman, are listed in order of seniority. cutoff. Exempt institutions (those with Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

176 87th Annual Report, 2000 total reservable liabilities equal to or ate federal financial supervisory agency less than the exemption level of and file annual reports concerning $5.5 million) with at least $5.5 million the agreements with the appropriate in total deposits may report annually, supervisory agency. The rules also idenand exempt institutions with less than tify the types of agreements covered, $5.5 million in total deposits are not describe how parties to covered agreerequired to file deposit reports. ments must make the agreements available to the public and the appropriate supervisory agency, explain the type of Regulation G information required to be included Disclosure and Reporting of in the annual report to the appropriate CRA-Related Agreements supervisory agency, and define terms used in the act. December 21, 2000—Adoption of New Regulation Regulation H The Board adopted a new Regulation G Membership of State Banking to implement the CRA sunshine pro- Institutions in the Federal visions of the Gramm-Leach-Bliley Reserve System Act. Those provisions establish annual reporting and public disclosure require- March 10, 2000—Interim ments for certain written agreements Amendment that relate to the Community Reinvestment Act of 1977 (CRA) and are The Board approved an interim amendentered into between insured depository ment to Regulation H to permit qualifyinstitutions or their affiliates and non- ing state member banks to establish governmental entities or persons. The financial subsidiaries that engage in new Regulation G is effective April 1, activities that are financial in nature or 2001. incidental to financial activities, effective March 11, 2000. Votes for this action: Messrs. Greenspan, Ferguson, Meyer, and Gramlich. Absent Votes for this action: Messrs. Greenspan, and not voting: Mr. Kelley. Ferguson, Kelley, Meyer, and Gramlich. The Board, jointly with the Federal The Gramm-Leach-Bliley Act autho- Deposit Insurance Corporation, the rizes qualifying banks to control or hold Office of the Comptroller of the Cur- an interest in a financial subsidiary. A rency, and the Office of Thrift Supervi- financial subsidiary may engage in sion, approved new rules to implement activities that have been determined the CRA sunshine provisions of the under the act to be financial in nature Gramm-Leach-Bliley Act. The rules or incidental to financial activities and require that insured depository institu- in activities that the parent bank is pertions, their affiliates, and other entities mitted to conduct directly. The interim and persons that are parties to certain amendment to Regulation H is substanwritten agreements that are in fulfill- tially similar to the interim rule adopted ment of the CRA make the agreements for financial subsidiaries of national available to the public and the appropri- banks and provides a streamlined notice Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 111 procedure for state member banks with provides that a bank in the second fifty guidance on the qualifying criteria. State largest grouping meets this alternative member banks may continue to retain requirement if it has a current long-term and establish operations subsidiaries that issuer credit rating from a nationally engage only in activities that the parent recognized statistical rating organization bank may conduct directly and that are that is in the three highest investmentconducted on the same terms and condi- grade rating categories used by the tions applicable to the bank. The Board rating organization. The Board and the also published the interim amendment Department of the Treasury also pubfor comment. lished the interim rule for comment. March 13, 2000—Interim November 14, 2000—Amendments Amendment The Board amended Regulation H to The Board approved an interim amend- provide consumer protection rules for ment to Regulation H to provide an the sale of insurance products by deposialternative standard for debt ratings that tory institutions, effective October 1, certain large state member banks may 2001. satisfy to establish a financial subsidiary, effective March 14, 2000. Votes for this action: Messrs. Greenspan, Ferguson, Kelley, Meyer, and Gramlich. Votes for this action: Messrs. Greenspan, Ferguson, Kelley, Meyer, and Gramlich. The Board, jointly with the Federal Deposit Insurance Corporation, the The Board and the Department of the Office of the Comptroller of the Cur- Treasury jointly approved an interim rency, and the Office of Thrift Supervirule under the Gramm-Leach-Bliley sion, approved new rules to implement Act to permit certain large state member provisions of the Gramm-Leach-Bliley and national banks to establish a finan- Act that provide consumer protections cial subsidiary by qualifying under an applicable to retail sales, solicitations, alternative requirement for rated debt. advertising, or offers of insurance by a The act provides that a state member or depository institution or by any person national bank that is ranked among the who is engaged in such activities at an largest fifty insured banks may control office of the institution or on behalf of a financial subsidiary only if the bank the institution.1 The rules prohibit cermeets certain criteria, which include tain practices, require certain disclosures having an issue of highly rated debt to prospective buyers and qualifications outstanding. State member or national for persons selling insurance, prescribe banks that are among the second fifty areas in the depository institution for largest insured banks may control a insurance sales activities, and limit financial subsidiary if they meet this referral fees for bank employees. debt rating criterion or an alternative criterion established by the Board and the Department of the Treasury. The interim rule, which is incorporated in 1. The agencies extended the original April 1 Regulation H for state member banks, effective date on March 14, 2001. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

178 87th Annual Report, 2000 Regulation H on the capital treatment of securities Membership of State Banking borrowing transactions when securities Institutions in the Federal Reserve are posted as collateral. System Regulation P Regulation Y Privacy of Consumer Financial Bank Holding Companies and Information Change in Bank Control May 10, 2000—Adoption of New November 8, 2000—Interim Regulation Amendments The Board adopted a new Regulation P The Board approved interim amend- to provide notice requirements and ments to Regulations H and Y to revise restrictions on a financial institution's the capital treatment under its market ability to disclose nonpublic personal risk rules for cash collateral that is information about consumers to unaffiliposted in connection with certain securi- ated third parties. The new Regulation P ties borrowing transactions, effective is effective November 13, 2000, and January 4, 2001, and available to compliance is optional until July 1, U.S. banking organizations beginning 2001, to allow sufficient time for finan- December 5, 2000. cial institutions to develop policies, procedures, and systems to implement the Votes for this action: Messrs. Greenspan, rule. Ferguson, Kelley, Meyer, and Gramlich. Votes for this action: Messrs. Greenspan, The Board, jointly with the Federal Ferguson, Meyer, and Gramlich. Absent Deposit Insurance Corporation and the and not voting: Mr. Kelley. Office of the Comptroller of the Currency, approved an interim rule that The Board, jointly with the Federal effectively lowers the capital require- Deposit Insurance Corporation, the ment when cash collateral is posted for Office of the Comptroller of the Curcertain securities borrowing transac- rency, and the Office of Thrift Supervitions. The interim rule applies only to sion, approved new rules to implement banking organizations with significant the consumer privacy provisions of the trading activities that are subject to capi- Gramm-Leach-Bliley Act. Under the tal treatment under the agencies' market rules, a financial institution is required risk rules. It is intended to align the to provide customers with a notice of its capital requirements for these transac- privacy policies and practices. The rules tions more appropriately with the risk also prohibit a financial institution from involved and to align the capital treat- disclosing nonpublic personal informament for U.S. banking organizations tion about a customer to unaffiliated with the capital treatment applied to third parties unless the institution satistheir domestic and foreign competitors. fies certain notice and opt-out require- The Board also published the interim ments and the customer has not elected rule for comment and sought comment to opt out of the disclosure. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 179 Regulation Y Votes for this action: Messrs. Greenspan, Bank Holding Companies and Ferguson, Kelley, Meyer, and Gramlich. Change in Bank Control Bank holding companies may under- January 18, 2000—Interim write, deal in, and make a market in Amendment securities to a limited extent through section 20 subsidiaries. These subsidi- The Board approved an interim amend- aries are subject to eight operating stanment to Regulation Y to provide proce- dards that address potential risks and dures for bank holding companies and conflicts associated with the affiliation foreign banks with U.S. offices that meet of a bank and a securities firm. The certain criteria to elect to be treated as Gramm-Leach-Bliley Act authorizes financial holding companies, effective financial holding companies to engage March 11, 2000. in these securities activities. The act also authorizes the Board to impose pruden- Votes for this action: Messrs. Greenspan, tial limitations on relationships or trans- Ferguson, Kelley, Meyer, and Gramlich. actions between a depository institution and any affiliate, including a securities The interim amendment, which affiliate. implements the financial holding com- After considering the overall regulapany provisions of the Gramm-Leachtory approach reflected in the Gramm- Bliley Act, enables qualified organiza- Leach-Bliley Act, the Board applied tions to engage in a broad range of two of the eight operating standards as securities, insurance, and other finanprudential limitations on transactions cial activities. The Board adopted an involving securities affiliates of finaninterim amendment with an effective cial holding companies. These limitadate that coincided with the effective tions require that when a domestic bank date of the act to allow organizations to or thrift institution, or a U.S. branch or qualify as financial holding companies agency of a foreign bank, makes intraas soon as authorized by law. The Board day extensions of credit to an affiliated also published the interim amendment securities firm, it does so on market for comment. terms consistent with section 23B of the Federal Reserve Act. The limitations also apply sections 23A and 23B March 10, 2000—Interim of the Federal Reserve Act to certain Amendment covered transactions between a U.S. The Board approved an interim amend- branch or agency of a foreign bank and ment to Regulation Y to apply two of its U.S. securities affiliate. The limitathe eight operating standards currently tions on bank holding companies that applicable to so-called section 20 affili- conduct securities activities through ates of bank holding companies to finan- section 20 subsidiaries are not affected cial holding companies engaged in by the interim rule. The Board also certain securities activities, effective published the interim amendment for March 11, 2000. comment. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

180 87th Annual Report, 2000 March 10, 2000—Interim activity that is complementary to a Amendments financial activity engaged in by the company. The Board also published the The Board approved interim amend- interim rule for comment. ments to Regulation Y to provide a list of financial activities that are permissible for financial holding companies March 10, 2000—Interim and to implement certain procedures for Amendments conducting financial activities, effective The Board approved amendments to March 11, 2000. its interim rule on procedures for bank holding companies and foreign banks Votes for this action: Messrs. Greenspan, with U.S. offices that meet certain crite- Ferguson, Kelley, Meyer, and Gramlich. ria to elect to become or be treated as financial holding companies, effective The Gramm-Leach-Bliley Act autho- March 15, 2000. rizes a bank holding company or foreign bank with U.S. offices that qualifies as a Votes for this action: Messrs. Greenspan, financial holding company to engage in Ferguson, Kelley, Meyer, and Gramlich. a broad range of activities that the statute defines as being financial in nature. In light of its experience in process- The act also authorizes the Board, in ing financial holding company elections consultation with the Secretary of the under an interim rule issued in January Treasury, to determine that additional 2000, the Board approved changes in activities are financial in nature or inci- the interim rule's procedures for foreign dental to a financial activity. In addition, banks. These amendments provide that the act authorizes the Board to allow a an election by a foreign bank that meets financial holding company to engage in the well-managed and well-capitalized activities that are complementary to a standards will become effective on the financial activity. thirty-first day after the election is filed The interim rule provides a consoli- unless the election is determined to dated list of all activities that the act be ineffective or the review period is defines as financial in nature and estab- extended by agreement with the bank. lishes procedures that are required for a All U.S. depository institution subsidifinancial holding company to engage in aries of electing foreign banks, includthose activities. In most cases, a finan- ing savings associations and nonbank cial holding company is only required trust companies, must meet the same to notify the Board in writing within requirements as depository institution 30 days of commencing, or acquiring a subsidiaries of bank holding companies. company that is engaged in, a financial Foreign banks in countries that have not activity. The interim rule also estab- been reviewed by the Board for comprelishes a procedure for requesting that the hensive consolidated supervision were Board, in consultation with the Secre- encouraged to use the pre-clearance protary of the Treasury, determine that an cess, which allows a foreign bank to activity is financial in nature or inciden- request a determination of its qualificatal to a financial activity. In addition, the tions before it files an election to be interim rule provides a procedure for a treated as a financial holding company. financial holding company to request the In addition, the interim amendments Board's prior approval to engage in an remove the compliance rating compo- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 181 nent from the definition of well man- management policies of financial holdaged when applying this standard to ing companies that have significant depository institution subsidiaries of a exposure to merchant banking investbank holding company that is electing to ments. The Board and the Department become a financial holding company. of the Treasury also published the The Board also published the amend- interim rule for comment. ments to the interim rule for comment. At the same time, the Board published for comment a proposed rule governing the regulatory capital treatment March 16, 2000—Interim of nonfinancial equity investments held Amendments directly or indirectly by bank holding companies. The proposed rule, devel- The Board approved interim amendoped in consultation with the Departments to Regulation Y governing the ment of the Treasury, would generally merchant banking activities of financial impose a 50 percent capital charge on holding companies, effective March 17, nonfinancial investments made under 2000. the merchant banking authority of the Gramm-Leach-Bliley Act and certain Votes for this action: Messrs. Greenspan, Ferguson, Kelley, Meyer, and Gramlich. other legal authorities. The Board and the Department of the Treasury jointly approved an interim December 13, 2000—Amendments rule incorporated in Regulation Y to The Board amended Regulation Y to implement the merchant banking proviprovide that acting as a "finder" in sions of the Gramm-Leach-Bliley Act. transactions is incidental to a financial The provisions authorize financial holdactivity and, therefore, permissible for ing companies to make investments as financial holding companies, effective part of a bona fide securities underwrit- January 22, 2001. ing, merchant banking, or investment banking activity. The interim rule per- Votes for this action: Messrs. Greenspan, mits a financial holding company to Ferguson, Kelley, Meyer, and Gramlich. make investments in any amount of shares, assets, or ownership interests of The Board, in consultation with the any type of nonfinancial company. Mer- Secretary of the Treasury, authorized chant banking investments may not be financial holding companies to act as a made by or on behalf of depository insti- finder by bringing together buyers and tutions or any subsidiary of a depository sellers of products and services for institution. In addition, the rule includes transactions that the buyers and sellers provisions on record keeping and report- themselves negotiate and consummate. ing, risk management practices, hold- The amendment adds acting as a finder ing periods for merchant banking to the list of activities in Regulation Y investments, limits on involvement in that are permissible for financial holding the management or operation of port- companies, provides specific examples folio companies, and cross-marketing of permissible and impermissible serand lending restrictions on activities vices, and requires financial holding between depository institution subsidi- companies to provide appropriate disaries and portfolio companies. The rule closures to distinguish the products and also requires Board review of the risk services that are offered or sold by the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

182 87th Annual Report, 2000 company from those offered by a third ratio was removed from the screening party through the company's finder test in the definition of well capitalized services. for foreign banks, but it was added to the list of factors that the Board can consider for purposes of the comparabil- December 21, 2000—Amendments ity review of foreign bank capital required by the final rule. In addition, The Board made final an interim rule the Board revised the definition of well amending Regulation Y to provide promanaged applicable to foreign bank cedures for bank holding companies and financial holding companies to require foreign banks with U.S. offices that meet that a foreign bank's U.S. branches, certain criteria to qualify as financial agencies, and commercial lending comholding companies, effective Februpanies have a satisfactory composite ratary 2,2001. ing, rather than satisfactory individual ratings as required by the interim rule. Votes for this action: Messrs. Greenspan, Ferguson, Meyer, and Gramlich. Absent and not voting: Mr. Kelley. December 21, 2000—Interim The Board made final an interim rule Amendment issued in January 2000 that implements The Board approved an interim amendthe financial holding company proviment to Regulation Y that defines three sions of the Gramm-Leach-Bliley Act. categories of activities as being financial The final rule sets forth the capital, manin nature or incidental to a financial agement, and Community Reinvestment activity and, therefore, permissible for Act requirements that bank holding financial holding companies, effective companies and foreign banking organi- January 2, 2001. zations must meet to qualify as financial holding companies and contains Votes for this action: Messrs. Greenspan, provisions that apply when a financial Ferguson, Meyer, and Gramlich. Absent holding company ceases to meet the pre- and not voting: Mr. Kelley. scribed requirements. In addition to listing activities that are financial in nature, The Board, jointly with the Secretary and thus permissible for financial hold- of the Treasury, issued interim rules to ing companies, the final rule provides a implement provisions of the Grammprocedure for requesting that the Board, Leach-Bliley Act that identify the folin consultation with the Secretary of lowing categories of activities as being the Treasury, determine that additional financial in nature or incidental to a activities are financial in nature or inci- financial activity and, therefore, permisdental to a financial activity; the rule sible for financial holding companies also provides a procedure for requesting and financial subsidiaries of national that the Board determine that an activity banks: (1) lending, exchanging, transferis complementary to a financial activity ring, investing for others, or safeguardand thus permissible. ing financial assets other than money or In the final rule, the Board made sev- securities, (2) providing any device or eral changes to provisions regarding for- other instrumentality for transferring eign bank financial holding companies money or other financial assets, and that had been included in the interim (3) arranging, effecting, or facilitating rule. Among other changes, the leverage transactions for the account of third Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 183 parties. The interim rules provide proce- Rules of Practice for Hearings dures for financial holding companies, financial subsidiaries of national banks, October 2, 2000—Amendment or others to request that the Board or the Secretary of the Treasury, as appropri- The Board amended its rules of practice ate, designate particular activities as for hearings to increase the maximum included in one of the three categories. amounts of its civil money penalties The Board and the Secretary also pub- to account for inflation, effective Octolished the interim rules for comment. ber 12, 2000. Votes for this action: Messrs. Greenspan, Ferguson, Kelley, Meyer, and Gramlich. Regulation Z Truth in Lending The Federal Civil Penalties Inflation Adjustment Act of 1990, as amended, September 19, 2000—Amendments requires federal agencies to adjust their civil money penalties under a prescribed The Board amended Regulation Z and cost-of-living adjustment at least once its commentary to revise the disclosure every four years. The amendment implerequirements for credit and charge card ments the mandatory numerical adjustapplications and solicitations, effective ments required by the act and covers September 27, 2000, with mandatory violations occurring after October 12, compliance as of October 1, 2001. 2000. Votes for this action: Messrs. Greenspan, Ferguson, Kelley, Meyer, and Gramlich. Policy Statements and Other Actions The Truth in Lending Act, as implemented by Regulation Z, promotes the informed use of consumer credit by April 27, 2000—Policy requiring disclosures about its terms and Statement on Payments costs. The annual percentage rate (APR) System Risk and other cost information generally The Board approved modifications to must be disclosed in tabular form in its daylight overdraft posting rules to credit and charge card solicitations and reflect the enhanced capabilities of the applications. The amendments require new Treasury Investment Program that disclosures be readily noticeable to (TIP), effective July 10, 2000, but subconsumers as well as in a reasonably sequently postponed the modifications understandable form, and that the APR in its July 6 policy action, discussed for purchase transactions be in 18-point below. type. APRs for cash advances and balance transfers must be included in the Votes for this action: Messrs. Greenspan, table, and balance transfer fees also Ferguson, Kelley, Meyer, and Gramlich. must be disclosed. Regarding cost information, the amendments provide addi- The Federal Reserve System impletional guidance on the level of detail mented TIP to replace the Treasury tax required or permitted to be in the table and loan system (TT&L), and the Board and on the requirement that the table be changed its posting rules to account for prominently located. TIP transactions. The posting rules pro- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

184 87th Annual Report, 2000 vide a schedule for posting debits and October 30, 2000—Federal Reserve credits to institutions' Federal Reserve ACH Deposit Deadlines and accounts so that the intraday account Pricing Practices for Transactions balances can be measured for compli- Involving Private-Sector ACH ance with the Federal Reserve's Policy Operators Statement on Payments System Risk. The Board approved a new approach to Before TIP's implementation, most pricing automated clearinghouse (ACH) TT&L debit transactions were posted to transactions by Federal Reserve Banks institutions' Federal Reserve accounts to enhance competition for services to after the close of Fedwire. TIP transacdepository institutions, effective in tions, however, are processed and posted 2001. on a flow basis throughout the day. The Board provided a transition period dur- Votes for this action: Messrs. Greenspan, ing which most TIP transactions that Ferguson, Kelley, Meyer, and Gramlich. resulted in debits to depository institutions' accounts were posted after the Federal Reserve Banks and privateclose of Fedwire. sector ACH operators (PSOs) rely on each other to process some transactions in which the originating depository insti- July 6, 2000—Policy Statement on tution or receiving depository institution Payments System Risk is not a customer of theirs (interoperator transactions). The new pricing proce- The Board approved minor corrections dures permit Reserve Banks and PSOs to its daylight overdraft posting rules, to negotiate deposit deadlines and fees which had been modified in light of for their interoperator transactions. Only the new Treasury Investment Program PSOs qualifying as operators under the (TIP) by the Board's policy action on rules of the National Automated Clear- April 27, discussed above. The Board ing House Association are eligible for also postponed the original July 10, the new procedures. New interoperator 2000, effective date for the modified deadlines will be implemented not later rules because of the delay in implementthan June 2001, and new fees will be ing TIP. established not later than September 2001. Votes for this action: Messrs. Greenspan, Ferguson, Kelley, Meyer, and Gramlich. Discount Rates in 2000 Minor corrections were made to the posting times for transactions involving During 2000, the Board of Governors same-day Treasury withdrawals, main approved three increases, totaling one account administrative withdrawals, and percentage point, in the basic discount special direct-investment withdrawals. rate charged by the Federal Reserve TIP implementation and the modified Banks. These actions, taken in February, rules subsequently took effect on Octo- March, and May, raised the basic rate ber 23, 2000. from 5 percent to 6 percent. The rates Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 185 for seasonal and extended credit, which ary pressures that would undermine are set on the basis of market-related the economy's long-lasting expansion. formulas, were changed more fre- Against this background, an increasing quently, and they exceeded the basic number of Federal Reserve Banks prorate by varying amounts during the year. posed a XA percentage point rise in the Rates charged under the temporary Cen- basic discount rate during January 2000, tury Date Change Special Liquidity and on February 2 the Board approved Facility (SLF), which was available outstanding requests from ten Banks for through April 7, continued to be set at such an increase. This increase occurred 150 basis points above the intended fed- in concert with a similar policy tighteneral funds rate established by the Fed- ing move by the FOMC. eral Open Market Committee (FOMC). In subsequent weeks, incoming economic information continued to point to vigorous growth in aggregate demand, Basic Discount Rate but inflationary pressures were still being held down by equally impressive The Board's decisions on the basic disgains in aggregate supply, abetted by count rate were made against the backfurther apparent acceleration in labor ground of the policy actions of the productivity. While the extent to which FOMC and related economic and finanprospective growth in demand might cial developments. These developments exceed further expansion in the econoare reviewed more fully in other parts of my's output potential and the implicathis Report, including the minutes of the tions for inflation were subject to a con- FOMC meetings in 2000. siderable range of uncertainty, by late February concerns about the risks of January through Mid-May: rising inflation led three Federal Reserve Three Increases in the Basic Rate Banks to request a further lA percentage During the closing weeks of 1999 and point increase in the discount rate and the early weeks of 2000, monetary pol- nearly all the Banks had joined in subicy was directed toward promoting mitting that request by the third week of stable conditions in financial markets to March. The pending actions to raise the help avert or minimize potential disrup- basic discount rate to 5V2 percent were tions during the period surrounding the approved by the Board on March 21 in century date change. Recently available conjunction with another XA percentage information provided little evidence that point increase by the FOMC in the the expansion in economic activity intended federal funds rate, to 6 percent. might be moderating from the vigorous The final changes for the year in both pace of the past year, notably during the basic discount rate and the intended the second half of 1999. While inflation federal funds rate—increases of lA perhad remained largely contained, there centage point—were approved on were mounting concerns that persisting May 16, 2000. A more forceful policy growth in aggregate demand at a pace move of xh percentage point, after a in excess of the rise in potential sup- series of lA percentage point increases ply would foster a buildup of inflation- initiated in August 1999, was deemed Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

186 87th Annual Report, 2000 desirable to contain what were seen business investment in capital equipas rising inflation pressures in the ment. Business efforts to pare inveneconomy. In particular, the extraordinary tories as sales slowed induced related and persisting strength of overall cutbacks in manufacturing activity. demand continued to exceed the rapid Shortly after the turn of the year, on productivity-enhanced growth of poten- January 3, 2001, the Board and the tial supply, and there were attendant FOMC approved V2 percentage point indications of growing pressures in reductions in the basic discount rate and already tight markets for labor and other the intended level of the federal funds resources. By early May, most of the rate. Reserve Banks had pending proposals calling for increases of XA percentage Structure of Discount Rates point in the basic rate, and by mid-May all the Banks had outstanding requests The basic discount rate is the rate norfor a higher rate, including four Banks mally charged on loans to depository that were proposing V2 percentage point institutions for short-term adjustment increases. The Banks with proposed credit, while flexible, market-related increases of lA percentage point revised rates generally apply on seasonal and them to V2 percentage point within a few extended credit. The flexible rates are days after the Board's decision on calculated every two weeks in accor- May 16. dance with formulas that are approved by the Board. The rate on loans from the Special Liquidity Facility during Mid-May through Year-End: the century date rollover period was No Further Changes in the Basic Rate 150 basis points above the target federal In mid-June, one Federal Reserve Bank funds rate established by the FOMC. requested a further increase of lA per- The objective of the seasonal procentage point in the basic rate. After the gram is to help smaller institutions meet latter was withdrawn in mid-July, there liquidity needs arising from a clear patwere no further proposals to change the tern of intra-yearly movements in their rate until December, when seven Banks deposits and loans. Funds may be prorequested a lA percentage point reduc- vided for periods longer than those pertion. By around midyear, economic mitted under adjustment credit. Since its growth had begun to exhibit signs of introduction in early 1992, the flexible some moderation from its exceptionally rate charged on seasonal credit has been rapid and unsustainable pace of the pre- closely aligned with short-term market vious year. Indications that the expan- rates; it is never less than the basic rate sion was moderating accumulated applicable to adjustment credit. gradually during the summer and into The purpose of extended credit is the autumn. Over the last few months of to assist depository institutions that are the year, the growing effects on business under sustained liquidity pressure and and consumer spending of tightening are not able to obtain funds from other credit conditions, declining stock mar- sources. The rate for extended credit is ket prices, and rising energy costs, 50 basis points higher than the rate for among other factors, led to substantial seasonal credit and is at least 50 basis slowing in the expansion of aggregate points above the basic rate. In approprifinal sales, including weakness in con- ate circumstances, the basic rate may be sumer purchases of durable goods and applied to extended-credit loans for up Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Policy Actions 187 to thirty days, but any further borrow- mulas for these flexible rates are not ings would be charged the flexible, shown in this summary. All votes taken market-related rate. by the Board of Governors during 2000 Exceptionally large adjustment-credit were unanimous. loans that arise from computer breakdowns or other operating problems not Votes on the Basic Discount Rate clearly beyond the reasonable control February 2, 2000. Effective this date, of the borrowing institution are assessed the Board approved actions taken by the the highest rate applicable to any credit directors of the Federal Reserve Banks extended to depository institutions. No of Boston, New York, Philadelphia, loans of this type were made during Cleveland, Richmond, Atlanta, Chicago, 2000. St. Louis, Kansas City, and San Fran- The Special Liquidity Facility was cisco to increase the basic discount rate established as a temporary program for lA percentage point, to 5 lA percent. lending to depository institutions during the period October 1, 1999, through Votes for this action: Messrs. Greenspan, April 7, 2000. This facility was intended Ferguson, Kelley, Meyer, and Gramlich. to help ensure that depository institu- Votes against this action: None. tions would have adequate liquidity in the period surrounding the century date The Board subsequently approved change. similar actions taken by the directors of At the end of 2000 the structure of the Federal Reserve Banks of Minnediscount rates was as follows: a basic apolis and Dallas, effective February 3 rate of 6 percent for short-term adjust- and 4, 2000, respectively. ment credit and rates of 6.45 percent for seasonal credit and 6.95 percent for March 21, 2000. Effective this date, extended credit. During 2000 the rate the Board approved actions taken by the for seasonal credit ranged from a low of directors of the Federal Reserve Banks 5.55 percent to a high of 6.65 percent, of Boston, New York, Philadelphia, that for extended credit from a low of Cleveland, Richmond, Atlanta, Chi- 6.05 percent to a high of 7.15 percent, cago, Minneapolis, Kansas City, and and that for SLF credit from a low of San Francisco to increase the basic 6.50 percent to a high of 7 percent. discount rate lA percentage point, to 5 ^percent. Board Votes Votes for this action: Messrs. Greenspan, Under the Federal Reserve Act, the Ferguson, Kelley, Meyer, and Gramlich. boards of directors of the Federal Votes against this action: None. Reserve Banks must establish rates on loans to depository institutions at least The Board approved similar actions every fourteen days and must submit taken by the directors of the Federal such rates to the Board of Governors for Reserve Banks of St. Louis and Dallas, review and determination. The Reserve effective March 22 and 23, 2000, Banks also are required to submit respectively. requests on the same schedule to renew the formulas for calculating the rates on May 16, 2000. Effective this date, the seasonal, extended, and SLF credit. Board approved actions taken by the Votes on the reestablishment of the for- directors of the Federal Reserve Banks Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

188 87th Annual Report, 2000 of Boston, Cleveland, Richmond, and the Federal Reserve Banks of Atlanta, San Francisco to increase the basic Chicago, Kansas City, and Dallas, effecdiscount rate V2 percentage point, to tive May 17; by the directors of the 6 percent. Federal Reserve Bank of St. Louis, effective May 18; and by the directors of Votes for this action: Messrs. Greenspan, the Federal Reserve Banks of New York, Ferguson, Kelley, Meyer, and Gramlich. Philadelphia, and Minneapolis, effective Votes against this action: None. May 19, 2000. The Board subsequently approved similar actions taken by the directors of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

189 Minutes of Federal Open Market Committee Meetings The policy actions of the Federal Open the Bank selected by the Committee to Market Committee, contained in the execute transactions for the System minutes of its meetings, are presented in Open Market Account. In the area of the ANNUAL REPORT of the Board of domestic open market operations, the Governors pursuant to the requirements Federal Reserve Bank of New York of section 10 of the Federal Reserve operates under two sets of instructions Act. That section provides that the from the Federal Open Market Com- Board shall keep a complete record of mittee: an Authorization for Domestic the actions taken by the Board and by Open Market Operations and a Domesthe Federal Open Market Committee on tic Policy Directive. (A new Domestic all questions of policy relating to open Policy Directive is adopted at each regumarket operations, that it shall record larly scheduled meeting.) In the foreign therein the votes taken in connection currency area, the Committee operates with the determination of open market under an Authorization for Foreign Curpolicies and the reasons underlying each rency Operations, a Foreign Currency policy action, and that it shall include in Directive, and Procedural Instructions its annual report to the Congress a full with Respect to Foreign Currency account of such actions. Operations. These policy instruments The minutes of the meetings contain are shown below in the form in which the votes on the policy decisions made they were in effect at the beginning of at those meetings as well as a resume of 2000. Changes in the instruments during the discussions that led to the decisions. the year are reported in the minutes for The summary descriptions of economic the individual meetings. 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, 2000 Members of the Committee voting for a particular action may differ among 1. The Federal Open Market Committee authorizes and directs the Federal Reserve themselves as to the reasons for their Bank of New York, to the extent necesvotes; in such cases, the range of their sary to carry out the most recent domestic views is noted in the minutes. When policy directive adopted at a meeting of the members dissent from a decision, they Committee: are identified in the minutes along with a summary of the reasons for their (a) To buy or sell U.S. Government securities, including securities of the Federal dissent. Financing Bank, and securities that are direct Policy directives of the Federal Open obligations of, or fully guaranteed as to Market Committee are issued to the principal and interest by, any agency of the Federal Reserve Bank of New York as United States in the open market, from or to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

190 87th Annual Report, 2000 securities dealers and foreign and inter- 2. In order to ensure the effective conduct national accounts maintained at the Federal of open market operations, the Federal Open Reserve Bank of New York, on a cash, regu- Market Committee authorizes the Federal lar, or deferred delivery basis, for the Sys- Reserve Bank of New York to lend on an tem Open Market Account at market prices, overnight basis U.S. Government securities and, for such Account, to exchange maturing held in the System Open Market Account to U.S. Government and Federal agency securi- dealers at rates that shall be determined by ties with the Treasury or the individual competitive bidding but that in no event shall agencies or to allow them to mature without be less than 1.0 percent per annum of the replacement; provided that the aggregate market value of the securities lent. The Fedamount of U.S. Government and Federal eral Reserve Bank of New York shall apply agency securities held in such Account reasonable limitations on the total amount of (including forward commitments) at the a specific issue that may be auctioned and on close of business on the day of a meeting of the amount of securities that each dealer may the Committee at which action is taken with borrow. The Federal Reserve Bank of New respect to a domestic policy directive shall York may reject bids which could facilitate not be increased or decreased by more than a dealer's ability to control a single issue as $12.0 billion during the period commencing determined solely by the Federal Reserve with the opening of business on the day fol- Bank of New York. lowing such meeting and ending with the close of business on the day of the next such 3. In order to ensure the effective conduct of meeting; open market operations, while assisting in the provision of short-term investments for (b) To buy U.S. Government securities, foreign and international accounts mainobligations that are direct obligations of, or tained at the Federal Reserve Bank of New fully guaranteed as to principal and interest York, the Federal Open Market Committee by, any agency of the United States, from authorizes and directs the Federal Reserve dealers for the account of the Federal Bank of New York (a) for System Open Reserve Bank of New York under agree- Market Account, to sell U.S. Government ments for repurchase of such securities or securities to such foreign and international obligations in 90 calendar days or less, at accounts on the bases set forth in pararates that, unless otherwise expressly autho- graph l(a) under agreements providing for rized by the Committee, shall be determined the resale by such accounts of those securiby competitive bidding, after applying rea- ties within 90 calendar days on terms compasonable limitations on the volume of agree- rable to those available on such transactions ments with individual dealers; provided that in the market; and (b) for New York Bank in the event Government securities or agency account, when appropriate, to undertake with issues covered by any such agreement are dealers, subject to the conditions imposed on not repurchased by the dealer pursuant to the purchases and sales of securities in paraagreement or a renewal thereof, they shall be graph l(b), repurchase agreements in U.S. sold in the market or transferred to the Sys- Government and agency securities, and to tem Open Market Account. arrange corresponding sale and repurchase agreements between its own account and foreign and international accounts main- (c) To sell U.S. Government securities tained at the Bank. Transactions undertaken that are direct obligations of, or fully guarwith such accounts under the provisions of anteed as to principal and interest by, any this paragraph may provide for a service fee agency of the United States to dealers for when appropriate. System Open Market Account under agreements for the resale by dealers of such securities or obligations in 90 calendar days or 4. In order to help ensure the effective conless, at rates that, unless otherwise expressly duct of open market operations during the authorized by the Committee, shall be deter- transition period surrounding the century mined by competitive bidding, after apply- date change, the Committee authorizes the ing reasonable limitations on the volume of Federal Reserve Bank of New York to sell agreements with individual dealers. options on repurchase agreements, reverse Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings 191 repurchase agreements, and matched sale at its meeting in June the ranges it had estabpurchase transactions for exercise no later lished in February for growth of M2 and M3 than January 2000. of 1 to 5 percent and 2 to 6 percent respectively, measured from the fourth quarter of 1998 to the fourth quarter of 1999. The range Domestic Policy Directive for growth of total domestic nonfinancial debt was maintained at 3 to 7 percent for the In Effect January 1, 20001 year. For 2000, the Committee agreed on a tentative basis in June to retain the same The information reviewed at this meeting ranges for growth of the monetary aggresuggests continued strong expansion of eco- gates and debt, measured from the fourth nomic activity. Nonfarm payroll employ- quarter of 1999 to the fourth quarter of 2000. ment increased substantially further in Octo- The behavior of the monetary aggregates ber and November, and the civilian unem- will continue to be evaluated in the light of ployment rate stayed at 4.1 percent in progress toward price level stability, move- November, its low for the year. Manufactur- ments in their velocities, and developments ing output recorded sizable gains in October in the economy and financial markets. and November. Total retail sales rose appre- To promote the Committee's long-run ciably over the two months. Housing activity objectives of price stability and sustainable has softened somewhat over recent months economic growth, the Committee in the but has remained at a high level. Trends in immediate future seeks conditions in reserve orders suggest that business spending on markets consistent with maintaining the capital equipment has increased further. The federal funds rate at an average of around U.S. nominal trade deficit in goods and ser- 5!/2 percent. In view of the evidence curvices rose in October from its average in the rently available, the Committee believes that third quarter. Aggregate price increases have prospective developments are equally likely been smaller in the past two months, reflect- to warrant an increase or a decrease in the ing a flattening in energy prices; labor com- federal funds rate operating objective during pensation rates have been rising more slowly the intermeeting period. than last year. Most market interest rates are up some- Authorization for Foreign what since the meeting on November 16, Currency Operations 1999. Measures of share prices in equity markets have risen further over the inter- In Effect January 1, 2000 meeting period. In foreign exchange markets, the trade-weighted value of the dollar 1. The Federal Open Market Committee has changed little over the period in relation authorizes and directs the Federal Reserve to the currencies of a broad group of impor- Bank of New York, for System Open Market tant U.S. trading partners. Account, to the extent necessary to carry out M2 continued to grow at a moderate pace the Committee's foreign currency directive in November while M3 surged. For the year and express authorizations by the Committhrough November, M2 and M3 are estitee pursuant thereto, and in conformity with mated to have increased at rates somewhat such procedural instructions as the Commitabove the Committee's annual ranges for tee may issue from time to time: 1999. Total domestic nonfinancial debt has expanded at a pace in the upper end of its A. To purchase and sell the following range. foreign currencies in the form of cable trans- The Federal Open Market Committee fers through spot or forward transactions on seeks monetary and financial conditions that the open market at home and abroad, includwill foster price stability and promote susing transactions with the U.S. Treasury, with tainable growth in output. In furtherance of the U.S. Exchange Stabilization Fund estabthese objectives, the Committee reaffirmed lished by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, with the Bank for International Settle- 1. Adopted by the Committee at its meeting on ments, and with other international financial December 21, 1999. institutions: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

192 87th Annual Report, 2000 Canadian dollars Mexican pesos new arrangements that may be authorized, Danish kroner Norwegian kroner shall be referred for review and approval to euro Swedish kronor the Committee. Pounds sterling Swiss francs Japanese yen 3. All transactions in foreign currencies B. To hold balances of, and to have undertaken under paragraph 1(A) above outstanding forward contracts to receive or shall, unless otherwise expressly authorized to deliver, the foreign currencies listed in by the Committee, be at prevailing market paragraph A above. rates. For the purpose of providing an investment return on System holdings of foreign C. To draw foreign currencies and to currencies, or for the purpose of adjusting permit foreign banks to draw dollars under interest rates paid or received in connection the reciprocal currency arrangements listed with swap drawings, transactions with forin paragraph 2 below, provided that draweign central banks may be undertaken at ings by either party to any such arrangement non-market exchange rates. shall be fully liquidated within 12 months after any amount outstanding at that time was first drawn, unless the Committee, 4. It shall be the normal practice to arrange because of exceptional circumstances, spe- with foreign central banks for the coordinacifically authorizes a delay. tion of foreign currency transactions. In making operating arrangements with foreign D. To maintain an overall open posi- central banks on System holdings of foreign tion in all foreign currencies not exceeding currencies, the Federal Reserve Bank of $25.0 billion. For this purpose, the overall New York shall not commit itself to maintain open position in all foreign currencies is any specific balance, unless authorized by defined as the sum (disregarding signs) of the Federal Open Market Committee. Any net positions in individual currencies. The agreements or understandings concerning the net position in a single foreign currency is administration of the accounts maintained by defined as holdings of balances in that cur- the Federal Reserve Bank of New York with rency, plus outstanding contracts for future the foreign banks designated by the Board receipt, minus outstanding contracts for of Governors under Section 214.5 of Regufuture delivery of that currency, i.e., as the lation N shall be referred for review and sum of these elements with due regard to approval to the Committee. sign. 2. The Federal Open Market Commit- 5. Foreign currency holdings shall be intee directs the Federal Reserve Bank of vested to ensure that adequate liquidity is New York to maintain reciprocal currency maintained to meet anticipated needs and so arrangements ("swap" arrangements) for the that each currency portfolio shall generally System Open Market Account for periods up have an average duration of no more than to a maximum of 12 months with the follow- 18 months (calculated as Macaulay duraing foreign banks, which are among those tion). When appropriate in connection with designated by the Board of Governors of the arrangements to provide investment facilities Federal Reserve System under Section 214.5 for foreign currency holdings, U.S. Governof Regulation N, Relations with Foreign ment securities may be purchased from for- Banks and Bankers, and with the approval of eign central banks under agreements for the Committee to renew such arrangements repurchase of such securities within 30 calon maturity: endar days. 6. All operations undertaken pursuant to Amount Foreign bank (millions of the preceding paragraphs shall be reported dollars equivalent) promptly to the Foreign Currency Subcommittee and the Committee. The Foreign Bank of Canada 2,000 Currency Subcommittee consists of the Bank of Mexico 3,000 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings 193 the absence of members of the Board serving orderly market conditions, provided that on the Subcommittee, other Board Members market exchange rates for the U.S. dollar designated by the Chairman as alternates, reflect actions and behavior consistent with and in the absence of the Vice Chairman of the IMF Article IV, Section 1. the Committee, his alternate). Meetings of the Subcommittee shall be called at the 2. To achieve this end the System shall: request of any member, or at the request of the Manager, System Open Market Account A. Undertake spot and forward pur- ("Manager"), for the purposes of reviewing chases and sales of foreign exchange. recent or contemplated operations and of consulting with the Manager on other mat- B. Maintain reciprocal currency ters relating to his responsibilities. At the ("swap") arrangements with selected forrequest of any member of the Subcommittee, eign central banks. questions arising from such reviews and consultations shall be referred for determination C. Cooperate in other respects with to the Federal Open Market Committee. central banks of other countries and with international monetary institutions. 7. The Chairman is authorized: 3. Transactions may also be undertaken: A. With the approval of the Committee, to enter into any needed agreement or A. To adjust System balances in light understanding with the Secretary of the Trea- of probable future needs for currencies. sury about the division of responsibility for foreign currency operations between the Sys- B. To provide means for meeting System and the Treasury; tem and Treasury commitments in particular currencies, and to facilitate operations of the B. To keep the Secretary of the Trea- Exchange Stabilization Fund. sury fully advised concerning System foreign currency operations, and to consult with C. For such other purposes as may be the Secretary on policy matters relating to expressly authorized by the Committee. foreign currency operations; 4. System foreign currency operations shall C. From time to time, to transmit be conducted: appropriate reports and information to the National Advisory Council on International A. In close and continuous consulta- Monetary and Financial Policies. tion and cooperation with the United States Treasury; 8. Staff officers of the Committee are authorized to transmit pertinent information on B. In cooperation, as appropriate, with System foreign currency operations to approforeign monetary authorities; and priate officials of the Treasury Department. C. In a manner consistent with the obli- 9. All Federal Reserve Banks shall particigations of the United States in the Internapate in the foreign currency operations for tional Monetary Fund regarding exchange System Account in accordance with paraarrangements under the IMF Article IV. graph 3 G(l) of the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944. Procedural Instructions with Respect to Foreign Currency Operations Foreign Currency Directive In Effect January 1, 2000 In Effect January 1, 2000 In conducting operations pursuant to the 1. System operations in foreign currencies authorization and direction of the Federal shall generally be directed at countering dis- Open Market Committee as set forth in the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

194 87th Annual Report, 2000 Authorization for Foreign Currency Opera- since the most recent regular meeting of the tions and the Foreign Currency Directive, Committee. the Federal Reserve Bank of New York, through the Manager, System Open Market B. Any swap drawing proposed by Account ("Manager"), shall be guided by a foreign bank exceeding the larger of the following procedural understandings (i) $200 million or (ii) 15 percent of the with respect to consultations and clearances size of the swap arrangement. with the Committee, the Foreign Currency Subcommittee, and the Chairman of the 3. The Manager shall also consult with the Committee. All operations undertaken pur- Subcommittee or the Chairman about prosuant to such clearances shall be reported posed swap drawings by the System, and promptly to the Committee. about any operations that are not of a routine character. 1. The Manager shall clear with the Subcommittee (or with the Chairman, if the Chairman believes that consultation with the Meeting Held on Subcommittee is not feasible in the time February 1-2, 2000 available): A meeting of the Federal Open Market A. Any operation that would result in a Committee was held in the offices of change in the System's overall open position the Board of Governors of the Federal in foreign currencies exceeding $300 million Reserve System in Washington, D.C., on any day or $600 million since the most recent regular meeting of the Committee. on Tuesday, February 1, 2000, at 2:30 p.m. and continued on Wednesday, B. Any operation that would result in a February 2, 2000, at 9:00 a.m. change on any day in the System's net position in a single foreign currency exceeding Present: $150 million, or $300 million when the Mr. Greenspan, Chairman operation is associated with repayment of Mr. McDonough, Vice Chairman swap drawings. Mr. Broaddus Mr. Ferguson C. Any operation that might generate a Mr. Gramlich substantial volume of trading in a particular Mr. Guynn currency by the System, even though the Mr. Jordan change in the System's net position in that Mr. Kelley currency might be less than the limits speci- Mr. Meyer fied in l.B. Mr. Parry D. Any swap drawing proposed by a Mr. Hoenig, Ms. Minehan, foreign bank not exceeding the larger of Messrs. Moskow and Poole, (i) $200 million or (ii) 15 percent of the size Alternate Members of the Federal of the swap arrangement. Open Market Committee 2. The Manager shall clear with the Com- Messrs. Boehne, McTeer, and Stern, mittee (or with the Subcommittee, if the Presidents of the Federal Reserve Subcommittee believes that consultation Banks of Philadelphia, Dallas, and with the full Committee is not feasible in the Minneapolis respectively time available, or with the Chairman, if the Chairman believes that consultation with Mr. Kohn, Secretary and Economist the Subcommittee is not feasible in the time Mr. Bernard, Deputy Secretary available): Ms. Fox, Assistant Secretary Mr. Gillum, Assistant Secretary A. Any operation that would result in a Mr. Mattingly, General Counsel change in the System's overall open position Mr. Baxter, Deputy General Counsel in foreign currencies exceeding $1.5 billion Ms. Johnson, Economist Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 195 Mr. Prell, Economist Ms. Low, Open Market Secretariat Assistant, Division of Monetary Mr. Beebe, Ms. Cumming, Affairs, Board of Governors Messrs. Eisenbeis, Goodfriend, Howard, Lindsey, Reinhart, Ms. Browne, Messrs. Hakkio Simpson, Sniderman, and and Hunter, Ms. Krieger, Stockton, Associate Economists Messrs. Lang, Rasche, Rolnick, and Rosenblum, Senior Vice Mr. Fisher, Manager, System Open Presidents, Federal Reserve Banks Market Account of Boston, Kansas City, Chicago, New York, Philadelphia, St. Louis, Mr. Winn,2 Assistant to the Board, Minneapolis, and Dallas Office of Board Members, respectively Board of Governors In the agenda for this meeting, it was Mr. Ettin, Deputy Director, Division of Research and Statistics, Board reported that advices of the election of of Governors the following members and alternate members of the Federal Open Market Messrs. Madigan and Slifman, Committee for the period commencing Associate Directors, Divisions January 1, 2000, and ending Decemof Monetary Affairs and Research ber 31, 2000, had been received and that and Statistics respectively, Board of Governors these individuals had executed their oaths of office. Messrs. Oliner and Whitesell, Assistant The elected members and alternate Directors, Divisions of Research members were as follows: and Statistics and Monetary Affairs respectively, Board of Governors William J. McDonough, President of the Federal Reserve Bank of New York, Mr. Small,3 Section Chief, Division with Jamie B. Stewart, Jr., First Vice of Monetary Affairs, Board of President of the Federal Reserve Bank Governors of New York, as alternate J. Alfred Broaddus, Jr., President of the Messrs. Brayton,3 Morton,4 and Federal Reserve Bank of Richmond, Rosine,4 Senior Economists, with Cathy E. Minehan, President of the Federal Reserve Bank of Boston, Divisions of Research and as alternate Statistics, International Finance, and Research and Statistics Jerry L. Jordan, President of the Federal respectively, Board of Governors Reserve Bank of Cleveland, with Michael H. Moskow, President of the Ms. Garrett and Mr. Hooker,4 Federal Reserve Bank of Chicago, as alternate Economists, Division Jack Guynn, President of the Federal of Monetary Affairs, Board Reserve Bank of Atlanta, with Wilof Governors liam Poole, President of the Federal Reserve Bank of St. Louis, as alternate Robert T. Parry, President of the Federal Reserve Bank of San Francisco, with 2. Attended Tuesday's session only. Thomas M. Hoenig, President of the 3. Attended portion of meeting relating to the Federal Reserve Bank of Kansas City, staff presentation of policy alternatives. as alternate 4. Attended portion of meeting relating to the Committee's review of the economic outlook and consideration of its money and debt ranges for By unanimous vote, the following 2000. officers of the Federal Open Market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

196 87th Annual Report, 2000 Committee were elected to serve until of directors of the Federal Reserve Bank of the election of their successors at the New York. first meeting of the Committee after By unanimous vote, the Committee December 31, 2000, with the underapproved an addition to the Authorizastanding that in the event of the discontion for Domestic Open Market Operatinuance of their official connection with tions regarding adjustments to the stance the Board of Governors or with a Fedof monetary policy during intermeeting eral Reserve Bank they would cease to periods. As had previously been agreed, have any official connection with the the temporary authority given to the Federal Open Market Committee: Federal Reserve Bank of New York to sell options to counter potential century- Alan Greenspan Chairman data-change pressures in financial mar- William J. McDonough Vice Chairman Donald L. Kohn Secretary and kets was allowed to lapse. Accordingly, Economist the Authorization was adopted, effective Normand R.V. Bernard Deputy Secretary February 1, 2000, as shown below. Lynn S. Fox Assistant Secretary Gary P. Gillum Assistant Authorization For Domestic Secretary Open Market Operations J. Virgil Mattingly, Jr. General Counsel Thomas C. Baxter, Jr. Deputy General Counsel 1. The Federal Open Market Committee Karen H. Johnson Economist authorizes and directs the Federal Reserve Michael J. Prell Economist Bank of New York, to the extent necessary to carry out the most recent domestic policy directive adopted at a meeting of the Jack H. Beebe, Christine Cumming, Committee: Robert A. Eisenbeis, Marvin S. (a) To buy or sell U.S. Government Goodfriend, David H. Howard, securities, including securities of the Federal David E. Lindsey, Vincent R. Reinhart, Financing Bank, and securities that are direct Thomas D. Simpson, Mark S. obligations of, or fully guaranteed as to Sniderman, and David J. Stockton, principal and interest by, any agency of the Associate Economists United States in the open market, from or to securities dealers and foreign and inter- By unanimous vote, the Federal national accounts maintained at the Federal Reserve Bank of New York, on a cash, regu- Reserve Bank of New York was selected lar, or deferred delivery basis, for the System to execute transactions for the System Open Market Account at market prices, and, Open Market Account until the adjourn- for such Account, to exchange maturing U.S. ment of the first meeting of the Commit- Government and Federal agency securities tee after December 31, 2000. with the Treasury or the individual agencies or to allow them to mature without replace- By unanimous vote, Peter R. Fisher ment; provided that the aggregate amount of was selected to serve at the pleasure of U.S. Government and Federal agency securithe Committee as Manager, System ties held in such Account (including forward Open Market Account, on the under- commitments) at the close of business on the standing that his selection was subject to day of a meeting of the Committee at which action is taken with respect to a domestic being satisfactory to the Federal Reserve policy directive shall not be increased or Bank of New York. decreased by more than $12.0 billion during the period commencing with the opening of Secretary's note: Advice subsequently business on the day following such meeting was received that the selection of Mr. Fisher and ending with the close of business on the as Manager was satisfactory to the board day of the next such meeting; Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 197 (b) To buy U.S. Government securities Bank of New York (a) for System Open and obligations that are direct obligations of, Market Account, to sell U.S. Government or fully guaranteed as to principal and inter- securities to such foreign and international est by, any agency of the United States, from accounts on the bases set forth in paragraph dealers for the account of the Federal l(a) under agreements providing for the Reserve Bank of New York under agree- resale by such accounts of those securities ments for repurchase of such securities or within 90 calendar days on terms comobligations in 90 calendar days or less, at parable to those available on such transrates that, unless otherwise expressly autho- actions in the market; and (b) for New York rized by the Committee, shall be determined Bank account, when appropriate, to underby competitive bidding, after applying rea- take with dealers, subject to the conditions sonable limitations on the volume of agree- imposed on purchases and sales of securities ments with individual dealers; provided that in paragraph l(b), repurchase agreements in in the event Government securities or agency U.S. Government and agency securities, and issues covered by any such agreement are to arrange corresponding sale and repurchase not repurchased by the dealer pursuant to the agreements between its own account and agreement or a renewal thereof, they shall be foreign and international accounts mainsold in the market or transferred to the Sys- tained at the Bank. Transactions undertaken tem Open Market Account. with such accounts under the provisions of (c) To sell U.S. Government securities this paragraph may provide for a service fee and obligations that are direct obligations of, when appropriate. or fully guaranteed as to principal and inter- 4. In the execution of the Committee's est by, any agency of the United States to decision regarding policy during any interdealers for System Open Market Account meeting period, the Committee authorizes under agreements for the resale by dealers of and directs the Federal Reserve Bank of such securities or obligations in 90 calendar New York, upon the instruction of the Chairdays or less, at rates that, unless otherwise man of the Committee, to adjust somewhat expressly authorized by the Committee, shall in exceptional circumstances the degree of be determined by competitive bidding, after pressure on reserve positions and hence the applying reasonable limitations on the vol- intended federal funds rate. Any such adjustume of agreements with individual dealers. ment shall be made in the context of the 2. In order to ensure the effective conduct Committee's discussion and decision at its of open market operations, the Federal Open most recent meeting and the Committee's Market Committee authorizes the Federal long-run objectives for price stability and Reserve Bank of New York to lend on an sustainable economic growth, and shall be overnight basis U.S. Government securities based on economic, financial, and moneheld in the System Open Market Account to tary developments during the intermeeting dealers at rates that shall be determined by period. Consistent with Committee praccompetitive bidding but that in no event shall tice, the Chairman, if feasible, will consult be less than 1.0 percent per annum of the with the Committee before making any market value of the securities lent. The Fed- adjustment. eral Reserve Bank of New York shall apply reasonable limitations on the total amount of With Mr. Broaddus dissenting, the a specific issue that may be auctioned, and Authorization for Foreign Currency on the amount of securities that each dealer Operations and the Foreign Currency may borrow. The Federal Reserve Bank of New York may reject bids which could Directive were reaffirmed in the forms facilitate a dealer's ability to control a single shown below. issue as determined solely by the Federal Reserve Bank of New York. 3. In order to ensure the effective conduct Authorization For Foreign of open market operations, while assisting in the provision of short-term investments for Currency Operations foreign and international accounts maintained at the Federal Reserve Bank of New 1. The Federal Open Market Committee York, the Federal Open Market Committee authorizes and directs the Federal Reserve authorizes and directs the Federal Reserve Bank of New York, for System Open Market Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

198 87th Annual Report, 2000 Account, to the extent necessary to carry out designated by the Board of Governors of the the Committee's foreign currency directive Federal Reserve System under Section 214.5 and express authorizations by the Committee of Regulation N, Relations with Foreign pursuant thereto, and in conformity with Banks and Bankers, and with the approval of such procedural instructions as the Commit- the Committee to renew such arrangements tee may issue from time to time: on maturity: A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or forward trans- Amount of actions on the open market at home and Foreign bank abroad, including transactions with the U.S. dollars equivalent) Treasury, with the U.S. Exchange Stabilization Fund established by Section 10 of the Bank of Canada 2,000 Gold Reserve Act of 1934, with foreign Bank of Mexico 3,000 monetary authorities, with the Bank for International Settlements, and with other international financial institutions: Any changes in the terms of existing swap arrangements, and the proposed terms of any Canadian dollars Mexican pesos new arrangements that may be authorized, Danish kroner Norwegian kroner shall be referred for review and approval to Euro Swedish kronor the Committee. Pounds sterling Swiss francs Japanese yen 3. All transactions in foreign currencies undertaken under paragraph 1A. above shall, B. To hold balances of, and to have unless otherwise expressly authorized by the outstanding forward contracts to receive or Committee, be at prevailing market rates. to deliver, the foreign currencies listed in For the purpose of providing an investment paragraph A above. return on System holdings of foreign curren- C. To draw foreign currencies and to cies, or for the purpose of adjusting interest permit foreign banks to draw dollars under rates paid or received in connection with the reciprocal currency arrangements listed swap drawings, transactions with foreign in paragraph 2 below, provided that draw- central banks may be undertaken at nonings by either party to any such arrangement market exchange rates. shall be fully liquidated within 12 months 4. It shall be the normal practice to after any amount outstanding at that time arrange with foreign central banks for the was first drawn, unless the Committee, coordination of foreign currency transbecause of exceptional circumstances, spe- actions. In making operating arrangements cifically authorizes a delay. with foreign central banks on System hold- D. To maintain an overall open posi- ings of foreign currencies, the Federal tion in all foreign currencies not exceeding Reserve Bank of New York shall not commit $25.0 billion. For this purpose, the overall itself to maintain any specific balance, unless open position in all foreign currencies is authorized by the Federal Open Market defined as the sum (disregarding signs) of Committee. Any agreements or understandnet positions in individual currencies. The ings concerning the administration of the net position in a single foreign currency is accounts maintained by the Federal Reserve defined as holdings of balances in that cur- Bank of New York with the foreign banks rency, plus outstanding contracts for future designated by the Board of Governors under receipt, minus outstanding contracts for Section 214.5 of Regulation N shall be future delivery of that currency, i.e., as the referred for review and approval to the sum of these elements with due regard to Committee. sign. 5. Foreign currency holdings shall be 2. The Federal Open Market Commit- invested to ensure that adequate liquidity is tee directs the Federal Reserve Bank of maintained to meet anticipated needs and so New York to maintain reciprocal currency that each currency portfolio shall generally arrangements ("swap" arrangements) for the have an average duration of no more than System Open Market Account for periods up 18 months (calculated as Macaulay durato a maximum of 12 months with the follow- tion). When appropriate in connection with ing foreign banks, which are among those arrangements to provide investment facili- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 199 ties for foreign currency holdings, U.S. Gov- eign Relationships of Federal Reserve Banks ernment securities may be purchased from dated January 1, 1944. foreign central banks under agreements for repurchase of such securities within 30 calendar days. Foreign Currency Directive 6. All operations undertaken pursuant to the preceding paragraphs shall be reported 1. System operations in foreign currenpromptly to the Foreign Currency Subcomcies shall generally be directed at countering mittee and the Committee. The Foreign Curdisorderly market conditions, provided that rency Subcommittee consists of the Chairmarket exchange rates for the U.S. dollar man and Vice Chairman of the Committee, reflect actions and behavior consistent with the Vice Chairman of the Board of Goverthe IMF Article IV, Section 1. nors, and such other member of the Board 2. To achieve this end the System shall: as the Chairman may designate (or in the A. Undertake spot and forward purabsence of members of the Board serving on chases and sales of foreign exchange. the Subcommittee, other Board members B. Maintain reciprocal currency designated by the Chairman as alternates, ("swap") arrangements with selected forand in the absence of the Vice Chairman of eign central banks. the Committee, his alternate). Meetings of the Subcommittee shall be called at the C. Cooperate in other respects with request of any member, or at the request of central banks of other countries and with the Manager, System Open Market Account international monetary institutions. ("Manager"), for the purposes of reviewing 3. Transactions may also be undertaken: recent or contemplated operations and of A. To adjust System balances in light consulting with the Manager on other mat- of probable future needs for currencies. ters relating to his responsibilities. At the B. To provide means for meeting Sysrequest of any member of the Subcommittee, tem and Treasury commitments in particular questions arising from such reviews and con- currencies and to facilitate operations of the sultations shall be referred for determination Exchange Stabilization Fund. to the Federal Open Market Committee. C. For such other purposes as may be expressly authorized by the Committee. 7. The Chairman is authorized: 4. System foreign currency operations A. With the approval of the Commit- shall be conducted: tee, to enter into any needed agreement or A. In close and continuous consultaunderstanding with the Secretary of the Trea- tion and cooperation with the United States sury about the division of responsibility for Treasury; foreign currency operations between the Sys- B. In cooperation, as appropriate, with tem and the Treasury; foreign monetary authorities; and B. To keep the Secretary of the Trea- C. In a manner consistent with the oblisury fully advised concerning System for- gations of the United States in the Internaeign currency operations, and to consult with tional Monetary Fund regarding exchange the Secretary on policy matters relating to arrangements under the IMF Article IV. foreign currency operations; C. From time to time, to transmit Mr. Broaddus dissented in the votes appropriate reports and information to the on the Authorization and the Directive National Advisory Council on International because they provide the foundation for Monetary and Financial Policies. foreign exchange market intervention. 8. Staff officers of the Committee are He continued to believe that the Fedauthorized to transmit pertinent information on System foreign currency operations eral Reserve's participation in foreign to appropriate officials of the Treasury exchange market intervention compro- Department. mises its ability to conduct monetary 9. All Federal Reserve Banks shall par- policy effectively. Because sterilized inticipate in the foreign currency operations tervention cannot have sustained effects for System Account in accordance with parain the absence of conforming monetary graph 3 G(l) of the Board of Governors' Statement of Procedure with Respect to For- policy actions, Federal Reserve partici- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

200 87th Annual Report, 2000 pation in foreign exchange operations in operation is associated with repayment of his view risks one of two undesirable swap drawings. C. Any operation that might generate a outcomes. First, the independence of substantial volume of trading in a particular monetary policy is jeopardized if the currency by the System, even though the System adjusts its policy actions to sup- change in the System's net position in that port short-term foreign exchange objec- currency might be less than the limits specitives set by the U.S. Treasury. Alterna- fied in l.B. D. Any swap drawing proposed by a tively, the credibility of monetary policy foreign bank not exceeding the larger of is damaged if the System does not fol- (i) $200 million or (ii) 15 percent of the size low interventions with compatible pol- of the swap arrangement. icy actions, the interventions conse- 2. The Manager shall clear with the Comquently fail to achieve their objectives, mittee (or with the Subcommittee, if the and the System is associated in the mind Subcommittee believes that consultation with the full Committee is not feasible in the of the public with the failed operations. time available, or with the Chairman, if By unanimous vote, the Procedural the Chairman believes that consultation with Instructions with Respect to Foreign the Subcommittee is not feasible in the time Currency Operations, in the form shown available): below, were reaffirmed. A. Any operation that would result in a change in the System's overall open position in foreign currencies exceeding $1.5 billion Procedural Instructions with since the most recent regular meeting of the Committee. Respect to Foreign Currency B. Any swap drawing proposed by Operations 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 Authorization for Foreign Currency Opera- proposed swap drawings by the System and tions and the Foreign Currency Directive, about any operations that are not of a routine the Federal Reserve Bank of New York, character. through the Manager, System Open Market Account ("Manager"), shall be guided by the following procedural understandings On January 19, 2000, the continuing with respect to consultations and clearances rules, regulations, and other instructions with the Committee, the Foreign Currency of the Committee were distributed with Subcommittee, and the Chairman of the the advice that, in accordance with pro- Committee. All operations undertaken pursucedures approved by the Committee, ant to such clearances shall be reported promptly to the Committee. they were being called to the Commit- 1. The Manager shall clear with the Sub- tee's attention before the February 1-2 committee (or with the Chairman, if the organization meeting to give members Chairman believes that consultation with the an opportunity to raise any questions Subcommittee is not feasible in the time they might have concerning them. Memavailable): bers were asked to indicate if they A. Any operation that would result in a change in the System's overall open position wished to have any of the instruments in in foreign currencies exceeding $300 million question placed on the agenda for conon any day or $600 million since the most sideration at this meeting. recent regular meeting of the Committee. The Rules of Procedure were placed B. Any operation that would result in a on the agenda and by unanimous vote change on any day in the System's net position in a single foreign currency exceeding the Committee approved updating $150 million, or $300 million when the changes, effective upon publication Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 201 in the Federal Register. The changes domestic demand had been met in part relate to electronic and telephone through further advances in imports. communications. Domestically, industrial production and nonfarm payrolls had continued to Secretary's note: The revised Rules of increase briskly. Despite very tight labor Procedure were published in the Federal markets, labor costs had been climbing Register on February 9, 2000. more slowly than in 1998. Consumer price inflation had stayed moderate over By unanimous vote, the Program for the past few months, despite a recent Security of FOMC Information was resurgence in energy prices. amended with regard to certain security Labor demand remained robust classifications and staff access to confi- through year-end, as nonfarm payroll dential FOMC information. employment posted a further large By unanimous vote, the minutes of increase in December. Job growth in the the meeting of the Federal Open Market services industry was brisk, construction Committee held on December 21, 1999, hiring rose somewhat further against a were approved. backdrop of good weather and project The Manager of the System Open backlogs, and manufacturing employ- Market Account reported on recent ment was essentially unchanged. The developments in foreign exchange mar- civilian unemployment rate held at kets. There were no open market opera- 4.1 percent in December, its low for the tions in foreign currencies for the Sys- year, and initial claims for unemploytem's account in the period since the ment insurance persisted at a very low previous meeting, and thus no vote was level through late January. required of the Committee. Industrial production recorded a sharp The Manager also reported on devel- advance in the fourth quarter. Manufacopments in domestic financial markets turing and mining output rose briskly, and on System open market transactions but utilities output was held down by in government securities and federal lackluster demand during a period of agency obligations during the period unseasonably warm weather in several December 21, 1999, to February 1, parts of the country. Output gains in 2000. By unanimous vote, the Commit- manufacturing were widespread and tee ratified these transactions. the factory operating rate rose further, The Committee then turned to a dis- though capacity utilization was still a cussion of the economic and financial little below its long-term average. outlook, the ranges for the growth of Consumer spending apparently was money and debt in 2000, and the imple- very robust in the fourth quarter. Total mentation of monetary policy over the nominal retail sales rose sharply further intermeeting period ahead. in December, with outlets for durable The information reviewed at this and nondurable goods recording submeeting suggested that economic activ- stantial gains in sales. Expenditures ity had expanded rapidly in recent related to Y2K concerns appeared to months. Consumer spending had have been relatively limited. Outlays remained very brisk, business fixed for services in October and November investment had continued on a strong (latest data) were strong, even though upward trend, and housing demand was spending for heating was down in still at a relatively high level despite response to the unseasonably warm some slippage recently. The growth of weather. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

202 87th Annual Report, 2000 Housing activity was still at a rela- The U.S. trade deficit in goods and tively high level at year-end, buoyed by services widened significantly over the continuing strong gains in jobs and in- October-November period from its comes despite the rise that had occurred average for the third quarter. The value in mortgage interest rates. Total private of exports rose appreciably over the two housing starts rebounded sharply in months, largely reflecting growth in December from a decline in November, industrial supplies and service receipts, although part of the December pickup but the value of imports increased might have been associated with favor- noticeably more, with some of the rise able weather patterns. Sales of new reflecting increases in import prices. The homes fell in November (latest data), available information suggested that reversing much of the sizable October economic expansion remained robust rise, but average sales for the two-month in most foreign industrial nations. In period were only slightly below their Japan, however, economic activity was strong rate of the first half of the year. sluggish, with a seemingly small rise in Sales of existing homes were down in the fourth quarter following a third- December, but they also were only a quarter decline. Economic activity in the little below their elevated first-half pace. developing countries apparently con- The available information suggested tinued to pick up in recent months, that growth of business spending for although the pace of recovery varied durable equipment slowed abruptly in widely. Economic growth appeared to the fourth quarter and that investment in have been brisk in Mexico, Korea, nonresidential structures fell further. At China, Hong Kong, and Taiwan but was least some of the deceleration in spend- mixed among the ASEAN countries and ing for capital equipment reflected a slower in Brazil. hesitancy to spend on computers and Price inflation had remained moderother high-tech equipment just in ate in recent months. Consumer price advance of the century rollover. The inflation was subdued in December in weakness in the nonresidential sector spite of a sizable increase in energy was evidenced by further declines in prices; however, for the year as a whole, construction outlays and new building sharp increases in energy prices noticecontracts in October and November. ably boosted overall consumer inflation. Office construction appeared to be level- Excluding the volatile energy compoing off in response to the higher cost nent, consumer price inflation slowed of financing and to perceptions that the somewhat in 1999. By contrast, the suboffice space currently coming on line dued rise in the core PCE chain price would be sufficient to meet demand. index in 1999 was essentially the same The book value of manufacturing and as in 1998. At the producer level, prices trade inventories surged in November of finished goods other than food and after having climbed moderately on bal- energy changed little in December and ance earlier in the year. Even though the registered a considerably reduced rise might have been related to concerns increase in 1999. At earlier stages of about supply disruptions around year- processing, however, core producer end, inventory-sales ratios generally prices recorded somewhat larger declined a little in association with very advances than those for finished goods strong increases in sales, and the ratios in December and for the year. With were at or near the bottom of their regard to labor costs, average hourly ranges for the previous twelve months. earnings rose by a larger amount in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 203 December than in November, but the earnings, and most broad stock market increase in this measure in 1999 was indexes fell slightly on balance over the about the same as for 1998. intermeeting period. At its meeting on December 21, the In foreign exchange markets, the Committee adopted a directive that trade-weighted value of the dollar was called for maintaining conditions in up on balance over the intermeeting reserve markets consistent with an interval in relation to indexes of major unchanged federal funds rate of about foreign currencies and those of other 5lA percent and that did not contain any important U.S. trading partners. Reflectbias relating to the direction of possible ing market expectations of substantial adjustments to policy during the inter- Federal Reserve tightening, the dollar meeting period. The members noted that appreciated considerably against the yen such a directive, which suggested that and the euro while depreciating somethey did not expect a further change in what against the Canadian dollar. policy before the February meeting, M2 growth picked up appreciably should foster steady conditions in during December and January, evidently financial markets during the sensitive reflecting extra demands for liquidity century-date-change period. The Com- and safety during the century-datemittee also agreed, however, that the change period. M3 accelerated by even statement accompanying the announce- more than M2 in December. Its non-M2 ment of its decision would note that the component ballooned as banks issued Committee was especially concerned substantial volumes of large time deposabout the potential for inflation pres- its to meet very high credit demands and sures to increase and would want to as institutional money market funds consider at its February meeting whether became recipients of some of their cuspolicy action would be needed to con- tomers' precautionary liquid balances. tain such pressures. From the fourth quarter of 1998 through Open market operations during the the fourth quarter of 1999, M2 and intermeeting period were directed M3 increased at rates somewhat above toward maintaining the federal funds the Committee's annual ranges for 1999. rate at around 5Vi percent. The funds Total domestic nonfinancial debt rate averaged close to the Committee's expanded in 1999 at a pace in the upper target over the intermeeting interval portion of its range. despite very strong demands for addi- The staff forecast prepared for this tional currency and market liquidity meeting suggested that the expansion through the year-end and a rapid would gradually moderate from its curunwinding thereafter. Against the back- rently elevated pace to a rate around or ground of the Committee's announced perhaps a little below the growth of the concern about the inflationary implica- economy's estimated potential. The tions of unsustainably rapid economic expansion of domestic final demand growth, incoming information suggest- increasingly would be held back by the ing that aggregate demand retained con- anticipated waning of positive wealth siderable momentum led to upward effects associated with earlier large pressure on market interest rates once gains in equity prices and by higher the century-date-change period had interest rates. As a result, growth of passed without incident. The effects of spending on consumer durables and higher interest rates apparently offset houses was expected to slow; in conthose of unexpectedly high corporate trast, however, overall business invest- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

204 87th Annual Report, 2000 ment in equipment and software was would be high enough without policy projected to strengthen in response to tightening to bring the growth of the upward trend in replacement demand in line with that of supply and demand, especially for computers and contain pressures in labor markets. In software; also, continued solid economic the view of some members, taut labor growth abroad was expected to boost markets together with a turnaround in the growth of U.S. exports for some some of the factors that had been tempoperiod ahead. Core price inflation was rarily damping inflation, such as oil and projected to rise somewhat over the import prices, already lent an upward forecast horizon, partly as a result of bias to the inflation outlook, and all higher import prices and some firming agreed that a significant further tightenof gains in nominal labor compensation ing of labor resource utilization would in persistently tight labor markets that appreciably raise the risk of deteriorawould not be fully offset by productivity tion in the underlying inflation picture growth. over time. In the Committee's review of current In keeping with the practice at meetand prospective economic develop- ings preceding the Federal Reserve's ments, members commented that the semiannual report to Congress on the economy still seemed to be growing economy and monetary policy and very vigorously as it entered the new the Chairman's associated testimony, year, while core inflation remained sub- the members of the Committee and the dued. The members were concerned, Federal Reserve Bank presidents not however, that recent trends in economic currently serving as members had preactivity, if they continued, might under- pared individual projections of the mine the economy's remarkable perfor- growth in nominal and real GDP, the mance. The economy's potential to pro- rate of unemployment, and the rate of duce goods and services had been inflation for the year 2000. The forecasts accelerating over time, but the demand of the growth of nominal GDP were for output had been growing even more concentrated in a range of 5x/4 to strongly. If this imbalance continued, 5 ¥2 percent, and for the rate of expaninflationary pressures were likely to sion in real GDP they had a central build that would interfere with the tendency of 3Vi to 33A percent. Growth economy's performance and could lead at these rates was expected to hold the to a disruptive adjustment in economic civilian unemployment rate in a range of activity. Accelerating productivity, 4 to AlA percent in the fourth quarter of although adding to the growth of the 2000. The central tendency of the proeconomy's potential output, also had jections of inflation for 2000—as meainduced expectations of rapidly sured by the chain price index for accelerating business earnings that in personal consumption expenditures— turn had generated sharp increases in encompassed a range of PA to 2 perstock market wealth and lifted the cent, on the low side of the 2 percent growth of purchasing power and spend- rise in this index experienced in 1999 ing above that in incomes. Relatively when energy prices had surged. high real interest rates that reflected the Mirroring developments in the overincreased productivity and damped the all economy, reports of economic conrise in asset values would be needed to ditions in the individual Federal Reserve help restore balance. In that regard, districts continued to display broadmembers questioned whether rates based strength, apart from softness in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 205 construction activity in some areas and softening in many areas and would tend weakness in agriculture. Retail sales to hold down the growth in overall busiappeared to have strengthened further ness expenditures for capital. However, during the opening weeks of the new spending by state and local governments year after a surge during the holiday on roadbuilding and other projects season. Motor vehicle sales in particular appeared to be on a robust uptrend. had continued to hold up at a remark- Housing construction was expected ably high level. Consumption was being to remain at a relatively elevated level, supported by robust growth in jobs and albeit below recent peaks, as a conincomes, very high levels of consumer sequence of moderating demand stemconfidence, and the lagged wealth ming from higher mortgage interest effects from earlier advances in stock rates and indications of overbuilding in market prices. Even so, growth in con- some areas. Members also noted, howsumer spending was thought likely to ever, that building activity in some parts moderate over time to a pace more in of the country was still being held back line with the expansion in consumer by shortages of skilled construction incomes, unless the stock market posted workers and scarcities of some building large further increases from current lev- supplies. The resulting backlogs along els. As the experience of recent years with low inventories of houses in some had amply demonstrated, however, the areas were factors that should limit the future course of stock market prices was expected decline in residential construchighly uncertain, and equity markets had tion this year. Moreover, many homeshown a remarkable resilience to higher buyers were shifting from fixed-rate interest rates as earning prospects con- long-term mortgages to currently lowertinued to be marked up in association cost adjustable rate mortgages. More with the acceleration in productivity. fundamentally, however, the income and Opportunities to enhance profits by wealth effects that were boosting houseusing new technology were likely to hold expenditures generally should help lead to robust further growth in business to sustain a perhaps somewhat diminfixed investment, boosted mainly by ished but still high level of homebuildspending for equipment and software ing activity for a while, despite higher over the year ahead. While the huge mortgage financing costs. amount of capital deepening already Rapid increases in U.S. exports in accomplished in recent years and the conjunction with the strengthening of projected deceleration in aggregate foreign economies were likely to add to demand were negative factors in the out- demands on domestic producers. Conlook for business capital spending, they sistent with this outlook, several memwere likely to be overridden by persist- bers cited anecdotal reports of improving declines in the prices of high-tech ing foreign markets, notably in East equipment and the rising importance of Asian countries. At the same time, replacement demand that was associated despite some expected deceleration in with relatively short-lived investments imports as domestic demand moderated, in high-tech equipment and computer the nation's trade deficit was projected software that had tended to characterize to increase somewhat further over the the buildup in business equipment in year ahead. There was a risk that, as recent years. With regard to other types global portfolios came to be increasof investment, spending on nonresiden- ingly weighted toward dollar assets, tial business structures appeared to be expected returns on those assets would Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

206 87th Annual Report, 2000 need to rise to attract world savings, had been a slight widening of the spread with much of the adjustment potentially between nominal and inflation-indexed occurring through a decline in the Treasury bond yields. While there exchange rate of the dollar that would seemed to be an increasing number of add to pressures on U.S. prices. exceptions, business contacts continued Concerning the outlook for inflation, to report that raising their prices was the members continued to see the risks very difficult to carry out successfully as primarily tilted toward rising infla- and often impossible. On balance, the tionary pressures, though they antici- outlook for inflation remained subject to pated that further gains in productivity a marked degree of uncertainty. Given would hold down increases in unit labor current levels of resource use and the costs and prices, at least over the nearer strength of the economic expansion relaterm. A key issue was whether growth tive to the growth of the economy's in aggregate demand would moderate long-run potential, however, the memsufficiently to at least avoid greater pres- bers expected that inflation pressures sures on what were already very tight would gather some momentum over labor markets. In this regard, several time unless financial conditions became cited recent statistical and anecdotal evi- tighter. dence of larger increases in labor com- In keeping with the requirements of pensation, although unit labor costs did the Full Employment and Balanced not appear to be trending higher at this Growth Act of 1978 (the Humphreypoint. However, some nonlabor input Hawkins Act), the Committee reviewed prices already were rising faster. The at this meeting the ranges for growth of prospects for energy prices were very the monetary and debt ranges that it had difficult to predict, but even if such established on a tentative basis in June prices were to stabilize, the passthrough 1999. The tentative ranges approved of the large earlier increases into infla- in June for the period from the fourth tion and wage expectations, as well as quarter of 1999 to the fourth quarter of into the prices of products that were 2000 included growth of 1 to 5 percent heavily energy dependent, was likely to for M2, 2 to 6 percent for M3, and 3 to exert some upward pressure on prices 7 percent for total domestic nonfinancial throughout the economy. debt. On the positive side for the near-term All but one of the members favored inflation outlook, there was no evidence the adoption of the ranges that had been that the acceleration in productivity was selected on a tentative basis at the meetcoming to an end. Members commented ing in June. They noted that for some in this regard that business firms across years the ranges for monetary growth the country were continuing to improve had been chosen to encompass rates of the efficiency of their operations in a increase that would be expected under variety of ways in order to hold down conditions of price stability, assuming costs. These efforts included persistingly historical velocity relationships. This large investments in new equipment, approach had been adopted partly as a rationalization of business organiza- result of the substantial unreliability tions, and training or retraining existing of the linkage between the growth of workers for more demanding or new the broad monetary aggregates and ecotasks. Members also noted that longer- nomic performance. Since the current run inflation expectations generally did benchmark ranges had first been adopted not appear to be worsening, though there in the mid-1990s, however, structural Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, February 207 productivity growth had increased sub- developments in prices, the economy, and stantially, raising the expected rate of financial markets. growth of money at price stability, other Votes for this action: Messrs. Greenspan, things equal. One member supported McDonough, Broaddus, Ferguson, Grama proposal to adjust the monetary growth lich, Guynn, Jordan, Kelley, and Parry. ranges upward by at least enough to Vote against this action: Mr. Meyer. reflect this development. However, other members emphasized the uncertainties In dissenting, Mr. Meyer noted that about the dimensions of this new trend although the money growth ranges do in productivity growth, the measured not play an important role in the conduct rate of increase in prices that would be of monetary policy today, the Congress consistent with reasonable price stabil- has mandated that the FOMC set and ity, and the long-run behavior of veloc- report ranges for money and credit ity. They felt that raising the benchmark growth. In recent years, the money ranges risked misleading the public ranges have been set to be consistent about the Committee's confidence in the with price stability and normal velocity implied values for these variables going behavior. The rate of money growth forward, about the Committee's deter- consistent with price stability depends mination to pursue its fundamental on the average growth of real GDP. objectives of price stability and sustain- Therefore, when there is a significant able economic expansion, and about increase in the projected average growth the very low weight most Committee rate in real GDP, money growth ranges members continued to place on the should be adjusted upward so that they monetary aggregates in policy delibera- remain consistent with price stability. tions owing to the uncertainties sur- While considerable uncertainty remains rounding them. about the average rate of growth in real At the conclusion of this discussion, GDP, there is a strong consensus that it the Committee voted to approve without is significantly higher today than when change the ranges for 2000 that it had the target ranges were set at their current established on a tentative basis on values. The failure to adjust monetary June 30, 1999. With Mr. Meyer dissent- aggregate ranges makes them less useing, the following statement of longer- ful signals of Federal Reserve intenrun policy and growth ranges for 2000 tions. As long as the Federal Reserve was approved for inclusion in the is required to set and report ranges domestic policy directive: for money and debt growth, it should update them as appropriate. The Federal Open Market Committee In the Committee's discussion of polseeks monetary and financial conditions that icy for the upcoming intermeeting will foster price stability and promote susperiod, all the members supported a tainable growth in output. In furtherance of proposal to tighten reserve conditions these objectives, the Committee at this meeting established ranges for growth of M2 by a modest amount consistent with and M3 of 1 to 5 percent and 2 to 6 percent an increase in the federal funds rate respectively, measured from the fourth quar- of lA percentage point to a level of ter of 1999 to the fourth quarter of 2000. The 53/4 percent. The Committee's decision range for growth of total domestic nonfinanto tighten its policy stance was intended cial debt was set at 3 to 7 percent for the to help bring the growth of aggregate year. The behavior of the monetary aggregates will continue to be evaluated in the demand into better alignment with the light of movements in their velocities and expansion of sustainable aggregate sup- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

208 87th Annual Report, 2000 ply in an effort to avert rising infla- after their firming today the risks tionary pressures in the economy. Rela- remained weighted mainly in the directively high real interest rates would be tion of rising inflation pressures. There required to accomplish this objective, were few signs thus far that the rise in given the effects of increasing produc- interest rates over recent quarters was tivity and profits on the demand for restraining demand in line with potential capital goods and, through the wealth supply, and the members generally effect, on consumption spending. Pri- agreed that further tightening actions vate long-term rates already had risen might well be needed to ensure that considerably, but whether they had financial conditions had adjusted suffireached a level that would lead to a ciently to rising productivity growth to rebalancing of demand and supply was forestall escalating pressures on labor an open question. Moreover, these rates costs and prices. With the cushion already encompassed expectations of of unutilized labor resources having a tightening of monetary policy at this dwindled over recent years and and several subsequent meetings. For a with the willingness of global investors number of reasons, including uncertain- to continue to acquire dollar assets to ties about the outlook for the expan- finance major further increases in sion of aggregate demand in relation imports at current interest and exchange to that of potential supply, the econo- rates in question, the need to achieve my's response to the Committee's ear- the appropriate financial and economic lier policy actions, and the recently balance had become more pressing. In somewhat unsettled conditions in finan- the circumstances, it was important cial markets, a majority of the mem- for the public to understand that the bers expressed a preference for a lim- Committee saw inflation risks as persistited policy move at this time. As long ing even after today's action. At the as inflation and inflation expectations conclusion of this discussion, members remained damped, these members saw who favored a 50 basis point increase little risk in a gradual approach to policy indicated that, in light of the clear intentightening and considerable advantage tion of the Committee to act, if necesto preserving the possibility of calibrat- sary, in a timely manner to contain ing those actions to the emerging situa- inflation, the contemplated inclusion of tion. A few members expressed a pref- a statement about the risks of higher erence for an increase of 50 basis points inflation in the press release for this in the federal funds rate in order to meeting, and the likelihood that the provide greater assurance against a Board of Governors would approve a buildup of inflationary expectations and 25 basis point increase in the discount inflation over coming months. Other rate later in the day, they could accept a members acknowledged that the Com- 25 basis point rise in the federal funds mittee might need to move more aggres- rate. sively at a later meeting should imbal- At the conclusion of this discussion, ances continue to build and inflation and the Committee voted to authorize and inflation expectations clearly begin to direct the Federal Reserve Bank of pick up. New York, until it was instructed other- The members agreed that the state- wise, to execute transactions in the Sysment to be issued after this meeting tem Account in accordance with the folshould highlight their view that even lowing policy directive: Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 209 To further the Committee's long-run The meeting adjourned at 11:50 a.m. objectives of price stability and sustainable on February 2, 2000. economic growth, the Committee in the immediate future seeks conditions in reserve markets consistent with increasing the fed- Donald L. Kohn eral funds rate to an average of around Secretary 53/4 percent. The vote also encompassed approval of the sentence below for inclusion in the press statement to be released shortly after the Meeting Held on meeting: March 21, 2000 Against the background of its long-run goals of price stability and sustainable eco- A meeting of the Federal Open Market nomic growth and of the information cur- Committee was held in the offices of rently available, the Committee believes the the Board of Governors of the Federal risks are weighted mainly toward conditions that may generate heightened inflation pres- Reserve System in Washington, D.C., sures in the foreseeable future. on Tuesday, March 21, 2000, at 9:00 a.m. Votes for this action: Messrs. Greenspan, McDonough, Broaddus, Ferguson, Gram- Present: lich, Guynn, Jordan, Kelley, Meyer, and Mr. Greenspan, Chairman Parry. Votes against this action: None. Mr. McDonough, Vice Chairman Mr. Broaddus The meeting was recessed briefly Mr. Ferguson after this vote, and the members of the Mr. Gramlich Board of Governors left the room to Mr. Guynn vote on pending increases in the dis- Mr. Jordan count rate at several Federal Reserve Mr. Kelley Banks. On the Board members' return, Mr. Meyer Mr. Parry Chairman Greenspan announced that the Board had approved a VA percentage Mr. Hoenig, Ms. Minehan, point increase in the discount rate. The Messrs. Moskow, Poole, and Committee concluded its meeting with a Stewart, Alternate Members of the review of the press release announcing Federal Open Market Committee the joint policy action. Messrs. Boehne, McTeer, and Stern* The members noted with deep regret Presidents of the Federal Reserve the recent death of Frank E. Morris, Banks of Philadelphia, former president of the Federal Reserve Dallas, and Minneapolis Bank of Boston and a member of the respectively Committee over the course of twenty years before his retirement at the end of Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary 1988. Mr. Morris is remembered as a Ms. Fox, Assistant Secretary highly respected colleague and friend Mr. Gillum, Assistant Secretary who made outstanding contributions to Mr. Mattingly, General Counsel the work of the Committee, the Federal Ms. Johnson, Economist Reserve Bank of Boston, and the Fed- Mr. Prell, Economist eral Reserve System more generally. Ms. Cumming, Messrs. Eisenbeis, It was agreed that the next meeting Goodfriend, Howard, Lindsey, of the Committee would be held on Reinhart, Simpson, and Stockton, Tuesday, March 21, 2000. Associate Economists Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

210 87th Annual Report, 2000 Mr. Fisher, Manager, System Open developments in foreign exchange mar- Market Account kets. There were no open market operations in foreign currencies for the Mr. Winn, Assistant to the Board, System's account in the period since the Office of Board Members, Board previous meeting, and thus no vote was of Governors required of the Committee. Mr. Ettin, Deputy Director, Division of The Manager also reported on devel- Research and Statistics, Board opments in domestic financial markets of Governors and on System open market transactions in government securities and Messrs. Madigan and Slifman, federal agency obligations during the Associate Directors, Divisions of Monetary Affairs and Research period February 2, 2000, through and Statistics respectively, Board March 20, 2000. By unanimous vote, of Governors the Committee ratified these transactions. Messrs. Struckmeyer and Whitesell, At its meeting in August 1999, the Assistant Directors, Divisions of Research and Statistics and Committee had voted to expand the Monetary Affairs respectively, collateral that could be accepted in Board of Governors System repurchase transactions and had authorized the use of reverse repur- Ms. Low, Open Market Secretariat chase agreements. These authoriza- Assistant, Division of Monetary tions were scheduled to expire at the Affairs, Board of Governors end of April 2000. At this meeting the Ms. Browne, Messrs. Hakkio Manager proposed that the authority to and Hunter, Ms. Krieger, use the broader range of collateral be Messrs. Lang, Rasche, and extended until the first meeting in 2001 Rosenblum, Senior Vice and that the authority to engage in Presidents, Federal reverse repurchase agreements be made Reserve Banks of Boston, Kansas City, Chicago, New York, permanent. Philadelphia, St. Louis, and The principal effect of the expanded Dallas respectively collateral authorized last August, together with the use of triparty repur- Mr. Bryan, Assistant Vice President, chase agreements, was to allow pass- Federal Reserve Bank of Cleveland through mortgage securities of GNMA, FNMA, and FHLMC and "stripped" Mr. Weber, Senior Research Officer, securities of the U.S. Treasury and fed- Federal Reserve Bank of eral government agencies to be taken Minneapolis as collateral for repurchase transactions. Direct Treasury obligations remained Mr. Rudebusch, Senior Research the preferred means for meeting the Sys- Officer, Federal Reserve Bank of San Francisco tem's needs, but anticipated paydowns of marketable federal debt associated By unanimous vote, the minutes of with projected budget surpluses were the meeting of the Federal Open Market likely to limit the System's ability in the Committee held on February 1-2, 2000, future to continue to add substantially were approved. to holdings, even on a temporary basis, The Manager of the System Open without generating undesirable market Market Account reported on recent repercussions. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 211 In this setting, the Manager recom- and to add to the System's portfolio to mended that a broad-gauge study be meet permanent reserve needs by purundertaken to consider alternative asset chasing coupon securities in the secondclasses and selection criteria that could ary market. However, the amount that be appropriate for the System Open could be added through outright pur- Market Account (SOMA), with particu- chases without disturbing the Treasury lar attention to alternatives to the current market would have to be gauged over reliance on net additions to outright time relative to conditions in the market holdings of Treasury securities as the as Treasury issuance patterns evolved in sole means of effectuating the upward response to System purchases and Treatrend in the asset side of the System's sury buybacks of coupon securities. balance sheet. All the members endorsed the pro- Pending the completion of that study posal for a study of the issues associated and the Committee's consideration of with the System's asset allocation in alternative asset allocations, the Man- light of declining Treasury debt. They ager suggested that the Desk could rely noted that the requested temporary on temporary operations with relatively expansion of authority, pending the long maturities to meet the growth in Committee's consideration of the comunderlying reserve needs that could not pleted study, should not be read as indicomfortably be met by further outright cating in any way how the Committee purchases of Treasury securities. In might ultimately choose to allocate the implementing these temporary opera- portfolio, and any interim operations in tions, the Manager expressed a prefer- the broader range of collateral should ence to distribute the System's demand be capable of being unwound without for collateral as broadly as possible in adverse market consequences. order to minimize the impact on spread At the conclusion of this discussion, relationships in the financing market. the Committee voted unanimously to This preference motivated his recom- extend the suspension of several promendation to extend temporarily the visions of the "Guidelines for the Conauthority to operate in the broader range duct of System Operations in Federal of collateral. Agency Issues" until the first regularly The required size of the longer-term scheduled meeting in 2001. temporary operations would depend on The Committee also accepted a prohow much of the permanent reserve posal by the Manager to make permaneed could be met by outright purchases nent the authority to use reverse repurof Treasury securities. The Manager chase agreements in the conduct of open noted that the desirability of maintain- market operations. Such agreements are ing a liquid bill portfolio suggested that equivalent to matched sale-purchase System holdings of any bill issue should transactions, which the Manager has be limited to 35-40 percent of the long been authorized to use, but reverse outstanding amount. With issue sizes RPs have the advantage of much greater declining, such limits might mean that flexibility because they are the common from time to time some portion of the practice in financial markets. The Man- System's maturing bill holdings would ager indicated that he did not expect be redeemed rather than rolled over in to use reverse RPs on a regular basis Treasury auctions. The Manager also until the System's new trading system intended to roll over maturing holdings became operational, but in conjunction of Treasury coupon issues in auctions with existing triparty arrangements there Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

212 87th Annual Report, 2000 might be occasions in the interim when except for the upturn in energy prices in the timing of open market operations recent months. would make it desirable to use them Labor demand remained robust in instead of matched sale-purchase trans- January and February, with the average actions. The members voted unani- increase in private nonfarm payroll mously to adopt on a permanent basis, employment over the two months only subject to the annual review required a little below the strong pace of 1999. for all the Committee's instruments, Job growth in manufacturing and conparagraph l(c) of the Authorization for struction was solid, while hiring in the Domestic Open Market Operations in services sector slowed appreciably. The the form reproduced below. civilian unemployment rate, at 4.1 percent in February, was just above its 1999 1. The Federal Open Market Committee low, and initial claims for unemployauthorizes and directs the Federal Reserve ment insurance were at an extremely Bank of New York, to the extent necessary low level in early March. to carry out the most recent domestic policy directive adopted at a meeting of the Industrial production was up sharply Committee: in the early months of the year, reflect- (c) To sell U.S. Government securities ing large gains in the manufacturing and and securities that are direct obligations of, utilities sectors. Within manufacturing, or fully guaranteed as to principal and interoutput of high-tech equipment was notaest by, any agency of the United States to bly strong, but production of motor dealers for System Open Market Account under agreements for the resale by dealers of vehicles and parts also recorded a sizsuch securities or obligations in 90 calen- able advance on balance over the dar days or less, at rates that, unless other- January-February period. By contrast, wise expressly authorized by the Committee, output of aircraft and parts weakened shall be determined by competitive bidding, again. The continuing strength in manuafter applying reasonable limitations on the volume of agreements with individual facturing lifted the factory operating rate dealers. further, but capacity utilization stayed a little below its long-term average. The Committee then turned to a dis- Retail sales continued to increase cussion of the economic and financial rapidly in January and February against outlook and the implementation of the backdrop of strong growth in disposmonetary policy over the intermeeting able income and household wealth and period ahead. elevated consumer confidence. Sales of The information reviewed at this light vehicles surged over the Januarymeeting suggested that the expansion February period. Purchases of goods of economic activity remained rapid. other than motor vehicles picked up sub- Consumer spending and business fixed stantially further, with gains widespread investment were still trending upward across most major categories. Outlays strongly, and housing demand was hold- for services rose briskly in January (lating at a high level. Although the growth est data); part of the gain resulted from in domestic demand was being met higher spending for heating as temperapartly through rising imports, industrial tures in many parts of the country production and nonfarm payrolls were dropped to more seasonable levels. expanding briskly. Labor markets con- Residential housing activity remained tinued to be very tight, but there were strong in the first two months of the few signs of any acceleration in labor year. Total private housing starts in costs. Price inflation was still moderate, January and February held at the high Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 213 December level, as a surge in starts of for these sectors stayed at the bottom of multifamily units offset a downturn their respective ranges over the past in starts of single-family homes. The twelve months. demand for housing, associated with The U.S. trade deficit in goods and continuing gains in jobs and incomes, services climbed to a new high in Januhad remained ebullient despite an ary, as the value of exports retreated appreciable increase in mortgage rates. from the peak reached in December Although sales of new single-family and the value of imports rose sharply. homes fell in January (latest data), the The drop in exports was concentrated decline followed a December pace that in computers, semiconductors, aircraft, was the highest monthly rate in more chemicals, and consumer goods, while than twenty years. Sales of existing the increase in imports was primarily in homes also declined in January, continu- oil and automotive products. The availing a trend that had begun last July, but able information suggested that ecoinventories of existing homes for sale nomic expansion continued to be robust evidently were at very low levels. in most foreign industrial economies. Business spending on durable equip- The Japanese economy was still the ment and software and on nonresidential notable exception, though some favorstructures increased sharply in January. able signs were evident. Economic Shipments of computing and communi- activity in the developing countries also cations equipment surged after the cen- picked up further, with Asian countries tury rollover, and shipments of other registering the largest gains. non-aircraft goods rose moderately. Price inflation had remained moder- Deliveries of aircraft continued to be ate in recent months, with the exception held down by the labor strike at Boeing. of higher energy prices. Consumer The recent strength in orders for many prices jumped in February as energy types of equipment pointed to further prices surged. Abstracting from energy advances in spending in coming months. prices, however, consumer price infla- Expenditures for nonresidential struc- tion was moderate in January and Februtures turned up last autumn and rose ary. Moreover, the increase in consumer rapidly in January. Office and other prices of items other than food and commercial construction activity was energy during the twelve months ended robust, while industrial building was in February was the same as the change little changed. during the previous twelve-month The pace of accumulation of manu- period. At the producer level, prices of facturing and trade inventories slowed finished goods other than food and somewhat in January from the elevated energy changed little in January and rate in the fourth quarter; however, February, and their rise during the sales grew briskly and the aggregate twelve months ended in February was inventory-sales ratio edged down somewhat smaller than the advance durfrom an already very low level. In ing the previous twelve-month period. manufacturing, stocks increased moder- At earlier stages of processing, however, ately further in January; however, ship- producer prices registered somewhat ments grew more, and the aggregate larger increases than those for finished stock-shipments ratio for the sector goods in both the January-February declined to a new low. Both wholesale period and the twelve months ended in and retail inventories increased in line February. With regard to labor costs, with sales, and inventory-sales ratios average hourly earnings grew at a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

214 87th Annual Report, 2000 slightly faster rate in January and Febru- longer-term Treasury securities declined ary than they had in the fourth quarter of significantly. Most major indexes of last year. However, the advance in this equity prices moved up appreciably on earnings measure in the twelve months net over the intermeeting period. ended in February was about the same In foreign exchange markets, the as that in the previous twelve-month trade-weighted value of the dollar period. changed little over the intermeeting At its meeting on February 1-2, 2000, period against a basket of major currenthe Committee adopted a directive that cies. The dollar rose against the Austracalled for a slight tightening of condi- lian dollar, British pound, Canadian tions in reserve markets consistent with dollar, and the euro as investors apparan increase of lA percentage point in the ently revised down their expectations federal funds rate to an average of about of the extent of monetary tightening in 53/4 percent. The members agreed that those countries. By contrast, the dollar this action was needed to help bring the declined against the Japanese yen and growth of aggregate demand into better the currencies of a number of other alignment with the expansion of poten- important trading partners, notably the tial aggregate supply and thereby help Mexican peso and the Brazilian real. avert rising inflationary pressures. The The growth of M2 and M3 slowed in members also agreed that the risks February, partly reflecting an unwinding remained weighted mainly in the direc- of Y2K effects and rising opportunity tion of greater inflation pressures and costs of holding liquid balances. In addithat further tightening actions might be tion, the surging prices of technologynecessary to bring about financial con- related equities might have spurred ditions that were sufficiently firm to con- depositors to shift some of their M2 tain upward pressures on labor costs and balances into equity mutual funds. The prices. growth of total domestic nonfinancial Open market operations during the debt slowed early in the year as large intermeeting period were directed to- federal debt paydowns resumed followward implementing the desired slightly ing the sharp buildup of Treasury balgreater pressure on reserve positions, ances before year-end. and the federal funds rate averaged very The staff forecast prepared for this close to the Committee's 53A percent meeting suggested that the economic target. The Committee's action and its expansion would moderate gradually announcement that the risks were from its currently elevated pace to a rate weighted in the direction of rising infla- around, or perhaps a little below, the tion were widely anticipated and had growth of the economy's estimated little immediate effect on market yields. potential. The expansion of domestic Subsequently, market rates moved up in final demand increasingly would be held response to the receipt of data that sig- back by the anticipated waning of posinaled persisting strength of the econ- tive wealth effects associated with large omy, but they turned back down in earlier gains in equity prices and by response to new information indicating higher interest rates. As a result, the continued low inflation and to greater growth of spending on consumer duravolatility in equity prices. On balance bles and houses was expected to slow; over the intermeeting period, interest in addition, business investment in rates on private instruments registered equipment and software was projected small mixed changes while yields on to decelerate following a first-quarter Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 215 surge that partly reflected information economy's potential and the implicatechnology expenditures that had been tions for inflation were subject to a wide postponed until after the century roll- range of uncertainty as to both degree over. In addition, solid economic expan- and timing. Nonetheless, given the persion abroad was expected to boost the sistence of rapid growth in aggregate growth of U.S. exports for some period demand beyond growth in aggregate ahead. Core price inflation was pro- supply and very tight conditions in jected to increase somewhat over the labor markets, the members continued forecast horizon, partly as a result of to be concerned about the risks of rising rising import prices and some firming of inflation. gains in nominal labor compensation In their comments about economic in persistently tight labor markets that conditions across the nation, members would not be fully offset by productivity referred to anecdotal and other evidence growth. of widespread strength in business activ- In the Committee's discussion of cur- ity, which in many areas appeared to be rent and prospective economic devel- rising appreciably further from already opments, members commented, as they high levels. Agriculture continued to be had at earlier meetings, that they saw a notable exception, though members little evidence of any slowing in the also reported signs of softening in housrapid expansion of domestic economic ing and other construction activity in activity, but they also saw few signs to some areas. With regard to developdate of significant acceleration in infla- ments in key sectors of the economy, tion. The growth in aggregate demand consumer spending had remained parcontinued to display remarkable vigor, ticularly robust thus far this year accordevidently driven by high levels of con- ing to reports from most parts of the sumer and business confidence and nation. Some moderation in such spendaccommodative financial markets. Large ing to a pace more in line with the increases in imports were helping to sat- growth in household incomes was cited isfy the impressive growth in demand. as a reasonable expectation, given At the same time, aggregate supply also underlying factors such as the large continued to record strong gains amid buildup of durable goods in consumer indications of further acceleration in hands, the rise in consumer debt loads, productivity. Looking ahead, however, and the effects of higher oil prices. members reiterated earlier concerns that Of key importance was the prospecaggregate demand could continue to tive performance of the stock margrow faster than potential aggregate sup- ket, whose robust gains in recent years ply, even under optimistic assumptions had undoubtedly boosted consumer regarding future productivity gains. confidence and spending. The members Contributing to that continuing imbal- noted that equity prices generally had ance, the strengthening of most foreign posted further gains during the interindustrial economies and the diminish- meeting period, but in their view the ing effects of the earlier appreciation of large increases of recent years were not the dollar were likely to boost further likely to be repeated, and an absence of foreign demand for U.S. output. The such gains would have a restraining experience of recent years amply dem- effect on consumer expenditures over onstrated, however, that the extent to time. Even so, further increases in which prospective growth in demand household incomes along with the might exceed further expansion in the lagged wealth effects of the sharp earlier Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

216 87th Annual Report, 2000 advances in stock market prices seemed tion, pointed to faster expansion in likely to sustain relatively strong con- exports, and recent anecdotal reports sumer spending for some period of time. were broadly consistent with such a After having moderated toward the development. Growth in imports was end of 1999, in part because of caution expected to moderate over time, though ahead of the century date change, busi- imports currently were still rising rapness fixed investment again appeared to idly. Even so, prospective developments be expanding at a vigorous pace. The in the foreign trade sector were not advance included not only notable likely to provide much relief to demand strength in the high-tech sector but brisk pressures on the U.S. economy. spending in a number of other areas as With regard to the outlook for inflawell. Factors underlying business opti- tion, members saw little evidence to date mism included robust growth in reve- of any acceleration in core inflation, and nues and profits and the ready availabil- unit costs for nonfinancial corporations ity of both debt and equity financing. were unchanged in the fourth quarter. The divergence, at least until recently, Despite such welcome developments, in the stock market between the valua- members expressed concern about inditions of high-tech firms and those of cations of a less benign inflation climore traditional, established firms was mate. The direct and indirect effects inducing a redirection of investment of higher fuel prices, the rise in other funds to business activities that were import prices, increasing medical costs, perceived to be more productive. While and some deterioration in surveys of the associated capital investments inflation expectations could begin to undoubtedly had contributed to the show through to higher underlying inflaacceleration in productivity, some mem- tion. More fundamentally, however, the bers expressed concern that the his- members believed that current growth torically elevated valuations of many in aggregate demand, should it persist, high-tech stocks were subject to a siz- would continue to exceed the expansion able market adjustment at some point. of potential output and, by putting added That risk was underscored by the pressure on already tight labor markets, increased volatility of the stock market. would at some point foster inflationary In the housing sector, building activ- imbalances that would undermine the ity generally remained at a high level, economic expansion. though slipping a bit in some parts of In the Committee's discussion of polthe country, and there were only limited icy for the intermeeting period ahead, all indications that the rise in mortgage the members endorsed a proposal to interest rates was holding down residen- tighten reserve conditions by a slight tial construction. On the other hand, amount consistent with an increase housing and other construction activity in the federal funds rate to a level of reportedly was being retarded by short- 6 percent. Persisting strength in aggreages of labor and, in some areas, of gate domestic demand had been accommaterials as well. On balance, recent modated thus far without a pickup developments did not augur any signifi- in underlying inflation because of the cant changes in homebuilding. remarkable acceleration in productivity The improved economic outlook for and because of two safety valves—the most of the nation's important trading economy's ability to draw on the pool partners, in association with the fading of available workers and to finance effects of the dollar's earlier apprecia- the rapid growth in imports relative to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, March 217 exports. However, a further acceleration direct the Federal Reserve Bank of New in productivity was unlikely to boost the York, until it was instructed otherwise, economy's growth potential sufficiently to execute transactions in the System to satisfy the expansion in aggregate account in accordance with the followdemand without some slowing in the ing policy directive: latter. In addition, the two safety valves could not be counted on to work indefi- The Federal Open Market Committee nitely. In these circumstances, the mem- seeks monetary and financial conditions bers saw substantial risks of rising pres- that will foster price stability and promote sustainable growth in output. To further its sures on labor and other resources and long-run objectives, the Committee in the of higher inflation that called for some immediate future seeks conditions in reserve further firming of monetary policy at markets consistent with increasing the fedthis meeting. They agreed, though, that eral funds rate to an average of around because a significant acceleration in 6 percent. inflation did not appear to be imminent and because uncertainties continued The vote also encompassed approval to surround the economic outlook, a of the sentence below for inclusion in gradual approach to policy adjustments the press statement to be released shortly was warranted. Some members com- after the meeting: mented that, although a more forceful policy move of 50 basis points might be Against the background of its long-run needed at some point, measured and pre- goals of price stability and sustainable ecodictable policy tightening moves, such nomic growth and of the information curas the one contemplated today, still were rently available, the Committee believes the risks are weighted mainly toward conditions desirable in current circumstances, that may generate heightened inflation preswhich included somewhat unsettled sures in the foreseeable future. financial markets. Looking ahead, the Committee would Votes for this action: Messrs. Greenspan, continue to assess the need for further McDonough, Broaddus, Ferguson, Gramtightening to contain inflation. Even lich, Guynn, Jordan, Kelley, Meyer, and after taking account of the lagged effects Parry. Votes against this action: None. of the considerable tightening that already had been implemented since The meeting was recessed briefly mid-1999, additional tightening might after this vote, and the members of the well be needed to ensure that financial Board of Governors left the room to conditions would adjust sufficiently to vote on increases in the discount rate bring aggregate demand into better bal- that were pending at several Federal ance with potential supply and thereby Reserve Banks. On the Board members' counter a possible escalation of pres- return, Chairman Greenspan announced sures on labor costs and prices. The that the Board had approved a lA permembers agreed that the press statement centage point increase in the discount to be issued shortly after this meeting rate to a level of 5!/2 percent. The Comshould continue to highlight their view mittee concluded its meeting with a that even after today's tightening move review of the press release announcing the risks would remain tilted toward the joint policy action. heightened inflation pressures. It was agreed that the next meeting At the conclusion of this discussion, of the Committee would be held on the Committee voted to authorize and Tuesday, May 16, 2000. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

218 87th Annual Report, 2000 The meeting adjourned at 12:50 p.m. Mr. Winn, Assistant to the Board, Office of Board Members, Board of Governors Donald L. Kohn Secretary Mr. Ettin, Deputy Director, Division of Research and Statistics, Board of Governors Meeting Held on May 16, 2000 Messrs. Madigan and Slifman, Associate Directors, Divisions of Monetary Affairs and Research A meeting of the Federal Open Market and Statistics respectively, Board Committee was held in the offices of the of Governors Board of Governors of the Federal Reserve System in Washington, D.C., Messrs. Oliner and Whitesell, Assistant on Tuesday, May 16, 2000, at 9:00 a.m. Directors, Divisions of Research and Statistics and Monetary Present- Affairs respectively, Board Mr. Greenspan, Chairman of Governors Mr. McDonough, Vice Chairman Mr. Broaddus Ms. Low, Open Market Secretariat Mr. Ferguson Assistant, Division of Monetary Mr. Gramlich Affairs, Board of Governors Mr. Guynn Mr. Jordan Messrs. Rives and Stone, First Vice Mr. Kelley Presidents, Federal Reserve Banks Mr. Meyer of St. Louis and Philadelphia Mr. Parry respectively Mr. Hoenig, Ms. Minehan, Messrs. Hakkio, Hunter, Lacker, Lang, Messrs. Moskow and Poole, Rasche, Rolnick, and Rosenblum, Alternate Members of the Federal Senior Vice Presidents, Federal Open Market Committee Reserve Banks of Kansas City, Chicago, Richmond, Philadelphia, Messrs. McTeer and Stern, Presidents St. Louis, Minneapolis, and Dallas of the Federal Reserve Banks respectively of Dallas and Minneapolis respectively Messrs. Bentley and Kopcke, Vice Presidents, Federal Reserve Mr. Kohn, Secretary and Economist Banks of New York and Mr. Bernard, Deputy Secretary Boston respectively Ms. Fox, Assistant Secretary Mr. Gillum, Assistant Secretary By unanimous vote, the minutes of Mr. Mattingly, General Counsel the meeting of the Federal Open Market Mr. Baxter, Deputy General Counsel Committee held on March 21, 2000, Ms. Johnson, Economist were approved. Mr. Prell, Economist The Manager of the System Open Mr. Beebe, Ms. Cumming, Market Account reported on recent Messrs. Eisenbeis, Howard, developments in foreign exchange mar- Lindsey, Reinhart, Simpson, kets. There were no open market opera- Sniderman, and Stockton, tions in foreign currencies for the Sys- Associate Economists tem's account in the period since the Mr. Fisher, Manager, System Open previous meeting, and thus no vote was Market Account required of the Committee. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 219 The Manager also reported on devel- securities in the secondary market to opments in domestic financial markets help to maintain liquid markets in and on System open market transactions benchmark securities. It was important in government securities and federal to announce a strategy that would allow agency obligations during the period market participants to take the System's March 21, 2000, through May 15, 2000. operations into account as they adapted The Committee ratified these trans- to the declining Treasury debt levels. actions by unanimous vote. While no specific blueprint could be With Mr. Broaddus dissenting, the given at this point regarding future Desk Committee voted to extend for one operations, the members encouraged the year beginning in mid-December 2000 Manager to discuss his plans with Treathe reciprocal currency ("swap") sury officials. arrangements with the Bank of Canada The Committee then turned to a disand the Bank of Mexico. The arrange- cussion of the economic and financial ment with the Bank of Canada is in the outlook and the implementation of amount of $2 billion equivalent and monetary policy over the intermeeting that with the Bank of Mexico in the period ahead. amount of $3 billion equivalent. Both The information reviewed at this arrangements are associated with the meeting suggested that economic Federal Reserve's participation in the growth had remained rapid through North American Framework Agree- early spring. Consumer spending and ment, which was established in 1994. business fixed investment were still Mr. Broaddus dissented because he trending upward strongly, and housing believed that the swap lines existed demand was holding at a high level. primarily to facilitate foreign exchange Industrial production and nonfarm paymarket intervention, and he was rolls were expanding briskly in response opposed to such intervention for the to burgeoning domestic demand, but the reasons he had expressed at the Febru- strength of demand was also showing ary meeting. through in the form of rising imports. The Manager discussed some aspects Labor markets continued to be very of a suggested approach to the manage- tight, and some measures of labor costs ment of the System's portfolio over and price inflation showed signs that coming quarters prior to the Commit- they might be picking up. tee's receipt and review of an ongoing Employment surged in March and study relating to the conduct of open April. Part of the pickup resulted from a market operations in a period of substan- step-up in government hiring of census tial declines in outstanding Treasury workers, but gains in private employdebt. During that interim, the manage- ment were very large over the two ment of the System portfolio should try months. Job growth in retail trade and to satisfy a number of objectives: keep- services was robust, and employment in ing the maturity of the portfolio from manufacturing and construction trended lengthening materially; meeting long- higher. The civilian unemployment rate run reserve needs to the extent possible dropped in April to 3.9 percent, a thirtythrough outright purchases of Treasury year low. securities without distorting the yield Industrial production accelerated in curve or impairing the liquidity of the April after a strong gain in the first market; and concentrating expansion of quarter. Manufacturing, notably in highthe System portfolio in "off-the-run" tech industries, led the way, but growth Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

220 87th Annual Report, 2000 in mining and utilities also was sizable. tributing factor. The upturn in nonresi- The pickup in manufacturing lifted the dential building activity was spread factory operating rate further, and capac- broadly across the major types of ity utilization in April was about equal structures. to its long-term average. The pace of accumulation of manu- Consumer spending increased very facturing and trade inventories slowed rapidly in the first quarter but apparently somewhat in the first quarter following decelerated early in the second quarter. a sizable buildup in late 1999, and the Nominal retail sales were down slightly aggregate inventory-sales ratio edged in April after brisk gains in February down from an already very low level. and March. Sales slumped at durable Stockbuilding by manufacturers and goods stores and changed little at non- merchant wholesalers picked up slightly durable goods outlets. However, the in the first quarter, but stocks remained underlying trend in spending remained at low levels in relation to sales. By strong as a result of robust expansion of contrast, inventory investment slowed disposable incomes, the large accumu- among retailers. Part of this slowdown lated gains in household wealth, and might have involved a liquidation of very positive consumer sentiment. precautionary stocks built up in anticipa- Residential housing activity stayed at tion of the century date change. The an elevated level in April; total private inventory-sales ratio in this sector was housing starts edged higher while starts at a historically lean level. of multifamily units partially reversed a The U.S. trade deficit in goods and sharp drop in March. Sales of both new services reached another new high in and existing single-family homes rose February as the value of imports rose in March (latest data). The persisting sharply further and the value of exports strong demand for housing during a changed little. For the January-February period of rising mortgage rates appar- period, the moderate rise in exports and ently was being underpinned by the the sharp increase in imports from rapid growth of jobs and the accumu- fourth-quarter levels were spread across lated gains in stock market wealth. most major trade categories. The avail- Business fixed investment was up able information suggested that ecosharply in the first quarter after a slug- nomic expansion remained robust in gish performance late last year. The most foreign industrial economies. The pickup encompassed both durable recent decline in the exchange value of equipment and software and nonresiden- the euro was spurring economic activity tial structures. Shipments of computing in the euro area, and Canada was beneand communications equipment surged fiting from spillovers from the U.S. following the century rollover, and ship- economy. For the Japanese economy, ments of other non-aircraft capital goods which had been the notable exception recorded an unusually large rise as well. among the foreign industrial econo- Moreover, the recent strength in orders mies, there were indications of some for many types of equipment pointed to strengthening of aggregate demand further advances in capital spending in during the first five months of the year. coming months. Expenditures for non- Economic activity in the developing residential structures, which had turned countries also continued to pick up. up last autumn, rose rapidly in the first Key South American countries were quarter; unusually favorable weather recovering from recent recessions, while over the two quarters likely was a con- several Asian emerging-market coun- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 221 tries were settling into growth at more action would help bring the growth of sustainable rates. aggregate demand into better alignment Recent information suggested that with the sustainable expansion of aggreprice inflation might be picking up gate supply. They also noted that even slightly and only partly as a direct result with this additional finning the risks of increases in energy prices. Although were still weighted mainly in the direcconsumer prices were unchanged in tion of rising inflation pressures and that April, they recorded sizable step-ups in more tightening might be needed. February and March; moreover, while Open market operations during the the rise in core consumer prices over the intermeeting period were directed totwelve months ended in April was the ward implementing the desired slightly same as the change in the year-earlier tighter pressure on reserve positions, twelve-month period, core consumer and the federal funds rate averaged very price inflation was up slightly in the close to the Committee's 6 percent March-April period compared with target. The Committee's action and its other recent months. At the producer announcement were widely anticipated level, prices of finished goods other than and had little initial effect on financial food and energy edged higher in March markets. Later in the week, however, and April, but the increase over the market interest rates moved up in twelve months ended in February was a response to the release of the minutes of little smaller than the rise over the pre- the February meeting and the mention ceding twelve months. With regard to therein of some sentiment for a larger labor costs, the employment cost index policy tightening than had been underfor hourly compensation of private taken. Subsequently, interest rates fell industry workers registered a larger as stock prices tumbled over the first advance in the first quarter than in pre- half of April, when investors seemed vious quarters, and the rate of increase to revise downward their assessments in compensation over the year ended in of equity valuations, especially those of March was substantially larger than the more speculative technology shares that rise over the year-earlier period. Faster previously had risen considerably. Intergrowth in benefits accounted for more est rates more than reversed those than half of the acceleration. Average declines, however, when stock prices hourly earnings of production or non- began to level out and incoming data supervisory workers grew at a slightly suggested that aggregate demand confaster rate in April than in March, and tinued to expand faster than potential the increase for the twelve months ended supply and that wage and price developin April was larger than for the previous ments were becoming more worrisome. twelve-month period. On balance over the intermeeting At its meeting on March 21, 2000, period, private interest rates moved up the Committee adopted a directive that appreciably while Treasury yields called for a slight tightening of con- increased somewhat less. Most major ditions in reserve markets consistent indexes of equity prices declined signifiwith an increase of lA percentage point cantly over the intermeeting period. in the federal funds rate to an average of In foreign exchange markets, the about 6 percent. The members saw sub- trade-weighted value of the dollar apprestantial risks of rising pressures on labor ciated considerably over the intermeetand other resources and of higher infla- ing period against a basket of major tion, and they agreed that the tightening currencies, reflecting in part the larger Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

222 87th Annual Report, 2000 intermeeting increase in U.S. long-term price inflation was projected to rise yields relative to rates in most foreign noticeably over the forecast horizon, industrial countries. The dollar's rise partly as a result of higher import prices against the euro was sizable, but the and some firming of gains in nominal dollar also made moderate gains against labor compensation in persistently tight the British pound, the Japanese yen, and labor markets that would not be fully the Canadian dollar. The dollar also offset by productivity growth. appreciated somewhat against the cur- In the Committee's review of current rencies of a group of other important and prospective economic and financial trading partners, notably the Mexican developments, members focused on peso and the Brazilian real. persisting indications that aggregate Growth of M2 picked up further in demand was expanding more rapidly April from its already strong pace in than potential supply and that pressures March, as households boosted their liq- on labor and other producer resources uid balances to meet higher-than-usual were continuing to increase. While there levels of final payments on 1999 taxes. were tentative signs that the growth of In contrast, M3 growth slowed consid- demand might be moderating in some erably in April after a robust March key sectors of the economy, such as advance. From the fourth quarter of retail sales and housing, clear-cut evi- 1999 through April, M2 and M3 dence of any significant deceleration in expanded at rates well above the upper the rapid growth of aggregate demand ends of their annual ranges for 2000. was lacking. Bond yields and other Total domestic nonfinancial debt con- financial conditions had firmed to some tinued to expand at a pace in the upper extent recently, but those adjustments portion of its range. had been influenced by the buildup in The staff forecast prepared for this market expectations of more monetary meeting continued to suggest that the policy tightening. In the absence of furexpansion would gradually moderate ther monetary restraint, any slowing from its currently elevated pace to a rate over coming quarters was not viewed as around, or perhaps a little below, the likely to be sufficient to avert increasing growth of the economy's estimated pressures on the economy's already potential. The expansion of domestic strained resources and rising inflation final demand increasingly would be held rates that would undermine the econoback by the anticipated waning of posi- my's remarkable performance. Adding tive wealth effects associated with ear- to concerns about heightened inflation lier large gains in equity prices and by pressures was statistical and anecdotal higher interest rates. As a result, the evidence that could be read as suggestgrowth of spending on consumer dura- ing that underlying inflation already was bles and houses was expected to slow; beginning to pick up. Unit costs, howin contrast, however, overall business ever, were still remarkably subdued, and investment in equipment and software members saw no developments at this was projected to remain robust, partly stage that might augur a sharp near-term because of the upward trend in replace- deterioration in price inflation. ment demand, especially for computers In their assessment of business conand software. In addition, continued ditions across the country, members solid economic growth abroad was commented on continuing indications of expected to boost the growth of U.S. robust economic activity in all regions exports for some period ahead. Core and widely increasing pressures on labor Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, May 223 and other resources. Indeed, economic The same background factors were activity appeared to have grown appre- likely to govern the prospective behavciably further from already elevated ior of housing activity. The evidence of levels in numerous parts of the country, a downturn in homebuilding was still although the latest regional data and quite marginal, but some anecdotal anecdotal reports provided scattered reports suggested that higher mortgage indications that business conditions rates were starting to exert a retardmight be starting to soften in some ing influence on housing demand. Even areas. In this regard, members referred so, members continued to identify areas to the emergence of slightly more cau- of remarkable strength across the natious attitudes on the part of some busi- tion, and overall housing construction ness executives concerning the pros- remained at an elevated level. On the pects for their industries. assumption of further growth in jobs With respect to developments in key and incomes in line with current foreexpenditure sectors of the economy, casts and absent markedly higher mortgrowth in consumer spending was gage financing costs, housing activity expected to slow from the exceptional might reasonably be expected to settle at pace of the first quarter, though still a level a bit below recent highs. likely to be relatively robust. Retail Business investment spending resales had edged lower in April, but tained strong upward momentum, members commented that it was too though it had exhibited an uneven early to gauge whether this softening growth pattern in recent quarters that was a harbinger of a more moder- importantly reflected Y2K effects. ate trend. Consumer sentiment had Looking ahead, further rapid growth remained upbeat in the context of an was expected in spending for business extended period of sizable expansion equipment and software in light of in employment and incomes and the likely ongoing efforts to hold down sharp rise in stock market prices over costs by substituting capital embodying the course of recent years. Some advanced technology for scarce labor members observed that the slightly less resources. Recent order trends and risebullient consumer behavior recently ing capacity utilization rates were might have been influenced to some consistent with this expectation. Expenextent by the volatility and downward ditures on nonresidential structures movement in the stock market over and other construction generally had the course of the past several weeks. strengthened in recent months, and Higher financing costs probably were members expected them to be well also beginning to play a role. Looking maintained in part because of heavy ahead, the experience of recent years spending on roads and other public amply demonstrated the difficulty of projects by state and local governments. forecasting the performance of the The foreign trade sector of the econstock market. The failure of further omy was projected to provide less of large increases to materialize, should a safety valve for the accommodation that occur, would over time imply a of domestic demand going forward. more neutral or even a negative net Although a number of foreign nations impact from wealth once the positive continued to face political and economic effects of the earlier advance had played problems, the strengthening economies themselves out, but the latter would take of many U.S. trading partners would some time. tend to limit the availability of excess Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

224 87th Annual Report, 2000 foreign production capacity to help meet believed that the risks of acceleration the growth in U.S. demand. At the same in core prices were now appreciably time, foreign demand for U.S. goods and higher given current trends in aggregate services would be expanding, thereby demand, pressures on resources, and adding to demand pressures on U.S. pro- developments in foreign economies. ducer resources, other things equal. In In the Committee's discussion of polthe latter regard, several members men- icy for the intermeeting period ahead, all tioned anecdotal evidence of growing the members endorsed a proposal to export demand for a variety of domestic tighten reserve conditions sufficiently products. to raise the federal funds rate by V2 per- In their discussion of the outlook for centage point to a level of 6V2 percent. inflation, the members focused on statis- A more forceful policy move than the tical and anecdotal indications of further 25 basis point increases that had been tightening of labor resources, accelera- implemented since mid-1999 was desirtion in some measures of labor compen- able in light of the extraordinary and sation, and early signs of a possible persisting strength of overall demand, upturn in underlying price inflation. exceeding even the increasingly rapid Data on employment, reinforced by growth of potential supply, and the anecdotal commentary from around the attendant indications of growing prescountry, continued to provide evidence sures in already tight markets for labor of extremely tight labor markets, which and other resources. The strength in at least in some parts of the country demand might itself be, at least in part, appeared to have tightened further since the result of the ongoing acceleration of early in the year. Business contacts productivity, with the latter feeding back spoke of spending a great deal of time on demand through higher equity prices and expense to attract and retain work- and profitable investment opportunities. ers while concomitantly persisting in Financial markets seemed to have recogefforts to improve the productivity of nized the need for real interest rates to their operations to accommodate bur- rise further under these circumstances, geoning growth in demand in the face and while market assessments were not of labor force constraints. There were always correct, the evidence suggested more reports that rising wages and bene- that a more substantial tightening at fits and increasing costs of nonlabor this meeting was needed to limit inflainputs could no longer be fully offset by tion pressures. The members saw little improvements in productivity, and more risk in a relatively aggressive policy business firms appeared to be attempt- move, given the strong momentum of ing or considering increases in their the expansion and widespread market selling prices to maintain or improve expectations of such a move. The their profit margins. However, their greater risk to the economic expansion ability to set higher prices, or at least at this point was for policy to be too to raise them significantly, continued to sluggish in adjusting, thereby allowing be severely constrained by the persis- inflationary disturbances and dislocatence of strong competition across much tions to build. A 50 basis point adjustof the economy. Indeed, examples of ment was more likely to help forestall successful efforts to mark up prices, a rise in inflationary expectations that, which tended to be concentrated in prod- at least in the opinion of some memucts using oil-related inputs, were still bers, already showed signs of worsenthe exception. Even so, the members ing. A widespread view that the Federal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, June 225 Reserve would take whatever steps were The vote also encompassed approval needed to hold down inflation over time of the sentence below for inclusion in probably had contributed to the persis- the press statement to be released shortly tence of subdued long-run inflation after the meeting: expectations during an extended period Against the background of its long-run when rapidly rising demand was pressgoals of price stability and sustainable ecoing on limited supply resources. Today's nomic growth and of the information curpolicy move would undergird such rently available, the Committee believes the relatively benign expectations and help risks are weighted mainly toward conditions ensure the success of the Committee's that may generate heightened inflation pressure in the foreseeable future. policy. The members agreed that the balance Votes for this action: Messrs. Greenspan, of risks sentence that would be included McDonough, Broaddus, Ferguson, Gramin the press statement to be released lich, Guynn, Jordan, Kelley, Meyer, and shortly after this meeting should indi- Parry. Votes against this action: None. cate, as it had for other recent meetings, It was agreed that the next meeting that even after today's tightening action of the Committee would be held on the members believed the risks would Tuesday-Wednesday, June 27-28, 2000. remain tilted toward rising inflation. The meeting adjourned at 1:05 p.m. This view of the risks was based primarily on the persisting momentum Donald L. Kohn of aggregate demand growth and the Secretary unusually high level of labor resource utilization. At the same time, a number of the members commented that they Meeting Held on did not want to prejudge the potential June 27-28, 2000 extent or pace of future policy tighten- A meeting of the Federal Open Market ing and that the Committee should con- Committee was held in the offices of the tinue to assess the need for further Board of Governors of the Federal policy moves in the light of evolving Reserve System in Washington, D.C., economic conditions to be reviewed on on Tuesday, June 27, 2000, at 2:30 p.m. a meeting-by-meeting basis. and continued on Wednesday, June 28, At the conclusion of this discus- 2000, at 9:00 a.m. sion, the Committee voted to authorize and direct the Federal Reserve Bank Present: of New York, until it was instructed Mr. Greenspan, Chairman otherwise, to execute transactions in the Mr. McDonough, Vice Chairman System Account in accordance with the Mr. Broaddus following domestic policy directive: Mr. Ferguson Mr. Gramlich Mr. Guynn The Federal Open Market Committee Mr. Jordan seeks monetary and financial conditions that Mr. Kelley will foster price stability and promote sus- Mr. Meyer tainable growth in output. To further its Mr. Parry long-run objectives, the Committee in the immediate future seeks conditions in reserve Mr. Hoenig, Ms. Minehan, markets consistent with increasing the fed- Messrs. Moskow and Poole, eral funds rate to an average of around Alternate Members of the Federal 6J/2 percent. Open Market Committee Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

226 87th Annual Report, 2000 Messrs. McTeer and Stern, Presidents Mr. ReifSchneider,5 Section Chief, of the Federal Reserve Banks Division of Research and of Dallas and Minneapolis Statistics, Board of Governors respectively Mr. Bomfim6 and Ms. Garrett, Mr. Kohn, Secretary and Economist Economists, Division of Monetary Mr. Bernard, Deputy Secretary Affairs, Board of Governors Ms. Fox, Assistant Secretary Mr. Gillum, Assistant Secretary Ms. Low, Open Market Secretariat Mr. Mattingly, General Counsel Assistant, Division of Monetary Mr. Baxter, Deputy General Counsel Affairs, Board of Governors Ms. Johnson, Economist Mr. Stockton, Economist Ms. Pianalto and Mr. Stone, First Vice Presidents, Federal Reserve Ms. Cumming, Messrs. Eisenbeis, Banks of Cleveland and Goodfriend, Howard, Lindsey, Philadelphia respectively Reinhart, and Simpson, Associate Economists Messrs. Hakkio, Hunter, Lang, Rasche, and Rosenblum, Mr. Fisher, Manager, System Open Senior Vice Presidents, Market Account Federal Reserve Banks of Kansas City, Chicago, Mr. Winn, Assistant to the Board, Philadelphia, St. Louis, and Office of Board Members, Dallas respectively Board of Governors Messrs. Altig, Fuhrer, Judd, Mr. Ettin, Deputy Director, Division Ms. Perelmuter, and Mr. Weber, of Research and Statistics, Vice Presidents, Federal Reserve Board of Governors Banks of Cleveland, Boston, San Francisco, New York, Messrs. Madigan and Slifman, and Minneapolis respectively Associate Directors, Divisions of Monetary Affairs and Research and Statistics respectively, By unanimous vote, the minutes of Board of Governors the meeting of the Federal Open Market Committee held on May 16, 2000, were Mr. Porter,5 Deputy Associate approved. Director, Division of Monetary Affairs, Board of Governors By unanimous vote, David J. Stock- Messrs. Freeman,6 Oliner,7 ton was elected to serve as economist Struckmeyer, Whitesell, and until the election of his successor at the Ms. Zickler,6 Assistant Directors, first meeting of the Committee after Divisions of International Finance, December 31, 2000, with the under- Research and Statistics, Research standing that in the event of the disconand Statistics, Monetary Affairs, and Research and Statistics tinuance of his official connection with respectively, Board of Governors the Board of Governors he would cease to have any official connection with the Federal Open Market Committee. The Manager of the System Open 5. Attended portion of meeting relating to the Market Account reported on recent Committee's discussion of the economic outlook. developments in foreign exchange mar- 6. Attended portion of meeting relating to the Committee's longrun policy. kets. There were no open market opera- 7. Attended Wednesday session only. tions in foreign currencies for the Sys- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, June 227 tern's account in the period since the months. The civilian unemployment rate previous meeting, and thus no vote was averaged 4.0 percent over April and required of the Committee. May. The Manager also reported on devel- Industrial production continued to rise opments in domestic financial markets in May after a brisk increase in April, and on System open market transactions but the average gain for April and May in government securities and federal was somewhat below the average agency obligations during the period monthly advance during the two pre- May 16, 2000, through June 27, 2000. vious quarters. Manufacturing output By unanimous vote, the Committee rati- climbed at a slower rate in the Aprilfied these transactions. May period, reflecting less rapid growth The Committee then turned to a dis- in the production of high-tech equipcussion of the economic outlook and the ment and sluggish output of other implementation of monetary policy over non-automotive equipment. The further the intermeeting period ahead. step-up in manufacturing activity lifted The information reviewed at this capacity utilization a little further, bringmeeting suggested that the economic ing it still closer to its long-term expansion was moderating somewhat average. from a very rapid pace in the first quar- Growth of consumer spending apparter. Consumer spending was increasing ently slowed considerably in the second only modestly after large gains earlier, quarter after outsized gains in several housing activity was down somewhat, previous quarters. Nominal retail sales and growth of business spending on declined in both April and May; outlays capital equipment, while still quite vig- fell at durable goods outlets and edged orous, was slowing a little after a first- up at nondurable goods stores. Despite quarter surge. As a consequence, indus- the recent weakness, however, contrial production and employment were tinued solid expansion of disposable rising at somewhat reduced rates. Core incomes, the large accumulated gains consumer prices continued to evidence in household wealth, and very positive some acceleration, to an important consumer sentiment suggested that extent reflecting some indirect effects of underlying fundamentals behind housethe sharp increase in oil prices over the hold spending remained favorable. past year. Higher mortgage rates apparently Nonfarm payroll employment were exerting a restraining effect on increased further in May, although the residential housing activity. Total pririse was associated with a surge in gov- vate housing starts fell in May to their ernment hiring of census workers that lowest level since the middle of last more than offset a considerable contrac- year. Moreover, while sales of new tion in private payrolls. The drop in single-family homes had not yet slackprivate employment following very ened appreciably through April (latest large gains in March and April seemed, data), sales of existing homes through in the absence of other signs of weaken- May were running below their 1999 ing labor demand, to be attributable at average. In addition, consumers' assessleast to some extent to statistical noise ments of homebuying conditions and and seasonal adjustment problems. builders' ratings of new home sales had Averaging over the three months, pri- weakened significantly. vate nonfarm employment advanced at Business fixed investment appeared about the rate of the previous twelve to be on track for another rapid increase Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

228 87th Annual Report, 2000 in the second quarter. Shipments of non- For the twelve months ended in May, defense capital goods, notably comput- both total and core consumer prices ing and communications equipment, increased somewhat more than in the continued on a strong uptrend in May, previous twelve-month period. At the and the persisting strength in orders for producer level, prices of finished goods many types of equipment pointed to fur- other than food and energy edged higher ther advances in coming months. Out- in April and May and rose during the lays for nonresidential structures, which twelve months ended in May by the had been weak in 1999, rose sharply in same moderate amount recorded for the first quarter and recorded a further the previous twelve-month period. With appreciable gain in April. regard to labor costs, average hourly The book value of manufacturing and earnings of production or nonsupertrade inventories increased in April at visory workers registered only a slight about the first-quarter pace. Stockbuild- increase in May after a somewhat larger ing was generally in line with sales, and rise in April. The advance for the twelve aggregate inventory-sales ratios for the months ended in April was about the manufacturing, wholesale, and retail same as that for the previous twelvesectors remained near the bottom of month period. their ranges for the preceding twelve At its meeting on May 16, 2000, the months. There were few indications Committee adopted a directive that across industries of significant inventory called for a tightening of conditions in imbalances. reserve markets sufficient to raise the The U.S. trade deficit in goods and federal funds rate l/i percentage point, services for April was very close to its to a level of 6V2 percent. The members March level. However, the deficit was noted that the relatively forceful move up appreciably from its average for the was necessary given the persisting first quarter, with the value of imports growth of aggregate demand in excess increasing substantially more than the of the expansion of potential supply, value of exports. The available informa- which was creating rising pressures tion indicated robust economic growth in already tight markets for labor and in all major regions of the world thus far other resources. In their view, this action this year. Economic activity in the for- would help bring aggregate demand into eign industrial countries expanded vig- better alignment over time with potenorously in the first quarter, and growth tial supply and thereby work to forestall generally appeared to be continuing at the emergence of inflationary expectaa strong pace in the second quarter. tions and the buildup of inflationary In addition, the available information pressures. They also noted that even suggested that a number of emerging- with this additional firming, the risks market economies had registered very were still weighted mainly in the direcrapid expansion thus far this year. tion of rising inflationary pressures. Recent information continued to indi- Open market operations during the cate that consumer price inflation had intermeeting period were directed picked up, while producer price inflation toward implementing the desired was essentially unchanged. Consumer increased pressure on reserve positions, prices edged up in May after having and the federal funds rate averaged very been unchanged in April; excluding the close to the Committee's 6x/2 percent food and energy components, consumer target. The Committee's action and its prices rose moderately further in May. announcement surprised markets only a Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, June 229 little, and bond and stock prices edged gish currency growth in the aftermath a bit lower. Markets grew increasingly of the century date change and by the uneasy over the next few weeks as increase in the opportunity cost of their incoming data suggested the possible liquid components associated with risneed for further substantial policy tight- ing market interest rates. Nevertheless, ening, which could have adverse effects supported by rapid growth in nominal on corporate earnings. These concerns spending and income, M2 evidently had apparently contributed to sharp further expanded over the first half of the year declines in equity prices and to widen- at a rate close to that in 1999, and M3 ing risk spreads on corporate bonds. had expanded at a faster rate than last Subsequently, debt and equity markets year. Strong demands for bank credit, rebounded in response to a series of U.S. funded by the issuance of large time economic data releases that were viewed deposits and other liabilities not as signaling a moderation in aggregate included in M2, underlaid the accelerademand and a continuation of limited tion in M3. cost and price pressures, and thus a The staff forecast prepared for this reduced probability of additional mone- meeting continued to suggest that the tary tightening. On balance over the economic expansion would moderate intermeeting interval, yields on longer- gradually from its currently elevated term Treasury securities and investment- pace to a rate around or perhaps a little grade corporate bonds declined appre- below the growth of the economy's esticiably, and most broad stock price mated potential. The expansion of indexes ended the period little changed. domestic final demand increasingly In foreign exchange markets, the would be held back by the anticipated trade-weighted value of the dollar depre- waning of positive wealth effects associciated somewhat over the intermeeting ated with earlier large gains in equity period against an index of major cur- prices and by higher interest rates; as a rencies. Decreases in longer-term U.S. result, growth of spending on consumer interest rates weighed on the dollar, and durables and houses was expected to the dollar's decline against the euro also slow further. By contrast, business fixed occurred against the background of indi- investment, notably purchases of equipcators of accelerating activity in the euro ment and software, was projected to area and possible further monetary tight- remain robust, and continued solid ecoening. Frequent hints that the Bank of nomic growth abroad would boost the Japan might abandon its zero policy rate growth of U.S. exports for some period might have contributed to the dollar's ahead. Core price inflation was proweakness against the yen. By contrast, jected to rise noticeably over the forethe dollar strengthened a little against cast horizon, partly as a result of higher the currencies of a group of other impor- import prices and some firming of gains tant trading partners, notably the cur- in nominal labor compensation in persisrencies of Mexico, Indonesia, and the tently tight labor markets that would not Philippines. be fully offset by productivity growth. M2 and M3 appeared to have In the Committee's discussion of currebounded in June following the clear- rent and prospective economic develing in May of unusually large final per- opments, members cited evidence of sonal tax payments for 1999. The expan- slower expansion in economic activity sion of these aggregates likely had been in recent months. In particular, conheld down somewhat this year by slug- sumer spending had decelerated notice- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

230 87th Annual Report, 2000 ably, especially for housing and motor real GDP, the rate of unemployment, vehicles, but the members agreed that and the rate of inflation for the years the eventual extent and duration of the 2000 and 2001. With regard to the slowing in overall economic growth growth of nominal GDP, most of the were subject to substantial uncertainty. forecasts were in ranges of 6lA to A number of factors supported a projec- 63/4 percent for 2000 as a whole and tion of considerably more moderate 5Vi to 6 percent for 2001. The forecasts expansion going forward in relation to of the rate of expansion in real GDP had the overly rapid pace in the second half a central tendency of 4 to 4x/2 percent of 1999 and early 2000, including the for 2000, suggesting a noticeable decelelikelihood that much of the effect on ration in the second half of the year, and spending of the rise in interest rates and were centered on a range of ?>lA to leveling out in equity prices this year 33/4 percent for 2001. The civilian rates had not yet been felt. Nevertheless, the of unemployment associated with these indications of slowing economic expan- forecasts had central tendencies of about sion were still tentative. Some sectors of 4 percent in the fourth quarter of 2000 the economy, such as business fixed and 4 to AlA percent in the fourth quarter investment, continued to display sub- of 2001. Forecasts of the rate of inflastantial vigor, and the members could tion were shaped importantly by the pronot be confident that growth would not jected pattern of energy prices; for this rebound to a clearly unsustainable pace, year the forecasts, as measured by the as had occurred previously in this chain-type price index for personal conexpansion. With regard to inflation, sumption expenditures, were centered members observed that steep increases on a range of 2Vi to 23A percent before in energy prices had boosted overall dropping back to a range of 2 to 2V2 perrates of inflation somewhat, and in cent in 2001. addition the higher energy prices likely In their assessment of business conhad contributed indirectly to the rise ditions in different parts of the country, in core measures of inflation. A number the presidents of the Federal Reserve of members also were concerned that Banks commented on indications of rising core inflation could be generated some slowing in the expansion of increasingly from unsustainably tight regional economic activity in a majorlabor markets, and they noted that labor ity of the districts, though several costs would need to be monitored emphasized that the available informaclosely even if growth in demand tion pointed to only slight moderation to slowed sufficiently to keep levels of date. This slowing and the cumulative resource utilization about unchanged. To effects of the firming in financial condate, however, rising productivity ditions this year had been accompanied growth had contained labor cost pres- by an increasing number of anecdotal sures, and despite the moderation in reports of more cautious business the expansion of activity, there were no sentiment. early signs of any slowing in the growth In their comments on developments of productivity. in key sectors of the economy nation- In preparation for a report to Con- wide, the members reported on statisgress, the members of the Board of Gov- tical and anecdotal indications that ernors and the presidents of the Federal growth in consumer spending had Reserve Banks provided individual pro- slowed appreciably in recent months jections of the growth of nominal and from the unusually robust pace seen in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, June 231 late 1999 and early this year. A number albeit at a reduced level. At least in of factors that might account for the some parts of the country, firms supplymoderation could also point to the pos- ing building materials and home fursible extension of the less robust trend. nishings were beginning to feel the Those factors included gradually wan- retarding effects of the slowdown in the ing wealth effects associated with the housing market. absence of further large gains in stock After a surge early in the year that market prices; rising levels of consumer evidently reflected in part investment debt; the loss of consumer purchasing spending delayed by Y2K concerns, power stemming from higher energy growth in business fixed investment prices; and the large cumulative buildup had moderated in recent months but of consumer stocks of motor vehicles was expected to remain quite robust and other durables. Still, the data on over the next several quarters. New retail sales were volatile and often orders for many types of business revised significantly; some of the recent equipment had remained strong, order moderation in spending might have backlogs had continued to build, and it reflected a pause following the surge was clear that business executives still in demand during atypically favorable anticipated high rates of return on their weather conditions over the winter new investments. As a result, business months; and the pace of purchases could investment spending could be expected pick up again. While the course of con- to remain elevated, at least over the sumer spending remained uncertain, nearer term and especially for high-tech members concluded that, in the context equipment and software. At the same of relatively high levels of consumer time, members cited anecdotal indiconfidence and sizable projected gains cations of the emergence of a more in jobs and incomes, slower but still cautious tone in the business commusolid expansion in consumer expendi- nity, evidently associated in part with tures was most likely to occur over com- less favorable financial conditions in ing quarters. debt and equity markets and possibly The housing market also provided auguring more substantial cutbacks in clear evidence of weakening demand. business investment over time should The slowdown evidently reflected the growth in personal consumption outlays effects of higher mortgage interest rates be sustained on a considerably slower on a growing number of homebuyers trend. and probably also the diminishing Strengthening economic activity in wealth effects of the earlier run-up in many of the nations that are important stock prices and the cumulatively large U.S. trading partners was reflected in additions to the stock of housing in the expanding exports, and several memeconomy. The sluggish tone of the hous- bers provided anecdotal confirmation of ing data was confirmed by anecdotal growing foreign markets for many U.S. reports of slowing residential sales and goods and services. While expanding building activity in most parts of the export markets were a welcome develcountry. Despite these developments, opment from the perspective of many sizable building backlogs in many areas, domestic businesses, they would add to the outlook for continuing growth in overall demand pressures on U.S. proconsumer incomes, and still favorable ducer resources at a time when the latter consumer sentiment were likely to sup- were already operating at very high port substantial homebuilding activity, levels. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

232 87th Annual Report, 2000 With regard to the outlook for infla- In contrast to its earlier practice, the tion, members gave considerable atten- Committee at this meeting did not tion to the somewhat faster increases establish ranges for growth of money in broad price measures over the past and debt in 2000 and 2001. The legal year, but they differed to some extent requirement to set and announce such regarding the prospects for further ranges recently had expired, and the increases in inflation. It was generally members did not view the ranges as agreed that developments relating to currently serving a useful role in the energy would continue to exert upward formulation of monetary policy. Owing pressure on prices over the near term, to uncertainties about the behavior of including the pass-through or indirect the velocities of money and debt, these effects of higher oil prices on core mea- ranges had not provided reliable benchsures of inflation. Looking beyond the marks for the conduct of monetary polnear term, a number of members, noting icy for some years. Nevertheless, the that core measures of consumer prices Committee believed that the behavior had been rising more rapidly this year, of these aggregates retained value for were concerned that these prices might gauging economic and financial conwell continue to accelerate gradually, ditions and that such behavior should even assuming that economic expansion continue to be monitored. Moreover, would be sustained at a pace close to Committee members emphasized that the economy's potential. In this view, they would continue to consider periodilabor markets were already operating at cally issues related to their long-run levels of utilization that were likely strategy for monetary policy, even if eventually to produce rising labor costs they were no longer setting ranges for that would be passed through to market the money and debt aggregates. prices even if productivity growth In the Committee's discussion of polremained high or rose somewhat further. icy for the intermeeting period ahead, Other members were more optimistic all the members supported a proposal to that core inflation might be contained maintain an unchanged policy stance near current levels. The recent increase consistent with a federal funds rate averin core inflation could largely reflect the aging about 6x/2 percent. The increasing indirect effects of the rise in energy though still tentative indications of some prices. To date, unit labor costs had been slowing in aggregate demand, together quite subdued, leaving open the ques- with the likelihood that the earlier poltion of what was a sustainable level of icy tightening actions had not yet labor resource use. Rising productivity exerted their full retarding effects on was likely to continue to restrain unit spending, were key factors in this decilabor costs to a degree, and product sion. The uncertainties surrounding the markets remained highly competitive. outlook for the economy, notably the However, even these members saw con- extent and duration of the recent modsiderable inflation risks should the slow- eration in spending and the effects of the down in aggregate demand fail to be appreciable tightening over the past sustained, and the members generally year, including the V2 percentage point agreed that for the foreseeable future increase in the intended federal funds possible increases in underlying infla- rate at the May meeting, reinforced the tion remained the principal risk to the argument for leaving the stance of polcontinued good performance of the U.S. icy unchanged at this meeting and economy. weighing incoming data carefully. Sev- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, June 233 eral members commented that a consid- tem Account in accordance with the folerable amount of new information bear- lowing domestic policy directive: ing on the prospective strength of the economy and the outlook for inflation The Federal Open Market Committee seeks monetary and financial conditions that would become available during the will foster price stability and promote susrelatively long interval before the next tainable growth in output. To further its longmeeting in August. Members generally run objectives, the Committee in the immesaw little risk in deferring any further diate future seeks conditions in reserve policy tightening move, particularly markets consistent with maintaining the fedsince the possibility that underlying eral funds rate at an average of around 6]/2 percent. inflation would worsen appreciably seemed remote under prevailing circum- The vote also encompassed approval stances. Among other factors, inflation of the sentence below for inclusion in expectations had been remarkably stable the press statement to be released shortly despite rising energy prices, and real after the meeting: interest rates were already relatively elevated. Against the background of its long-run In their discussion of the balance-ofgoals of price stability and sustainable ecorisks sentence in the press statement nomic growth and of the information curto be issued shortly after this meet- rently available, the Committee believes that ing, all the members agreed that the the risks are weighted mainly toward conditions that may generate heightened inflalatter should continue to express, as it tion pressures in the foreseeable future. had for every meeting earlier this year, their belief that the risks remained Votes for this action: Messrs. Greenspan, weighted toward rising inflation. Indica- McDonough, Broaddus, Ferguson, Gramtions that growth in aggregate demand lich, Guynn, Jordan, Kelley, Meyer, and was moderating to a pace closer to that Parry. Votes against this action: None. of potential supply were still partial and tentative, and labor markets It was agreed that the next meeting remained unusually tight. Many Com- of the Committee would be held on mittee members noted that, based on Tuesday, August 22, 2000. the currently available information, The meeting adjourned at 10:35 a.m. additional firming of policy could well be needed at some point in the future, though a number also expressed the Notation Vote opinion that less tightening probably By notation vote completed on July 18, would be required than they had thought 2000, the Committee authorized Vice at the time of the May meeting. Sev- Chairman McDonough to accept the eral emphasized that the press release Legion of Honor to be awarded by the should not convey the impression that French government pursuant to a decithe Committee now viewed further polsion by the President of the French icy tightening moves as an unlikely Republic. prospect. At the conclusion of this discussion, Votes for this action: Messrs. Greenspan, the Committee voted to authorize and Broaddus, Ferguson, Gramlich, Guynn, direct the Federal Reserve Bank of Jordan, Kelley, Meyer, and Parry, Votes New York, until it was instructed other- against this action: None. Abstention: wise, to execute transactions in the Sys- Mr. McDonough. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

234 87th Annual Report, 2000 In conformance with regulations of Mr. Fisher, Manager, System Open the Board of Governors of the Federal Market Account Reserve System pertaining to foreign Messrs. Madigan and Slifman, decorations, the Board's Vice Chair- Associate Directors, Divisions man, Mr. Ferguson, authorized Chairof Monetary Affairs and Research man Greenspan to accept the same and Statistics respectively, Board award from the French government. of Governors Donald L. Kohn Mr. Whitesell, Assistant Director, Secretary Division of Monetary Affairs, Board of Governors Meeting Held on Mr. Reifschneider, Section Chief, August 22, 2000 Division of Research and Statistics, Board of Governors A meeting of the Federal Open Market Committee was held in the offices of Ms. Low, Open Market Secretariat the Board of Governors of the Federal Assistant, Division of Monetary Reserve System in Washington, D.C., Affairs, Board of Governors on Tuesday, August 22, 2000, at 9:00 a.m. Mr. Kumasaka, Assistant Economist, Division of Monetary Affairs, Present: Board of Governors Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Connolly, First Vice President, Mr. Broaddus Federal Reserve Bank of Boston Mr. Ferguson Mr. Gramlich Ms. Browne, Mr. Hakkio, Ms. Krieger, Mr. Guynn Messrs. Lang, Rasche, Rolnick, Mr. Jordan and Rosenblum, Senior Vice Mr. Kelley Presidents, Federal Reserve Mr. Meyer Banks of Boston, Kansas City, Mr. Parry New York, Philadelphia, St. Louis, Minneapolis, and Dallas Mr. Hoenig, Ms. Minehan, respectively Messrs. Moskow and Poole, Alternate Members of the Federal Mr. Sullivan, Vice President, Federal Open Market Committee Reserve Bank of Chicago Messrs. McTeer, Santomero, and Stern, Presidents of the Federal Reserve Mr. Tallman, Assistant Vice President, Banks of Dallas, Philadelphia, and Federal Reserve Bank of Atlanta Minneapolis respectively By unanimous vote, the minutes of Mr. Kohn, Secretary and Economist the meeting of the Federal Open Market Mr. Bernard, Deputy Secretary Committee held on June 27-28, 2000, Ms. Fox, Assistant Secretary Mr. Mattingly, General Counsel were approved. Ms. Johnson, Economist The Manager of the System Open Mr. Stockton, Economist Market Account reported on recent developments in foreign exchange mar- Mr. Beebe, Ms. Cumming, kets. There were no open market trans- Messrs. Goodfriend, Howard, Lindsey, Reinhart, Simpson, and actions in foreign currencies for the Sys- Sniderman, Associate Economists tem's account in the period since the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 235 previous meeting, and thus no vote was ment rate remained at 4.0 percent in required of the Committee. July. The Manager also reported on devel- Industrial production registered furopments in domestic financial markets ther gains in June and July. Persisting and on System open market transactions strength in manufacturing output was in government securities and federal accompanied by brisk increases in agency obligations during the period mining activity and sizable declines in June 28, 2000, through August 21, 2000. utilities services associated with cooler- By unanimous vote, the Committee rati- than-normal temperatures. In manufacfied these transactions. turing, production of high-tech equip- The Committee then turned to a dis- ment and most other types of business cussion of the economic outlook and the equipment remained robust, but the implementation of monetary policy over manufacture of motor vehicles and parts the intermeeting period ahead. dropped substantially in July after a The information reviewed at this small June decline. The further step-up meeting suggested that economic activ- in overall manufacturing activity lifted ity was expanding at a more moderate capacity utilization to a rate around its pace than earlier in the year. Growth in long-term average. consumer spending had slowed from Growth of nominal retail sales picked the outsized gains seen earlier, and sales up appreciably in July after having of new homes and motor vehicles were slowed noticeably in the second quarter. down appreciably from their earlier Sales rose sharply at general merchanhighs. However, business spending on disers, furniture and appliance stores, equipment and software had continued and outlets for other durable goods. to surge, and industrial production was However, outlays at automotive dealers still trending upward. Even though declined substantially. Growth in houseexpansion in employment had slowed hold expenditures for services eased considerably in recent months, labor somewhat in the second quarter (latest markets remained extremely tight by available data), with a drop in spendhistorical standards, and some measures ing for brokerage services more than of labor compensation had accelerated. accounting for the slowdown. The With productivity also continuing to recent deceleration in consumer spendaccelerate, unit labor costs had changed ing occurred against the background little and measures of core price infla- of moderate growth of real disposable tion had increased only mildly. income in recent quarters and little Total nonfarm payroll employment net change in stock market valuations dropped appreciably in July after a small thus far this year. Nevertheless, conincrease in June. Much of the weakness sumer sentiment continued to be very over the two months reflected substan- buoyant. tial declines in the number of temporary With mortgage rates at levels well Census workers. In the private sector, above their average for last year, total payroll gains had diminished somewhat private housing starts fell further in June on balance since the first quarter. The and July, reaching their lowest level slowdown was particularly large in the since late 1997. Sales of new singleusually robust services sector. Manufac- family homes also were weaker in June turing employment, by contrast, had (latest data). By contrast, sales of existrisen on net since the early spring after a ing homes picked up somewhat in June. lengthy decline. The civilian unemploy- Consumers' assessments of homebuying Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

236 87th Annual Report, 2000 conditions and builders' ratings of new little. Excluding the food and energy home sales remained soft. components, consumer prices rose mod- Growth of business fixed investment, erately in both months. For the twelve while still robust, slowed considerably months ended in July, core CPI prices in the second quarter after having surged increased somewhat more than in the in the first quarter. Business spending on previous twelve-month period. When equipment and software continued to measured by the PCE chain-price index, expand at its very rapid first-quarter however, the acceleration in core conpace; investment in high-tech equipment sumer prices during the last four quar- (notably computers and communica- ters was very small. Producer prices tions equipment), software, and indus- exhibited a pattern that was generally trial machinery was particularly strong. similar to that of consumer prices. Prices By contrast, outlays for nonresidential of all finished goods jumped in June and structures weakened in the second quar- were unchanged in July, and core proter after a first-quarter burst. ducer prices were unchanged on balance The book value of manufacturing and in the June-July period. For the twelve trade inventories jumped in the second months ended in July, core producer quarter. Part of the pickup reflected large prices rose slightly more than in the increases in stocks of motor vehicles previous twelve-month period. With at wholesalers and automotive dealer- regard to labor compensation, recent ships that left inventory-sales ratios in data suggested an acceleration, on balthe motor vehicle sector at relatively ance, over the past year. Growth in high levels. Elsewhere, stockbuilding hourly compensation for private induswas only a bit stronger than sales, try workers slowed somewhat in the secand inventory-sales ratios generally ond quarter after having risen sharply in remained within their relatively low the first quarter. Over the four quarters ranges for the preceding twelve months. ended in June, however, the change in The U.S. trade deficit in goods and compensation rates was substantially services changed little in June from its larger than the change over the previous May level, but the deficit for the second four-quarter period. By contrast, the quarter as a whole was appreciably advance of average hourly earnings of larger than its average for the first quar- production or nonsupervisory workers ter. Both exports and imports grew rap- for the twelve months ended in July was idly last quarter, though the dollar value about the same as that for the previous of imports increased significantly more twelve-month period. than the value of exports. The available At its meeting on June 27-28, 2000, information indicated that economic the Committee adopted a directive that expansion was vigorous in both foreign called for maintaining conditions in industrial countries and major develop- reserve markets consistent with an ing countries in the second quarter, but unchanged federal funds rate of about recent information pointed to some 6V2 percent. In reaching this decision, slowing of growth in these countries. the members cited increasing though Recent data suggested that price infla- still tentative indications of some slowtion had picked up slightly. Consumer ing in aggregate demand from an unsusprices, as measured in the CPI, jumped tainably elevated pace and the likeliin June in response to a surge in energy hood that the policy tightening actions prices but climbed only modestly fur- implemented earlier had not yet exerted ther in July, when energy prices changed their full retarding effects on spending. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 237 The members agreed, however, that the quarter as a result of an accelerated paystatement accompanying the announce- down in federal debt, while private borment of their decision should continue rowing remained brisk. However, partial to underscore their view that the risks data for the period since midyear sugremained weighted mainly in the direc- gested that the overall growth in housetion of rising inflation. hold and business borrowing might also Open market operations were directed be slowing somewhat. The expansion of throughout the intermeeting period M2 had declined substantially since late toward maintaining the federal funds spring, apparently in part as a result of rate at the Committee's target level of the widening opportunity costs of hold- 6]/2 percent, and the rate averaged close ing assets in M2 stemming from higher to the intended level. Other interest rates market interest rates and possibly also generally moved lower over the period, from slackening growth in household extending declines that had begun dur- incomes. Sluggish currency flows were ing the spring. Factors contributing to another contributing factor. At the same the most recent reductions included eco- time, M3 accelerated in July and partial nomic data releases that were viewed, data pointed to further robust growth in on balance, as confirming earlier indica- August. The advance in this broader tions that demand growth was slowing aggregate seemed to be driven by to a more sustainable pace and that interest-sensitive inflows to M3's instiprice pressures would remain damped, tutional money fund component. thereby lessening or potentially obviat- The staff forecast prepared for this ing further tightening of monetary pol- meeting suggested that the economic icy. Most broad indexes of stock market expansion, after slowing appreciably prices rose somewhat over the period from its elevated pace of recent quarters, since the June meeting. would be sustained at a rate a little In foreign exchange markets, the below that of the staff's upwardly trade-weighted value of the dollar revised estimate of the economy's increased on net against an index of potential output. The forecast anticimajor currencies, even though interest pated that the expansion of domestic rate differentials moved against assets final demand would be held back to denominated in dollars relative to those some extent by the waning and eventual of other industrial countries. At least in disappearance of positive wealth effects part, the dollar's appreciation reflected associated with outsized earlier gains in heightened market perceptions that eco- equity prices and by higher interest nomic growth in the United States, rates. As a result, growth of spending on though evidently moderating from its consumer durables was expected to stay rapid pace in recent quarters, was likely well below that in recent quarters and to continue to exceed that in most other housing demand to stabilize at a level industrial nations. The foreign exchange below recent highs. By contrast, the value of the dollar dropped slightly expansion of business fixed investment, against the currencies of other important notably in equipment and software, was trading partners, paced by a substantial projected to remain robust, and further rise in the value of the Mexican peso in solid economic growth abroad was response to brightening political and expected to boost the expansion of U.S. economic prospects in Mexico. exports for some period ahead. Core The growth of domestic nonfinancial consumer price inflation was projected debt moderated slightly in the second to rise somewhat over the forecast Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

238 87th Annual Report, 2000 horizon, in part as a result of higher agreed that the risks remained weighted import prices but largely as a conse- toward rising inflation. quence of some further increases in In the Committee's discussion of nominal labor compensation gains that the outlook for the economy, members would not be fully offset by growth in focused considerable attention on the productivity. growth rate of the economy's supply In the Committee's discussion of cur- potential—its ability to satisfy further rent and prospective economic con- growth in demand on a sustainable ditions, the members agreed that the basis. The widespread application of information available since midyear technological advances and the associprovided increased evidence that the ated surge in outlays for capital equipgrowth of aggregate demand and that ment had been fostering an acceleration of aggregate supply were coming into in labor productivity that seemed to be closer balance. The statistical evidence ongoing. Data on productivity and capireviewed by the Committee, which was tal accumulation that had become availsupported by widespread anecdotal able in recent months had tended to reports, pointed to a noticeable slowing confirm these trends, and the statistical in the expansion of demand and eco- evidence was reinforced by comments nomic activity. The slowdown was led from many business executives and by by a moderation in consumer spending persistent upward revisions to longand some decline in housing expendi- term profit forecasts, which had yet to tures that were occurring even before suggest a leveling out of productivity the full effects of earlier tightening in growth. financial conditions had been felt. At Quickening productivity had been the the same time, an apparent continued fundamental factor behind the econoacceleration in underlying productivity my's remarkable performance in recent was boosting the economy's potential years. Members noted, however, that output growth and, in the context of the historical episodes involving major leveling out of the broadest measures changes in productivity trends had been of equity prices this year, was doing so rare, and the past therefore provided without the full feedback on demand a limited basis for evaluating the course of previous such accelerations. While of future productivity developments. prices were rising somewhat more than Accordingly, considerable caution a year ago, most of this pickup seemed needed to be exercised in assessing the to reflect the direct and indirect effects outlook for productivity and in relying of higher energy prices, and the increase on projections of the economy and in productivity growth had kept unit prices, which necessarily embodied labor costs well contained despite more judgments about this outlook, in making rapid gains in compensation. These monetary policy. Another source of developments had much improved the uncertainty related to the interactions prospects for a sustainable economic of rising productivity and aggregate expansion at the prevailing stance of demand. Over the course of recent years, monetary policy. Even so, the members accelerating productivity gains had anticipated that labor markets would tended to boost aggregate demand by remain exceptionally tight, and with even more than potential aggregate suplabor compensation already accelerating ply owing to the effects of stronger profand higher energy prices potentially its on investment spending and, through raising inflation expectations, they the rising stock market, on consumption Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 239 as well. However, the leveling out in of higher energy prices on incomes stock prices this year suggested that available to be spent on other goods recent increases in productivity growth and services. While these factors might had been built into market expectations well continue to damp the growth of and prices some time ago and were not consumer spending going forward, likely to provide the same impetus to members noted that consumer condemand going forward as had past pro- fidence remained at a high level, conductivity acceleration. Members cau- sumer incomes were rising, and no tioned nonetheless that the possibility anecdotal or other evidence pointed to that long-term interest rates and equity any marked deterioration in consumer prices did not yet adequately reflect spending that would pose a potential ongoing productivity gains could not be threat to the sustainability of the ecoruled out, with attendant effects boost- nomic expansion. ing demand. Finally, rising productivity The housing sector provided the clearly had been a major force in con- clearest indication of a response of taining inflation in a period of unusually aggregate demand to firming interest low unemployment rates, and while rates, affecting industries producing consome of the interactions between pro- struction materials and household furductivity growth and wages and prices nishings. Anecdotal reports from much could be adduced, these interactions of the country tended to confirm the involved complex processes that were statistical evidence of a downward trend very difficult to assess given the paucity in housing starts and home sales. Facof prior experience. As a consequence, tors helping to explain the softness in judgments about labor market pressures, housing, which included the rise that productivity, and inflation had to be had occurred in mortgage interest rates viewed with care on the basis of evolv- and reported overbuilding in some ing developments. metropolitan areas, were expected to In their review of the outlook for continue to exert some downward presexpenditures in key sectors of the econ- sure on housing activity. However, referomy, members observed that growth in ence also was made to indications that consumer spending had moderated sub- wealth effects were continuing to boost stantially after a period of exceptional housing demand and prices in parts of gains in late 1999 and early 2000. The the country. clearest evidence of softening consumer In sharp contrast to developments in demand tended to be concentrated in the consumer and housing sectors, busisales of motor vehicles and in housing- ness outlays for capital equipment and related durable goods. Available data on software had continued to rise at excepreduced growth in consumer spending tional rates, even after several years were supported by anecdotal reports of of rapid growth. The persistence of drasome slippage in retail sales below matic expansion evidently reflected expectations in several parts of the expectations that such capital investcountry. Factors underlying these devel- ments would continue to earn very high opments included diminishing wealth rates of return. Although the extraoreffects after several months of limited dinary rates of increase in investment changes in equity prices, the cumulative outlays currently displayed little or no buildup in the stock of motor vehicles sign of abating, historical patterns indiand other consumer durables owned by cated that even dramatic surges or shifts the public, and the constraining effects in technology invariably lost momen- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

240 87th Annual Report, 2000 turn once the new technology was the standards of recent years, largely as widely adopted, and rates of return on a result of higher energy costs. Morefurther investments tended to diminish. over, supply factors in major energy There was no reliable way to anticipate markets—petroleum, gas, and electricity the timing of such a downturn and generating capacity—did not point to indeed little reason to expect a turn- significant relief for some considerable around over the nearer term in the cur- period of time. Still, core consumer rent investment boom. Members noted, price indexes remained relatively however, that the investment outlook for damped and had risen only a little over the nonresidential construction sector the past year, especially when measured presented a much more mixed picture. by the PCE chain price index, and that While such business investment con- suggested underlying price pressures tinued to exhibit considerable vigor in remained largely contained. Nonethemany areas, it clearly had weakened less, a number of members were conin others and for the nation as a whole cerned that unusually taut labor markets seemed poised for a relatively subdued could begin at some point to show advance in coming quarters. One factor through to increases in labor compenpointing in the latter direction was evi- sation in excess of productivity gains, dence of more cautious attitudes on the pressuring unit costs and prices. Evipart of many business executives and dence of this had yet to emerge, perhaps especially their lending institutions. because productivity continued to accel- The strengthening economies of many erate, but a flattening out of the rate of U.S. trading partners were fostering ris- increase in productivity, even at a high ing demand for U.S. exports, a trend that level, could well pose at some point a seemed likely to persist according to risk to continued favorable inflation perreports from many domestic business formance. To be sure, there were a numcontacts. Nonetheless, the nation's cur- ber of positive factors in the outlook for rent account deficit apparently contin- inflation, including highly competitive ued to increase, a development about conditions in many markets, stable and which members expressed concern in relatively favorable expectations with view of the risks that it posed for the regard to the longer-run inflation outforeign exchange value of the dollar and look, and signs that the remarkable domestic inflation over time. Still, the acceleration in productivity was conexperience of the past few years clearly tinuing. On balance, however, the memdemonstrated that the dollar was likely bers saw a mild upward trend in key to remain strong as long as foreign measures of inflation as a distinct possiinvestors continued to see attractive bility, albeit one that was subject to coninvestment opportunities in the United siderable uncertainty. States. Past experience also suggested In the Committee's discussion of polthat international capital flows can icy for the intermeeting period ahead, quickly reverse themselves, but the tim- all the members endorsed a proposal to ing of a major turnaround in the dollar, retain the current stance of policy, conif any, could not be predicted with any sistent with a federal funds rate continudegree of confidence. ing to average about 6V2 percent. In In the Committee's discussion of the their assessment of factors leading to outlook for inflation, members noted this decision, the members focused on that overall measures of price inflation the further evidence that moderating had picked up to fairly high levels by demand and accelerating productivity Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, August 241 were closing the gap between the growth tion over time were seen importantly to of aggregate demand and potential sup- stem from the unusually taut conditions ply, even before earlier Committee tight- in labor markets, which could place ening actions had exerted their full upward pressures on unit costs and restraining effects. While the recent rally prices, especially once productivity in domestic financial markets could be growth leveled out in the future. But viewed as having partially eroded the members also cited the potential for perdegree of monetary restraint imple- sistently higher energy prices to affect mented earlier, real interest rates for pri- longer-run inflation expectations, and vate borrowers were still at relatively the possibility that, taking into considerelevated levels, banking institutions ation recent declines in long-term interwere continuing to report further tight- est rates, financial conditions might not ening of their standards and terms for yet be tight enough to balance aggregate business loans, equity prices had risen demand and potential supply in the face only modestly, and the dollar had firmed of optimism about the growth of labor over recent months. In addition, the last and capital income in association with few readings on core inflation had not accelerating productivity. suggested a further upward drift, unit At the conclusion of this discussion, labor costs were not increasing, and the Committee voted to authorize and longer-term inflation expectations had direct the Federal Reserve Bank of been stable for some time. Accordingly, New York, until it was instructed otherthe Committee incurred little risk in wise, to execute transactions in the Sysleaving the stance of policy unchanged tem Account in accordance with the folat this meeting and waiting to see how lowing domestic policy directive: the various factors affecting both supply and demand in the economy unfolded The Federal Open Market Committee and influenced the prospects for eco- seeks monetary and financial conditions that nomic activity and prices. will foster price stability and promote sustainable growth in output. To further its long- At the same time, many members run objectives, the Committee in the immeemphasized that the Committee needed diate future seeks conditions in reserve to be prepared to act promptly should markets consistent with maintaining the inflationary pressures appear to be inten- federal funds rate at an average of around sifying, and in the Committee's discus- 6V2 percent. sion of the balance-of-risks sentence to be included in the press statement that The vote also encompassed approval would be issued after this meeting, all of the sentence below for inclusion in the members agreed that the sentence the press statement to be released shortly should continue to indicate that the risks after the meeting: to the economy remained weighted toward higher inflation in the foresee- Against the background of its long-run able future. While the members did not goals of price stability and sustainable ecoexpect underlying inflation to intensify nomic growth and of the information currently available, the Committee believes that materially, especially over the nearer the risks are weighted mainly toward conterm, the statement was intended to ditions that may generate heightened inflaexpress their views about the longer tion pressures in the foreseeable future. term, and over that horizon they agreed that the risks lay in the direction of price Votes for this action: Messrs. Greenacceleration. The risks of higher infla- span, McDonough, Broaddus, Ferguson, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

242 87th Annual Report, 2000 Gramlich, Guynn, Jordan, Kelley, Meyer, Mr. Beebe, Ms. Cumming, and Parry. Votes against this action: None. Messrs. Eisenbeis, Howard, Lindsey, Reinhart, Simpson, and Sniderman, Associate Economists It was agreed that the next meeting of the Committee would be held on Tuesday, October 3, 2000. Mr. Fisher, Manager, System Open Market Account The meeting adjourned at 12:50 p.m. Messrs. Madigan and Slifman, Donald L. Kohn Associate Directors, Divisions of Secretary Monetary Affairs and Research and Statistics respectively, Board of Governors Meeting Held on Mr. Winn, Assistant to the Board, October 3, 2000 Office of Board Members, Board of Governors A meeting of the Federal Open Market Committee was held in the offices of Mr. Ettin, Deputy Director, Division the Board of Governors of the Fed- of Research and Statistics, eral Reserve System in Washington, Board of Governors D.C., on Tuesday, October 3, 2000, at 9:00 a.m. Messrs. Oliner and Struckmeyer, Associate Directors, Division Present: of Research and Statistics, Mr. Greenspan, Chairman Board of Governors Mr. McDonough, Vice Chairman Mr. Broaddus Mr. Porter, Deputy Associate Director, Mr. Ferguson Division of Monetary Affairs, Mr. Gramlich Board of Governors Mr. Guynn Mr. Jordan Mr. Kelley Mr. Whitesell, Assistant Director, Mr. Meyer Division of Monetary Affairs, Mr. Parry Board of Governors Mr. Hoenig, Ms. Minehan, Mr. Ramm, Section Chief, Division Messrs. Moskow and Poole, of Research and Statistics, Alternate Members of the Federal Board of Governors Open Market Committee Messrs. Reeve and Sack, Economists, Messrs. McTeer, Stern, and Santomero, Divisions of International Finance Presidents of the Federal Reserve and Monetary Affairs respectively, Banks of Dallas, Minneapolis, and Board of Governors Philadelphia respectively Ms. Low, Open Market Secretariat Mr. Kohn, Secretary and Economist Assistant, Division of Monetary Mr. Gillum, Assistant Secretary Affairs, Board of Governors Ms. Fox, Assistant Secretary Mr. Mattingly, General Counsel Mr. Baxter, Deputy General Counsel Mr. Kumasaka, Assistant Economist, Ms. Johnson, Economist Division of Monetary Affairs, Mr. Stockton, Economist Board of Governors Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, October 243 Messrs. Hakkio, Kos, Lacker, agency obligations during the period Ms. Mester, Messrs. Rasche, August 22, 2000, through October 2, Rolnick, and Rosenblum, 2000. By unanimous vote, the Commit- Senior Vice Presidents, Federal tee ratified these transactions. Reserve Banks of Kansas City, New York, Richmond, The Committee then turned to a dis- Philadelphia, St. Louis, cussion of the economic outlook and the Minneapolis, and Dallas implementation of monetary policy over respectively the intermeeting period ahead. The information reviewed at this Messrs. Evans and Rosengren, meeting suggested that economic activ- Vice Presidents, Federal Reserve ity was expanding at a more moderate Banks of Chicago and Boston respectively pace than in the first half of the year. The moderation reflected lower growth Mr. Tallman, Senior Economist, in most major expenditure sectors. As a Federal Reserve Bank of Atlanta result of the deceleration in aggregate demand, expansion of employment and By unanimous vote, the minutes of industrial production had slowed. Risthe meeting of the Federal Open Market ing energy prices had boosted overall Committee held on August 22, 2000, price inflation considerably, but core were approved. measures of consumer inflation had The Manager of the System Open increased substantially less. Market Account reported on recent Total nonfarm payroll employment developments in foreign exchange mar- dropped further in August, in part kets and on System transactions in reflecting additional large declines in the those markets during the period number of temporary Census workers. August 22, 2000, through October 2, In the private sector, a labor strike held 2000. By unanimous vote, the Commit- down the August rise in payroll employtee ratified these transactions. ment, but even after adjusting for the In ratifying these transactions, mem- effects of the strike, the pace of private bers emphasized that the action was not job gains in the July-August period fell intended to signal an increased willing- considerably from the rate for the first ness by the Committee to intervene in half of the year. The slowdown was foreign exchange markets. In the current particularly pronounced in the construcinstance, the intervention transactions tion, manufacturing, and services secwere undertaken in a spirit of coopera- tors. The civilian unemployment rate tion with the international financial edged up to 4.1 percent in August. community and at the express request Total industrial production rose only of the European Central Bank (ECB). slightly on balance during July and Members commented that historical August after having registered strong experience suggested that foreign gains earlier in the year. The growth exchange market interventions generally in production of high-tech equipment had not had lasting effects when not remained rapid, though not at the accompanied by supporting changes in extraordinary rates posted earlier in the macroeconomic policies. year, and softer conditions had emerged The Manager also reported on devel- in a number of manufacturing indusopments in domestic financial markets tries, including steel, trucks, motor vehiand on System open market transactions cles, and construction supplies. Because in government securities and federal of the weakness in production, the rate Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

244 87th Annual Report, 2000 of capacity utilization in manufacturing somewhat after the substantial gains of edged down to a level slightly below its the first half of the year. Information long-term average. on orders for nondefense capital goods Consumer spending picked up some- pointed to further slowing in the pace of what in July and August from a moder- spending increases in coming months. ate rate of increase in the second quarter. Nonresidential construction activity fell Real personal consumption expenditures in July but market fundamentals, includon durable goods surged in the July- ing rising property values and lower August period, spending on nondurable vacancy rates, suggested the likelihood goods picked up somewhat less, and of further expansion in nonresidenconsumption of services decelerated a tial investment, particularly in office little. The recent strengthening of con- buildings. sumer spending occurred against the Business inventory investment background of moderate growth of real decreased sharply in July after a large disposable income in recent quarters but second-quarter advance. Much of the generally buoyant consumer sentiment. slowdown was associated with a runoff With interest rates on fixed-rate mort- of stocks of motor vehicles at wholesalgages having fallen significantly since ers and automotive dealerships. Elsemid-May and consumers' assessments where, stockbuilding eased a little and of homebuying conditions having risen sales decelerated somewhat. Inventoryrecently, single-family housing starts sales ratios generally were within their picked up somewhat in August. How- ranges for the preceding twelve months, ever, such starts were still sharply below and there seemed to be only a few scattheir levels of early in the year, likely tered indications of inventory imbalreflecting in part the recent smaller gains ances at the industry level. in income and employment and the flat- The U.S. trade deficit in goods and tening out of equity prices thus far this services widened considerably in July year. New home sales picked up in July from its June level, with the dollar value (latest data), though that gain might of exports retracing part of its extraorhave been overstated as a result of prob- dinary June increase and the value of lems with estimation procedures, and imports rising further. The drop in existing home sales bounced back in exports was concentrated in aircraft August, roughly offsetting a drop in and automotive products, while the July. Multifamily starts, by contrast, advance in imports was largely in declined further in August even though industrial supplies, automotive prodvacancy rates remained low and apart- ucts, and services. The available informent rents continued to rise. mation indicated that economic expan- The available information suggested sion in the foreign industrial countries that business investment in durable had slowed somewhat in the third equipment and software increased sub- quarter from the robust growth during stantially further in the third quarter. the first half of the year, primarily Data on shipments of nondefense capital reflecting reduced economic expangoods in July and August indicated that sion in Japan. Growth appeared to be outlays for high-tech equipment, nota- somewhat uneven among the developbly computing and communications ing countries in the third quarter but equipment, remained quite strong. For remained solid on balance. other types of equipment, spending Recent information continued to indigrowth seemed to have moderated cate a slight pickup in price inflation. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, October 245 Consumer prices edged up on balance close to the intended level. Most shortover July and August, despite a net drop and intermediate-term interest rates in energy prices; excluding the food and moved lower over the interval, though energy components, consumer price long-term yields changed little or drifted inflation remained moderate in both slightly higher. Market expectations months. On a year-over-year basis, how- about the near-term prospects for interever, core consumer prices increased est rates were revised downward in somewhat more in the twelve months response to both the Committee's stateended in August than in the previous ment after the August meeting, which twelve-month period. Core producer was interpreted as expressing greater prices edged up over the July-August confidence that growth rates of aggreperiod and decelerated a little on a year- gate demand and aggregate supply were over-year basis. With regard to labor coming into better alignment, and to costs, average hourly earnings of pro- subsequent data releases, which were duction or nonsupervisory workers rose seen as confirming earlier indications moderately in July and August. The of some slowing in the economic advance for the twelve months ended in expansion. Against a background of August was slightly larger than that for some upward pressure on long-term the previous twelve-month period. Treasury yields and of growing con- At its meeting on August 22, 2000, cerns about corporate earnings, most the Committee adopted a directive that broad indexes of stock market prices called for maintaining conditions in declined somewhat over the intermeetreserve markets consistent with an ing period. unchanged federal funds rate of about In foreign exchange markets, the 61//2 percent. In reaching their decision, trade-weighted value of the dollar the members noted that decelerating de- increased somewhat further on balance mand and surging productivity seemed in terms of an index of major foreign to have narrowed the gap between the currencies. The dollar's net appreciagrowth rates of aggregate demand and tion against the euro occurred despite potential supply, even though previous a small policy tightening by the ECB policy tightening actions had not yet on August 31 as sentiment toward that exerted their full restraining effects. The currency remained negative, in part members emphasized, however, that because of concerns about capital flows unusually taut labor markets could result out of the euro area. The major indusin greater upward pressures on unit costs trial countries undertook joint foreign and prices, especially if productivity exchange intervention late in the period, growth were to level out or edge lower on September 22, to stem the euro's in the future, and they agreed that the slide. The intervention was at the initiastatement accompanying the announce- tive of the ECB and was joined by the ment of their decision should continue United States and other nations because to indicate that the risks remained of shared concern about the potential weighted mainly in the direction of ris- implications of recent movements in ing inflation. the euro. The dollar also posted gains Open market operations throughout against the currencies of a number of the intermeeting period were directed other important trading partners, notably toward maintaining the federal funds the Brazilian real and the Mexican peso. rate at the Committee's targeted level of The broad monetary aggregates had 6V2 percent, and the average rate was expanded relatively briskly in recent Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

246 87th Annual Report, 2000 months. The growth of M2, perhaps consequence of further increases in reflecting the recent vigor of consumer nominal labor compensation gains that spending, picked up considerably in would not be fully offset by growth in August and September after having productivity. increased slowly in June and July. Aver- In the Committee's discussion of curaged across the past four months, how- rent and prospective economic developever, M2 increased at a pace noticeably ments, members referred to recent statisbelow that of earlier in the year, with the tical and anecdotal information that slowdown partly reflecting a lagged tended to confirm earlier indications of response to a widening, during the first appreciable slowing in the pace of the half of the year, of the opportunity costs expansion from the outsized increases of holding M2 assets. M3 expansion experienced in the latter part of 1999 remained robust in August and Septem- and the first half of this year. Several ber, though somewhat below the pace commented that growth of aggregate in the first half of the year. The growth demand now appeared to be closer to, of domestic nonfinancial debt slowed and perhaps slightly below, the rate of somewhat in July and August in associa- expansion in the nation's output potention with some moderation in the brisk tial. Looking ahead, they generally pace of private borrowing that was off- anticipated that the softening in equity set in part by a less rapid paydown of prices and the rise in interest rates that federal debt. had occurred earlier in the year would The staff forecast prepared for this contribute to keeping growth in demand meeting suggested that the economic at a more subdued but still relatively expansion, after slowing considerably robust pace. The members recognized from its elevated pace of recent quarters, that marked uncertainties surrounded would be sustained at a rate a little any forecast in present circumstances. below the staff's current estimate of the Those uncertainties had been augmented economy's potential output. The fore- by recent developments in world oil cast anticipated that the expansion of markets and continued to include quesdomestic final demand would be held tions about the extent of further gains in back to some extent by the eventual productivity, the effects of such gains on disappearance of positive wealth effects the growth of aggregate demand as well associated with outsized earlier gains as supply, and the associated degree of in equity prices and by higher interest prospective pressures on resources and rates. As a result, growth of spending on inflation. In the latter regard, members consumer durables was expected to anticipated that even assuming reduced remain appreciably below that in recent economic growth in line with their forequarters, and housing demand would casts and further impressive gains in trend slightly downward. By contrast, productivity, conditions in labor markets business fixed investment, notably out- were likely to remain relatively tight, lays for equipment and software, was and risks persisted that at some point projected to remain robust, and brisk such tightness could exert upward presgrowth abroad would boost the expan- sures on labor costs and prices. sion of U.S. exports for some period Developments in world oil markets ahead. Core consumer price inflation also might exert continued upward preswas projected to rise a little over the sure on inflation, while at the same time forecast horizon, in part as a result of posing a downward risk to economic higher import prices but largely as a activity. Uncertainties relating to politi- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, October 247 cal events in the Middle East, superim- With regard to the outlook for resiposed on limited available inventories dential construction, anecdotal reports of oil products held by producers and indicated some softening in housing refiners, had fostered recent "spikes" in activity in many parts of the country, oil prices. While price quotations in though some members cited regional futures markets pointed to a decline evidence of a partial rebound recently in oil prices over time, such prices that was attributed to declines in mortmight well remain relatively elevated gage interest rates. However, financial for a extended period, with negative factors, including mortgage interest rates effects on spending and inflation. There at levels still appreciably above earlier already were scattered signs that higher lows and the sideways performance of energy prices, by reducing income avail- the stock market, were expected to able for discretionary purchases, might constrain housing activity somewhat be damping retail sales. Moreover, to over coming quarters, though such the extent that relatively high oil prices activity likely would remain on a relapersisted, they were likely to have tively high plateau. increasing pass-through effects on core In their comments about the prospects measures of inflation as well as on for business fixed investment, members "headline" inflation, especially if the cited some indications that the expanenergy price increases began to affect sion in business spending for equipment inflation expectations. However, the and software might be moderating from course of oil prices was very difficult to the extraordinary pace of recent years, predict not only because of political and though growth in such expenditures market uncertainties but in part also probably would remain robust. Retardbecause of the lack of information about ing influences bearing on the outlook for the extent of what appeared to be a investment expenditures included foreprecautionary buildup of fuel supplies casts of slower growth in final demand by households and retail businesses. and less favorable financial conditions, In their review of the outlook for notably weakness in the equity prices household spending, members cited a of numerous "new economy" firms and number of developments that pointed to tightening credit availability for busislower but continuing growth. With ness firms that did not enjoy investmentsome exceptions, anecdotal reports from grade credit ratings or favorable earnvarious parts of the country suggested a ings prospects. Evidence of overbuilding recent softening in retail sales, and some in some areas of commercial and other industry contacts indicated that they nonresidential real estate also was menwere marking down their forecasts of tioned. Against this background, some retail sales. A flat and volatile stock members referred to a growing sense of market and the rise in energy costs caution among business- and financialappeared to be key factors currently sector executives about undertaking tending to inhibit growth in consumer or financing business investments. At spending at least to some extent. On the the same time, the incentive to take positive side, continuing gains in con- advantage of increasingly efficient highsumer incomes and a high level of con- tech equipment and software, typically sumer confidence could be expected to available at declining prices, would foster sustained growth in such spend- continue to provide an important undering, albeit probably at a pace below pinning for further large gains in investrecent trends. ment spending, with favorable impli- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

248 87th Annual Report, 2000 cations for continued rapid growth in the economy, all the Committee memproductivity. bers indicated that they favored an In their assessment of the outlook for unchanged policy stance for the interinflation, members agreed that although meeting period ahead. In support of this forecasts of more moderate growth view, they placed considerable weight in aggregate demand at a pace around on widespread indications, reinforced potential output had substantially by developments since the August reduced the odds of rising inflation, the meeting, that growth in aggregate risks still were pointed in that direction demand had moderated appreciably to a on balance. Even so, any increase in pace that improved the prospects for inflation was likely to be modest and containing pressures on resources. gradual and was subject to substantial Moreover, the tightening that had uncertainty for a variety of reasons. As occurred in financial conditions through noted previously, the behavior of oil the spring and the rise in energy prices was one highly uncertain source prices since the fall of 1998 had not yet of potentially greater inflation pressures. exerted their full effects on aggregate Another major source of uncertainty demand, and members expected these was the prospective performance of effects to contribute to a more sustainproductivity. Largely as a consequence able rate of growth in aggregate spendof rapidly expanding "new economy" ing. Although inflation had picked up, investments, gains in productivity had a decline in energy prices, should it occurred at remarkable rates in recent materialize in line with market expecyears. However, the anticipated modera- tations, clearly would have favorable tion in the expansion of economic activ- implications for inflation expectations ity and the related softening in expected and cost pressures in the economy. returns on such investments might well Questions nonetheless remained regardrestrain the further expansion of invest- ing the extent and duration of the slowment spending and limit the associated down in the economic expansion and pickup in productivity. Once productiv- the other factors bearing on the outlook ity growth tended to level out, employ- for inflation, especially against the backers would find it more difficult to offset drop of substantial pressures on labor the rise in their costs that might occur resources. should tight labor markets persist. All the members agreed that their Finally, a decline in the dollar from its views regarding the outlook for inflation current level, should that happen, might were consistent with retaining the press add to inflation pressures going forward. release sentence indicating that the risks On the more positive side, there were no remained weighted toward higher inflasigns that the pace of productivity gains tion over time. Some expressed the was currently leveling out and no evi- opinion that those risks were now dence of rising longer-term inflation less decidedly tilted to the upside and expectations. Moreover, cost pressures that a reconsideration of the sentence and price inflation had remained sub- might be warranted over the next sevdued for an extended period despite low eral months, but they believed that a rates of unemployment that in the past change at this point would be premahad been associated with increasing ture. While the prospects of a signifiinflation. cant rise in inflation seemed quite Against the backdrop of these uncer- limited for the nearer term, the members tainties and the current performance of agreed on the need to remain especially Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 249 vigilant for signs of potentially rising Meeting Held on inflation over the intermediate term, November 15, 2000 particularly since any increase in infla- A meeting of the Federal Open Market tion would occur from a level that Committee was held in the offices of the in the view of many members was Board of Governors of the Federal already on the high side of an acceptable Reserve System in Washington, D.C., range. on Wednesday, November 15, 2000, at At the conclusion of this discussion, 9:00 a.m. the Committee voted to authorize and direct the Federal Reserve Bank of Present: New York, until it is instructed other- Mr. Greenspan, Chairman wise, to execute transactions in the Sys- Mr. McDonough, Vice Chairman tem Account in accordance with the fol- Mr. Broaddus lowing domestic policy directive: Mr. Ferguson Mr. Gramlich Mr. Guynn The Federal Open Market Committee Mr. Kelley seeks monetary and financial conditions that Mr. Meyer will foster price stability and promote sus- Mr. Parry tainable growth in output. To further its longrun objectives, the Committee in the immedi- Mr. Hoenig, Ms. Minehan, ate future seeks conditions in reserve Messrs. Moskow and Poole, markets consistent with maintaining the fed- Alternate Members of the Federal eral funds rate at an average of around Open Market Committee 6!/2 percent. Messrs. McTeer, Stern, and Santomero, The vote also encompassed approval Presidents of the Federal Reserve of the sentence below for inclusion in Banks of Dallas, Minneapolis, and Philadelphia respectively the press statement to be released shortly after the meeting: Mr. Kohn, Secretary and Economist Mr. Bernard, Deputy Secretary Against the background of its long-run Mr. Gillum, Assistant Secretary goals of price stability and sustainable eco- Ms. Fox, Assistant Secretary nomic growth and of the information cur- Mr. Mattingly, General Counsel rently available, the Committee believes that Ms. Johnson, Economist the risks are weighted mainly toward con- Mr. Stockton, Economist ditions that may generate heightened inflation pressures in the foreseeable future. Ms. Cumming, Messrs. Eisenbeis, Goodfriend, Howard, Votes for this action: Messrs. Greenspan, Lindsey, Reinhart, Simpson, McDonough, Broaddus, Ferguson, Gram- and Sniderman, Associate lich, Guynn, Jordan, Kelley, Meyer, and Economists Parry. Votes against this action: None. Mr. Fisher, Manager, System Open Market Account It was agreed that the next meeting of the Committee would be held on Mr. Winn, Assistant to the Board, Wednesday, November 15, 2000. Office of Board Members, Board The meeting adjourned at 12:05 p.m. of Governors Mr. Ettin, Deputy Director, Division Donald L. Kohn of Research and Statistics, Board Secretary of Governors Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

250 87th Annual Report, 2000 Mr. Madigan, Associate Director, October 3, 2000, through November 14, Division of Monetary Affairs, 2000. By unanimous vote, the Commit- Board of Governors tee ratified these transactions. The Committee then turned to a dis- Messrs. Oliner, Slifman, and cussion of the economic situation and Struckmeyer, Associate Directors, Division of Research outlook and the implementation of and Statistics, Board of Governors monetary policy over the intermeeting period ahead. Mr. Whitesell, Assistant Director, The information reviewed at this Division of Monetary Affairs, meeting suggested that economic Board of Governors growth had slowed appreciably from the rapid pace in the first half of the Ms. Low, Open Market Secretariat Assistant, Division of Monetary year. The slowdown was most apparent Affairs, Board of Governors in housing construction and business investment in equipment and software, Mr. Barron and Ms. Pianalto, First while consumer spending remained on Vice Presidents, Federal Reserve a relatively solid upward trend. With Banks of Atlanta and Cleveland expansion of aggregate demand less respectively robust, industrial production and Messrs. Hakkio, Hunter, Ms. Mester, employment were rising at appreciably Messrs. Rasche, Rolnick, and slower rates, though unemployment Rosenblum, Senior Vice remained very low. Core inflation Presidents, Federal Reserve appeared to be increasing, but very Banks of Kansas City, Chicago, gradually and in part reflecting the indi- Philadelphia, St. Louis, Minneapolis, and Dallas rect effects of higher energy costs. respectively Growth in private nonfarm payroll employment slowed in October from the Messrs. Fuhrer, Judd, and moderate September rate; since mid- Ms. Perelmuter, Vice Presidents, year, employment growth had been con- Federal Reserve Banks of Boston, San Francisco, and New York siderably lower than earlier in the year. respectively The fallofif in growth was concentrated in the manufacturing, retail trade, and By unanimous vote, the minutes of temporary help services industries. By the meeting of the Federal Open Market contrast, the pace of hiring was brisk in Committee held on October 3, 2000, real estate and construction and slowed were approved. only slightly in services industries other The Manager of the System Open than temporary help. The civilian unem- Market Account reported on recent ployment rate held at its current cyclical developments in foreign exchange mar- low of 3.9 percent in October. kets. There were no open market opera- Industrial production edged down in tions in foreign currencies for the Sys- October, after its growth had dropped tem's account in the period since the abruptly in the third quarter to a pace previous meeting. well below that recorded during the first The Manager also reported on devel- half of the year. Manufacturing output opments in domestic financial markets was unchanged in October; a further and on System open market transactions sharp decline in production of motor in government securities and federal vehicles followed on the heels of a thirdagency obligations during the period quarter slump, and the manufacture of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 251 other durables also fell. Expansion of industrial equipment slowed. Despite the output of high-tech equipment, which third-quarter weakness in expenditures, had been extraordinarily rapid earlier in recent data on orders for nondefense the year, slowed somewhat in October. capital goods suggested that spending With production unchanged in October, for many types of equipment remained the rate of capacity utilization in manu- on an upward trend. Data on construcfacturing fell to a level slightly below its tion put in place indicated that nonresilong-term average. dential building activity picked up con- Nominal retail sales edged up in siderably in the third quarter, with the October after rising substantially in the institutional, industrial, and office catethird quarter. Nondurable goods stores, gories recording solid gains. Market notably apparel, registered a sizable fundamentals, including rising property increase in October sales, but that gain values and low vacancy rates, suggested was more than offset by declines in that further expansion of office building outlays for durable goods, particularly was likely. Other commercial construcmotor vehicles. Consumer spending for tion, by contrast, remained weak, partly services continued to grow at a moder- reflecting the already substantial stock ate rate through September (latest data). of large retail stores and regional malls. Recent consumer buying patterns The pace of inventory investment seemed to reflect moderate growth of slowed considerably in the third quarter. real disposable income in recent quar- However, for a second consecutive quarters and still generally buoyant con- ter, the book value of inventories rose sumer sentiment. faster than sales, and inventory over- Single-family housing starts declined hangs were evident in some industries. further in the third quarter as a whole. In manufacturing, stock accumulation Nevertheless, the drop in interest rates edged up and the aggregate stockon fixed-rate mortgages since mid-May shipments ratio in September, though might have sparked the slight increase, still quite low by historic norms, was on balance, in single-family housing just above the middle of its range over starts in August and September and the the preceding twelve months. In the upturn in new home sales in the third wholesale sector, inventory accumulaquarter. After a strong first half, multi- tion dropped in the third quarter; howfamily starts dropped in the third quarter ever, sales declined and the aggregate despite low vacancy rates and rising inventory-sales ratio for the sector was apartment rents. at the top of its narrow range over the Business investment in durable equip- past year. Retail stockbuilding also ment and software decelerated sharply slowed in the third quarter, with much in the third quarter. In the high-tech of the drop reflecting reductions in area, spending on computers and related motor vehicle inventories at auto dealequipment as well as software recorded ers. The aggregate inventory-sales ratio further robust gains. However, expendi- for this sector edged lower and was near tures on communications equipment the middle of its range over the past declined after a half-year of very strong year. increases, and outlays for other types of The U.S. trade deficit in goods and equipment also softened; investment services narrowed in August after havin aircraft, autos, trucks, and construc- ing widened considerably in July; on tion and mining equipment fell, while balance, the trade deficit increased growth of spending on agricultural and somewhat from its second-quarter level. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

252 87th Annual Report, 2000 The value of exports grew in the July- with larger increases in benefits account- August period at about the same strong ing for much of the rise. Average hourly pace as that recorded for the second earnings of production or nonsuperquarter. The value of imports also rose visory workers increased at a slightly briskly over the two months, but at a higher rate in both October and the slightly lower rate than that of the sec- twelve months ended in October. ond quarter. The available information At its meeting on October 3, 2000, indicated that, on average, economic the Committee adopted a directive that expansion in the foreign industrial coun- called for maintaining conditions in tries slowed appreciably in the third reserve markets consistent with an quarter from the elevated pace during unchanged federal funds rate of about the first half of the year and that the 6V2 percent. In taking that action, the slowdown importantly reflected little or members noted that the growth of aggreno growth in Japan. In addition, eco- gate demand had moderated apprecianomic activity appeared to have deceler- bly, the prospects for a significant rise ated in many developing countries in the in inflation seemed quite limited for the third quarter but remained solid in most near term, and previous policy tightenof those nations. ing actions and the earlier rise in energy Incoming data continued to indicate prices had not yet exerted their full that price inflation had picked up some- restraining effects on demand. Neverthewhat. Consumer prices, as measured less, in the context of continuing subby the consumer price index (CPI), stantial pressures on labor resources and rose considerably in September (latest the potential effects of the previous rise data) after having edged down in in energy prices on inflation expecta- August; a sizable step-up in energy tions, members believed it was necesprices and a noticeable increase in core sary to remain on guard for signs of inflation contributed about equally to the rising inflation over the intermediate acceleration. Although the core measure term. As a result, they agreed that the of CPI prices accelerated noticeably in statement accompanying the announcethe twelve months ended in September ment of their decision should continue compared with the previous twelve- to indicate that the risks remained month period, personal consumption weighted mainly in the direction of risexpenditure (PCE) price inflation had ing inflation. been about steady. By contrast, core pro- Open market operations were directed ducer prices dropped a little in October throughout the intermeeting period and decelerated somewhat on a year- toward maintaining the federal funds over-year basis, though the deceleration rate at the Committee's targeted level was more than accounted for by a surge of 6V2 percent, and the average rate in tobacco prices during the year ended remained close to the intended level. in October 1999. With regard to labor Short- and intermediate-term market costs, the third-quarter rise in the interest rates registered small mixed employment cost index (ECI) for hourly changes over the intermeeting interval. compensation of private industry work- At longer maturities, Treasury coupon ers was smaller than the elevated yields drifted slightly lower, and rates increase of the previous quarter. How- on high-grade corporate securities ever, ECI compensation advanced con- changed little. However, growing marsiderably more during the year ended in ket concerns about the outlook for September than in the previous year, corporate earnings led to substantial Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 253 increases in interest rates on lower-rated growth since midyear was at about the investment-grade and high-yield bonds, same pace as in the first half of the and the early November survey of senior year. M3 also increased at a slower rate loan officers indicated that banks had in October, partly reflecting weakness tightened further their standards and in bank lending and declines in bank terms for business loans. The mixed holdings of securities. The growth of reports on corporate earnings, incoming domestic nonfinancial debt picked up information indicating slower growth in in September in association with an economic activity in the United States, increase in the pace of private borrowand wide swings in and uncertainty ing and a less rapid paydown of federal about the price of oil contributed to a debt. sharp drop in broad indexes of stock The staff forecast prepared for this market prices over the period in volatile meeting suggested that the economic trading. expansion, having slowed considerably, In foreign exchange markets, the would be sustained over the forecast trade-weighted value of the dollar horizon at a rate a little below the staff's increased slightly further on balance current estimate of the economy's over the intermeeting interval in terms potential output. The forecast anticiof the currencies of a broad group of pated that the expansion of domestic U.S. trading partners. Among the major final demand would be held back to foreign currencies, the dollar moved up some extent by the waning influence of against the euro and the Canadian and the positive wealth effects associated Australian dollars but edged down a bit with past outsized gains in equity prices in terms of the yen. The dollar rose to but also by some firming of conditions a record level against the euro in the in credit markets. As a result, growth weeks following the FOMC meeting, of spending on consumer durables was but the release of weaker-than-expected expected to be appreciably below that in U.S. economic growth data in late Octo- recent quarters and housing demand to ber was seen as possibly marking a shift trend slightly downward. By contrast, in the relative growth rates, and the dol- business fixed investment—notably, outlar subsequently gave up much of its lays for equipment and software—was intermeeting gains in terms of the euro. projected to remain relatively robust, The dollar also posted gains against an and brisk growth abroad would underindex of the currencies of other impor- gird the expansion of U.S. exports. Core tant trading partners, largely reflecting price inflation was projected to rise a conditions in some emerging econo- little over the forecast horizon, in part mies. Concerns about Argentina's recent as a result of higher import prices economic and fiscal performance and but largely as a consequence of further its external financing situation spilled increases in nominal labor compenover to other Latin American countries, sation gains that would not be fully offnotably Brazil and Mexico, and political set by growth in productivity. developments in Indonesia and the Phil- In the Committee's discussion of curippines depressed the currencies of those rent and prospective economic concountries. ditions, members commented that the The broad monetary aggregates decel- information that had become available erated in October. The slower growth since the previous meeting had reinof M2 followed strong expansion in forced earlier indications of appre- August and September, however, and ciable slowing in the expansion of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

254 87th Annual Report, 2000 economic activity. The cumulating evi- conditions for many businesses, includdence of moderating expansion seemed ing some further tightening since the especially clear in the information on meeting in early October, and decreases employment growth and manufacturing in the wealth of households. The slowoutput. Aggregate demand currently down in the pace of the expansion and appeared to be growing at a pace a little disappointing business earnings had fosbelow the rate of increase in the econo- tered more cautious attitudes on the part my's output potential, a configuration of lending institutions and investors. that could well persist in coming quar- Anecdotal comments from around the ters. Actual and expected shortfalls in country supported the indications from business profitability had led to tighter surveys of tightening terms and stancredit conditions for many borrowers dards at banks for business borrowers. and lower equity prices, which would At the same time, spreads in securities continue to restrain spending; moreover, markets had widened, most sharply on further pressure on profit margins, with obligations of borrowers rated below adverse effects on financial markets, investment grade, and as a result those business investment, and consumer borrowers faced higher credit costs. spending, was a distinct possibility. Lender caution and less receptive mar- Members observed, however, that eco- kets probably had contributed to connomic growth had rebounded sharply siderable weakening recently in overall from temporary slowdowns previously growth of credit to nonfinancial busiin the current expansion, and several nesses. Rising interest and energy costs noted the possibility that a less restric- in conjunction with restraint on the tive fiscal policy stance would be bol- prices of final output had depressed the stering demand in the years ahead. earnings and stock market valuations Although the softening in aggregate of many firms, notably in the high-tech demand moved in the direction of con- area, with adverse repercussions on taining potential inflation pressures, the their ability to borrow and willingness members continued to be concerned to invest and on the financial position of about the possibility that inflation would the households holding their equity edge higher. Even with demand growth shares. slower, labor markets were likely to Less hospitable conditions in finanremain unusually tight for some time, cial markets for a number of borrowers and in such circumstances labor costs and deteriorating profit margins had could begin to rise increasingly in contributed to a substantial moderation excess of even elevated gains in produc- in the growth of business fixed investtivity. Some members also commented ment in recent months, and anecdotal that energy prices might not trend lower reports of reductions in capital spending as soon as, or to the extent, now plans were consistent with continued expected by market analysts, and a few more moderate expansion in such outraised the prospect that the dollar might lays. The recent deceleration was espedepreciate from its currently elevated cially pronounced in expenditures for level and add to potential upward pres- high-tech equipment and software, sures on domestic prices over the fore- though such spending was still growing cast horizon. at a robust pace. It was suggested that A key factor underlying the economic the weakening expansion of expendioutlook was the emergence in recent tures in these capital goods might reflect months of less accommodative financial a surfeit in capacity following a period Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, November 255 of extraordinary growth in many demand was expected to edge lower in industries—for example, those related response to the same income and wealth to fiber optics. The available evidence effects that were influencing consumer did not indicate any material decrease in durables expenditures and to the the optimism of equity market analysts increase in mortgage interest rates that as a group regarding the outlook for had occurred on net over the past year. earnings over the long term. This sug- Current forecasts of appreciable gested that their contacts among busi- growth in foreign economic activity had ness executives remained fundamentally favorable implications for U.S. exports upbeat about the long-term prospects for and the nation's trade balance, but some productivity and earnings. In these cir- members expressed concern about cumstances, appreciable further growth financial and economic weakness in a in investment spending seemed to be in number of foreign economies. Failure to prospect for coming quarters, though remedy structural and other problems in undoubtedly at a slower pace than had some countries incurred the risk of ecobeen experienced on average in recent nomic and financial distress, with posquarters. sible spillover effects on other econo- Even limited slowing in the expan- mies and financial markets. While those sion of investment expenditures could risks seemed small, they might be diffibe expected to have retarding effects on cult to contain. The exchange value of the growth of consumer income and the dollar was another source of uncerspending. While such spending had held tainty for the outlook. In the view of up well in the third quarter, the limited some members, the dollar could well information available on more recent come under downward pressure as the developments suggested some soften- nation's current account deficits coning, though the data were not conclu- tinued to cumulate. A lower dollar sive. Factors cited in support of a some- would tend to have a favorable effect on what weaker trajectory in consumer the trade deficit but also would add to spending included the impact of inflationary pressures in the domestic elevated energy costs, the high debt economy. burdens of many households, and the Members continued to be concerned ebbing of the wealth effects from strong about the outlook for inflation. Meaearlier gains in stock market prices. sured increases in "headline" consumer Even so, anticipated increases in prices could be explained mostly as employment and income and still rela- a result of sharp advances in energy tively high levels of consumer con- prices, which many observers expected fidence were likely to support appre- to be reversed at some point. However, ciable further growth in consumer core consumer price measures also disspending, albeit probably at a rate some- played a gradual uptrend, perhaps only what below the brisk pace of the past in part as a consequence of the passfew years. through effects of persistently high Key indicators of housing activity had energy prices. Measures of labor comfluctuated considerably this year, but pensation appeared to be accelerating, the evidence of recent months pointed partly as a result of sharply rising health on balance to a mild softening in such benefit costs. To be sure, unit labor costs activity, a perception that was supported in the nonfinancial corporate sector by anecdotal reports from several areas had changed little over the past year, around the country. In general, housing undoubtedly reflecting impressive Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

256 87th Annual Report, 2000 further gains in productivity. Even of highly competitive conditions in most so, higher interest rates and increased domestic markets, the outlook for conenergy and other input costs were add- tinued robust gains in productivity, and ing to overall production expenses. To relatively subdued inflation expectations date, competitive pressures were con- were favorable factors in the inflation tinuing to inhibit the ability of many outlook, but the members continued to firms to pass on those costs, although a view the prospects as weighted on balsignificant exception was a number of ance in the direction of a gradual successful efforts to impose energy uptrend in core inflation. surcharges. In the Committee's discussion of pol- Looking to the future, however, the icy for the intermeeting period ahead, members generally agreed that the risks all the members supported a proposal to were in the direction of a heightening maintain an unchanged policy stance in inflation pressures despite their belief consistent with the federal funds rate that growth in overall demand now continuing to average about 6V2 percent. seemed to have declined to a more sus- Despite clear indications of a more modtainable pace and probably would con- erate expansion in economic activity, tinue to expand for a time at a rate persisting risks of heightened inflation below that of the economy's output pressures remained a policy concern, potential. The members believed that particularly in the context of an evident, growth in labor compensation was likely if gradual, uptrend in key measures of to remain under upward pressure from core inflation. Indeed, a few members the anticipated persistence of very tight commented that measures of core inflaconditions in labor markets that would tion already were near or slightly above enable wages to catch up to earlier gains levels that they viewed as acceptable for in labor productivity. Whether offsetting the longer run. Although overall finanincreases in the growth of labor produc- cial conditions had tightened during the tivity would materialize was open to course of recent months and currently question, in part because productivity appeared to be holding down the growth growth might tend to level out in the in spending, this added restraint was context of less ebullient expansion in likely to be necessary to contain inflabusiness investment. Another key factor tion pressures. In these circumstances, in the outlook for inflation was the all the members saw the maintenance of course of oil and other energy prices. a steady policy as the best course at this Thus far, increases in energy costs had juncture to promote the Committee's been reflected only marginally in core longer-run objectives of price stability consumer prices, and while there were and sustainable economic expansion. widespread market expectations of Still, growth had slowed more quickly declining oil prices in coming quarters, than many members had anticipated, a great deal of uncertainty, including the and financial market and other developpotential for more difficulties in the ments now seemed more likely to keep Middle East, surrounded the timing and pressures on resources from mounting extent of such an outcome. The longer over coming quarters. Under the circumrelatively high energy prices persisted, stances, the members focused at this of course, the greater might be their meeting on the potential desirability of imprint on both inflation expectations moving from a statement of risks and core prices. In sum, the moderation weighted toward rising inflation to one in economic expansion, the persistence that indicated a balanced view of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 257 risks to the Committee's goals of price run objectives, the Committee in the immedistability and sustainable economic ate future seeks conditions in reserve markets consistent with maintaining the growth. The members agreed that a federal funds rate at an average of around stronger case could be made for a shift 6!/2 percent. to a balanced risk statement than at the previous meeting. A few indicated that The vote also encompassed approval the decision was a close call for them, of the sentence below for inclusion in and several commented that develop- the press statement to be released shortly ments might be moving in a direction after the meeting: that would make a shift advisable in the relatively near future. Even so, they Against the background of its long-run were unanimous in concluding that such goals of price stability and sustainable ecoa change would be premature at this nomic growth and of the information currently available, the Committee believes that time. Concerns about the possibility of the risks are weighted mainly toward conrising inflation persisted. And while the ditions that may generate heightened inflamembers could see an increased risk tion pressures in the foreseeable future. of a marked slowing of growth relative to the rapid rate of expansion of the Votes for this action: Messrs. Greenspan, economy's potential, the degree to McDonough, Broaddus, Ferguson, Gramlich, Guynn, Kelley, Meyer, Moskow, and which growth in demand might remain Parry. Votes against this action: None. sufficiently damped to contain and offset Mr. Moskow voted as alternate member those inflation pressures was quite for Mr. Jordan. uncertain. Moreover, a shift in the Committee's published views might induce It was agreed that the next meeting of an undesirable softening in overall the Committee would be held on Tuesfinancial market conditions, which in day, December 19, 2000. itself would tend to add to inflation The meeting adjourned at 1:00 p.m. pressures. The members concluded that retaining a risk statement weighted Donald L. Kohn toward more inflation pressures would Secretary best represent their current thinking, but they believed it was desirable to provide Meeting Held on some recognition of the emergence of December 19, 2000 increased downside risks to the economic expansion in the statement to be A meeting of the Federal Open Market released after this meeting. Committee was held in the offices of the At the conclusion of this discussion, Board of Governors of the Federal the Committee voted to authorize and Reserve System in Washington, D.C., direct the Federal Reserve Bank of on Tuesday, December 19, 2000, at New York, until it was instructed other- 9:00 a.m. wise, to execute transactions in the System Account in accordance with the fol- Present: lowing domestic policy directive: Mr. Greenspan, Chairman Mr. McDonough, Vice Chairman Mr. Broaddus The Federal Open Market Committee Mr. Ferguson seeks monetary and financial conditions that Mr. Gramlich will foster price stability and promote sus- Mr. Guynn tainable growth in output. To further its long- Mr. Jordan Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

258 87th Annual Report, 2000 Mr. Kelley Mr. Lyon, First Vice President, Federal Mr. Meyer Reserve Bank of Minneapolis Mr. Parry Ms. Browne, Messrs. Hakkio, Hunter, Mr. Hoenig, Ms. Minehan, Kos, Ms. Mester, Messrs. Rolnick Messrs. Moskow and Poole, and Rosenblum, Senior Vice Alternate Members of the Federal Presidents, Federal Reserve Banks Open Market Committee of Boston, Kansas City, Chicago, New York, Philadelphia, Messrs. McTeer, Santomero, and Stern, Minneapolis, and Dallas Presidents of the Federal Reserve respectively Banks of Dallas, Philadelphia, and Minneapolis respectively Messrs. Cunningham and Gavin, Vice Presidents, Federal Reserve Mr. Kohn, Secretary and Economist Banks of Atlanta and St. Louis Mr. Bernard, Deputy Secretary respectively Ms. Fox, Assistant Secretary Mr. Gillum, Assistant Secretary By unanimous vote, the minutes of Mr. Mattingly, General Counsel the meeting of the Federal Open Market Mr. Baxter, Deputy General Counsel Ms. Johnson, Economist Committee held on November 15, 2000, Mr. Stockton, Economist were approved. The Manager reported on develop- Mr. Beebe, Ms. Cumming, ments in domestic financial markets and Messrs. Goodfriend, Howard, on System open market transactions Lindsey, Reinhart, Simpson, and in government securities and federal Sniderman, Associate Economists agency obligations during the period Mr. Fisher, Manager, System Open November 15, 2000, through Decem- Market Account ber 18, 2000. By unanimous vote, the Committee ratified these transactions. Mr. Winn, Assistant to the Board, The Manager of the System Open Office of Board Members, Market Account also reported on recent Board of Governors developments in foreign exchange markets. There were no open market opera- Mr. Ettin, Deputy Director, Division of Research and Statistics, tions in foreign currencies for the Sys- Board of Governors tem's account in the period since the previous meeting. Mr. Madigan, Associate Director, The Committee then turned to a dis- Division of Monetary Affairs, cussion of the economic situation and Board of Governors outlook and the implementation of monetary policy over the intermeeting Messrs. Oliner, Slifman, and Struckmeyer, Associate Directors, period ahead. Division of Research and The information reviewed at this Statistics, Board of Governors meeting provided evidence that economic activity, which had expanded at Mr. Whitesell, Assistant Director, an appreciably lower pace since mid- Division of Monetary Affairs, year, might have slowed further in Board of Governors recent months. Consumer spending and business purchases of equipment and Ms. Low, Open Market Secretariat Assistant, Division of Monetary software had decelerated markedly after Affairs, Board of Governors having registered extraordinary gains in Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 259 the first half of the year. Housing con- trending up, growth continued to slow struction, though still relatively firm, from the extraordinarily rapid increases was noticeably below its robust pace of earlier in the year. The weakening of earlier in the year. With final spend- of factory output in November was ing rising at a reduced rate, inventory reflected in a further decline in the rate overhangs had emerged in a number of of capacity utilization in manufacturing goods-producing industries, most vis- to a point somewhat below its long-term ibly in the motor vehicle sector. Manu- average. facturing production had declined as a Consumer spending appeared to be consequence, and the rate of expansion decelerating noticeably further in the in employment had moderated further. fourth quarter in an environment of Evidence on core price inflation was diminished consumer confidence, mixed; by one measure, it appeared to smaller job gains, and lower stock be increasing very gradually, in part prices. Retail sales were down somereflecting the indirect effects of higher what on balance in October and Novemenergy costs, but by another it had ber after a substantial third-quarter remained at a relatively subdued level. increase; sales of light vehicles dropped Growth in private nonfarm payroll over the two months, and growth in employment moderated a little further expenditures on other consumer goods on balance in October and November. slowed. Outlays on services continued Manufacturing payrolls changed little to grow at a moderate rate through Octoover the two months, and job gains in ber (latest data). the construction, retail trade, and ser- Against the backdrop of declining vices industries were smaller than those interest rates on fixed-rate mortgages, of earlier in the year. By contrast, the residential building activity had leveled pace of hiring remained relatively brisk out since midyear, and October starts in the finance, insurance, and real estate remained at the third-quarter level. Sales sectors. With growth in the demand for of new homes edged down in October, labor slowing, initial claims for unem- though they were still slightly above ployment insurance continued to trend their third-quarter level; sales of existupward, and the civilian unemployment ing homes slipped somewhat in October rate edged up to 4 percent in November, but were near the middle of their range its average thus far this year. over the past year. In the multifamily Industrial production declined slightly sector, starts moved up slightly further in October and November following in October, though they remained apprea moderate third-quarter increase that ciably below their elevated level during was well below the pace of expansion the first half of the year. Continuing recorded during the first half of the year. relatively low vacancy rates for multi- Utilities output surged in November in family units suggested that the prosresponse to unseasonably cold weather pects for additional construction were across much of the country while min- favorable. ing activity changed little. In manufac- Business investment in equipment turing, motor vehicle output was scaled and software increased at a sharply back further in November, and there also lower, though still relatively robust, rate were widespread declines in industries in the third quarter, and information on not directly affected by conditions in the shipments of nondefense capital goods motor vehicle sector. Although the pro- indicated another moderate increase in duction of high-tech equipment was still business investment in October. Ship- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

260 87th Annual Report, 2000 ments of communications, computing, third quarter. The value of exports conand office equipment were well above tinued to grow strongly in the latest their third-quarter averages, and ship- quarter, led by advances in exported ments of non-high-tech equipment machinery and industrial supplies. The turned up in October after having fallen value of imports rose at an even faster appreciably in earlier months. On the rate than exports, with increases in all downside, sales of medium and heavy major trade categories, especially industrucks declined further over October and trial supplies, semiconductors, and ser- November, and new orders for such vices. Economic growth in the foreign trucks remained weak. Investment in industrial countries slowed moderately nonresidential structures continued to in the third quarter, and the available rise briskly in October, and all the major information suggested a further reducsubcategories of construction put in tion in the fourth quarter. Economic place were up substantially on a year- expansion eased in the euro area despite over-year basis. Market fundamentals, continued strong growth of investment including rising property values and low and exports, as consumer spending vacancy rates, suggested that further appeared to be damped by earlier interexpansion of nonresidential building est rate increases and by the drain on activity, particularly office construction, spendable income of higher prices for was likely. oil and imported goods more generally. Inventory investment on a book-value In addition, weak consumption appeared basis picked up in October from the to be an important factor in continued third-quarter pace, and the aggregate sluggish economic growth in Japan. inventory-sales ratio edged up to its Economic activity also decelerated in highest level in the past twelve months. some developing countries in the third In manufacturing, sizable increases in quarter, with recent indicators suggeststocks were led by large accumulations ing a slowdown in expansion in many at producers of industrial and electrical parts of East Asia. machinery. As a result, the stock-sales Incoming data indicated that, on balratio for manufacturing reached its high- ance, price inflation had picked up only est level in a year; advances in stock- a little, if at all. Consumer prices, as sales ratios were widespread among measured by the consumer price index makers of durable goods while ratios (CPI) on a total and a core basis, rose remained high for a number of cate- mildly in October and November after a gories of nondurable products. At the sizable September increase, but on a wholesale level, inventory accumulation year-over-year basis core CPI prices inched up from its third-quarter rate, and increased noticeably more in the twelve the sector's inventory-sales ratio was at months ended in November than in the the top of its range for the past twelve previous twelve-month period. When months. Total retail stocks rose in measured by the personal consumption line with sales in October, and the expenditure (PCE) chain-type index, inventory-sales ratio for this sector also however, consumer price inflation was remained at the upper end of its range modest in both October (latest data) and over the past year. the twelve months ended in October, The U.S. trade deficit in goods and with little change year over year. At the services reached a new record high in producer level, core prices edged down September and on a quarterly average on balance in October and November; basis was up appreciably further in the moreover, producer inflation eased Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 261 somewhat on a year-over-year basis, conditions in some segments of finanthough the deceleration was more than cial markets, slower economic expanaccounted for by an earlier surge in sion, and public comments by Federal tobacco prices during the year ended in Reserve officials about the implications November 1999. With regard to labor of those developments, market expectacosts, average hourly earnings of pro- tions about the future course of the fedduction or nonsupervisory workers eral funds rate were revised down appreincreased in November at the slightly ciably over the intermeeting period, higher rate recorded in October. For the and market interest rates on Treasury twelve months ended in October, aver- and private investment-grade securities age hourly earnings rose somewhat declined somewhat over the intermeetmore than in the previous twelve ing interval. The weaker outlook for months. economic growth, coupled with growing At its meeting on November 15, market concerns about corporate earn- 2000, the Committee adopted a directive ings, weighed down equity prices and that called for maintaining conditions boosted risk spreads on lower-rated in reserve markets consistent with an investment-grade and high-yield bonds. unchanged federal funds rate of about Equity prices were quite volatile during 6V2 percent. In taking that action, the the intermeeting period, and reflecting members noted that despite clear indica- numerous dour reports on corporate tions of a more moderate expansion in earnings and incoming information indieconomic activity, persisting risks of cating slower growth in economic activheightened inflation pressures remained ity in the United States, broad indexes a concern, particularly in the context of stock market prices dropped considerof a gradual upward trend in core ably on balance over the intermeeting inflation. In these circumstances, a period. steady monetary policy was the best In foreign exchange markets, the means to promote price stability and trade-weighted value of the dollar edged sustainable economic expansion. While lower on balance over the intermeeting recognizing that growth was slowing interval in terms of the currencies of a more than had been anticipated and that broad group of U.S. trading partners. developments might be moving in a Among the major foreign currencies, the direction that would require a shift to dollar fell moderately against the euro a balanced risk statement, members but moved up by a roughly comparable agreed that such a change would be extent in terms of the yen. The dollar's premature. As a result, they agreed that decline against the euro reflected a the statement accompanying the an- growing perception that economic nouncement of their decision should expansion in the euro area would cool continue to indicate that the risks comparatively less than in the United remained weighted mainly in the direc- States. Correspondingly, the slide of the tion of rising inflation. yen seemed to be related to weak eco- Open market operations throughout nomic data, stagnant business sentiment, the intermeeting period were directed and political uncertainties in Japan. The toward maintaining the federal funds dollar posted a small gain against an rate at the Committee's targeted level index of the currencies of other imporof 6J/2 percent, and the average rate tant trading partners, largely reflecting remained close to the intended level. weaker financial conditions in some Against the background of deteriorating emerging economies. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

262 87th Annual Report, 2000 The broad monetary aggregates decel- horizon, partly as a result of higher erated further in November. The slow- import prices but also as a consequence ing growth of M2 in October and of some further increases in nominal November following strong expansion labor compensation gains that would not in August and September apparently be fully offset by the expected growth of reflected the moderating rates of productivity. increase in nominal income and spend- In the Committee's discussion of curing in recent months and perhaps some rent and prospective economic developpersisting effects of the rise in opportu- ments, members commented that recent nity costs earlier in the year. M3 growth statistical and anecdotal information slowed less than that of M2 in Novem- provided clear indications of significant ber, in part because of stepped-up issu- slowing in the expansion of business ance of large time deposits as banks activity and also pointed to appreciable reduced their reliance on funding from erosion in business and consumer conoverseas offices. The growth of domes- fidence. The deceleration in the econtic nonfinancial debt slowed in October omy had occurred from an unsustain- (latest data), reflecting a larger further ably high growth rate in the first half of paydown of federal debt and a reduced the year, and the resulting containment pace of private borrowing. in demand pressures on resources The staff forecast prepared for this already had improved the outlook for meeting suggested that the economic inflation. The question at this juncture expansion had slowed considerably, to a was whether the expansion would rate somewhat below the staff's current remain near its recent pace or continue estimate of the growth of the economy's to moderate. While the former still potential output, but that it would gradu- seemed to be the most likely outcome, ally gain strength over the next two the very recent information on labor years. The forecast anticipated that the markets, sales and production, business expansion of domestic final demand and consumer confidence, developments would be held back to some extent by in financial markets, and growth in forthe diminishing influence of the wealth eign economies suggested that the risks effects associated with past outsized to the economy had shifted rapidly and gains in equity prices but also by the perceptibly to the downside. Concerning relatively high interest rates and the the outlook for inflation, members comsomewhat stringent credit terms and mented that the upside risks clearly had conditions on some types of loans by diminished in the wake of recent develfinancial institutions. As a result, growth opments and that, with pressures on of spending on consumer durables was resources likely to abate at least a little, expected to be appreciably below that subdued inflation was a reasonable in recent quarters, and housing demand prospect. to be slightly weaker. Business fixed Weakening trends in production and investment, notably outlays for equip- employment were most apparent in the ment and software, was projected to manufacturing sector. There were wideremain relatively robust; growth abroad spread anecdotal reports of production would support the expansion of U.S. cutbacks, notably in industries related exports; and fiscal policy was assumed to motor vehicles, and of associated to continue its moderate expansionary declines in manufacturing employment. trend. Core price inflation was projected However, many of the factory workers to rise only slightly over the forecast losing their jobs were readily finding Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 263 employment elsewhere in what gener- substantially in recent months from very ally continued to be characterized as high rates of increase over an extended very tight labor markets across the period. The slowdown reflected a mix country. The softening in manufactur- of interrelated developments including ing reflected weak sales and prompt flagging growth in demand and tightenefforts to limit unwanted buildups in ing financial conditions in the form of inventories. Even so, business contacts declining equity prices and stricter credit reported currently undesired levels of terms for many business borrowers. The inventories in a range of industries, not re-evaluation of prospects was most proonly in motor vehicles. In the aggregate, nounced in the high-tech industries. The cutbacks in inventory investment or run- profitability of using and producing such offs of existing inventories accounted software and equipment had been overfor a significant part of the recent mod- estimated to a degree, and disappointing eration in the growth of the overall sales and a better appreciation of risks economy. had resulted in much slower growth in The slowing in the growth of con- production of such equipment and sharp sumer spending that had prompted much deterioration in the equity prices of of the backup in inventories was evident high-tech companies. At the same time, from a wide variety of information, nonresidential construction activity including anecdotal reports from vari- appeared to have been well maintained ous parts of the country. Consumer in many parts of the country, though sentiment seemed to have deteriorated there were reports of softening in some appreciably in recent weeks, though regions and of some reductions or delays from a very high level, and retail sales in planned projects. Against this backwere widely indicated to have softened ground, risks of further retrenchment in after a promising spurt early in the holi- capital spending persisted, but to date day season. Factors cited to account for there was no evidence to suggest that the relatively sudden emergence of this the underlying pace of advances in techweakness, and also as possible harbin- nology and related productivity growth gers of developments in coming quar- had abated. Over time, further increases ters, were the negative wealth effects of in productivity would undergird confurther declines in stock market prices, tinuing growth in demand for high-tech the impact of very high energy costs on equipment. In the nonresidential condisposable incomes, and some increase struction area, members noted that high in caution about the outlook for employ- occupancy rates and high rents were ment opportunities and incomes. The supportive elements in the construction extent to which such developments outlook. would persist and perhaps foster more With regard to the prospects for housaggressive retrenchment in consumer ing activity, members provided anecspending clearly was uncertain, but the dotal reports of some weakening in a members nonetheless anticipated that number of regions, though homebuildover time underlying employment and ing was holding up well in others. Housincome trends would be consistent with ing demand was, of course, responding further expansion in consumer expendi- to many of the same factors that were tures, though at a pace well below that affecting consumer spending, including of earlier in the year. the negative wealth effects of declining Growth in business expenditures for stock market prices. On the positive equipment and software had moderated side, further growth in incomes and Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

264 87th Annual Report, 2000 declines in mortgage rates were key sumer prices over coming quarters. elements of underlying strength for the Growth in economic activity at a pace housing sector. On balance, housing somewhat below that of the economy's construction at a pace near current lev- output potential would lessen pressures els appeared to be a reasonable prospect on labor and other resources from levels in association with forecasts of moder- that had, in the past few years, been ate growth in the overall economy. associated with at most a small uptick Growth in foreign economic activity in core inflation. Indications that rapid likely would continue to foster expan- growth in structural productivity would sion in U.S. exports, though members persist and widespread reports that noted that there were signs of softer strong competitive pressures in most business conditions in some foreign markets continued to inhibit business nations. In addition, members referred efforts to increase prices in the face of to some anecdotal evidence of increas- rising costs also were favorable factors ing concern among business contacts in the outlook. Further declines in oil about future prospects for exports of prices, as evidenced by quotations in manufactured goods. On the other hand, futures markets, would if realized have any depreciation in the foreign exchange effects not only on so-called headline value of the dollar as the economy inflation but would help hold down core slowed would help to bolster exports. prices over time. Despite previous Against the backdrop of slowing increases in headline inflation, survey economic growth, core inflation had and other measures of inflation expectaremained quiescent. Views regarding the tions continued to suggest that long-run outlook for inflation were somewhat inflation expectations had not risen and mixed, though all the members agreed might even have fallen a bit of late as that the risks of higher inflation had the economy softened. diminished materially. Nonetheless, In the Committee's discussion of polsome members noted that while recent icy for the intermeeting period ahead, all anecdotal reports pointed to a modest the members indicated that they could reduction in labor market strains in some support an unchanged policy stance, areas and industries, labor markets in consistent with a federal funds rate avergeneral were still very tight and likely aging about 6V2 percent. However, they would remain taut relative to historical also endorsed a proposal calling for a experience. In such circumstances, if shift in the balance of risks statement to structural productivity growth leveled be issued after this meeting to express out, worker efforts to catch up to past the view that most members believed increases in productivity could put pres- the risks were now weighted toward sures on labor compensation costs. The conditions that could generate economic latter could well be augmented by weakness in the foreseeable future. In sharply rising medical costs and by their evaluation of the appropriate polattempts to protect the purchasing power icy for these changing circumstances, of wages from the erosion caused by the the members agreed that the critical rise in energy prices. Further deprecia- issue was whether the expansion would tion of the dollar in relation to major stabilize near its recent growth rate or foreign currencies would add to import was continuing to slow. In the view of prices and domestic inflation pressures. almost all the members, the currently But there were also a number of reasons available information bearing on this for optimism about the outlook for con- issue was not sufficient to warrant an Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 265 easing at this point. Much of the usual weakness, with no intermediate issuance aggregative data on spending and of a balanced risks assessment, some employment, although to be sure avail- members observed that such a change able only with a lag, continued to sug- was likely to be viewed as a relatively gest moderate economic expansion. The rapid shift by some observers. The information pointing to further weak- revised statement of risks, even though ness was very recent and to an important it would not be associated with an easextent anecdotal. As a consequence, ing move, could strengthen expectations most of the members were persuaded regarding future monetary policy easing that a prudent policy course would be to an extent that was difficult to predict to await further confirmation of a weak- and could generate sizable reactions in ening expansion before easing, par- financial markets. At the same time, it ticularly in light of the high level of might raise questions about why the resource utilization and the experience Committee did not alter the stance of of recent years when several lulls in the policy. Nonetheless, the Committee's growth of the economy had been fol- reasons for not easing today were lowed by a resumption of very robust deemed persuasive by most members, economic expansion. Additional evi- while shifting its statement about ecodence of slowing economic growth nomic risks seemed clearly justified by might well materialize in the weeks recent developments. In one view, even immediately ahead—from the regular though the risks of a weakening econaggregated monthly data releases, but omy had increased, a statement of balalso from weekly readings on the labor anced risks would be preferable because market and reports from businesses on further moderation in the expansion the strength of sales and production— might well fail to materialize. and the members agreed that the Com- At the conclusion of this discussion, mittee should be prepared to respond the Committee voted to authorize and promptly to indications of further weak- direct the Federal Reserve Bank of New ness in the economy. Those few mem- York, until it was instructed otherwise, bers who expressed a preference for eas- to execute transactions in the System ing at this meeting believed that, with Account in accordance with the followunit labor costs and inflation expecta- ing domestic policy directive: tions contained, enough evidence of further weakness already existed to warrant The Federal Open Market Committee an immediate action. Nonetheless, they seeks monetary and financial conditions that will foster price stability and promote suscould accept a delay in light of pretainable growth in output. To further its longvailing uncertainties about the prospec- run objectives, the Committee in the immetive performance of the economy and diate future seeks conditions in reserve the intention of the Committee to act markets consistent with maintaining the promptly in coming weeks, including federal funds rate at an average of around 6]/2 percent. the possibility of an easing move early in the intermeeting period, should The vote also encompassed approval confirming information on weakening of the sentence below for inclusion in trends in the economy emerge. the press statement to be released shortly With regard to the consensus in favor after the meeting: of moving from an assessment of risks weighted toward rising inflation to one Against the background of its long-run that was weighted toward economic goals of price stability and sustainable eco- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

266 87th Annual Report, 2000 nomic growth and of the information cur- efforts in a number of industries to readrently available, the Committee believes that just inventories that were now deemed the risks are weighted mainly toward condito be too high, notably those related to tions that may generate economic weakness motor vehicles. Retail sales were apprein the foreseeable future. ciably below business expectations for Votes for this action: Messrs. Greenspan, the holiday season despite some pickup McDonough, Broaddus, Ferguson, Gram- in the latter half of December, apparlich, Guynn, Jordan, Kelley, Meyer, and ently largely induced by price discount- Parry. Votes against this action: None. ing, and sales of motor vehicles evidenced significant further weakness as This meeting adjourned at 1:35 p.m. the month progressed. Business confiwith the understanding that the next dence appeared to have deteriorated furregularly scheduled meeting of the ther since the December meeting amid Committee would be held on Tuesdaywidespread reports of reductions in Wednesday, January 30-31, 2001. planned production and capital spending. Elevated energy costs were continuing to drain consumer purchasing power Telephone Conference Meeting and were adding to the costs of many A telephone conference meeting was business firms, with adverse effects on held on January 3, 2001, for the purpose profits and stock market valuations. of considering a policy easing action. In Interacting with these developments keeping with the Committee's Rules of were forecasts of further declines in Organization, the members at the start business profits over coming quarters. of the meeting unanimously re-elected On the more positive side, housing Alan Greenspan as Chairman of the activity appeared to be responding to Federal Open Market Committee and lower mortgage interest rates, and on the William J. McDonough as Vice Chair- whole nonresidential construction activman. Their terms of office were ity seemed to be reasonably well mainextended for one year until the first tained. Moreover, while the expansion meeting of the Committee after Decem- had weakened and economic activity ber 31, 2001. By unanimous vote, the might remain soft in the near term, the Federal Reserve Bank of New York was longer-term outlook for reasonably susselected to execute transactions for the tained economic expansion, supported System Open Market Account until the by easier financial conditions and the adjournment of the first meeting of the response of investment and consump- Committee after December 31, 2001. tion to rising productivity and living At its meeting on December 19, 2000, standards, was still quite good. Inflation the Committee had contemplated the expectations appeared to be declining, possibility that ongoing economic and with businesses continuing to encounter financial developments might warrant a marked and even increased resistance reassessment of the stance of monetary to their efforts to raise prices. On balpolicy before the next scheduled meet- ance, the information already in hand ing in late January. Information that had indicated that the expansion clearly become available since the December was weakening and by more than had meeting tended to confirm that the been anticipated. In the circumstances, economic expansion had continued to prompt and forceful policy action sooner weaken. The manufacturing sector was and larger than expected by financial especially soft, reflecting apparent markets seemed called for. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Minutes of FOMC Meetings, December 267 Against this background, all the mem- nomic growth and of the information curbers supported a proposal for an easing rently available, the Committee believes that the risks are weighted mainly toward condiof reserve conditions consistent with a tions that may generate economic weakness reduction of 50 basis points in the fedin the foreseeable future. eral funds rate to a level of 6 percent. The Committee voted to authorize and Votes for this action: Messrs. Greendirect the Federal Reserve Bank of New span, McDonough, Ferguson, Gramlich, York, until it was instructed otherwise, Hoenig, Kelley, Meyer, Minehan, Moskow, and Poole. Votes against this to execute transactions in the System action: None. Account in accordance with the following domestic policy directive: Chairman Greenspan indicated that shortly after this meeting the Board of The Federal Open Market Committee Governors would consider pending seeks monetary and financial conditions that will foster price stability and promote sus- requests by several Federal Reserve tainable growth in output. To further its long- Banks to reduce the discount rate by run objectives, the Committee in the imme- 25 basis points. At the time of this diate future seeks conditions in reserve conference call meeting, no pending markets consistent with a reduction in the requests for a 50 basis point reduction federal funds rate to an average of around 6 percent. were outstanding, but the press release would indicate that the Board would be The vote encompassed approval of prepared to consider requests for further the sentence below for inclusion in the reductions of 25 basis points if they press statement to be released shortly were received. after the meeting: Donald L. Kohn Against the background of its long-run Secretary goals of price stability and sustainable eco- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

269 Litigation During 2000 the Board of Governors cuit, filed June 27, 2000), appellant was a party in eighteen lawsuits or sought review of a district court order appeals filed that year and was a party in enforcing an administrative subpoena nine other cases pending from previous issued by the Board. On June 30, 2000, years, for a total of twenty-seven cases; the court of appeals denied the appelin 1999, the Board had been a party in a lant's motion for a stay of the district total of twenty-three cases. One of the court order, and on December 1, 2000, actions filed in 2000 raised questions the court dismissed the case on appelunder the Bank Holding Company Act. lant's motion. As of December 31, 2000, sixteen cases Board of Governors v. Pharaon, were pending. No. 91-CIV-6250 (S.D. New York, filed September 17, 1991), is an action Judicial Review of Board Orders brought to recover assets of an indiunder the Bank Holding vidual subject to a civil money penalty Company Act imposed by the Board. The case was remanded from the U.S. Court of Dime Bancorp, Inc. v. Board of Gover- Appeals for the Second Circuit for deternors, No. 00-4249 (2nd Circuit, filed mination of the penalty amount follow- December 11, 2000), is a petition for ing the court of appeals' determination review of a Board order dated Septem- requiring a 10 percent surcharge and ber 27, 2000, approving the applications prejudgment interest on the penalty of North Fork Corporation, Inc., imposed. Melville, New York, to acquire control of Dime Bancorp, Inc. and to thereby Other Actions acquire its wholly owned subsidiary, The Dime Savings Bank of New York, Howe v. Bank for International Settle- FSB, both of New York, New York ments, No. 00CV12485 RCL (D. Massa- (86 Federal Reserve Bulletin 767). chusetts, filed December 7, 2000), is an Irontown Housing Corp. v. Board of action seeking damages in connection Governors, No. 99-9549 (10th Cir- with gold market activities and the cuit, filed December 27, 1999), was a repurchase of privately owned shares of petition for review of a Board order the Bank for International Settlements. dated December 13, 1999, approving the Barnes v. Reno, No. l:00CV02900 merger of First Security Corporation and (D. District of Columbia, filed Decem- Zions Bancorporation, both of Salt Lake ber 4, 2000), is a civil rights action City, Utah (86 Federal Reserve Bulletin naming a Federal Reserve employee as 122). On June 28, 2000, the court dis- a defendant. missed the petition for review. Guerrero v. United States, No. 99- 6771 (E.D. California, service effected November 21, 2000), is a prisoner Litigation under the Financial suit naming the Federal Reserve as a Institutions Supervisory Act defendant. In Board of Governors v. Interfinancial El Bey v. United States, No. 00-5293 Services, Ltd., No. 00-5233 (D.C. Cir- (D.C. Circuit, filed August 31, 2000), is Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

270 87th Annual Report, 2000 an appeal from a district court order blowing. The action was dismissed on dismissing a pro se action against the December 15, 2000. Federal Reserve and other defendants as Bennett v. Federal Bureau of Investilacking an arguable basis in law. gation et al, No. H-00-0707 (S.D. Sedgwick v. Board of Governors, Texas, filed March 1, 2000), was an No. 00-16525 (9th Circuit, filed action alleging Board interference with August 16, 2000), is an appeal of the a private investment. On October 20, district court's dismissal of an action 2000, the district court dismissed the under the Federal Tort Claims Act action. alleging violation of bank supervision Albrecht v. Board of Governors, requirements. No. OO-CV-317 (CKK) (D. District of Individual Reference Services Group, Columbia, filed February 18, 2000), is Inc. v. Board of Governors et ah, an action challenging the method of No. 00-CV-1828 (ESH) (D. District of funding of the retirement plan for cer- Columbia, filed July 28, 2000), is an tain Board employees. action under the Administrative Proce- Folstad v. Board of Governors, dure Act challenging a portion of an No. 00-1056 (6th Circuit, filed Janinteragency rule regarding privacy of uary 15, 2000), was an appeal of a disconsumer financial information. The trict court order granting summary judgaction has been consolidated with a ment to the Board on a Freedom of separate action, Trans Union LLC v. Information Act case. On October 26, Board of Governors et al, No. 00-CV- 2000, the court of appeals affirmed the 2087 (ESH) (D. District of Columbia, district court order. filed August 30, 2000), challenging the Toland v. Internal Revenue Service, same rule. Federal Reserve System, et al., No. CV- Reed Elsevier Inc. v. Board of Gover- S-99-1769-JBR-RJJ (D. Nevada, filed nors, No. 00-1289 (D.C. Circuit, filed December 29, 1999), was a challenge to June 30, 2000), is a petition for review income taxation and Federal Reserve of an interagency rule regarding privacy notes. On May 1, 2000, the court of consumer financial information. granted the government's motion to dis- Mann v. Greenspan, No. CIV-00- miss the action. 754-C (W.D. Oklahoma, filed April 18, Wasserman v. Board of Governors, 2000), was an employment discrimina- No. 99-6290 (2nd Circuit, filed Octotion action by an employee of a Federal ber 27, 1999), was an appeal of the Reserve Bank. On May 10, 2000, the denial of various post-dismissal motions plaintiff voluntarily dismissed the Board following the voluntary dismissal of as a party. the appellant's district court action. On Bettersworth v. Board of Governors, January 19, 2000, the court of appeals No. 00-50262 (5th Circuit, filed dismissed the case. April 14, 2000), is an appeal of the Artisv. Greenspan, No. l:99CV02073 district court's February 17, 2000, dis- (EGS) (D. District of Columbia, filed missal of appellant's Privacy Act August 3, 1999), is an employment disclaims. crimination action. Hunter v. Board of Governors, Sheriff Gerry Ali v. U.S. State Depart- No. OO-CV-735 (D. District of Colum- ment, No. 99-7438 (CD. California, bia, filed April 5, 2000), was an action filed July 21, 1999), was an action relatclaiming retaliation for alleged whistle- ing to impounded bank drafts. On Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Litigation 271 December 23, 1999, the court stayed In Fraternal Order of Police v. Board the action pending plaintiff's retaining of Governors, No. 98-3116 (D. District counsel or returning to the United of Columbia, filed December 22, 1998), States. plaintiff seeks a declaratory judgment Kerr v. Department of the Treasury, regarding the Board's labor practices. No. 99-16263 (9th Circuit, filed Hunter v. Board of Governors, April 28, 1999), was an appeal of the No. l:98CV02994 (TFH) (D. District district court's dismissal of an action of Columbia, filed December 9, 1998), challenging income taxation and Fed- was an action under the Freedom of eral Reserve notes. The district court's Information Act, the Privacy Act, and dismissal was affirmed on July 13, 2000. the First Amendment. On May 10, 2000, Nelson v. Greenspan, No. 1:99- the district court granted the Board's CV00215 (EGS) (D. District of Colum- motion for summary judgment, and on bia, filed January 28, 1999), is an August 25, 2000, it denied plaintiff's employment discrimination complaint. request for attorney fees. • 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 275 Board of Governors of the Federal Reserve System December 31, 2000 Members Term expires January 31, ALAN GREENSPAN, of New York, Chairman1 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 Rosanna Pianalto-Cameron, Special Karen H. Johnson, Director Assistant to the Board David H. Howard, Deputy Director David Skidmore, Special Assistant Vincent R. Reinhart, Deputy Director to the Board Thomas A. Connors, Associate Director Diane E. Werneke, Special Assistant Dale W. Henderson, Associate Director to the Board Donald B. Adams, Senior Adviser Richard T. Freeman, Assistant Director LEGAL DIVISION William L. Helkie, Assistant Director J. Virgil Mattingly, Jr., General Counsel Steven B. Kamin, Assistant Director Scott G. Alvarez, Associate General Ralph W. Tryon, Assistant Director Counsel Richard M. Ashton, Associate General Counsel DIVISION OF MONETARY AFFAIRS Kathleen M. O'Day, Associate General Donald L. Kohn, Director Counsel David E. Lindsey, Deputy Director Ann Misback, Assistant General Counsel Brian F. Madigan, Associate Director Sandra L. Richardson, Assistant General Richard D. Porter, Deputy Associate Counsel Director Stephen L. Siciliano, Assistant General William C. Whitesell, Assistant Director Counsel Normand R.V. Bernard, Special Assistant {Catherine H. Wheatley, Assistant General to the Board Counsel 1. The designations as Chairman and Vice Chairman expire on June 20, 2004, and October 5, 2003, respectively, unless the service of these members of the Board shall have terminated sooner. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

276 87th Annual Report, 2000 Board of Governors—Continued DIVISION OF RESEARCH Barbara J. Bouchard, Assistant Director AND STATISTICS Angela Desmond, Assistant Director David J. Stockton, Director James A. Embersit, Assistant Director Edward C. Ettin, Deputy Director Charles H. Holm, Assistant Director William R. Jones, Associate Director Heidi Willman Richards, Assistant Director Myron L. Kwast, Associate Director David M. Wright, Assistant Director Stephen D. Oliner, Associate Director Sidney M. Sussan, Adviser Patrick M. Parkinson, Associate Director William C. Schneider, Jr., Project Director, Lawrence Slifman, Associate Director National Information Center Charles S. Struckmeyer, Associate Director Martha S. Scanlon, Deputy DIVISION OF CONSUMER Associate Director AND COMMUNITY AFFAIRS Joyce K. Zickler, Deputy Dolores S. Smith, Director Associate Director Glenn E. Loney, Deputy Director Stuart Wayne Passmore, Assistant Director Sandra F. Braunstein, Assistant Director David L. Reifschneider, Assistant Director Maureen P. English, Assistant Director Janice Shack-Marquez, Assistant Director Adrienne D. Hurt, Assistant Director Alice Patricia White, Assistant Director Irene Shawn McNulty, Assistant Director Glenn B. Canner, Senior Adviser David S. Jones, Senior Adviser DIVISION OF FEDERAL RESERVE BANK Thomas D. Simpson, Senior Adviser OPERATIONS AND PAYMENT SYSTEMS Louise L. Roseman, Director DIVISION OF BANKING SUPERVISION Paul W. Bettge, Associate Director AND REGULATION Kenneth D. Buckley, Assistant Director Richard Spillenkothen, Director Joseph H. Hayes, Jr., Assistant Director Stephen C. Schemering, Deputy Director Jeffrey C. Marquardt, Assistant Director Herbert A. Biern, Senior Associate Edgar A. Martindale, Assistant Director Director Marsha W. Reidhill, Assistant Director Roger T. Cole, Senior Associate Director Jeff J. Stehm, Assistant Director William A. Ryback, Senior Associate Director Gerald A. Edwards, Jr., Associate Director OFFICE OF STAFF DIRECTOR FOR MANAGEMENT Stephen M. Hoffman, Jr., Associate Stephen R. Malphrus, Staff Director for Director Management James V. Houpt, Associate Director Jack P. Jennings, Associate Director MANAGEMENT DIVISION Michael G. Martinson, Associate Director Stephen J. Clark, Associate Director, Molly S. Wassom, Associate Director Finance Function Howard A. Amer, Deputy Associate Darrell R. Pauley, Associate Director, Director Human Resources Function Norah M. Barger, Deputy Associate Director Christine M. Fields, Assistant Director, Betsy Cross, Deputy Associate Director Human Resources Function Richard A. Small, Deputy Associate Sheila Clark, Equal Employment Opportunity Programs Director Director Deborah P. Bailey, Assistant Director Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 211 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 Maureen T. Hannan, Associate Director Tillena G. Clark, Assistant Director OFFICE OF THE INSPECTOR GENERAL Geary L. Cunningham, Assistant Director Barry R. Snyder, Inspector General Po Kyung Kim, Assistant Director Donald L. Robinson, Deputy Inspector Raymond H. Massey, Assistant Director General Sharon L. Mowry, Assistant Director Day W. Radebaugh, Jr., Assistant Director Federal Open Market Committee December 31,2000 Members ALAN GREENSPAN, Chairman, Board of Governors WILLIAM J. McDONOUGH, Vice Chairman, President, Federal Reserve Bank of New York J. ALFRED BROADDUS, JR., President, Federal Reserve Bank of Richmond ROGER W. FERGUSON, JR., Board of Governors EDWARD M. GRAMLICH, Board of Governors JACK GUYNN, President, Federal Reserve Bank of Atlanta JERRY L. JORDAN, President, Federal Reserve Bank of Cleveland EDWARD W. KELLEY, JR., Board of Governors LAURENCE H. MEYER, Board of Governors ROBERT T. PARRY, President, Federal Reserve Bank of San Francisco Alternate Members THOMAS M. HOENIG, President, Federal Reserve Bank of Kansas City CATHY E. MINEHAN, President, Federal Reserve Bank of Boston MICHAEL H. MOSKOW, President, Federal Reserve Bank of Chicago WILLIAM POOLE, President, Federal Reserve Bank of St. Louis JAMIE B. STEWART, JR., 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, DAVID J. STOCKTON, Assistant Secretary Economist Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

278 87th Annual Report, 2000 Federal Open Market Committee—Continued JACK H. BEEBE, DAVID H. HOWARD, Associate Economist Associate Economist CHRISTINE M. CUMMING, DAVID E. LINDSEY, Associate Economist Associate Economist ROBERT A. EISENBEIS, THOMAS D. SIMPSON, Associate Economist Associate Economist MARVIN S. GOODFRIEND, MARK S. SNIDERMAN, Associate Economist Associate Economist PETER R. FISHER, Manager, System Open Market Account During 2000 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 31,2000 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 Chase & Co., Incorporated, New York, New York District 3—RONALD L. HANKEY, President and Chief Executive Officer, Adams County National Bank, Gettysburg, Pennsylvania District 4—DAVID A. DABERKO, Chairman and Chief Executive Officer, National City Corporation, Cleveland, Ohio District 5—L.M. BAKER, JR., Chairman and Chief Executive Officer, Wachovia Corporation, Winston Salem, North Carolina District 6—WILLIAM G. SMITH, JR., President and Chief Executive Officer, Capital City Bank Group, Tallahassee, Florida 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—R. SCOTT JONES, President and Chief Executive Officer, Signal Financial Corporation, Mendota Heights, Minnesota District 10—C.Q. CHANDLER, Chairman and Chief Executive Officer, INTRUST Financial Corporation, Wichita, Kansas District 11—RICHARD W. EVANS, JR., Chairman and Chief Executive Officer, Frost National Bank, San Antonio, Texas District 12—WALTER A. DODS, JR., Chairman and Chief Executive Officer, Bane West Corporation, Honolulu, Hawaii Officers DONALD A. WARNER III, President NORMAN R. BOBINS, 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 279 Federal Advisory Council—Continued The Federal Advisory Council met on Feb- from each of the twelve Federal Reserve ruary 3-4, May 4-5, September 7-8, and Districts, is required by the Federal Reserve November 2-3, 2000. The 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 4, May 5, September 8, and Novem- consult with, and advise, the Board on all ber 3, 2000. The council, which is composed matters within the jurisdiction of the Board, of one representative of the banking industry Consumer Advisory Council December 31, 2000 Members WALTER J. BOYER, Chairman, The Diamond Group, Dallas, Texas DOROTHY BROADMAN, Senior Vice President, Cal Fed Bank, San Francisco, California TERESA A. BRYCE, General Counsel, Nexstar, St. Louis, Missouri MALCOLM BUSH, President, Woodstock Institute, Chicago, Illinois ROBERT M. CHEADLE, Chief Executive Officer, Indian Territory Development, Ada, Oklahoma 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 LESTER WM. FIRSTENBERGER, Deputy General Counsel, American General Finance, Evansville, Indiana JOHN C. GAMBOA, Executive Director, The Greenlining Institute, San Francisco, California KARLA S. IRVINE, Executive Director, Housing Opportunities Made Equal of Greater Cincinnati, Inc., Cincinnati, Ohio WILLIE M. JONES, Senior Vice President, The Community Builders, Inc., Boston, Massachusetts M. DEAN KEYES, Senior Vice President, Firstar, St. Louis, Missouri 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 JEREMY NOWAK, Chief Executive Officer, The Reinvestment Fund, Philadelphia, Pennsylvania MARTA RAMOS, Vice President and Community Reinvestment Act Officer, Banco Popular de Puerto Rico, San Juan, Puerto Rico Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

280 87th Annual Report, 2000 Consumer Advisory Council—Continued DAVID L. RAMP, Assistant Attorney General, State of Minnesota, St. Paul, Minnesota RUSSELL W. SCHRADER, Senior Vice President and Assistant General Counsel, Visa U.S.A., San Francisco, California ROBERT G. SCHWEMM, Ashland Professor of Law, University of Kentucky, Lexington, Kentucky DAVID J. SHIRK, Senior Manager, Lending Systems Framework, Inc., Tarrytown, New York 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 DWIGHT GOLANN, Chair LAUREN ANDERSON, Vice Chair Professor of Law, Executive Director, Suffolk University Law School, Neighborhood Housing Services Boston, Massachusetts of New Orleans, Inc., New Orleans, Louisiana 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 30, June 22, and October 26, 2000. 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, 2000 Members JAMES C. BLAINE, President, State Employees' Credit Union, Raleigh, North Carolina LAWRENCE L. BOUDREAUX III, President and Chief Executive Officer, Fidelity Homestead Association, New Orleans, Louisiana TOM R. DORETY, President and Chief Executive Officer, Suncoast Schools Federal Credit Union, Tampa, Florida 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 CORNELIUS D. MAHONEY, Chairman, President, and Chief Executive Officer, Woronco Savings Bank, Westfield, Massachusetts KATHLEEN E. MARINANGEL, Chair, President, and Chief Executive Officer, McHenry Savings Bank, McHenry, Illinois Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 281 Thrift Institutions Advisory Council—Continued 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 MARK H. WRIGHT, President and Chief Executive Officer, USAA Federal Savings Bank, San Antonio, Texas CLARENCE ZUGELTER, President, Chief Executive Officer, and Chairman, First Federal Bank, Kansas City, Missouri Officers F. WELLER MEYER, President THOMAS S. JOHNSON, Vice President The members of the Thrift Institutions unions, savings and loan associations, and Advisory Council met with the Board of savings banks, consults with, and advises, Governors on February 11, July 14, and the Board on issues pertaining to the thrift December 1, 2000. The council, which is industry and on various other matters within composed of representatives from credit the Board's jurisdiction. Officers of Federal Reserve Banks and Branches December 31,2000 Chairmanl President Vice President BANK or Branch Deputy Chairman First Vice President in charge of Branch BOSTON2 William C. Brainard Cathy E. Minehan William O. Taylor Paul M. Connolly NEW YORK2 Peter G. Peterson William J. McDonough Charles A. Jamie B. Stewart, Jr. Heimbold, Jr. Buffalo Bal Dixit Barbara L.Walter3 PHILADELPHIA Joan Carter Anthony M. Santomero Charisse R. Lillie William H. Stone, Jr. CLEVELAND2 David H. Hoag Jerry L. Jordan Robert W. Mahoney Sandra Pianalto Cincinnati George C. Juilfs Barbara B. Henshaw Pittsburgh John T. Ryan III Robert B. Schaub RICHMOND2 Jeremiah J. Sheehan J. Alfred Broaddus, Jr. Wesley S. Walter A. Varvel Williams, Jr. Baltimore George L. Russell, Jr. William J. Tignanelli3 Charlotte Joan H. Zimmerman Dan M. Bechter3 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

282 87th Annual Report, 2000 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 D. Bruce Carr Andre T. Anderson Jacksonville William E. Flaherty ' Robert J. Slack Miami Kaaren Johnson-Street James T. Curry III Nashville Frances F. Marcum MelvynK. Purcell3 New Orleans Dwight H. Evans Robert J. Musso3 CHICAGO2 Arthur C. Martinez Michael H. Moskow Robert J. Darnall William C. Conrad Detroit Timothy D. Leuliette David R. Allardice3 ST. LOUIS Susan S. Elliott William Poole Charles W. Mueller W. LeGrande Rives Little Rock Vick M. Crawley Robert A. Hopkins Louisville J. Stephen Barger Thomas A. Boone Mike P. Sturdivant, Jr. Martha Perine Beard Memphis James J. Howard Gary H. Stern MINNEAPOLIS Ronald N. Zwieg James M. Lyon William P. Underriner Samuel H. Gane Helena Jo Marie Dancik Thomas M. Hoenig KANSAS CITY Terrence P. Dunn Richard K. Rasdall Kathryn A. Paul CarlM. Gambs3 Denver Patricia B. Fennell Kelly J. Dubbert Gladys Styles Johnston Steven D. Evans Oklahoma City Omaha Roger R. Robert D. McTeer, Jr. DALLAS Hemminghaus Helen E. Holcomb H.B. Zachry, Jr. El Paso Beauregard Brite White 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. Mullinix4 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 283 Conference of Chairmen Richard K. Rasdall, Jr., First Vice President of the Federal Reserve Bank of Kan- The chairmen of the Federal Reserve Banks sas City, served as chair of the conference are organized into the Conference of Chair- in 2000, and Paul M. Connolly, First Vice men, which meets to consider matters of President of the Federal Reserve Bank of common interest and to consult with, and Boston, served as its vice chair. Leesa M. advise, the Board of Governors. Such meet- Guy ton, of the Federal Reserve Bank of ings, attended also by the deputy chairmen, Kansas City, served as its secretary, and were held in Washington on May 31 and David Park, of the Federal Reserve Bank of June 1, and on November 29 and 30, 2000. Boston, served as its assistant secretary. The members of the Executive Committee of the Conference of Chairmen during 2000 were Jo Marie Dancik, chair; John F. Directors Wieland, vice chair; and Peter G. Peterson, The following list of directors of Federal member. Reserve Banks and Branches, current as of On November 30, 2000, the conference December 31, 2000, shows for each director elected its Executive Committee for 2001; the class of directorship, the director's prinit named John F. Wieland as chair, Peter G. cipal organizational affiliation, and the date Peterson as vice chair, and Charisse R. Lillie the director's term expires. Each Federal as the third member. Reserve Bank has a nine-member board: three Class A and three Class B directors, Conference of Presidents who are elected by the stockholding member banks, and three Class C directors, who are The presidents of the Federal Reserve Banks appointed by the Board of Governors of the are organized into the Conference of Presi- Federal Reserve System. dents, which meets periodically to consider matters of common interest and to consult Class A directors represent the stockholdwith, and advise, the Board of Governors. ing member banks in each Federal Reserve Jerry L. Jordan, President of the Federal District. Class B and Class C directors repre- Reserve Bank of Cleveland, served as chair sent the public and are chosen with due, but of the conference in 2000, and J. Alfred not exclusive, consideration to the interests Broaddus, Jr., President of the Federal of agriculture, commerce, industry, services, Reserve Bank of Richmond, served as its labor, and consumers; they may not be offivice chair. Stephen J. Ong, of the Federal cers, directors, or employees of any bank or Reserve Bank of Cleveland, served as its bank holding company. In addition, Class C secretary, and Betty M. Fahed, of the Federal directors may not be stockholders of any Reserve Bank of Richmond, served as its bank or bank holding company. assistant secretary. For the election of Class A and Class B On October 31, 2000, the conference directors, the Board of Governors classifies elected J. Alfred Broaddus, Jr., as its chair the member banks of each Federal Reserve for 2001-02, and Michael H. Moskow, Presi- District into three groups. Each group, which dent of the Federal Reserve Bank of Chi- comprises banks with similar capitalization, cago, as its vice chair. elects one Class A director and one Class B director. Annually, the Board of Governors Conference of First designates one of the Class C directors as chair of the board of each District Bank, and Vice Presidents it designates another Class C director as The Conference of First Vice Presidents of deputy chair. the Federal Reserve Banks was organized in Federal Reserve Branches have either five 1969 to meet periodically for the consider- or seven directors, a majority of whom are ation of operations and other matters. appointed by the parent Federal Reserve Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

284 87th Annual Report, 2000 Bank; the others are appointed by the Board For the name of the chair and deputy chair of Governors. One of the directors appointed of the board of directors of each Reserve by the Board is designated annually as chair Bank and of the chair of each Branch, see of the board of that Branch in a manner the preceding table, "Officers of Federal prescribed by the parent Federal Reserve Reserve Banks and Branches." Bank. Directors of Federal Reserve Banks and Branches Term expires Dec. 31 DISTRICT l—BOSTON Class A Edwin N. Clift President and Chief Executive Officer, 2000 Merrill Merchants Bank, Bangor, Maine Terrence Murray Chairman and Chief Executive Officer, 2001 FleetBoston Financial Corporation, Boston, Massachusetts Paul M. Ferguson President and Chief Executive Officer, 2002 Pemigewasset National Bank, Plymouth, New Hampshire Class B Edward Dugger III President and Chief Executive Officer, 2000 UNC Partners, Inc., Boston, Massachusetts Robert R. Glauber Chief Executive Officer, National Association 2001 of Securities Dealers, Inc., Washington, D.C. Orit Gadiesh Chairman, Bain & Company, Boston, Massachusetts 2002 Class C James J. Norton Vice President, AFL-CIO, Washington, D.C. 2000 William C. Brainard Professor of Economics, Yale University, 2001 New Haven, Connecticut William O. Taylor Chairman Emeritus, The Boston Globe, 2002 Boston, Massachusetts DISTRICT 2—NEW YORK Class A Walter V. Shipley Retired Chairman, The Chase Manhattan 2000 Corporation, New York, New York T. Joseph Semrod Chairman and Chief Executive Officer, 2001 Summit Bancorp, Princeton, New Jersey George W. Hamlin IV President and Chief Executive Officer, 2002 The Canandaigua National Bank and Trust Company, Canandaigua, New York Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 285 Term expires Dec. 31 DISTRICT 2, NEW YORK—Continued Class B Eugene R. McGrath Chairman, President, and Chief Executive 2000 Officer, Consolidated Edison Company of New York, Inc., New York, New York Ronay Menschel President, Phipps Houses, New York, New York 2001 Ann M. Fudge Executive Vice President, Kraft Foods, Inc., and 2002 President, Coffee & Cereals Division, Tarrytown, New York Class C 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, 2001 New York, New York Albert J. Simone President, Rochester Institute of Technology, 2002 Rochester, New York BUFFALO BRANCH Appointed by the Federal Reserve Bank William E. Swan President and Chief Executive Officer, 2000 First Niagara Bank, Lockport, New York Maureen Torrey Marshall ...Co-Owner, Torrey Farms, Inc., Elba, New York 2000 Kathleen R. Whelehan Executive Vice President, Consumer Finance 2001 Division, HSBC, Buffalo, New York Geraldine C. Ochocinska ....Director, Region 9, UAW, Buffalo, New York 2002 Appointed by the Board of Governors 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 Patrick P. Lee Chairman and Chief Executive Officer, 2002 International Motion Control, Inc., Buffalo, New York DISTRICT 3—PHILADELPHIA Class A Harry Elwell III President and Chief Executive Officer, 2000 First National Bank of Absecon, Absecon, New Jersey Rufus A. Fulton, Jr. Chairman, President, and Chief Executive Officer, 2001 Fulton Financial Corporation, Lancaster, Pennsylvania Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

286 87th Annual Report, 2000 Term expires Dec. 31 DISTRICT 3, Class A—Continued Frank Kaminski, Jr. Chairman, President, and Chief Executive Officer, 2002 Atlantic Central Bankers Bank, Camp Hill, Pennsylvania Class B Robert D. Burns President and Chief Executive Officer, 2000 Burris Foods, Inc., Milford, Delaware Howard E. Cosgrove Chairman and Chief Executive Officer, 2001 Conectiv, Wilmington, Delaware Robert E. Chappell Chairman and Chief Executive Officer, 2002 Penn Mutual Life Insurance Co., Philadelphia, Pennsylvania Class C Glenn A. Schaeffer President, Pennsylvania Building and Construction 2000 Trades Council, Harrisburg, Pennsylvania Charisse R. Lillie Partner, Ballard Spahr Andrews & Ingersoll, 2001 Philadelphia, Pennsylvania Joan Carter President and Chief Operating Officer, 2002 UM Holdings Ltd., Haddonfield, New Jersey DISTRICT 4—CLEVELAND Class A 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 Tiney M. McComb Chairman and President, Heartland BancCorp, 2002 Gahanna, Ohio Class B 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 David L. Nichols Chairman, Flooring America, Inc., 2002 Kennesaw, Georgia Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 287 Term expires Dec. 31 DISTRICT 4, CLEVELAND—Continued Class C Robert W. Mahoney Former Chairman, Diebold, Incorporated, 2000 Uniontown, Ohio David H. Hoag Former Chairman, The LTV Corporation, 2001 Cleveland, Ohio Phillip R. Cox President and Chief Executive Officer, 2002 Cox Financial Corporation, Cincinnati, Ohio CINCINNATI BRANCH Appointed by the Federal Reserve Bank 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 Judith G. Clabes President and Chief Executive Officer, 2002 Scripps Howard Foundation, Cincinnati, Ohio V. Daniel Radford Executive Secretary-Treasurer, Cincinnati 2002 AFL-CIO Labor Council, Cincinnati, Ohio Appointed by the Board of Governors 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 George C. Juilfs President and Chief Executive Officer, 2002 SENCORP, Newport, Kentucky PITTSBURGH BRANCH Appointed by the Federal Reserve Bank Thomas J. O' Shane President and Chief Executive Officer, 2000 Mid Am Bank, Toledo, Ohio Edward V. Randall, Jr Management Consultant, Babst Calland 2001 Clements & Zomnir, Pittsburgh, Pennsylvania Georgia Berner President, Berner International Corp., 2002 New Castle, Pennsylvania Peter N. Stephans Chairman and Chief Executive Officer, 2002 Trigon Incorporated, McMurray, Pennsylvania Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

288 87th Annual Report, 2000 Term expires Dec. 31 DISTRICT 4, PITTSBURGH BRANCH—Continued Appointed by the Board of Governors 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 Charles E. Bunch Senior Vice President, Strategic Planning and 2002 Corporate Services, PPG Industries, Inc., Pittsburgh, Pennsylvania DISTRICT 5—RICHMOND Class A 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 and 2001 Trust Company, Asheboro, North Carolina Fred L. Green III President and Chief Executive Officer, 2002 The National Bank of South Carolina, Columbia, South Carolina Class B James E. Haden President and Chief Executive Officer, 2000 Martha Jefferson Hospital, Charlottesville, Virginia Craig A. Ruppert President, Ruppert Nurseries, Inc., 2001 Laytonsville, Maryland W. Henry Harmon President and Chief Executive Officer, Columbia 2002 Energy Resources, Charleston, West Virginia Class C Wesley S. Williams, Jr Partner, Covington & Burling, Washington, D.C. 2000 Irwin Zazulia Retired President and Chief Executive Officer, 2001 Hecht's, Arlington, Virginia Jeremiah J. Sheehan Retired Chairman and Chief Executive Officer, 2002 Reynolds Metals Company, Richmond, Virginia BALTIMORE BRANCH Appointed by the Federal Reserve Bank William L. Jews President and Chief Executive Officer, 2000 Blue Cross and Blue Shield of Maryland, Owings Mills, Maryland Virginia W. Smith Retired President and Chief Executive Officer, 2000 Union National Bank, Westminster, Maryland Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 289 Term expires Dec. 31 DISTRICT 5, BALTIMORE BRANCH Appointed by the Federal Reserve Bank—Continued Jeremiah E. Casey Director and Former Chairman, 2001 Allfirst Financial, Inc., Baltimore, Maryland Dyan Brasington President, High Technology Council of Maryland, 2002 Rockville, Maryland Appointed by the Board of Governors Vacancy 2000 Owen E. Herrnstadt Director, International Department, International 2001 Association of Machinists and Aerospace Workers, AFL-CIO, Upper Marlboro, Maryland George L. Russell, Jr. Law Offices of Peter G. Angelos, 2002 Baltimore, Maryland CHARLOTTE BRANCH Appointed by the Federal Reserve Bank Elleveen T. Poston President, Quality Transport, Inc., 2000 Lake City, South Carolina Cecil W. Sewell, Jr Chief Executive Officer, Centura Banks, Inc., 2000 Rocky Mount, North Carolina William H. Nock President and Chief Executive Officer, 2001 Sumter National Bank, Sumter, South Carolina Lucy J. Reuben Dean, School of Business, South Carolina State 2002 University, Orangeburg, South Carolina Appointed by the Board of Governors Joan H. Zimmerman President, Southern Shows, Inc., 2000 Charlotte, North Carolina James F. Goodmon President and Chief Executive Officer, 2001 Capitol Broadcasting Company, Inc., Raleigh, North Carolina Michael A. Almond President and Chief Executive Officer, 2002 Charlotte Regional Partnership, Charlotte, North Carolina DISTRICT 6—ATLANTA Class A D. Paul Jones, Jr Chairman and Chief Executive Officer, 2000 Compass Bancshares, Inc., Birmingham, Alabama Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

290 87th Annual Report, 2000 Term expires Dec. 31 DISTRICT 6, Class A—Continued Waymon L. Hickman Chairman and Chief Executive Officer, 2001 First Farmers and Merchants National Bank, Columbia, Tennessee Richard G. Hickson President and Chief Executive Officer, 2002 Trustmark Corporation, Jackson, Mississippi Class B John Dane III President and Chief Executive Officer, 2000 Trinity Yachts, Inc., New Orleans, Louisiana Suzanne E. Boas President, Consumer Credit Counseling Service, Inc., 2001 Atlanta, Georgia Juanita P. Baranco Executive Vice President, Baranco Automotive Group, 2002 Morrow, Georgia Class C Paula Lovell President, Lovell Communications, Inc., 2000 Nashville, Tennessee Maria Camila Leiva Executive Vice President, Miami Free Zone 2001 Corporation, Miami, Florida John F. Wieland Chief Executive Officer and Chairman, 2002 John Wieland Homes and Neighborhoods, Inc., Atlanta, Georgia BIRMINGHAM BRANCH Appointed by the Federal Reserve Bank 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 Past President, Union Planters National Bank, 2001 Deatsville, Alabama W. Charles Mayer III President, Alabama Banking Group, 2002 AmSouth Bank, Birmingham, Alabama Appointed by the Board of Governors 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 V. Larkin Martin Managing Partner, Martin Farm, Courtland, Alabama 2002 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 291 Term expires Dec. 31 DISTRICT 6, ATLANTA—Continued JACKSONVILLE BRANCH Appointed by the Federal Reserve Bank Terry R. West President and Chief Executive Officer, Jax Navy 2000 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 Jerry M. Smith Chairman and President, First National Bank of 2002 Alachua, Alachua, Florida Appointed by the Board of Governors William E. Flaherty Chairman, Blue Cross and Blue Shield of 2000 Florida, Inc., Jacksonville, Florida Julie K. Hilton Vice President & Partner, Paradise Found 2001 Resorts & Hotels, Panama City Beach, Florida Marsha G. Rydberg Partner, Rydberg & Petitt, P.A., Tampa, Florida 2002 MIAMI BRANCH Appointed by the Federal Reserve Bank Carlos A. Migoya Regional President, Dade/Monroe Counties, 2000 First Union National Bank of Florida, Miami, Florida Rudy Everett Schupp Chairman and Chief Executive Officer, 2001 Republic Security Bank, West Palm Beach, Florida D. Keith Cobb Chairman, Laundromax, Inc., Ft. Lauderdale, Florida 2002 James W. Moore Managing Partner, Riverside Capital, LLC, 2002 Fort Myers, Florida Appointed by the Board of Governors Kaaren Johnson-Street President, Kaaren Street Associates, Inc., 2000 Miami, Florida Rosa Sugranes Chairman and Founder, Iberia Tiles, 2001 Miami, Florida Mark T. Sodders President, Lakeview Farms, Inc., 2002 Pahokee, Florida Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

292 87th Annual Report, 2000 Term expires Dec. 31 DISTRICT 6, NASHVILLE BRANCH Appointed by the Federal Reserve Bank James E. Dalton, Jr President and Chief Executive Officer, 2000 Quorum Health Group, Inc., Brentwood, Tennessee John E. Seward, Jr. Managing Director, Allied Jet International, 2000 Piney Flats, Tennessee Dale W. Polley Past President, First American Corporation, 2001 Nashville, Tennessee Leonard A. Walker, Jr. Chairman and Chief Executive Officer, 2002 First National Bank and Trust Company, Athens, Tennessee Appointed by the Board of Governors Whitney Johns Martin Chairman and Chief Executive Officer, 2000 Capital Across America, Nashville, Tennessee Frances F. Marcum Partner, Marcum Capital, L.L.C., 2001 Tullahoma, Tennessee Beth Dortch Franklin President and Chief Executive Officer, 2002 Star Transportation, Inc., Nashville, Tennessee NEW ORLEANS BRANCH Appointed by the Federal Reserve Bank Teri G. Fontenot President and Chief Executive Officer, 2000 Woman's 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 C.R. Cloutier President and Chief Executive Officer, 2002 MidSouth National Bank, Lafayette, Louisiana Appointed by the Board of Governors Ben Tom Roberts Senior Executive Vice President/Owner, 2000 Roberts Brothers, Inc., Mobile, Alabama Dwight H. Evans President and Chief Executive Officer, 2001 Mississippi Power Company, Gulfport, Mississippi R. Glenn Pumpelly President and Chief Executive Officer, 2002 Pumpelly Oil, Inc., Sulphur, Louisiana Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 293 Term expires Dec. 31 DISTRICT 7—CHICAGO Class A Robert R. Yohanan Managing Director and Chief Executive Officer, 2000 First Bank & Trust, Evanston, Illinois Alan R. Tubbs President, Maquoketa State Bank and Ohnward 2001 Bancshares, Inc., Maquoketa, Iowa Verne G. Istock Retired President, BANK ONE Corporation, 2002 Chicago, Illinois Class B 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 Connie E. Evans President, Women's Self-Employment Project, 2002 Chicago, Illinois Class C Lester H. McKeever, Jr Managing Principal, Washington, Pittman & 2000 McKeever, Chicago, Illinois Arthur C. Martinez Retired Chairman and Chief Executive Officer, 2001 Sears, Roebuck and Co., Chicago, Illinois Robert J. Darnall Chairman and Chief Executive Officer, 2002 Prime Advantage Chicago, Chicago, Illinois DETROIT BRANCH Appointed by the Federal Reserve Bank 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 Mark T. Gaffney President, Michigan State AFL-CIO, 2002 Lansing, Michigan Irma B. Elder President, Elder Ford, Troy, Michigan 2002 Appointed by the Board of Governors Timothy D. Leuliette Senior Managing Director and Chief Executive 2000 Officer, Heartland Industrial Partners, Bloomfield Hills, Michigan Stephen R. Polk Chairman and Chief Executive Officer, 2001 R.L. Polk & Co., Southfield, Michigan Edsel B. Ford II Board Director, Ford Motor Company, 2002 Dearborn, Michigan Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

294 87th Annual Report, 2000 Term expires Dec. 31 DISTRICT 8—ST. LOUIS Class A Michael A. Alexander Chairman and President, First National Bank, 2000 Mt. Vernon, Illinois Thomas H. Jacobsen Chairman, Firstar Corporation, 2001 St. Louis, Missouri Lunsford W. Bridges President and Chief Executive Officer, 2002 Metropolitan National Bank, Little Rock, Arkansas Class B Robert L. Johnson Chairman and Chief Executive Officer, 2000 Johnson Bryce, Inc., Memphis, Tennessee Bert Green wait Partner, Greenwalt Company, Hazen, Arkansas 2001 Joe Gliessner Executive Director, New Directions Housing Corp., 2002 Louisville, Kentucky Class C 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 Gayle P.W. Jackson Managing Director, Lange, Mullen & Bohn, L.L.C., 2002 Global Financial Solutions, St. Louis, Missouri LITTLE ROCK BRANCH Appointed by the Federal Reserve Bank Raymond E. Skelton Chief Executive Officer, Firstar Bank of Arkansas, 2000 Little Rock, Arkansas Lawrence A. Davis, Jr Chancellor, University of Arkansas at Pine Bluff, 2001 Pine Bluff, Arkansas Everett Tucker III Moses Nosari Tucker Real Estate, 2002 Little Rock, Arkansas Vacancy 2002 Appointed by the Board of Governors Vacancy 2000 Vick M. Crawley Plant Manager, Baxter Healthcare Corporation, 2001 Mountain Home, Arkansas A. Rogers Yarnell II President, Yarnell Ice Cream Co., Inc., 2002 Searcy, Arkansas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 295 Term expires Dec. 31 DISTRICT 8, LOUISVILLE BRANCH Appointed by the Federal Reserve Bank Frank J. Nichols Chairman, President, and Chief Executive Officer, 2000 Community Financial Services, Inc., Benton, Kentucky Orson Oliver President, Mid-America Bank of Louisville, 2001 Louisville, Kentucky Larry E. Dunigan Chairman and Chief Executive Officer, 2002 Holiday Management Corp., Evansville, Indiana Edwin K. Page Vice President, External Affairs, 2002 AP Technoglass Co., Elizabethtown, Kentucky Appointed by the Board of Governors Debbie Scoppechio Chairman and Chief Executive Officer, 2000 Creative Alliance, Inc., Louisville, Kentucky Roger Reynolds Reynolds Group, L.L.C., Louisville, Kentucky 2001 J. Stephen Barger Executive Secretary-Treasurer, Kentucky State 2002 District Council of Carpenters, AFL-CIO, Frankfort, Kentucky MEMPHIS BRANCH Appointed by the Federal Reserve Bank E.C. Neelly III Management Consultant, First American 2000 National Bank, Tupelo, Mississippi Walter L. Morris, Jr President, H&M Lumber Co., Inc., 2001 West Helena, Arkansas James A. England Chairman, President, and Chief Executive Officer, 2002 Decatur County Bank, Decaturville, Tennessee John C. Kelley, Jr President, Business Financial Services, 2002 First Tennessee Bank, Memphis, Tennessee Appointed by the Board of Governors Carol G. Crawley Senior Vice President, Memphis Area Chamber 2000 of Commerce, Memphis, Tennessee Gregory M. Duckett Senior Vice President and Corporate Counsel, 2001 Baptist Memorial Health Care Corporation, Memphis, Tennessee Mike P. Sturdivant, Jr Partner, Due West, Glendora, Mississippi 2002 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

296 87th Annual Report, 2000 Term expires Dec. 31 DISTRICT 9—MINNEAPOLIS Class A 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 Roger N. Berglund Chairman and President, Dakota Western Bank, 2002 Bowman, North Dakota Class B Kathryn L. Ogren Owner, Bitterroot Motors, Missoula, Montana 2000 Jay F. Hoeschler President and Owner, Hoeschler Corporation, 2001 La Crosse, Wisconsin Rob L. Wheeler Vice President, Wheeler Manufacturing Co., Inc., 2002 Lemmon, South Dakota Class C Ronald N. Zwieg President, United Food & Commercial Workers, 2000 Local 653, Plymouth, Minnesota James J. Howard Chairman, Xcel Energy, Inc., Minneapolis, Minnesota 2001 Linda Hall Whitman President, Ceridian, Maple Plain, Minnesota 2002 HELENA BRANCH Appointed by the Federal Reserve Bank Emil W. Erhardt Chairman and President, Citizens State Bank, 2000 Hamilton, Montana Sandra M. Stash, P.E General Manager, Chemicals, OBC and 2000 Upstream Operations, ARCO Environmental Remediation, L.L.C., Anaconda, Montana Richard E. Hart President, Mountain West Bank, 2001 Great Falls, Montana Appointed by the Board of Governors William P. Underriner General Manager, Selover Buick Inc., 2000 Billings, Montana Thomas O. Markle President and Chief Executive Officer, 2001 Markle's, Inc., Glasgow, Montana Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 297 Term expires Dec. 31 DISTRICT 10—KANSAS CITY Class A 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 Dennis E. Barrett Vice Chairman, FirstBank Holding Company of 2002 Colorado, Lakewood, Colorado Class B Hans Helmerich President and Chief Executive Officer, 2000 Helmerich & Payne, Inc., Tulsa, Oklahoma Frank A. Potenziani M&T Trust, Albuquerque, New Mexico 2001 Paula Marshall-Chapman ....Chief Executive Officer, The Bama Companies, Inc., 2002 Tulsa, Oklahoma Class C 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, L.L.P, 2001 Denver, Colorado Rhonda Holman Vice President, Kauffman Center for 2002 Entrepreneurial Leadership at the Ewing Marion Kauffman Foundation, Kansas City, Missouri DENVER BRANCH Appointed by the Federal Reserve Bank 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 Vacancy 2002 Appointed by the Board of Governors Kathryn A. Paul President, Western Operations (Retired), 2000 Kaiser Permanente, Denver, Colorado James A. King Chief Executive Officer, BT, Inc., 2001 Riverton, Wyoming Kathleen Avila Partner and Chief Executive Officer, 2002 Avila Retail, Albuquerque, New Mexico Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

298 87th Annual Report, 2000 Term expires Dec. 31 DISTRICT 10, OKLAHOMA CITY BRANCH Appointed by the Federal Reserve Bank 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, 2001 Citizens Bank & Trust Co., Okmulgee, Oklahoma Robert A. Funk Chairman and Chief Executive Officer, 2002 Express Personnel Services, Oklahoma City, Oklahoma Appointed by the Board of Governors 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 Vacancy 2002 OMAHA BRANCH Appointed by the Federal Reserve Bank 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 Omaha, Nebraska 2001 Judith A. Owen President and Chief Executive Officer, 2002 Norwest Bank Nebraska, N.A., Omaha, Nebraska Appointed by the Board of Governors A.F. Raimondo Chairman and Chief Executive Officer, 2000 Behlen Manufacturing Co., Columbus, Nebraska Gladys Styles Johnston Chancellor, University of Nebraska at Kearney, 2001 Kearney, Nebraska Bob L. Gottsch Vice President, Gottsch Feeding Corporation, 2002 Hastings, Nebraska Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 299 Term expires Dec. 31 DISTRICT ll—DALLAS Class A 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 Kenneth T. Murphy Chairman, President, and Chief Executive Officer, 2002 First Financial Bankshares, Inc., Abilene, Texas Class B Judy Ley Allen Co-Manager and Partner, The Fairways at Pole 2000 Creek Development, L.L.C., Houston, Texas Julie S. England Vice President, Texas Instruments, Dallas, Texas 2001 Malcolm Gillis President, Rice University, Houston, Texas 2002 Class C H.B. Zachry, Jr Chairman and Chief Executive Officer, 2000 H.B. Zachry Company, San Antonio, Texas Roger R. Hemminghaus Chairman Emeritus, Ultramar Diamond 2001 Shamrock Corp., San Antonio, Texas Patricia M. Patterson President, Patterson Investments, Inc., 2002 Dallas, Texas EL PASO BRANCH Appointed by the Federal Reserve Bank Cecil E. Nix Member, International Brotherhood of Electrical 2000 Workers, Local 460, Midland, Texas Lester L. Parker President and Chief Executive Officer, 2001 United Bank of El Paso, El Paso, Texas James D. Renfrow President and Chief Executive Officer, 2002 The Carlsbad National Bank, Carlsbad, New Mexico Melissa W. O'Rourke President, Charlotte's, Inc., El Paso, Texas 2002 Appointed by the Board of Governors Gail S. Darling President, Gail Darling, Inc., El Paso, Texas 2000 Beauregard Brite White Rancher, J.E. White, Jr. & Sons, Marfa, Texas 2001 James Haines Chief Executive Officer and President, 2002 El Paso Electric Company, El Paso, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

300 87th Annual Report, 2000 Term expires Dec. 31 DISTRICT 11, HOUSTON BRANCH Appointed by the Federal Reserve Bank 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 Priscilla D. Slade President, Texas Southern University, 2002 Houston, Texas Ray B. Nesbitt President (Retired), Exxon Chemical Company, 2002 Houston, Texas Appointed by the Board of Governors Jeffrey K. Skilling President and Chief Operating Officer, 2000 Enron Corp., Houston, Texas Edward O. Gay lord Chairman, Jacintoport Terminal Company, 2001 Houston, Texas Vacancy 2002 SAN ANTONIO BRANCH Appointed by the Federal Reserve Bank Arthur R. Emerson Groves, Rojas, Emerson, San Antonio, Texas 2000 R. Tom Roddy Chairman, CaminoReal Bank, San Antonio, Texas 2001 Mary Rose Cardenas Vice President, Cardenas Motors, Inc., 2002 Brownsville, Texas Daniel B. Hastings, Jr President and Owner, Daniel B. Hastings, Inc., 2002 Laredo, Texas Appointed by the Board of Governors Marvin L. Ragsdale President, Iron Workers District Council of the 2000 State of Texas, Austin, Texas Ron R. Harris President and Chief Executive Officer, Pervasive 2001 Software, Austin, Texas Patty P. Mueller Vice President, Mueller Energetics Corp., 2002 Corpus Christi, Texas Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 301 Term expires Dec. 31 DISTRICT 12—SAN FRANCISCO Class A John V. Rindlaub President, Northwest Banking, Bank of America, 2000 Seattle, Washington Warren K.K. Luke Chairman and Chief Executive Officer, 2001 Hawaii National Bank, Honolulu, Hawaii E. Lynn Caswell Vice Chairman and Chief Executive Officer, 2002 EarthOne Capital Group.com, Laguna Hills, California Class B Krestine Corbin President and Chief Executive Officer, 2000 Sierra Machinery, Inc., Sparks, Nevada George M. Scalise President, Semiconductor Industry Association, 2001 San Jose, California Robert S. Attiyeh Senior Vice President and Chief Financial Officer 2002 (Retired), Consultant, Amgen, Inc., Los Angeles, California Class C Nelson C. Rising Chairman and Chief Executive Officer, 2000 Catellus Development Corporation, San Francisco, California Sheila D. Harris Consultant, Harris Consulting, 2001 Litchfield Park, Arizona Gary G. Michael Chairman and Chief Executive Officer, 2002 Albertson's, Inc., Boise, Idaho Los ANGELES BRANCH Appointed by the Federal Reserve Bank Liam E. McGee President, Bank of America California, 2000 Los Angeles, California Linda Griego Managing Partner, Engine Co. No. 28, 2000 Los Angeles, California Russell Goldsmith Chairman and Chief Executive Officer, 2001 City National Bank, Beverly Hills, California John H. Gleason Executive Vice President, Del Webb Corporation, 2002 Phoenix, Arizona Appointed by the Board of Governors 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 Lori R. Gay President, Los Angeles Neighborhood Housing 2002 Service, Los Angeles, California Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

302 87th Annual Report, 2000 Term expires Dec. 31 DISTRICT 12, PORTLAND BRANCH Appointed by the Federal Reserve Bank Guy L. Williams President and Chief Executive Officer, 2000 Security Bank, Coos Bay, Oregon Vacancy 2001 Phyllis A. Bell President, Oregon Coast Aquarium, 2002 Newport, Oregon Martin Brantley President and General Manager, 2002 Oregon's 12-KPTV, Portland, Oregon Appointed by the Board of Governors Patrick Borunda Director, Oweesta Fund, First Nations 2000 Development Institute, Vancouver, Washington Karla S. Chambers Vice President, Stahlbush Island Farms, Inc., 2001 Corvallis, Oregon Nancy Wilgenbusch President, Marylhurst University, 2002 Marylhurst, Oregon SALT LAKE CITY BRANCH Appointed by the Federal Reserve Bank R.D. Cash Chairman, President, and Chief Executive Officer, 2000 Questar Corporation, Salt Lake City, Utah Curtis H. Harris Chairman, President, and Chief Executive Officer, 2001 Barnes Banking Company, Kaysville, Utah J. Pat McMurray President, First Security Bank, N.A., Boise, Idaho 2002 Maria Garciaz Executive Director, Salt Lake Neighborhood 2002 Housing Services, Salt Lake City, Utah Appointed by the Board of Governors Barbara L. Wilson Idaho and Regional Vice President, 2000 Qwest Communications International, Inc., Boise, Idaho Gary L. Crocker Chairman, ARUP Laboratories, Salt Lake City, Utah 2001 H. Roger Boyer Chairman, The Boyer Company, Salt Lake City, Utah 2002 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve System Organization 303 Term expires Dec. 31 DISTRICT 12, SEATTLE BRANCH Appointed by the Federal Reserve Bank 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 Mary E. Pugh President, Pugh Capital Management, Inc., 2002 Seattle, Washington James C. Hawkanson Managing Director and Chief Executive Officer, 2002 The Commerce Bank of Washington, N.A., Seattle, Washington Appointed by the Board of Governors Richard R. Sonstelie Chairman (Retired), Puget Sound Energy, Inc., 2000 Bellevue, Washington Helen M. Rockey Chief Executive Officer and President (Retired), 2001 Just for Feet, Inc., Seattle, Washington Boyd E. Givan Senior Vice President and Chief Financial 2002 Officer (Retired), The Boeing Company, Seattle, Washington Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

304 87th Annual Report, 2000 Membership of the Board of Governors, 1913-2000 Appointed Members Name Federal Reserve Date initially took Other datesl 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, 1913-2000 305 Appointed Members—Continued Name Federal Reserve Date initially took Other dates1 District oath of office 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

306 87th Annual Report, 2000 CHAIRMEN3 Charles S. Hamlin Aug. 10, 1914-Aug. 9, 1916 W.RG. 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 E 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 Mayll, 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, 2. Successor took office on this date. 1996, to June 20, 1996. Digitized for FRASER 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

309 Board of Governors Financial Statements The financial statements of the Board for 2000 and 1999 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, 2000 and 1999, 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 auditing standards generally accepted in the United States of America 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, 2000 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. 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 21, 2001, 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. McLean, Virginia February 21, 2001 Deloitte Touche Tohmatsu Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

310 87th Annual Report, 2000 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM BALANCE SHEETS As of December 31, 2000 1999 ASSETS CURRENT ASSETS Cash $22,842,252 $31,072,908 Accounts receivable 1,057,901 873,148 Prepaid expenses and other assets 1,108,766 794,000 Total current assets 25,008,919 32,740,056 PROPERTY, BUILDINGS, AND EQUIPMENT, NET (Note 5) 68,521,774 63,928,406 Total assets $93,530,693 $96,668,462 LIABILITIES AND FUND BALANCE CURRENT LIABILITIES Accounts payable and accrued liabilities $10,702,740 $12,360,089 Accrued payroll and related taxes 6,040,961 7,090,754 Accrued annual leave 8,492,728 8,063,655 Capital lease payable (current portion) 180,340 172,058 Unearned revenues and other liabilities 2,044,160 2,347,303 Total current liabilities 27,460,929 30,033,859 CAPITAL LEASE PAYABLE (non-current portion) 280,683 366,464 ACCUMULATED RETIREMENT BENEFIT OBLIGATION (Note 2) 694,782 747,717 ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (Note 3) 4,065,704 3,614,828 ACCUMULATED POSTEMPLOYMENT BENEFIT OBLIGATION (Note 4) 3,109,456 2,581,079 Total liabilities 35,611,554 37,343,947 FUND BALANCE 57,919,139 59,324,515 Total liabilities and fund balance $93,530,693 $96,668,462 See notes to financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 311 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF REVENUES AND EXPENSES AND FUND BALANCE For the years ended December 31, 2000 1999 BOARD OPERATING REVENUES Assessments levied on Federal Reserve Banks for Board operating expenses and capital expenditures $ 188,067,200 $213,789,510 Other revenues (Note 6) 9,645,279 8,661,435 Total operating revenues 197,712,479 222,450,945 BOARD OPERATING EXPENSES Salaries 118,376,878 115,618,738 Retirement and insurance contributions 19,889,451 16,012,513 Contractual services and professional fees 13,860,641 15,642,464 Depreciation and net losses on disposals 8,855,763 8,124,505 Utilities 6,249,503 6,109,935 Travel 5,769,788 5,970,437 Postage and supplies 5,536,156 6,879,584 Equipment and facilities rental 5,075,502 4,761,618 Software 4,192,658 4,189,644 Repairs and maintenance 3,373,654 3,662,547 Printing and binding 2,047,590 2,387,568 Other expenses (Note 6) 5,890,271 4,717,322 Total operating expenses 199,117,855 194,076,875 BOARD OPERATING REVENUES OVER (UNDER) EXPENSES (1,405,376) 28,374,070 ISSUANCE AND REDEMPTION OF FEDERAL RESERVE NOTES Assessments levied on Federal Reserve Banks for currency costs 435,837,762 484,959,221 Expenses for currency printing, issuance, retirement, and shipping 435,837,762 484,959,221 CURRENCY ASSESSMENTS OVER (UNDER) EXPENSES 0 0 TOTAL REVENUE OVER (UNDER) EXPENSES (1,405,376) 28,374,070 FUND BALANCE, Beginning of year 59,324,515 30,950,445 TRANSFERS TO THE U.S. TREASURY Transfers and accrued transfers from surplus Federal Reserve Bank earnings (Note 1) 3,752,000,000 0 Transfers and accrued transfers to the U.S. Treasury (Note 1) (3,752,000,000) 0 FUND BALANCE, End of year $ 57,919,139 $ 59,324,515 See notes to financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

312 87th Annual Report, 2000 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM STATEMENTS OF CASH FLOWS For the years ended December 31, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES Board operating revenues over (under) expenses $ (1,405,376) $28,374,070 Adjustments to reconcile operating revenue over (under) expenses to net cash provided by operating activities: Depreciation and net losses on disposals 8,855,763 8,124,505 (Increase) decrease in accounts receivable, prepaid expenses and other assets (499,519) 458,411 Increase (decrease) in accounts payable and accrued liabilities (1,657,349) 4,128,902 Increase (decrease) in accrued payroll and related taxes (1,049,793) (654,870) Increase (decrease) in accrued annual leave 429,073 570,122 Increase (decrease) in capital lease payable (77,499) (3,456) Increase (decrease) in unearned revenues and other liabilities (303,143) 313,174 Increase (decrease) in accumulated retirement benefit obligation (52,935) (25,460) Increase (decrease) in accumulated postretirement benefit obligation 450,876 (17,107,041) Increase (decrease) in accumulated postemployment benefit obligation 528,377 397,477 Net cash provided by operating activities 5,218,475 24,575,834 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposals 44,400 88,292 Capital expenditures (13,493,531) (13,702,648) Net cash used in investing activities (13,449,131) (13,614,356) NET INCREASE (DECREASE) IN CASH (8,230,656) 10,961,478 CASH BALANCE, Beginning of year 31,072,908 20,111,430 CASH BALANCE, End of year $22,842,252 $31,072,908 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Capital lease obligations incurred $ 116,340 $ 123,020 See notes to financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 313 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM NOTES TO FINANCIAL STATEMENTS FOR THE Board who entered on duty after 1983 are covered by a YEARS ENDED DECEMBER 31, 2000 AND 1999 non-contributory defined benefits program under the System Plan. Contributions to the System Plan are actuarially ,.. o A „ determined and funded by participating employers at (1) SIGNIFICANT ACCOUNTING POLICIES amounts prescribed by th/s;stem Fpla/S administrator. Organization—The Federal Reserve System was Based on actuarial calculations, it was determined that founded by Congress in 1913 and consists of the Board of employer funding contributions were not required for the Governors (Board) and twelve regional Reserve Banks. years 2000 and 1999, and the Board was not assessed a The Board was established as a federal government contribution for these years. Excess Plan assets will conagency and is supported by Washington staff numbering tinue to fund future years' contributions. The Board is not about 1,700, as it carries out its responsibilities in con- accountable for the assets of this plan, junction with other components of the Federal Reserve A relatively small number of Board employees partici- System. The accompanying financial statements include pate in the Civil Service Retirement System (CSRS) or only the operations and activities for the Board and are the Federal Employees' Retirement System (FERS). The prepared in accordance with accounting principles gener- Board matches employee contributions to these plans, ally accepted in the United States of America. These defined benefit plans are administered by the Office Board Operating Revenues and Expenses— of Personnel Management. The Board's contributions to Assessments made on the Federal Reserve Banks for these plans totaled $266,000 and $244,000 in 2000 and Board operating expenses and capital expenditures are 1999, respectively. The Board has no liability for future calculated based on expected cash needs. These assess- payments to retirees under these programs, and it is not ments, other operating revenues, and operating expenses accountable for the assets of the plans, are recorded on the accrual basis of accounting. Employees of the Board may also participate in the Issuance and Redemption of Federal Reserve Notes— Federal Reserve System's Thrift Plan. Under the Thrift The Board incurs expenses and assesses the Federal Plan, members may contribute up to a fixed percentage Reserve Banks for the costs of printing, issuing, shipping, of their salary. Board contributions are based upon a and retiring Federal Reserve Notes. These assessments fixed percentage of each member's basic contribution and expenses are separately reported in the statements of and were $5,133,000 and $4,966,000 in 2000 and 1999, revenues and expenses because they are not Board operat- respectively, ing transactions. Effective January 1, 1996, Board employees covered Property, Buildings and Equipment—The Board's under the System Plan are also covered under a Benefits property, buildings and equipment are stated at cost less Equalization Plan (BEP). Benefits paid under the BEP are accumulated depreciation. Depreciation is calculated on a limited to those benefits that cannot be paid from the straight-line basis over the estimated useful lives of the System Plan due to limitations imposed by Secassets, which range from 4 to 10 years for furniture and tions 401(a)(17), 415(b) and 415(e) of the Internal Reveequipment and from 10 to 50 years for building equip- nue Code of 1986. Section 401 (a) of the Code was ment and structures. Upon the sale or other disposition of amended to increase the contribution limitation for highly a depreciable asset, the cost and related accumulated paid employees to $170,000 from $160,000 effective in depreciation are removed from the accounts and any gain 2000. This increase resulted in a reduction in the benefit or loss is recognized. obligation of the BEP for 2000. Pension costs attributed Federal Reserve Bank Surplus Earnings—The Federal to the BEP reduce the pension costs of the System Plan. Reserve Act, as amended, required that $3,752,000,000 Activity for 2000 and 1999 is summarized in the followof surplus Federal Reserve Bank earnings be transferred ing table: from the Banks to the Board and then to the U.S. Treasury in 2000. 2QQ0 1999 Estimates—The preparation of financial statements in Change in benefit obligation conformity with accounting principles generally accepted Benefit obligation at in the United States of America requires management to beginning of year $631,264 $897,822 make estimates and assumptions that affect the reported Service cost 544 12,206 amounts of assets and liabilities and the disclosure of Interest cost ..„ 99 37,840 contingent assets and liabilities at the date of the financial Plan ^ ^ ^ns 0 0 statements and the reported amounts of revenues and plan amendments8."."'.'."'.'. (552,770) 0 expenses during the reporting period. Actual results could Actuarial (gain)/loss (69,229) (234,999) differ from those estimates. Benefits paid (8,104) (81,605) (2) RETIREMENT BENEFITS Benefit obligation at {Z) KETIREMENT BENEFITS end Qf ^ $ 1,804 $ 631,264 Substantially all of the Board's employees participate in the Retirement Plan for Employees of the Federal Reserve System (System Plan). The System Plan is a 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 prior to 1984 are covered by a contributory defined benefits program under the System Plan. Employees of the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

314 87th Annual Report, 2000 (3) POSTRETIREMENT BENEFITS 2000 1999 The Board provides certain life insurance programs for Change in plan assets its active employees and retirees. Activity for 2000 and Fair value of plan assets 1999 is summarized in the following table: at beginning of year $ 2000 1999 Actual return on plan assets 0 0 Change in benefit Employer contributions 8,104 81,605 obligation Plan participants' Benefit obligation at contributions 0 0 beginning of year .. $4,096,411 $22,946,312 Benefits paid __flU04) (81,605) Service cost 126,076 162,487 Fair value of plan assets Interest cost 312,298 265,565 at end of year $ 0 $ 0 Plan participants' contributions 0 0 Reconciliation of funded Plan amendments 0 (1,384,322) status at end of year Actuarial (gain)/loss .... (278,501) (1,703,601) Funded status $ (1,804) $ (631,264) Benefits paid (994) (16,190,030) Unrecognized net Benefit obligation actuarial (gain)/ at end of year $ 4,255,290 $ 4,096,411 loss (358,390) (320,381) Unrecognized prior Change in plan assets service cost (1,287,253) (851,331) Fair value of plan Unrecognized net assets at beginning transistion of year $ 0 obligation 952,665 1,055,259 Actual return on Prepaid/(accrued) plan assets 0 0 postretirement Employer contributions . 994 16,190,030 benefit cost $ (694,782) $ (747,717) Plan participants' contributions 0 Benefits paid (994) (16,190,030) Amounts recognized Fair value of plan in the Statement of assets at end Financial Position of year $ 0 $ 0 consist of: Prepaid benefit cost $ 0 Accrued benefit Reconciliation of liability (694,782) (747,717) funded status Intangible asset 0 0 at end of year Accumulated other Funded status $(4,255,290) $(4,096,411) comprehensive Unrecognized net income 0 actuarial (gain)Aoss 189,586 481,583 Net amount recognized $ (694,782) $ (747,717) Unrecognized prior service cost 0 0 Weighted-average Unrecognized net assumptions as of transition December 31 obligation 0 0 Discount rate 7.50% 7.50% Prepaid/(accrued) Expected asset return . N/A N/A postretirement Salary scale 5.00% 5.00% benefit cost $(4,065,704) $(3,614,828) Corridor 10.00% 10.00% Components of net Components of net periodic expense periodic expense for year for year Service cost $ 126,076 $ 162,487 Service cost $ 544 $ 12,206 Interest cost 312,298 265,565 Interest cost 99 37.840 Amortization of prior Expected return service cost 0 0 on plan assets 0 0 Amortization of Amortization of (gains)/losses 13,497 39,259 prior service cost (116,848) (72,520) Total net periodic Recognized net expense 451,871 467,311 actuarial gain .... (31,220) (23,975) Other credit 0 (1,384,322) Amortization of Total expense $ 451,871 $ 917,011 net liability 102,594 102,594 Net periodic benefit expense $ (44,831) $ 56,145 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 315 The liability and costs for the postretirement benefit The Board began the Eccles Building Infrastructure plan were determined using discount rates of 7.50 percent Enhancement Project in July 1999. This $12.5 million as of December 31, 2000 and December 31, 1999. Unrec- project, scheduled for nineteen phases over three and a ognized losses of $189,586 and $481,583 as of Decem- half years, includes asbestos removal, lighting and plumbber 31, 2000 and 1999, respectively, result from changes ing improvements, cabling and other enhancements. Mulin the discount rate used to measure the liabilities. Under tiple phases will be in process at the same time. Statement of Financial Accounting Standards No. 106, Effective January 1, 1999, in accordance with AICPA Employers' Accounting for Postretirement Benefits Other Statement of Position 98-1, Accounting for the Costs of Than Pensions, the Board may have to record some of Computer Software Developed or Obtained for Internal these unrecognized losses in operations in future years. Use, the Board began to capitalize the costs of computer The assumed salary trend rate for measuring the increase software developed or obtained for internal use. Prior to in postretirement benefits related to life insurance was an 1999, the Board capitalized purchased software only. average of 6 percent. These changes increased software assets and decreased The above accumulated postretirement benefit obliga- expenses by $1,691,000 in 1999. These changes did not tion is related to the Board sponsored life insurance affect accumulated depreciation in 1999. programs. The Board has no liability for future payments to employees who continue coverage under the federally (6) OTHER REVENUES AND OTHER EXPENSES sponsored programs upon retiring. Contributions for The following are summaries of the components of active employees participating in federally sponsored pro- Other Revenues and Other Expenses. grams totaled $4,792,000 and $4,482,000 in 2000 and 1999, respectively. 2000 1999 Other revenues (4) POSTEMPLOYMENT BENEFIT PLAN Data processing The Board provides certain postemployment benefits revenue $4,817,207 $4,073,910 to eligible employees after employment but before National Information retirement. Effective January 1, 1994, the Board adopted Center 2,606,998 1,937,206 Statement of Financial Accounting Standards No. 112, Subscription Employers' Accounting for Postemployment Benefits, revenue 1,079,822 1,240,032 which requires that employers providing postemployment Reimbursable benefits to their employees accrue the cost of such bene- services to fits. Prior to January 1994, postemployment benefit ex- other agencies ... 607,716 609,442 penses were recognized on a pay-as-you-go basis. The Miscellaneous 533,536 800,845 postemployment benefit expense was $851,000 and Total Other $628,000 for 2000 and 1999, respectively. Revenues $9,645,279 $8,661,435 Other expenses (5) PROPERTY, BUILDINGS AND EQUIPMENT Tuition, registration, The following is a summary of the components of the and membership Board's property, buildings and equipment, at cost, net of fees $1,429,231 $1,352,849 accumulated depreciation. Cafeteria operations, net 821,817 857,435 As of December 31, Subsidies and 2000 1999 contributions 837,071 856,893 Land and Miscellaneous 2,802,152 1,650,145 improvements ... $ 1,301,314 $ 1,301,314 Total Other Buildings 44,978,514 43,661,936 Expenses $5,890,271 $4,717,322 equipment 49,090,528 49,187,837 Software 7,883,210 5,047,293 Construction in process 9,980,880 4,699,571 113,234,446 103,897,951 Less accumulated depreciation (44,712,672) (39,969,545) Property, buildings, and equipment, net $ 68,521,774 $ 63,928,406 Furniture and equipment and accumulated depreciation include $864,000 and $366,000, and $738,000 and $225,000 as of December 31, 2000 and 1999, respectively, for capitalized leases. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

316 87th Annual Report, 2000 (7) COMMITMENTS (8) FEDERAL FINANCIAL INSTITUTIONS The Board has entered into several operating leases to EXAMINATION COUNCIL secure office, training and warehouse space for periods The Board is one of the five member agencies of the ranging from one to ten years. Minimum future commit- Federal Financial Institutions Examination Council (the ments under those leases having an initial or remaining "Council"). During 2000 and 1999, the Board paid noncancelable lease term in excess of one year at Decem- $256,000 and $327,000, respectively, in assessments for ber 31, 2000, are as follows: operating expenses of the Council. These amounts are included in other expenses for 2000 and 1999. • 2001 $ 4,926,000 2002 4,967,000 2003 4,729,000 2004 5,089,000 2005 2,833,000 After 2005 3,649,000 $26,193,000 Rental expenses under the operating leases were $4,687,000 and $4,334,000 in 2000 and 1999, respectively. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Board Financial Statements 317 Deloitte &Touche 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, 2000, and have issued our report thereon dated February 21, 2001. We conducted our audit in accordance with auditing standards generally accepted in the United States of America 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. However, we noted other matters involving the internal control over financial reporting that we have reported to the management of the Board in a separate letter dated February 21, 2001. 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. McLean, Virginia February 21, 2001 Deloitte Touche Tohmatsu Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

319 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, 2000 and 1999. 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, 2000 and 1999 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 of America. 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 standards generally accepted in the United States of America. 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, 2000 and 1999, and the combined results of their operations for the years then ended, on the basis of accounting described in Note 3. Baltimore, Md. \S> ^ March 2,2001 ( jxjuc^<^dG^S>^^ Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

320 87th Annual Report, 2000 THE FEDERAL RESERVE BANKS COMBINED STATEMENTS OF CONDITION December 31, 2000 and 1999 (in millions) ASSETS 2000 1999 Gold certificates $ 11,045 $ 11,048 Special drawing rights certificates 2,200 6,200 Coin 949 207 Items in process of collection 7,152 6,524 Loans to depository institutions 110 233 Securities purchased under agreements to resell (tri-party) 43,375 140,640 US. government and federal agency securities, net 518,501 483,902 Investments denominated in foreign currencies 15,670 16,140 Accrued interest receivable 6,111 5,314 Bank premises and equipment, net 1,949 1,861 Other assets 2,815 2,391 Total assets $609,877 $674,460 LIABILITIES AND CAPITAL LIABILITIES Federal Reserve notes outstanding, net $563,450 $600,662 Deposits Depository institutions 19,046 24,027 U.S. Treasury, general account 5,149 28,402 Other deposits 426 274 Deferred credit items 6,357 6,117 Interest on Federal Reserve notes due U.S. Treasury 560 1,066 Accrued benefit costs 848 816 Other liabilities 250 234 Total liabilities 596,086 661,598 CAPITAL Capital paid-in 6,997 6,431 Surplus 6,794 6,431 Total capital 13,791 12,862 Total liabilities and capital $609,877 $674,460 The accompanying notes are an integral part of these combined financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks Combined Financial Statements 321 THE FEDERAL RESERVE BANKS COMBINED STATEMENTS OF INCOME for the years ended December 31, 2000 and 1999 (in millions) 2000 1999 Interest income Interest on U.S. government and federal agency securities $32,737 $28,216 Interest on investments denominated in foreign currencies 269 225 Interest on loans to depository institutions 23 11 Total interest income 33,029 28,452 Other operating income (loss) Income from services 882 836 Reimbursable services to government agencies 302 295 Foreign currency losses, net (1,410) (504) Government securities losses, net (82) (22) Other income 82 83 Total other operating income (loss) (226) 688 Operating expenses Salaries and other benefits 1,507 1,446 Occupancy expense 196 189 Equipment expense 243 242 Cost of unreimbursed Treasury services 8 8 Assessments by Board of Governors 624 699 Other expenses 357 294 Total operating expenses 2,935 2,878 Net income prior to distribution $29,868 $26,262 Distribution of net income Dividends paid to member banks $ 410 $ 374 Transferred to surplus 4,115 479 Payments to U.S. Treasury as interest on Federal Reserve notes 25,343 25,409 Total distribution $29,868 $26,262 The accompanying notes are an integral part of these combined financial statements. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

322 87th Annual Report, 2000 THE FEDERAL RESERVE BANKS COMBINED STATEMENTS OF CHANGES IN CAPITAL for the years ended December 31, 2000 and 1999 (in millions) Capital Total paid-in Surplus capital Balance at January 1, 1999 (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 Net income transferred to surplus 4,115 4,115 Surplus transfer to the U.S. Treasury (3,752) (3,752) Net change in capital stock issued (11 million shares) 566 566 Balance at December 31, 2000 (139 million shares) $6,997 $6,794 $13,791 The accompanying notes are an integral part of these combined 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 statu- (2) OPERATIONS AND SERVICES tory responsibilities. The majority of the assets, liabilities, and income of the Reserve Banks is derived from central The System performs a variety of services and operations. bank activities and responsibilities with regard to mone- Functions include: formulating and conducting monetary tary policy and currency. For this reason, the accompany- policy; participating actively in the payments mechanism, ing combined set of financial statements for the twelve including large-dollar transfers of funds, automated clearindependent Reserve Banks is prepared with adjustments inghouse operations and check processing; distribution to eliminate interdistrict accounts and transactions. of coin and currency; fiscal agency functions for the U.S. Treasury and certain federal agencies; serving as the Structure federal government's bank; providing short-term loans to depository institutions; serving the consumer and the The Reserve Banks serve twelve Federal Reserve Dis- community by providing educational materials and infortricts nationwide. In accordance with the Federal Reserve mation regarding consumer laws; supervising bank hold- Act, supervision and control of each Reserve Bank is ing companies, state member banks and U.S. offices of exercised by a Board of Directors. Banks that are mem- foreign banking organizations; and administering other bers of the System include all national banks and any regulations of the Board of Governors. The Board of state chartered bank that applies and is approved for Governors' operating costs are funded through assessmembership in the System. ments on the Reserve Banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks Combined Financial Statements 323 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED The FOMC establishes policy regarding open market the policies outlined in the Financial Accounting Manual operations, oversees these operations, and issues authori- and GAAP. zations and directives to the FRBNY for its execution of The preparation of the combined financial statements transactions. Authorized transaction types include direct in conformity with the Financial Accounting Manual purchase and sale of U.S. government and federal agency requires management to make certain estimates and securities, matched sale-purchase transactions, the pur- assumptions that affect the reported amounts of assets and chase of securities under agreements to resell, and the liabilities and disclosure of contingent assets and liabililending of U.S. government securities. In August 1999, ties at the date of the combined financial statements and the FOMC provided temporary authorization for FRBNY the reported amounts of income and expenses during the to expand the collateral that can be accepted for reporting period. Actual results could differ from those repurchase agreements. To facilitate the acceptance of estimates. Unique accounts and significant accounting expanded collateral FRBNY began entering into tri-party policies are explained below. repurchase agreements ("tri-party agreements") beginning October 1999. Since then this authorization has been (A) Gold Certificates extended to allow the auctioning of options on repurchase agreements that could be exercised in the period sur- The Secretary of the Treasury is authorized to issue gold rounding the 1999 year-end. FRBNY is also authorized certificates to the Reserve Banks to monetize gold held by by the FOMC to hold balances of and to execute spot and the U.S. Treasury. Payment for the gold certificates by the forward foreign exchange and securities contracts in nine Reserve Banks is made by crediting equivalent amounts foreign currencies, maintain reciprocal currency arrange- in dollars into the account established for the U.S. Treaments (F/X swaps) with various central banks, and "ware- sury. These gold certificates held by the Reserve Banks house" foreign currencies for the U.S. Treasury and are required to be backed by the gold of the U.S. Trea- Exchange Stabilization Fund (ESF) through the Reserve sury. The U.S. Treasury may reacquire the gold certifi- Banks. cates at any time and the Reserve Banks must deliver them to the U.S. Treasury. At such time, the U.S. Treasury's account is charged and the Reserve Banks' gold (3) SIGNIFICANT ACCOUNTING POLICIES certificate account is lowered. The value of gold for purposes of backing the gold certificates is set by law at Accounting principles for entities with the unique powers $42% a fine troy ounce. and responsibilities of the nation's central bank have not been formulated by the Financial Accounting Standards (B) Special Drawing Rights Certificates Board. The Board of Governors has developed specialized accounting principles and practices that it believes Special drawing rights (SDRs) are issued by the Internaare appropriate for the significantly different nature and tional Monetary Fund (Fund) to its members in proporfunction of a central bank as compared to the private tion to each member's quota in the Fund at the time of sector. These accounting principles and practices are issuance. SDRs serve as a supplement to international documented in the Financial Accounting Manual for Fed- monetary reserves and may be transferred from one naeral Reserve Banks {Financial Accounting Manual), tional monetary authority to another. Under the law prowhich is issued by the Board of Governors. All Reserve viding for United States participation in the SDR system, Banks are required to adopt and apply accounting policies the Secretary of the U.S. Treasury is authorized to issue and practices that are consistent with the Financial SDR certificates, somewhat like gold certificates, to the Accounting Manual. Reserve Banks. At such time, equivalent amounts in These combined financial statements have been pre- dollars are credited to the account established for the U.S. pared in accordance with the Financial Accounting Treasury, and the Reserve Banks' SDR certificate account Manual. Differences exist between the accounting prin- is increased. The Reserve Banks are required to purchase ciples and practices of the System and accounting prin- SDRs, at the direction of the U.S. Treasury, for the ciples generally accepted in the United States of America purpose of financing SDR certificate acquisitions or for (GAAP). The primary differences are the presentation financing exchange stabilization operations. of all security holdings at amortized cost, rather than at the fair value presentation requirements of GAAP, and the (C) Loans to Depository Institutions accounting for matched sale-purchase transactions as separate sales and purchases, rather than secured borrow- The Depository Institutions Deregulation and Monetary ings with pledged collateral, as is generally required Control Act of 1980 provides that all depository instiby GAAP. In addition, the Board of Governors and the tutions that maintain reservable transaction accounts or Reserve Banks have elected not to present a Statement of nonpersonal time deposits, as defined in Regulation D Cash Flows. The Statement of Cash Flows has not been issued by the Board of Governors, have borrowing priviincluded as the liquidity and cash position of the Reserve leges at the discretion of the Reserve Banks. Borrowers Banks are not of primary concern to users of these execute certain lending agreements and deposit sufficombined financial statements. Other information regard- cient collateral before credit is extended. Loans are evaluing the Reserve Banks' activities is provided in, or may ated for collectibility, and currently all are considered be derived from, the Statements of Condition, Income, collectible and fully collateralized. If any loans were and Changes in Capital. Therefore, a Statement of Cash deemed to be uncollectible, an appropriate reserve would Flows would not provide any additional useful informa- be established. Interest is recorded on the accrual basis tion. There are no other significant differences between and is charged at the applicable discount rate established Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

324 87th Annual Report, 2000 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED at least every fourteen days by the Board of Directors of of the market values of the securities loaned. The market the Reserve Banks, subject to review by the Board of values of the collateral and the securities loaned are Governors. However, Reserve Banks retain the option monitored by FRBNY on a daily basis, with additional to impose a surcharge above the basic rate in certain collateral obtained as necessary. The securities loaned circumstances. continue to be accounted for in the SOMA. Prior to April 26, 1999, all Reserve Banks were authorized to (D) U.S. Government and Federal Agency Securities and engage in such lending activity. Investments Denominated in Foreign Currencies Foreign exchange contracts are contractual agreements between two parties to exchange specified currencies, at a The FOMC has designated the FRBNY to execute open specified price, on a specified date. Spot foreign contracts market transactions on its behalf and to hold the resulting normally settle two days after the trade date, whereas the securities in the portfolio known as the System Open settlement date on forward contracts is negotiated Market Account (SOMA). In addition to authorizing and between the contracting parties, but will extend beyond directing operations in the domestic securities market, two days from the trade date. The FRBNY generally the FOMC authorizes and directs the FRBNY to execute enters into spot contracts, with any forward contracts operations in foreign markets for major currencies in generally limited to the second leg of a swap/warehousing order to counter disorderly conditions in exchange mar- transaction. kets or to meet other needs specified by the FOMC in The FRBNY, on behalf of the Reserve Banks, maincarrying out the System's central bank responsibilities. tains renewable, short-term F/X swap arrangements with Purchases of securities under agreements to resell and two authorized foreign central banks. The parties agree to matched sale-purchase transactions are accounted for as exchange their currencies up to a pre-arranged maximum separate sale and purchase transactions. Purchases under amount and for an agreed upon period of time (up to agreements to resell are transactions in which the FRBNY twelve months), at an agreed upon interest rate. These purchases a security and sells it back at the rate specified arrangements give the FOMC temporary access to foreign at the commencement of the transaction. Matched sale- currencies that it may need for intervention operations to purchase transactions are transactions in which the support the dollar and give the partner foreign central FRBNY sells a security and buys it back at the rate bank temporary access to dollars it may need to support specified at the commencement of the transaction. its own currency. Drawings under the F/X swap arrange- In addition to the aforementioned purchases of securi- ments can be initiated by either the FRBNY or the partner ties under agreements to resell and matched sale-purchase foreign central bank, and must be agreed to by the transactions, the FRBNY engages in tri-party agreements. drawee. The F/X swaps are structured so that the party Tri-party agreements are conducted with two custodial initiating the transaction (the drawer) bears the exchange banks that manage the clearing and settlement of collat- rate risk upon maturity. The Bank will generally invest eral. Acceptable collateral under tri-party repurchase the foreign currency received under an F/X swap in agreements primarily includes U.S. Government and interest-bearing instruments. agency securities, pass-through mortgage securities of Warehousing is an arrangement under which the GNMA, FHLMC, and FNMA, STRIP securities of the FOMC agrees to exchange, at the request of the Treasury, U.S. Government and "stripped" securities of other gov- U.S. dollars for foreign currencies held by the Treasury ernment agencies. The tri-party repurchase and reverse or ESF over a limited period of time. The purpose of the repurchase transactions are accounted for as financing warehousing facility is to supplement the U.S. dollar transactions with the associated interest income and inter- resources of the Treasury and ESF for financing purest expense recorded over the period of the agreement. chases of foreign currencies and related international Another tool employed by the FRBNY to address operations. potential reserve shortages was the ability to sell options In connection with its foreign currency activities, the on overnight repurchase agreements. In 1999 the FRBNY FRBNY, on behalf of the Reserve Banks, may enter into had temporary authority to sell European options to pri- contracts which contain varying degrees of off-balancemary dealers that give the dealers the right to enter into sheet market risk, because they represent contractual comrepurchase agreements with the FRBNY on the specified mitments involving future settlement, and counter-party exercise date. The options were auctioned in three week credit risk. The FRBNY controls credit risk by obtaining long "strips" with each strip consisting of the right to credit approvals, establishing transaction limits, and perexercise overnight repurchase agreements for up to five forming daily monitoring procedures. consecutive business days. In general, the options could While the application of current market prices to the only be exercised at strike price of 150 or 250 basis points securities currently held in the SOMA portfolio and above the most recently announced FOMC Federal funds investments denominated in foreign currencies may result target rate. in values substantially above or below their carrying Effective April 26, 1999, the FRBNY was given the values, these unrealized changes in value would have no sole authorization by the FOMC to lend U.S. government direct effect on the quantity of reserves available to the securities held in the SOMA to U.S. government securi- banking system or on the prospects for future Reserve ties dealers and to banks participating in U.S. government Bank earnings or capital. Both the domestic and foreign securities clearing arrangements, in order to facilitate the components of the SOMA portfolio from time to time effective functioning of the domestic securities market. involve transactions that can result in gains or losses These securities-lending transactions are fully collateral- when holdings are sold prior to maturity. However, deciized by other U.S. government securities. FOMC policy sions regarding the securities and foreign currencies transrequires FRBNY to take possession of collateral in excess actions, including their purchase and sale, are motivated Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks Combined Financial Statements 325 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED by monetary policy objectives rather than profit. Accord- of the collateral tendered, with the exception of securities, ingly, earnings and any gains or losses resulting from the whose collateral value is equal to the par value of the sale of such currencies and securities are incidental to the securities tendered. Tri-party agreements, however, are open market operations and do not motivate its activities valued at the contract amount. The Board of Governors or policy decisions. may, at any time, call upon a Reserve Bank for additional U.S. government and federal agency securities and security to adequately collateralize the Federal Reserve investments denominated in foreign currencies compris- notes. To satisfy the obligation to provide sufficient collating the SOMA are recorded at cost, on a settlement-date eral for outstanding Federal Reserve notes, the Reserve basis, and adjusted for amortization of premiums or accre- Banks have entered into an agreement that provides that tion of discounts on a straight-line basis. Interest income certain assets of the Reserve Banks are jointly pledged as is accrued on a straight-line basis and is reported as collateral for the Federal Reserve notes of all Reserve "Interest on U.S. government and federal agency securi- Banks. In the event that this collateral is insufficient, the ties" or "Interest on investments denominated in foreign Federal Reserve Act provides that Federal Reserve notes currencies," as appropriate. Income earned on securities become a first and paramount lien on all the assets of the lending transactions is reported as a component of "Other Reserve Banks. Finally, as obligations of the United income." Gains and losses resulting from sales of securi- States, Federal Reserve notes are backed by the full faith ties are determined by specific issues based on average and credit of the United States government. cost. Gains and losses on the sales of U.S. government The "Federal Reserve notes outstanding, net" account and federal agency securities are reported as "Govern- represents Federal Reserve notes reduced by currency ment securities gains (losses), net." Foreign-currency held in the vaults of the Reserve Banks of $188,264 mildenominated assets are revalued monthly at current mar- lion and $221,297 million at December 31, 2000 and ket exchange rates in order to report these assets in U.S. 1999, respectively. dollars. Realized and unrealized gains and losses on At December 31, 2000 and 1999, all gold certificates, investments denominated in foreign currencies are all special drawing rights certificates, and domestic reported as "Foreign currency gains (losses), net." For- securities with par values of $550,205 million and eign currencies held through F/X swaps, when initiated $583,414 million respectively, were pledged as collateral. by the counterparty, and warehousing arrangements are At December 31, 2000 and 1999, no loans or investrevalued monthly, with the unrealized gain or loss ments denominated in foreign currencies were pledged as reported as a component of "Other assets" or "Other collateral. liabilities," as appropriate. (G) Capital Paid-in (E) Bank Premises and Equipment The Federal Reserve Act requires that each member bank Bank premises and equipment are stated at cost less subscribe to the capital stock of the Reserve Bank in an accumulated depreciation. Depreciation is calculated on a amount equal to 6 percent of the capital and surplus of the straight-line basis over estimated useful lives of assets member bank. As a member bank's capital and surplus ranging from 2 to 50 years. New assets, major alterations, changes, its holdings of the Reserve Bank's stock must be renovations and improvements are capitalized at cost as adjusted. Member banks are those state-chartered banks additions to the asset accounts. Maintenance, repairs and that apply and are approved for membership in the Sysminor replacements are charged to operations in the year tem and all national banks. Currently, only one-half of the incurred. Internally developed software is capitalized subscription is paid-in and the remainder is subject to based on the cost of direct materials and services and call. These shares are nonvoting with a par value of $100. those indirect costs associated with developing, imple- They may not be transferred or hypothecated. By law, menting, and testing software. each member bank is entitled to receive an annual dividend of 6 percent on the paid-in capital stock. This cumulative dividend is paid semiannually. A member (F) Federal Reserve Notes bank is liable for Reserve Bank liabilities up to twice the par value of stock subscribed by it. Federal Reserve notes are the circulating currency of the United States. These notes are issued through the various Federal Reserve agents to the Reserve Banks upon (H) Surplus deposit with such agents of certain classes of collateral security, typically U.S. government securities. These notes The Board of Governors requires Reserve Banks to mainare identified as issued to a specific Reserve Bank. The tain a surplus equal to the amount of capital paid-in as of Federal Reserve Act provides that the collateral security December 31. This amount is intended to provide additendered by the Reserve Bank to the Federal Reserve tional capital and reduce the possibility that the Reserve agent must be equal to the sum of the notes applied for by Banks would be required to call on member banks for such Reserve Bank. In accordance with the Federal additional capital. Reserve Banks are required by the Reserve Act, gold certificates, special drawing rights cer- Board of Governors to transfer to the U.S. Treasury tificates, U.S. government and federal agency securities, excess earnings, after providing for the costs of operatri-party agreements, loans allowed under Section 13, tions, payment of dividends, and reservation of an amount and investments denominated in foreign currencies are necessary to equate surplus with capital paid-in. pledged as collateral for net Federal Reserve notes out- The Consolidated Appropriations Act of 2000 (Public standing. The collateral value is equal to the book value Law 106-113, Section 302) directed the Reserve Banks to Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

326 87th Annual Report, 2000 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED transfer to the U.S. Treasury additional surplus funds of The maturity distribution of U.S. government and fed- $3,752 million during the Federal Government's 2000 eral agency securities bought outright and securities purfiscal year. Reserve Banks were not permitted to replenish chased under agreements to resell, which were held in surplus for these amounts during fiscal year 2000 which the SOMA at December 31, 2000, were as follows (in ended September 30, 2000; however, the surplus was millions): replenished by December 31, 2000, for eleven of the twelve Reserve Banks. Surplus was not equated to capital Par value at December 31, 2000, at one Reserve Bank where the amount of additional surplus required exceeded the U.S. Federal Maturities of government Bank's net income in 2000 due to the substantial increase securities held securities Total in capital paid-in and the transfer. In the event of losses, or a substantial increase in Within 15 days ..... $ 18,053 $• $ 18,053 capital, a Reserve Bank will suspend its payments to the 16 days to 90 days . 108,961 108,961 U.S. Treasury until such losses or increases in capital are 91 days to 1 year .. 125,539 125,539 recovered through subsequent earnings. Weekly pay- Over 1 year to ments to the U.S. Treasury may vary significantly. 5 years 132,792 130 132,922 Over 5 years to 10 years 55,462 55,462 (I) Income and Costs Related to Treasury Services Over 10 years 70,896 70,896 Total $511,703 $130 $511,833 Reserve Banks are required by the Federal Reserve Act to serve as fiscal agents and depositories of the United States. By statute, the Department of the Treasury is permitted, but not required, to pay for these services. The Repurchase costs of providing fiscal agency and depository services Maturities of agreement to the Treasury Department that have been billed but will securities held triparty not be paid are reported as the "Cost of unreimbursed (Contract amount) Treasury services." Within 15 days $31,405 16 days to 90 days 11,970 (J) Taxes 91 days to 1 year • • • Over 1 year to 5 years • • • The Reserve Banks are exempt from federal, state, and Over 5 years to 10 years • • local taxes, except for taxes on real property, which are Over 10 years • • • reported as a component of "Occupancy expense." Total $43,375 (4) U.S. GOVERNMENT AND FEDERAL AGENCY SECURITIES Total securities held under agreements to resell at December 31, 2000 were $43,375 million that consisted Securities bought outright are held in the SOMA at the entirely of agreements through third party custodial FRBNY. arrangements and are reported as Securities purchased under agreements to resell (tri-party). In August 1999, Total securities held in the SOMA at December 31, the FOMC extended the maximum permissible maturity 2000 and 1999, that were bought outright, were as fol- for securities purchased under agreements to resell from lows (in millions): 60 days to 90 days. - At December 31, 2000 and 1999, matched sale- 2000 1999 purchase transactions involving U.S. government securities with par values of $21,112 million and Par value $39,182 million, respectively, were outstanding. Matched Federal agency $ 130 $ 181 sale-purchase transactions are generally overnight U.S. government Bills 178,741 176,518 arrangements. Notes 240,178 218,467 At December 31, 2000 and 1999, U.S. government Bonds 92,784 82,978 securities with par values of $2,086 million and Total par value 511,833 478,144 $2,061 million, respectively, were loaned. Unamortized premiums 9,735 9,098 (5) INVESTMENTS DENOMINATED IN Unaccreted discounts (3,067) (3,340) FOREIGN CURRENCIES Total $518,501 $483,902 The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests in foreign government debt instruments. Foreign government debt instruments held include both securities bought outright and securities held under agreements to resell. These investments are guaranteed as to principal and interest by the foreign governments. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks Combined Financial Statements 327 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED Total investments denominated in foreign currencies, Bank premises and equipment at December 31 include valued at current exchange rates at December 31, were as the following amounts for leases that have been capitalfollows (in millions): ized (in millions): 2000 1999 2000 1999 European Union euros Bank premises and equipment $34 $33 Foreign currency deposits $ 4,633 $ 4,333 Accumulated depreciation (22) (19) Government debt instruments Capitalized leases, net $YL $14 including agreements to resell 2,743 2,538 Certain of the Reserve Banks lease unused space to Japanese yen outside tenants. Those leases have terms ranging from 1 Foreign currency deposits 2,752 323 to 15 years. Rental income from such leases totaled Government debt instruments including agreements $18 million and $17 million for the years ended Decemto resell 5,493 ber 31, 2000 and 1999, respectively. Future minimum lease payments under noncancelable agreements in exist- Accrued interest and amortization . 49 48 ence at December 31, 2000, were (in millions): Total $15,670 $16,140 2001 $17 2002 15 The maturity distribution of investments denominated 2003 12 in foreign currencies at December 31, 2000, were as 2004 10 follows (in millions): 2005 8 Thereafter _22 Maturities of Investments Denominated Total $84 in Foreign Currencies Within 1 year $14,706 (7) COMMITMENTS AND CONTINGENCIES Over 1 year to 5 years 418 Over 5 years to 10 years 433 At December 31, 2000, the Reserve Banks were obligated Over 10 years 113 under noncancelable leases for premises and equipment Total $15,670 with terms ranging from 1 to approximately 23 years. These leases provide for increased rentals based upon At December 31, 2000 and 1999, there were no open increases in real estate taxes, operating costs or selected foreign exchange contracts or outstanding F/X swaps. price indices. At December 31, 2000 and 1999, the warehousing Rental expense under operating leases for certain operfacility was $5,000 million, with no balance outstanding. ating facilities, warehouses, and data processing and office equipment (including taxes, insurance and mainte- (6) BANK PREMISES AND EQUIPMENT nance when included in rent), net of sublease rentals, was A summary of bank premises and equipment at December $64 million and $66 million for the years ended Decem- 31 is as follows (in millions): ber 31, 2000 and 1999, respectively. Certain of the Reserve Banks' leases have options to renew. 2000 1999 Future minimum rental payments under noncancelable Bank premises and equipment operating leases, net of sublease rentals, with terms of Land $ 192 $ 191 one year or more, at December 31, 2000, were (in mil- Buildings 1,285 1,222 lions): Building machinery and equipment 296 287 Construction in progress 163 98 Furniture and equipment 1,290 1,238 2001 $ 14 3,226 3,036 2002 10 2003 9 Accumulated depreciation (1,277) (1,175) 2004 8 2005 7 Bank premises and Thereafter $117 equipment, net $1,949 $1,861 Total $165 Depreciation expense was $182 million and $183 million for the years ended December 31, 2000 and 1999, At December 31, 2000, the Reserve Banks had contracrespectively. tual commitments through the year 2007 totaling $356.2 million for the maintenance of currency and check processing machines, none of which has been recognized. Two Reserve Banks contract for maintenance for these machines on behalf of the System and allocate the costs, annually, to each other Reserve Bank. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

328 87th Annual Report, 2000 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED The Reserve Banks are involved in certain legal actions Following is a reconciliation showing the beginning and claims arising in the ordinary course of business. and ending balance of the System Plan assets, the funded Although it is difficult to predict the ultimate outcome of status, and the prepaid pension benefit costs (in millions): these actions, in management's opinion, based on discussions with counsel, the aforementioned litigation and 2000 1999 claims will be resolved without material adverse effect Estimated fair value of plan on the financial position or results of operations of the assets at January 1 $6,156 $5,798 Reserve Banks. Actual return on plan assets 149 484 Contributions by employer • • • ... Contributions by plan participants .. 3 3 Benefits paid (132) (129) (8) RETIREMENT AND THRIFT PLANS Estimated fair value of plan Retirement Plans assets at December 31 $6,176 $6,156 The Reserve Banks currently offer two defined benefit Funded status $3,366 $3,580 Unrecognized initial net retirement plans to their employees, based on length of transition (obligation) (45) (91) service and level of compensation. Substantially all of the Unrecognized prior service cost 122 136 Reserve Banks' employees participate in the Retirement Unrecognized net actuarial (gain) .. (1,192) (1,767) Plan for Employees of the Federal Reserve System (Sys- Prepaid pension benefit cost 2,251 1,858 tem Plan) and the Benefit Equalization Retirement Plans offered by each individual Reserve Bank (BEP). Prepaid pension benefit costs are reported as a component The System Plan is a multi-employer plan with contri- of "Other assets." butions fully funded by participating employers. No separate accounting is maintained of assets contributed by the The weighted-average assumptions used in developing participating employers. FRBNY acts as the sponsor of the pension benefit obligation for the System Plan are as this Plan. The prepaid pension cost includes amounts follows: related to the participation of employees of the 12 Reserve Banks, the Board of Governors, and the Plan Administra- 2000 1999 tive Office in the plan. Discount rate 7.50% 7.50% Following is a reconciliation of the beginning and Expected long-term rate of ending balances of the System Plan benefit obligation (in return on plan assets 9.00% 9.00% millions): Rate of compensation increase 5.00% 5.00% The components of net periodic pension benefit credit 2000 1999 for the System Plan as of December 31 are shown below Estimated actuarial present value (in millions): of projected benefit obligation at January 1 $2,576 $2,774 2000 1999 Service cost—benefits earned during the period 80 89 Service cost—benefits earned Interest cost on projected during the period $ 80 $ 89 benefit obligation 191 169 Interest cost on projected Actuarial (gain) loss 90 (330) benefit obligation 191 169 Contributions by plan participants .. 3 3 Amortization of initial net Benefits paid (132) (129) transition obligation (46) (45) Plan amendments 2 Amortization of prior service cost 16 16 Estimated actuarial present value Recognized net (gain) (85) (76) of projected benefit Expected return on plan assets (549) (520) obligation at December 31 .... $2,810 $2,576 Net periodic pension benefit (credit) . $(393) $(367) Net periodic pension benefit (credit) is reported as a component of "Other expense." The Reserve Banks' projected benefit obligation and net pension costs for the BEP at December 31, 2000 and 1999, and for the years then ended, are not material. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal Reserve Banks Combined Financial Statements 329 NOTES TO THE COMBINED FINANCIAL STATEMENTS OF THE FEDERAL RESERVE BANKS—CONTINUED Thrift Plan At December 31, 2000 and 1999, the weightedaverage assumption used in developing the postretirement Employees of the Reserve Banks may also participate in benefit obligation was 7.50 percent. the defined contribution Thrift Plan for Employees of the For measurement purposes, an 8.75 percent annual rate Federal Reserve System (Thrift Plan). The Reserve of increase in the cost of covered health care benefits was Banks' Thrift Plan contributions totaled $47 million and assumed for 2001. Ultimately, the health care cost trend $45 million for the years ended December 31, 2000 and rate is expected to decrease gradually to 5.50 percent by 1999, respectively, and are reported as a component of 2008, and remain at that level thereafter. "Salaries and other benefits." Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A (9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS one percentage point change in assumed health care cost AND POSTEMPLOYMENT BENEFITS trend rates would have the following effects for the year Postretirement Benefits Other Than Pensions ended December 31, 2000 (in millions): In addition to the Reserve Banks' retirement plans, 1 Percentage 1 Percentage Point Increase Point Decrease employees who have met certain age and length of service requirements are eligible for both medical benefits Effect on aggregate and life insurance coverage during retirement. of service and The Reserve Banks fund benefits payable under the interest cost medical and life insurance plans as due and, accordingly, components of have no plan assets. Net postretirement benefit costs are net periodic actuarially determined using a January 1 measurement postretirement date. benefit cost .... $ 12 $ (9) Effect on accumulated postretirement Following is a reconciliation of beginning and ending benefit obligation ... 99 (82) balances of the benefit obligation (in millions): The following is a summary of the components of net 2000 1999 periodic postretirement benefit costs for the years ended December 31 (in millions): Accumulated postretirement benefit obligation at January 1 $600 $645 Service cost—benefits earned during 2000 1999 the period 16 18 Interest cost of accumulated Service cost—benefits earned during benefit obligation 44 39 the period $15 $18 Actuarial loss (gain) 14 (73) Interest cost of accumulated benefit Contributions by plan participants 3 3 obligation 44 39 Benefits paid (28) (25) Amortization of prior service cost (9) (9) Plan amendments (5) (7) Recognized net actuarial loss (1) ... Accumulated postretirement benefit Net periodic postretirement benefit costs .. $49 $48 obligation at December 31 $644 $600 Following is a reconciliation of the beginning and ending Net periodic postretirement benefit costs are reported as a balance of the plan assets, the unfunded postretirement component of "Salaries and other benefits." benefit obligation and the accrued postretirement benefit costs (in millions): Postemployment Benefits 2000 1999 The Reserve Banks offer benefits to former or inactive employees. Postemployment benefit costs are actuarially Fair value of plan assets at January 1 determined and include the cost of medical and dental Actual return on plan assets insurance, survivor income, disability benefits, and those Contributions by the employer 25 22 workers' compensation expenses self-insured by indi- Contributions by plan participants .. 3 3 Benefits paid (28) (25) vidual Reserve Banks. Costs were projected using the same discount rate and health care trend rates as were Fair value of plan assets at used for projecting postretirement costs. The accrued December 31 $. . . postemployment benefit costs recognized by the Reserve Unfunded postretirement benefit Banks at December 31, 2000 and 1999, were $102 milobligation $644 $600 lion and $93 million, respectively. This cost is included as Unrecognized prior service cost 95 99 a component of "Accrued benefit costs." Net periodic Unrecognized net actuarial gain/(loss) .. 7 23 postemployment benefit costs included in 2000 and 1999 operating expenses were $21 million and $20 million, Accrued postretirement benefit cost $746 $722 respectively. Accrued postretirement benefit costs are reported as a component of "Accrued benefit costs." 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

332 87th Annual Report, 2000 1. Statement of Condition of the Federal Reserve Banks, by Bank, December 31, 2000 and 1999 Millions of dollars Total Boston Item 2000 1999 2000 1999 ASSETS Gold certificate account 11,046 11,048 535 533 Special drawing rights certificate account 2,200 6,200 115 307 Coin 949 207 46 4 Loans To depository institutions 110 233 91 Other 0 0 0 Securities purchased under agreements to resell (triparty) 43,375 140,640 Federal agency obligations Bought outright 130 181 7 9 Held under repurchase agreements 0 0 0 0 U.S. Treasury securities Bought outright1 511,703 477,963 29,376 24,717 Held under repurchase agreements 0 0 0 0 Total loans and securities 555,318 619,017 29,385 24,817 Items in process of collection 8,019 7,278 473 383 Bank premises 1,460 1,365 93 93 Other assets Denominated in foreign currencies2 15,670 16,140 703 725 Other3 19,769 17,300 955 778 Interdistrict settlement account 0 0 2,782 9,921 Total assets 614,431 678,556 35,088 37,562 LIABILITIES Federal Reserve notes 563,450 600,662 31,891 34,764 Deposits Depository institutions 19,045 24,027 1,645 1,545 U.S. Treasury, general account 5,149 28,402 0 0 Foreign, official accounts 216 71 1 Other4 1,390 1,270 63 34 Total deposits 25,800 53,770 1,709 1,580 Deferred credit items 7,225 6,871 521 400 4,165 4,390 249 240 Other liabilities and accrued dividends5 00,640 665,694 34,371 36,985 Total liabilities CAPITAL ACCOUNTS 6,997 6,431 358 289 Capital paid in 6,794 6,431 358 289 Surplus 0 0 0 0 Other capital accounts 614,431 678,556 35,088 37,562 Total liabilities and capital accounts FEDERAL RESERVE NOTE STATEMENT 751,714 821,959 36,707 42,799 Federal Reserve notes outstanding (issued to Bank) 188,264 221,297 4,816 8,034 Less: Held by Bank 563,450 600,662 31,891 34,764 Federal Reserve notes, net Collateral for Federal Reserve notes Gold certificate account 11,046 11,048 Special drawing rights certificate account 2,200 6,200 Other eligible assets 0 0 U.S. Treasury and federal agency securities 550,205 583,414 DigitizedT footra lF cRolAlaSteEraRl 563,450 600,662 http://fraser.stlouisfed.org/ For notes see end of table. Federal Reserve Bank of St. Louis

Statistical Tables 333 1.—Continued NewYork Philadelphia Cleveland Richmond 2000 1999 2000 1999 2000 1999 2000 1999 4,428 4,435 414 319 520 566 750 834 874 2,431 83 187 104 299 147 516 74 9 52 8 67 11 117 38 0 0 2 1 0 0 5 12 0 0 0 0 0 0 0 0 43,375 140,640 50 72 5 5 7 10 8 14 0 0 0 0 0 0 0 0 197,518 190,346 21,313 14,316 28,635 27,667 30,038 35,957 0 0 0 0 0 0 0 0 240,944 331,059 21,320 14,322 28,643 27,677 30,051 35,983 893 941 384 282 282 401 658 493 166 164 51 50 154 158 128 125 3,230 3,277 486 479 1,083 1,081 4,121 3,356 8,577 8,056 769 522 964 900 1,689 1,218 -3,255 -69,615 1,353 8,761 2,260 3,273 2,402 646 255,930 280,757 24,911 24,930 34,078 34366 40,063 43,209 240,061 236,509 23,114 23,437 31,183 31,757 34,048 36,876 4,570 10,035 702 592 1,249 1,118 1,641 1,957 5,149 28,402 0 0 0 0 0 0 192 47 1 1 2 2 8 6 646 564 46 15 112 26 42 74 10,556 39,048 749 608 1,363 1,145 1,691 2,037 943 973 404 326 349 315 683 566 1,435 1,575 188 159 239 259 283 347 252,995 278,106 24,456 24,531 33,134 33,477 36,706 39,826 1,468 1,325 228 199 472 444 1,679 1,691 1,468 1,325 228 199 472 444 1,679 1.691 0 0 0 0 0 0 0 0 255,930 280,757 24,911 24,930 34,078 34,366 40,063 43,209 300,366 326,492 31,820 30,931 36,272 38,915 50,845 54,760 60,305 89,983 8,706 7,493 5,089 7,158 16,797 17,884 240,061 236,509 23,114 23,437 31,183 31,757 34,048 36,876 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

334 87th Annual Report, 2000 1. Statement of Condition of the Federal Reserve Banks, by Bank, December 31, 2000 and 1999—Continued Millions of dollars Atlanta Chicago Item 2000 1999 2000 1999 ASSETS Gold certificate account 802 724 1,064 993 Special drawing rights certificate account 166 450 212 549 Coin 83 20 114 32 Loans To depository institutions 14 25 34 Other ... 0 0 0 Securities purchased under agreements to resell (triparty) Federal agency obligations Bought outright 9 11 16 17 Held under repurchase agreements 0 0 0 0 U.S. Treasury securities Bought outrightl 34,060 29,093 61,207 44,890 Held under repurchase agreements 0 0 0 0 Total loans and securities 34,075 29,118 61,248 44,942 Items in process of collection 514 603 1,119 753 Bank premises 251 146 104 107 Other assets Denominated in foreign currencies 2 1,122 1,134 1,409 1,581 Other3 1,147 945 1,953 1,379 Interdistrict Settlement Account 4,499 13,643 -770 23,292 Total assets 42,658 46,784 66,453 73,628 LIABILITIES Federal Reserve notes 39,286 43,852 61,206 68,385 Deposits Depository institutions 1,097 899 2,796 2,970 U.S. Treasury, general account 0 0 0 0 Foreign, official accounts 2 2 3 3 Other4 86 36 134 56 Total deposits 1,185 937 2,933 3,029 Deferred credit items 877 772 575 637 320 302 476 420 Other liabilities and accrued dividends5 41,668 45,863 65,190 72,471 Total liabilities CAPITAL ACCOUNTS 495 460 632 578 Capital paid in 495 460 632 578 Surplus 0 0 0 0 Other capital accounts Total liabilities and capital accounts 42,658 46,784 66,453 73,628 FEDERAL RESERVE NOTE STATEMENT Federal Reserve notes outstanding (issued to Bank) 60,948 62,089 70,685 79,306 Less: Held by Federal Reserve Bank 21,662 18,237 9,479 10,920 Federal Reserve notes, net 39,286 43,852 61,206 68,385 NOTE. Components may not sum to totals because of and excludes securities sold and scheduled to be bought rounding back under matched sale-purchase transactions. 1. Includes securities loaned—fully guaranteed by U.S. Treasury securities pledged with Federal Reserve Banks— Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 335 1.—Continued St. Louis Minneapolis Kansas City Dallas San Francisco 2000 1999 2000 1999 2000 1999 2000 1999 2000 1999 359 337 158 140 340 313 514 575 1,162 1,279 71 175 30 78 66 175 98 341 234 692 51 10 33 13 67 17 91 16 155 30 8 37 5 10 31 11 5 10 23 12 0 0 0 0 0 0 0 0 0 0 5 6 1 2 4 5 4 9 14 19 0 0 0 0 0 0 0 0 0 0 19,438 15,722 2,154 5,716 17,052 14,333 15,140 23,816 55,770 51,389 0 0 0 0 0 0 0 0 0 0 19,451 15,765 2,159 5,729 17,087 14,350 15,148 23,835 55,807 51,421 539 471 516 599 579 474 334 296 1,727 1,581 34 32 126 128 49 51 138 146 166 165 385 327 572 549 436 381 513 616 1,609 2,635 643 498 140 209 571 457 544 743 1,816 1,594 -740 5,176 -642 -3,050 -818 3,969 -5,829 -9,087 -1,241 13,071 20,793 22,792 3,093 4,395 18,377 20,186 11,552 17,481 61,435 72,468 19,410 21,575 1,587 2,766 16,646 18,829 9,754 15,269 55,263 66,641 596 440 456 482 722 480 939 1,246 2,632 2,263 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 3 5 39 20 1 5 53 18 32 49 137 374 636 461 458 488 776 499 972 1,297 2,771 2,641 296 272 451 584 433 340 298 269 1,394 1,419 175 168 63 87 164 160 151 226 422 446 20,517 22,476 2,560 3,925 18,020 19,828 11,175 17,060 59,850 71,147 138 158 368 235 179 179 188 211 792 660 138 158 165 235 179 179 188 211 792 660 0 0 0 0 0 0 0 0 0 0 20,793 22,792 3,093 4,395 18,377 20,186 11,552 17,481 61,435 72,468 23,180 26,444 9,581 11,348 21,578 24,597 32,467 36,681 77,265 87,597 3,770 4,869 7,994 8,581 4,932 5,769 22,713 21,412 22,001 20,956 19,410 21,575 1,587 2,766 16,646 18,829 9,754 15,269 55,263 66,641 2. Valued monthly at market exchange rates. deposits are held solely by the Federal Reserve Bank of 3. The System total includes depository institution New York. overdrafts of $8 million for 2000 and $22 million for 5. Includes exchange-translation account reflecting the 1999. monthly revaluation at market exchange rates of foreign Digitized fo4r. FInRclAuSdeEs Ri nternational organization deposits of exchange commitments. $133 million for 2000 and $139 million for 1999. These http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

336 87th Annual Report, 2000 2. Federal Reserve Open Market Transactions, 2000 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 0 0 2,294 Gross sales 0 0 0 0 Exchanges 37,029 38,607 48,459 37,141 New bills 37,029 38,607 48,459 37,141 Redemptions 0 0 198 779 Others within 1 year Gross purchases 0 0 0 0 Gross sales 0 0 0 0 Maturity shift 3,566 6,877 5,034 0 Exchanges -4,360 -6,688 -3,515 0 Redemptions 390 0 0 568 0 to 5 years Gross purchases 160 0 740 1,723 Gross sales 0 0 0 0 Maturity shift -3,566 -5,210 -5,034 0 Exchanges 4,045 4,348 3,515 0 5 to 10 years Gross purchases 809 0 489 930 Gross sales 0 0 0 0 Maturity shift 0 -949 0 0 Exchanges 316 1,170 0 0 More than 10 years Gross purchases 1,069 0 330 0 Gross sales 0 0 0 0 Maturity shift 0 -717 0 0 Exchanges 0 1,170 0 0 All maturities Gross purchases 2,038 0 1,559 4,947 Gross sales 0 0 0 0 Redemptions 390 0 198 1,347 Matched transactions Gross purchases 492,277 340,127 401,404 336,103 Gross sales 471,663 339,585 401,841 334,751 Repurchase agreements Gross purchases 0 0 0 0 Gross sales 0 0 0 0 Net change in U.S. Treasury securities 22,262 542 923 4,952 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 337 2.—Continued May June July Aug. Sept. Oct. Nov. Dec. Total 0 0 1,825 531 231 779 2,507 509 8,676 0 0 0 0 0 0 0 0 0 36,386 44,008 33,718 42,797 37,006 38,142 45,182 39,428 477,904 36,386 44,008 33,718 42,797 37,006 38,142 45,182 39,428 477,904 2,297 4,188 4,902 3,438 3,898 2,656 1,021 1,145 24,522 164 1,875 1,284 2,770 716 0 580 1,420 8,809 0 0 0 0 0 0 0 0 0 13,063 4,672 5,152 7,040 0 8,663 7,957 0 62,025 -12,633 -3,109 -3,333 -7,396 0 -6,608 -7,012 0 -54,656 0 0 367 887 0 787 780 0 3,779 890 706 2,259 2,508 2,385 734 1,332 1,045 14,482 0 0 0 0 0 0 0 0 0 -10,334 -4,672 -5,152 -3,439 0 -8,663 -5,997 0 -52,068 10,063 3,109 3,333 5,418 0 6,608 5,737 0 46,177 0 0 0 1,914 448 0 510 111 5,871 0 0 0 0 0 0 0 0 0 -1,552 0 0 -3,601 0 0 -699 0 -6,801 2,570 0 0 1,254 0 0 1,275 0 6,585 528 1,151 500 727 547 982 0 0 5,833 0 0 0 0 0 0 0 0 0 -1,177 0 0 0 0 0 -1,261 0 -3,155 0 0 0 724 0 0 0 0 1,894 1,582 3,732 5,868 8,450 4,326 2,495 4,929 3,745 43,670 0 0 0 0 0 0 0 0 0 2,297 4,188 5,269 4,325 3,898 3,443 1,802 1,145 28,301 357,355 368,396 344,935 381,349 335,321 344,920 351,391 345,680 4,381,188 356,640 369,739 344,384 381,475 334,530 346,428 351,232 348,917 4,399,257 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -1 -1,800 1,150 3,999 1,219 -2,457 3,286 -637 33,439 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

338 87th Annual Report, 2000 2. Federal Reserve Open Market Transactions, 2000—Continued Millions of dollars Type of security and transaction Jan. Feb. Mar. Apr. FEDERAL AGENCY OBLIGATIONS Outright transactions Gross purchases 0 0 0 0 Gross sales 0 0 0 0 Redemptions 6 25 0 10 Repurchase agreements Gross purchases 0 0 0 0 Gross sales 0 0 0 0 Net change in agency obligations -6 -25 -10 TRIPARTY ARRANGEMENTS Repurchase agreements1 Gross purchases 61,345 82,998 61,230 79,585 178,880 81,335 78,425 Gross sales 62,253 Net change in triparty arrangements 117,535 1,663 -1,023 1,160 Total net change in System Open Market Account -95,279 2,180 -100 6,102 NOTE. Sales, redemptions, and negative figures reduce 1. Cash value of agreements through third-party custoholdings of the System Open Market Account; all other dial banks. These agreements are collateralized by U.S. figures increase such holdings. Components may not sum government and federal agency securities. to totals because of rounding. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 339 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 0 0 0 0 10 0 0 0 51 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -10 -51 107,375 70,850 66,485 47,265 66,080 64,428 87,125 95,470 890,236 105,885 70,315 46,230 62,308 79,295 79,365 987,501 75,925 67,285 1,490 535 -9,440 1,035 -1,205 2,120 7,830 16,105 -97,265 1,489 -1,265 -8,290 5,034 4 -337 11,116 15,468 -63,877 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

340 87th Annual Report, 2000 3. Federal Reserve Bank Holdings of U.S. Treasury and Federal Agency Securities, December 31, 1998-2000 Millions of dollars December 31 Change Description 1999 to 1998 to 2000 1999 1998 2000 1999 U.S. TREASURY SECURITIES Held outright1 532,815 517,145 473,068 15,670 44,077 By remaining maturity Bills 1-90 days 130,710 124,294 106,996 6,416 17,298 91 days to 1 year 69,143 91,405 108,703 -22,262 -17,298 Notes and bonds 1 year or less 73,812 59,899 49,149 13,913 10,750 More than 1 year through 5 years 132,792 124,169 107,730 8,623 16,439 More than 5 years through 10 years ... 55,461 51,107 44,822 4,354 6,285 More than 10 years 70,896 66,270 55,668 4,626 10,602 By type Bills 199,854 215,699 215,699 -15,845 0 Notes 240,177 218,467 187,895 21,710 30,572 Bonds 92,784 82,978 69,474 9,806 13,504 Repurchase agreements 0 0 19,674 0 -19,674 MSPs, foreign accounts 21,112 39,182 20,927 -18,070 18,255 MSPs, in the market 0 0 0 0 0 FEDERAL AGENCY SECURITIES Held outright1 130 181 338 -51 -157 By remaining maturity 1 year or less 0 51 102 -51 -51 More than 1 year through 5 years 130 10 61 120 -51 More than 5 years through 10 years 0 120 175 -120 -55 More than 10 years 0 0 0 0 0 By issuer Federal Farm Credit Banks 0 0 10 0 -10 Federal Home Loan Banks 0 6 38 -6 -32 Federal Land Banks 0 0 0 0 0 Federal National Mortgage Association .. 130 175 290 -45 -115 Repurchase agreements 10,702 0 -10,702 TRIPARTY ARRANGEMENTS Repurchase agreements2 43,375 140,640 0 -97,265 140,640 NOTE. Components may not sum to totals because of 2. Cash value of agreements through third-party custorounding. dial banks. These arrangements are collateralized by U.S. 1. Excludes the effects of temporary transactions— government and federal agency securities. repurchase agreements and matched sale-purchase agreements (MSPs). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 341 4. Number and Annual Salaries of Officers and Employees of the Federal Reserve Banks, December 31, 2000 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 222,800 69 8,718,822 1,100 156 56,148,405 1,326 65,090,027 New York 283,300 261 40,802,375 3,061 69 171,952,706 3,392 213,038,381 Philadelphia 205,000 58 7,232,200 1,150 68 49,631,410 1,277 57,068,610 Cleveland 222,700 49 5,649,700 1,251 47 50,568,588 1,348 56,440,988 Richmond 222,800 93 10,463,100 1,955 139 80,701,513 2,188 91,387,413 Atlanta 239,100 94 11,572,750 2,436 56 97,154,906 2,587 108,966,756 Chicago 249,000 85 10,378,640 1,942 78 94,337,451 2,106 104,965,091 St. Louis 209,000 71 7,686,050 1,162 75 45,797,021 1,309 53,692,071 Minneapolis 232,700 49 5,713,200 1,128 122 47,318,330 1,300 53,264,230 Kansas City 222,300 67 7,376,100 1,480 64 60,800,284 1,612 68,398,684 Dallas 221,000 63 4,902,298 1,402 78 50,320,848 1,544 55,444,146 San Francisco ... 303,000 77 10,643,700 2,246 72 115,295,602 2,396 126,242,302 Federal Reserve Information Technology . 0 27 3,423,700 636 8 40,973,642 671 44,397,342 Total 2,832,700 1,063 134,562,635 20,949 1,032 961,000,706 23,056 1,098,396,041 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

342 87th Annual Report, 2000 5. Income and Expenses of the Federal Reserve Banks, by Bank, 2000 Thousands of dollars Item Total Boston New York Philadelphia Cleveland CURRENT INCOME Loans 22,846 1,183 1,588 85 154 U.S. Treasury and federal agency securities 32,736,903 1,756,418 13,546,318 1,211,301 1,774,378 Foreign currencies 269,531 12,095 55,552 8,358 18,626 Priced services 881,544 47,104 91,254 42,663 59,087 Other 53,167 1,796 28,136 1,212 2,163 Total 33,963,992 1,818,596 13,722,848 1,263,619 1,854,408 CURRENT EXPENSES Salaries and other personnel expenses 1,187,573 67,356 230,222 59,860 59,070 Retirement and other benefits 319,774 18,872 70,027 14,170 16,090 Net periodic pension costs1 . -392,599 0 -392,609 -2 -1 Fees 46,452 1,890 7,280 981 2,604 Travel 54,473 2,419 8,329 2,234 3,573 Software expenses 82,598 3,760 9,817 2,263 5,329 Postage and other shipping costs 85,045 1,615 5,216 1,721 2,269 Communications 12,117 1,151 2,598 446 654 Materials and supplies 54,269 2,505 9,862 3,767 3,049 Building expenses Taxes on real estate 31,536 4,701 4,340 1,531 1,851 Property depreciation 67,545 4,428 12,775 2,987 5,795 Utilities 29,211 2,514 6,603 2,407 1,924 Rent 33,376 710 11,157 282 270 Other 34,459 907 10,050 1,426 2,539 Equipment Purchases 9,876 832 1,628 615 531 Rentals 31,932 167 1,872 271 282 Depreciation 114,215 6,569 19,847 5,107 5,988 Repairs and maintenance 86,611 5,338 10,529 4,530 5,159 Earnings-credit costs 385,204 23,567 61,438 14,167 39,251 Other 70,660 4,935 13,380 2,906 4,105 Shared costs, net2 0 5,141 23,971 12,837 13,862 Recoveries -68,061 -11,573 -7,741 -2,622 -2,917 Expenses capitalized3 -2,138 -161 0 -199 -252 Total 2,274,130 147,643 120,591 131,689 171,025 Reimbursements -302,442 -18,921 -54,878 -22,760 -26,345 Net expenses 1,971,688 128,722 65,713 108,929 144,680 For notes see end of table. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 343 5.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 513 5,555 3,396 4,265 3,207 834 1,259 1,982,103 2,044,067 3,544,503 1,151,197 196,802 1,019,316 1,098,193 3,412,308 70,889 19,295 24,242 6,620 9,846 7,497 8,828 27,681 68,127 162,529 98,248 47,100 46,371 68,367 58,427 92,266 2,396 4,786 4,672 1,183 454 942 1,062 4,366 2,124,028 2,231,485 3,677,220 1,209,497 257,738 1,099,328 1,167,344 3,537,880 148,203 117,833 111,939 56,832 55,838 72,588 70,723 137,107 38,417 33,412 29,353 16,761 14,541 16,615 20,840 30,677 0 8 -4 7 2 4 -3 -1 15,224 4,776 3,301 960 3,645 960 1,620 3,211 7,441 5,438 5,264 2,653 2,991 3,640 3,421 7,068 36,928 4,999 3,943 2,483 3,329 1,711 2,091 5,945 3,553 45,492 5,188 2,810 3,229 4,685 2,692 6,574 925 1,033 1,500 768 551 720 960 810 6,290 6,549 4,961 3,171 2,040 3,320 3,927 4,828 2,032 2,291 3,920 372 4,878 517 2,294 2,809 5,975 4,170 5,834 3,604 4,113 4,092 5,554 8,217 2,512 1,538 2,513 1,420 1,634 1,377 1,913 2,855 10,754 6,585 1,467 888 64 532 539 127 2,804 2,355 5,474 1,173 2,113 1,083 2,435 2,101 1,377 1,060 695 354 326 714 496 1,248 26,482 741 765 312 195 168 161 516 24,514 11,528 8,901 5,126 4,953 6,587 5,235 9,860 16,926 11,452 8,971 3,120 3,218 3,294 4,432 9,644 57,290 19,892 48,655 15,841 16,550 17,173 23,296 48,085 9,261 6,778 7,197 3,478 3,305 4,490 4,487 6,338 -152,343 5,451 21,780 20,775 8,089 16,360 14,575 9,502 -20,710 -3,185 -6,052 -1,817 -789 -1,336 -4,854 -4,465 -105 -590 -131 -59 0 -331 -285 -24 243,749 289,606 275,433 141,033 134,814 158,966 166,550 293,031 -34,174 -13,047 -19,700 -28,009 -24,697 -20,394 -14,116 -25,402 209,575 276,559 255,733 113,025 110,117 138,572 152,434 267,629 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

344 87th Annual Report, 2000 5. Income and Expenses of the Federal Reserve Banks, by Bank, 2000—Continued Thousands of dollars Item Total Boston New York Philadelphia Cleveland PROFIT AND LOSS Current net income 31,992,304 1,689,874 13,657,135 1,154,690 1,709,728 Additions to and deductions from (-) current net income 4 Profits on sales of U.S. Treasury and federal agency securities Profits on foreign exchange transactions 0 0 0 0 0 Other additions 2,138 30 22 32 7 Total additions 2,138 30 22 32 7 Losses on sales of U.S. Treasury and federal agency securities -82,313 -4,494 -32,270 -2,953 -4,684 Losses on foreign exchange transactions -1,409,988 -63,273 -290,614 -43,723 -97,439 Other deductions -1,776 -1 -15 -5 -2 Total deductions -1,494,077 -67,767 -322,899 -46,681 -102,125 Net addition to or deduction from (-) current net income -1,491,940 -67,738 -322,877 -46,648 -102,119 Cost of unreimbursed Treasury services 8,088 387 519 4,173 517 Assessments by Board Board expenditures5 188,067 8,296 39,458 5,827 12,835 Cost of currency 435,838 25,225 171,610 17,006 23,043 Net income before payment to U.S. Treasury 29,868,372 1,588,229 13,122,671 1,081,036 1,571,215 Dividends paid 409,614 18,781 89,281 12,705 27,482 Payments to U.S. Treasury (interest on Federal Reserve notes) 25,343,892 1,331,225 12,117,903 923,508 1,256,932 Transferred to/from surplus 4,114,865 238,223 915,487 144,823 286,802 Surplus, January 1 6,431,077 288,595 1,325,475 199,425 444,429 Surplus, December 316 6,793,942 358,447 1,467,657 227,900 471,943 NOTE. Components may not sum to totals because of 3. Includes expenses for labor and materials temporounding. rarily capitalized and charged to activities when products 1. Reflects the effect of Financial Accounting Stan- are consumed. dards Board Statement of Financial Accounting Stan- 4. Includes reimbursement from the U.S. Treasury for dards No. 87, Employers' Accounting for Pensions (SFAS uncut sheets of Federal Reserve notes, gains and losses on 87). The System Retirement Plan for employees is the sale of Reserve Bank buildings, counterfeit currency recorded on behalf of the System on the books of the that is not charged back to the depositing institution, and Federal Reserve Bank of New York, resulting in a reduc- stale Reserve Bank checks that are written off. tion in expenses of $392,656 thousand. The Retirement 5. For additional details, see the preceding chapter, Benefits Equalization Plan is recorded by each Federal "Board of Governors Financial Statements." Reserve Bank. 6. Reflects the statutorily required special transfer of 2. Includes distribution of costs for projects performed surplus to the U.S. Treasury of $3,752 billion on May 10, by one Reserve Bank for the benefit of one or more other 2000. Reserve Banks. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 345 5.—Continued Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco 1,914,453 1,954,926 3,421,487 1,096,472 147,621 960,756 1,014,910 3,270,251 0 0 0 0 0 0 0 0 10 1,965 10 1 1 2 56 2 10 1,965 10 1 1 2 56 2 -5,503 -5,248 -8,802 -2,920 -661 -2,608 -3,258 -8,911 -370,837 -100,938 -126,818 -34,630 -51,509 -39,219 -46,183 -144,807 -5 -2 -2 -2 -2 -4 -1,737 0 -376,345 -106,187 -135,622 -37,552 -52,172 -41,830 -51,177 -153,718 -376,335 -104,222 -135,612 -37,551 -52,171 -41,829 -51,122 -153,717 377 185 622 49 272 421 400 166 48,405 13,377 16,816 4,552 7,563 5,131 6,139 19,667 26,758 31,819 49,619 15,655 2,008 13,662 11,080 48,354 1,462,578 1,805,324 3,218,818 1,038,665 85,607 899,713 946,169 3,048,347 100,688 29,183 36,414 9,086 18,562 10,747 12,203 44,482 387,802 1,472,600 2,791,850 957,376 0 784,655 833,400 2,486,643 974,088 303,541 390,553 72,203 67,045 104,310 100,567 517,223 1,691,431 460,390 578,431 157,954 234,937 178,884 210,646 660,481 1,678,709 495,332 631,518 138,004 164,915 178,830 188,318 792,368 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

346 87th Annual Report, 2000 6. Income and Expenses of the Federal Reserve Banks, 1914-2000 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 347 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 e t r e a r l e R st e o se n rve (s t e o c t s io u n rp l 1 u 3 s b) ( t s o e c s t u io rp n l u 7 s ) notes 217 1,743 6,804 1,134 ' 1,134 5,541 48,334 5,012 2,704 70,652 5.654 60,725 82,916 6,120 59,974 15,993 6,307 10,851 -660 6,553 3,613 2,546 6,682 114 -3,078 6,916 59 2,474 7,329 818 8,464 7,755 250 5,044 8,458 2,585 21,079 9,584 4,283 22,536 10,269 17 -2,298 10,030 -7,058 9,282 2,011 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

348 87th Annual Report, 2000 6. Income and Expenses of the Federal Reserve Banks, 1914-2000—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 1,852,162 213,790 484,959 -533,557 2000 33,963,992 1,971,688 188,067 435,838 -1,500,027 Total, 1914-2000 535,786,356 38,180,719 3,068,527 6,082,928 3,346,655 Aggregate for each Bank, 1914-2000 Boston 28,916,698 2,580,331 91,291 118,486 352,767 New York 178,860,569 5,908,8863 1,183,114 776,579 2,009,808 Philadelphia 20,052,718 2,107,931 74,946 137,744 236,063 Cleveland 34,168,310 2,437,017 119,036 211,708 372,302 Richmond 42,099,293 3,362,341 -22,705 273,978 515,140 Atlanta 26,364,621 3,768,791 283,601 249,337 357,153 Chicago 67,932,649 4,928,968 430,347 379,498 725,337 St. Louis 18,622,625 1,976,866 48,100 82,514 227,061 Minneapolis 9,199,451 1,815,852 89,746 91,645 96,224 Kansas City 20,376,632 2,461,831 96,927 114,651 230,880 Dallas 26,156,253 2,497,090 389,938 189,379 282,488 San Francisco 63,036,537 4,334,815 562,315 443,008 677,706 Total 535,786,356 38,180,719 3,346,655 3,068,527 6,082,928 NOTE. Also see note at the end of table 1. 2. Represents transfers made as a franchise tax from Components may not sum to totals because of 1917 to 1932; transfers made under section 13b of the rounding. Federal Reserve Act from 1935 to 1947; and transfers ... Not applicable. made under section 7 of the Federal Reserve Act for 1996 1. For 1987 and subsequent years, includes the cost of and 1997. services provided to the Treasury by Federal Reserve Banks for which reimbursement was not received. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 349 6.—Continued Payments to U.S. Treasury Transferred Transferred Dividends paid t S ra ta n t s u f t e o r r s y 2 Fed In er te n a r l o e t R s e t s e o se n rve (s t e o c t s io u n rp l 1 u 3 s b) ( t s o e c s t u io rp n l u 7 s ) 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 25,409,736 479,053 409,614 0 25,343,892 4,114,865 5,074,773 44,113,958 431,724,494 -4 10,887,6153 208,047 2,579,504 22,623,237 135 545,482 1,296,263 17,307,161 150,414,517 -433 2,330,903 237,578 1,312,118 15,725,925 291 370,014 362,126 2,827,043 27,318,977 -10 758,181 492,631 3,083,928 31,662,058 -72 2,686,584 393,500 2,713,230 18,376,729 5 789,476 611,484 4,593,811 56,114,454 12 1,009,433 136,613 1,833,837 14,173,307 -27 240,554 153,126 416,227 6,405,077 65 310,982 184,163 1,249,703 15,936,885 -9 295,454 291,903 1,510,802 21,446,422 55 328,051 707,339 4,686,594 51,526,906 -17 1,222,500 5,074,773 44,113,958 431,724,494 -4 10,887,6154 3. This amount is reduced $2,165,864 thousand, which tion of section 13b surplus (1958), and $106,000 thouis related to the System Retirement Plan. See note 1, sand (1996), $107,000 thousand (1997), and table 5. $3,752,000 thousand (2000) transferred to the Treasury 4. The $10,887,615 thousand transferred to surplus as statutorily required; and was increased by transfer of was reduced by direct charges of $500 thousand for $11,131 thousand from reserves for contingencies (1955), charge-off on Bank premises (1927), $139,300 thousand leaving a balance of $6,793,942 thousand on Decemfor contributions to capital of the Federal Deposit Insur- ber 31, 2000. ance Corporation (1934), $4 thousand net upon elimina- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

350 87th Annual Report, 2000 7. Acquisition Costs and Net Book Value of Premises of the Federal Reserve Banks and Branches, December 31, 2000 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)l equipment BOSTON 22,074 98,872 15,161 136,106 93,416 NEW YORK 20,330 169,973 48,203 238,506 160,968 888 4,830 3,233 8,951 4,978 Buffalo 2,380 65,731 9,133 77,244 50,723 PHILADELPHIA 3,112 118,322 24,452 145,885 124,282 CLEVELAND 2,247 17,994 8,687 28,928 13,320 Cincinnati 1,658 13,323 8,668 23,650 16,813 Pittsburgh RICHMOND 6,629 71,736 25,398 103,763 76,421 Baltimore 6,478 27,101 4,929 38,509 24,931 Charlotte 3,130 27,541 4,750 35,421 26,499 ATLANTA 17,608 131,874 0 149,482 149,475 Birmingham 7,098 44,875 3,250 55,223 54,931 Jacksonville 1,730 18,304 2,976 23,010 16,991 48 Miami 3,746 14,608 3,790 22,144 14,613 Nashville 629 3,750 2,834 7,213 3,894 New Orleans 3,498 8,381 4,058 15,937 10,903 CHICAGO 5,044 122,801 12,767 140,612 96,066 Detroit 798 6,911 3,731 11,439 8,084 ST. LOUIS 700 22,531 8,353 31,584 17,908 Little Rock 1,148 4,882 1,940 7,970 6,115 Louisville 700 4,755 1,631 7,086 4,730 Memphis 1,136 4,679 3,484 9,299 5,680 MINNEAPOLIS 11,377 100,027 13,356 124,760 115,413 Helena 2,042 9,513 902 12,457 10,233 KANSAS CITY 2,048 19,531 8,379 29,959 14,986 Denver 3,188 8,056 3,700 14,945 8,837 Oklahoma City 646 11,243 3,493 15,382 10,353 Omaha 6,535 11,314 1,401 19,250 14,846 DALLAS 29,049 105,477 20,240 154,766 129,317 El Paso 262 2,911 1,018 4,191 2,540 Houston 0 257 0 257 257 26,481 San Antonio 482 5,656 2,722 8,861 5,880 SAN FRANCISCO .... 15,600 77,929 19,436 112,965 75,560 Los Angeles 4,847 58,282 9,821 72,950 53,173 Portland 2,884 11,453 2,982 17,319 14,173 Salt Lake City 495 9,407 2,832 12,733 9,695 Seattle 325 12,943 4,192 17,460 13,257 Total 192,540 1,447,773 295,903 1,936,216 1,460,264 26,530 NOTE. Components may not sum to totals because of 3. Covers acquisitions for banking-house purposes and rounding. Bank premises formerly occupied and being held pending 1. Includes expenditures for construction at some sale. offices, pending allocation to appropriate accounts. 2. Excludes charge-offs of $17,699 thousand before 1952. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 351 8. Operations in Principal Departments of the Federal Reserve Banks, 1997-2000 Operation 2000 1999 1998 1997 Millions of pieces (except as noted) Loans (thousands)' 4 7 Currency processed 31,505 23,092 26,341 24.510 Currency destroyed 8,179 7,257 7,251 7.769 Coin received2 5,138 6,719 8,454 9,603 Checks handled U.S. government checks 262 288 321 378 Postal money orders 230 226 213 204 Other 16,994 17,075 16,573 15,949 Government securities transfers 14 13 14 13 Transfer of funds 108 103 98 90 Automated clearinghouse transactions Commercial 3,812 3,344 2,966 2,603 Government 838 809 753 677 Food stamps redeemed 686 1,158 1,843 2,854 Millions of dollars Loansl 20,431 39,863 Currency processed 542,567 444,234 409,166 399,080 Currency destroyed 112,164 82,951 94,858 123,359 Coin received2 666 778 1,001 1,212 Checks handled U.S. government checks 282,791 306,077 343,670 401,989 Postal money orders 30,036 29,118 28,469 26,464 Other 13,849,084 13,788,037 13,076,097 12,169,087 Government securities transfers 188,133,178 179,486,282 197,781,609 174,949,330 Transfer of funds 379,756,389 343,381,658 328,748,912 288,419,808 Automated clearinghouse transactions Commercial : 11,619,954 10,862,424 10,338,376 9,128,779 Government 2,404,491 2,233,279 1,988,335 1,581,552 Food stamps redeemed 3,414 6,221 9,278 15,054 1. Collection of data discontinued effective 1999. 2. For 1999-2000, 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

352 87th Annual Report, 2000 9. Federal Reserve Bank Interest Rates on Loans to Depository Institutions, December 31, 2000 Extended credit3 Adjustment Seasonal Reserve Bank credit1 credit2 First thirty After thirty days of days of borrowing borrowing All Federal Reserve Banks 6.00 6.45 6.00 6.95 1. Adjustment credit is available on a short-term basis 3. Extended credit is available to depository institutions, to help depository institutions meet temporary needs for if similar assistance is not reasonably available from other funds that cannot be met through reasonable alternative sources, when exceptional circumstances or practices sources. Adjustment credit is usually provided at the involve only a particular institution or when an institution basic discount rate, but under certain circumstances a is experiencing difficulties adjusting to changing market special rate or rates above the basic discount rate may be conditions over a longer period of time. See section applied. See section 201.3(a) of Regulation A. 201.3(c) of Regulation A. 2. Seasonal credit is available to help smaller deposi- Extended-credit loans outstanding more than thirty tory institutions meet regular, seasonal needs for funds days will be charged a flexible rate somewhat above rates that cannot be met through special industry lenders and on market sources of funds; the rate will always be at that arise from a combination of expected patterns of least 50 basis points above the discount rate applicable to movement in their deposits and loans. The discount rate adjustment credit. The flexible rate is reestablished on the on seasonal credit takes into account rates on market first business day of each two-week reserve maintenance sources of funds and ordinarily is reestablished on the period. At the discretion of the Federal Reserve Bank, the first business day of each two-week reserve maintenance flexible rate may be charged on extended-credit loans that period; however, it is never lower than the discount rate are outstanding less than thirty days. applicable to adjustment credit. See section 201.3(b) of Regulation A. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 353 10. Reserve Requirements of Depository Institutions, December 31, 2000 Requirements Type of deposit Percentage of deposits Effective date Net transaction accounts' $0 million-$42.8 million2 3 12-28-00 More than $42.8 million3 10 12-28-00 Nonpersonal time deposits 4 0 12-27-90 Eurocurrency liabilities5 0 12-27-90 NOTE. Required reserves must be held in the form of liabilities subject to a zero percent reserve requirement deposits with Federal Reserve Banks or vault cash. Non- each year for the succeeding calendar year by 80 percent member institutions may maintain reserve balances with a of the percentage increase in the total reservable liabilities Federal Reserve Bank indirectly, on a pass-through basis, of all depository institutions, measured on an annual basis with certain approved institutions. For previous reserve as of June 30. No corresponding adjustment is made in requirements, see earlier editions of the Annual Report or the event of a decrease. The exemption applies only to the Federal Reserve Bulletin. Under the Monetary Con- accounts that would be subject to a 3 percent reserve trol Act of 1980, depository institutions include commer- requirement. Effective with the reserve maintenance cial banks, savings banks, savings and loan associations, period beginning December 28, 2000, 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 18, 2001, 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- $5.0 million to $5.5 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 Vi 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 IV2 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 28, 2000, for deposi- with an original maturity of 1V2 years or more has been tory institutions that report weekly, and with the reserve zero since October 6, 1983. maintenance period beginning January 18, 2001, 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 $44.3 million to $42.8 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 1 Vi years (see note 4). Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

354 87th Annual Report, 2000 11. Initial Margin Requirements under Regulations T, U, and X Percent of market value Short sales, Effective date T only1 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 355 12. Principal Assets and Liabilities and Number of Insured Commercial Banks in the United States, by Class of Bank, June 30, 2000 and 1999 Millions of dollars, except as noted Member banks Nonmember Item Total banks Total National State 2000 ASSETS Loans and investments 4,400,182 3,471,696 2,494,827 976,868 928,486 Loans, gross 3,371,753 2,683,443 1,979,302 704,140 688,311 Net 3,369,258 2,681,963 1,978,243 703,720 687,296 Investments 1,028,429 788,253 515,525 272,728 240,175 U.S. Treasury and federal agency securities 315,111 213,717 127,536 86,181 101,394 Other 713,318 574,536 387,989 186,547 138,782 Cash assets, total 244,286 201,238 151,594 49,644 43,048 LIABILITIES Deposits, total 3,259,112 2,485,487 1,788,445 697,041 773,625 Interbank 53,948 44,923 32,540 12,382 9,025 Other transaction 623,039 470,771 340,530 130,241 152,268 Other nontransaction 2,582,125 1,969,793 1,415,374 554,418 612,332 Equity capital 493,874 396,035 279,336 116,699 97,839 Number of banks 8,450 3,295 2,300 995 5,155 1999r ASSETS Loans and investments 3,963,597 3,134,241 2,373,434 760,807 829,356 Loans, gross 2,972,155 2,377,026 1,827,191 549,835 595,128 Net 2,969,510 2,375,558 1,826,044 549,514 593,952 Investments 991,442 757,215 546,243 210,972 234,228 U.S. Treasury and federal agency securities 307,796 205,994 140,710 65,284 101,802 Other 683,646 551,221 405,532 145,688 132,426 Cash assets, total 236,950 196,497 149,165 47,331 40,453 LIABILITIES Deposits, total 3,060,372 2,353,308 1,755,358 597,951 707,064 Interbank 54,662 47,320 36,797 10,524 7,342 Other transaction 650,132 496,420 371,086 125,334 153,713 Other nontransaction 2,355,578 1,809,568 1,347,475 462,094 546,010 Equity capital 457,317 367,616 270,989 96,627 89,701 Number of banks 8,653 3,410 2,410 1,000 5,243 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

356 87th Annual Report, 2000 13. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-2000 and Month-End 2000 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 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 i e c i g n r a h t g t i t e f s - s r t c o e 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 357 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- ing bilities With Curc t u io la n - ings8 T s r u e r a y - e F i o g r n - Other counts 5 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 - d ] ce E s x s - 11 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 1,898 0 1,884 14 4,760 211 51 19 20 258 0 0 2,220 0 2,161 59 4,817 203 16 8 21 272 0 0 2,212 0 2,256 -44 4,808 201 17 46 19 293 0 0 2,194 0 2.250 -56 4,716 208 18 5 21 301 0 0 2,487 0 2,424 63 4,686 202 23 6 21 348 0 0 2,389 0 2,430 -41 4,578 216 29 6 24 393 0 0 2,355 0 2,428 -73 4,603 211 19 6 22 375 0 0 2,471 0 2,375 96 5,360 222 54 79 31 354 0 0 1,961 0 1,994 -33 5,388 272 8 19 24 355 0 0 2,509 0 1,933 576 5,519 284 3 4 128 360 0 0 2,729 0 1,870 859 5,536 :3,029 121 20 169 241 0 0 4,096 0 2,282 1,814 5,882 :2,566 544 29 226 253 0 0 5,587 0 2,743 2,844 6,543 :2,376 244 99 160 261 0 0 6,606 0 4,622 1,984 6,550 :3,619 142 172 235 263 0 0 7,027 0 5,815 1,212 6,856 :2,706 923 199 242 260 0 0 8,724 0 5,519 3,205 7,598 :1,409 634 397 256 251 0 0 11,653 0 6,444 5,209 8,732 :2,213 368 1,133 599 284 0 0 4,026 0 7,411 6,615 11,160 :2,215 867 774 586 291 0 0 12,450 0 9,365 3,085 15,410 :2,193 799 793 485 256 0 0 13,117 0 11,129 1,988 20,499 :2,303 579 1,360 356 339 0 0 12,886 0 11,650 1,236 25,307 :2,375 440 1,204 394 402 0 0 14,373 0 12,748 1,625 28,515 :2,287 977 862 446 495 0 0 15,915 0 14,457 1,458 28,952 :2,272 393 508 314 607 0 0 16,139 0 15,577 562 28,868 1,336 870 392 569 563 0 0 17,899 0 16,400 1,499 28,224 1,325 1,123 642 547 590 0 0 20,479 0 19,277 1,202 27,600 1,312 821 767 750 106 0 0 16,568 0 15,550 1,018 27,741 1,293 668 895 565 714 0 0 17,681 0 16,509 1,172 29,206 1,270 247 526 363 746 0 0 20,056 0 19,667 389 30,433 1,270 389 550 455 111 0 0 19,950 0 20,520 -570 30,781 761 346 423 493 839 0 0 20,160 0 19,397 763 30,509 796 563 490 441 907 0 0 18,876 0 18,618 258 31,158 767 394 402 554 925 0 0 19,005 0 18,903 102 31,790 775 441 322 426 901 0 0 19,059 0 19,089 -30 31,834 761 481 356 246 998 0 0 19,034 0 19,091 -57 32,193 683 358 272 391 1,122 0 0 18,504 0 18,574 -70 32,591 391 504 345 694 841 0 0 18,174 310 18,619 -135 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

358 87th Annual Report, 2000 13. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-2000 and Month-End 2000—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasuryand cial Trea- Period federal agency secur u i H t n e i d l e e d s r Loans Float3 ot A h l e l r4 R F e O e s t de e h r r e a v r l e Total s G t o o l c d k6 c d r i e i r i c r g n a a t h i t w g t f e - s - s r s c t o e u u a u n r r n t c d - - y 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 7,1545 0 183 3,440 64 2,743 64,584 10,367 6,852 1970 62,142 62,142 0 335 4,261 57 1,123 67,918 10,732 400 7,147 1971 70,804 69,481 1,323 39 4,343 261 1,068 76,515 10,132 400 7,710 1972 71,230 71,119 111 1,981 3,974 106 1,260 78,551 10,410 400 8,313 1973 80,495 80,395 100 1,258 3,099 68 1,152 86,072 11,567 400 8,716 1974 85,714 84,760 954 299 2,001 999 3,195 92,208 11,652 400 9,253 1975 94,124 92,789 1,335 211 3,688 1,126 3,312 102,461 11,599 500 10,218 1976 104,093 100,062 4,031 25 2,601 991 3,182 110,892 11,598 1,200 10,810 1977 111,274 108,922 2,352 265 3,810 954 2,442 118,745 11,718 1,250 11,331 1978 118,591 117,374 1,217 1,174 6,432 587 4,543 131,327 11,671 1,300 11,831 1979 126,167 124,507 1,660 1,454 6,767 704 5,613 140,705 11,172 1,800 13,083 1980 130,592 128,038 2,554 1,809 4,467 776 8,739 146,383 11,160 2,518 13,427 1981 140,348 136,863 3,485 1,601 1,762 195 9,230 153,136 11,151 3,318 13,687 1982 148,837 144,544 4,293 717 2,735 1,480 9,890 63,659 11,148 4,618 13,786 1983 160,795 159,203 1,592 918 1,605 418 8,728 172,464 11,121 4,618 15,732 1984 169,627 167,612 2,015 3,577 833 0 12,347 186,384 11,096 4,618 16,418 1985 191,248 186,025 5,223 3,060 988 0 15,302 210,598 11,090 4,718 17,075 1986 221,459 205,454 16,005 1,565 1,261 0 17,475 241,760 11,084 5,018 17,567 1987 231,420 226,459 4,961 3,815 811 0 15,837 251,883 11,078 5,018 18,177 1988 247,489 240,628 6,861 2,170 1,286 0 18,803 269,748 11,060 5,018 18,799 1989 235,417 233,300 2,117 481 1,093 0 39,631 276,622 11,059 8,518 19,628 1990 259,785 241,431 18,354 190 2,566 0 39,880 302,421 11,058 10,018 20,402r 1991 288,429 272,531 15,898 218 1,026 0 34,524 324,197 11,059 10,018 21,014r 1992 308,517 300,423 8,094 675 3,350 0 30,278 342,820 11,056 8,018 21,447r 1993 349,866 336,654 13,212 94 963 0 33,394 384,317 11,053 8,018 22,095r 1994 378,746 368,156 10,590 223 740 0 33,441 413,150 11,051 8,018 22,994r 1995 394,693 380,831 13,862 135 231 0 33,483 428,543 11,050 10,168 24,003r 1996 414,715 393,132 21,583 85 5,297 0 32,222 452,319 11,048 9,718 24,966r 1997 455,260 431,420 23,840 2,035 561 0 32,044 489,901 11,047 9,200 25,543r 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 2000 555,208 511,833 43,375 110 795 0 36,896 593,009 11,046 2,200 31,219 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Statistical Tables 359 13.—Continued Factors absorbing reservefunds Deposits, other Member bank than reserves, with Federal ReserveBanks Other Cur- Trea- Other Re- Federal rency sury Federal quired Reserve clearcash 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 quired 11 cess11'12 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 ,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 ,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 ,090 0 0 2,968 26,052 8,036 35,197 -1,10314 93,717 460 10,393 352 ,357 0 0 3,063 25,158 8,628 35,461 -1,535 103,811 392 7,114 379 ,187 0 0 3,292 26,870 9,421 37,615 -1,265 114,645 240 4,196 368 ,256 0 0 4,275 31,152 10,538 42,694 -893 125,600 494 4,075 429 1,412 0 0 4,957 29,792 11,429 44,217 -2,835 136,829 441 3,062 411 617 0 0 4,671 27,456 13,654 40,558 675 144,774 443 4,301 505 781 0 117 5,261 25,111 15,576 42,145 -1,442 154,908 429 5,033 328 ,033 0 436 4,990 26,053 16,666 41,391 1,328 171,935 479 3,661 191 851 0 1,013 5,392 20,413 17,821 39,179 -945 183,796 513 5,316 253 867 0 1,126 5,952 20,693 197,488 550 9,351 480 ,041 0 1,490 5,940 27,141 211,995 447 7,588 287 917 0 1,812 6,088 46,295 230,205 454 5,313 244 ,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 ,298 0 1,618 8,486 36,713 286,963r 561 8,960 369 242 0 1,962 8,147 36,696 307,756r 636 17,697 968 ,706 0 3,949 8,113 25,464 334,701r 508 7,492 206 372 0 5,898 7,984 26,181 n.a. n.a. n.a. 365,271r 377 14,809 386 397 0 6,332 9,292 28,619 403,843r 335 7,161 250 876 0 4,197 11,959 26,592 424,244r 270 5,979 386 932 0 5,167 12,342 24,444 450,648r 249 7,742 167 892 0 6,601 13,829 17,923 482,327r 225 5,444 457 900 0 6,665r 15,500 24,173r 517,484 85 6,086 167 ,605 0 6,784 16,354 19,522 628,359 109 28,402 71 ,261 0 7,482r 17,256 16,545r 593,271 450 5,149 216 ,382 0 6,332 17,962 12,713 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

360 87th Annual Report, 2000 13. Reserves of Depository Institutions, Federal Reserve Bank Credit, and Related Items— Year-End 1918-2000 and Month-End 2000—Continued Millions of dollars Factors supplying reserve funds Federal Reserve Bank credit outstanding Spe- U.S. Treasury and cial Trea- Period federal agency securities draw- sury 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 f e s - s re c o ta n u u n c r t d - - y - Total Bought repur- assets5 ac- ing7 outright1 chase count agreement2 2000 Jan. ... 523,508 500,403 23,105 130 2,572 0 34,843 561,052 11,048 6,200 28,282 Feb. ... 525,689 500,921 24,768 109 456 0 32,248 558,502 11,048 6,200 28,622 Mar. ... 525,603 501,858 23,745 236 -271 0 34,173 559,741 11,048 6,200 29,003 Apr. ... 531,740 506,835 24,905 240 -243 0 34,994 566,731 11,048 5,200 29,348 May ... 533,279 506,884 26,395 431 1,366 0 32,353 567,429 11,048 5,200 29,671 June ... 532,020 505,090 26,930 512 166 0 34,015 566,713 11,046 4,200 29,979 July ... 523,733 506,243 17,490 628 1,260 0 35,110 560,732 11,046 4,200 30,283 Aug. ... 528,847 510,322 18,525 597 128 0 33,264 562,835 11,046 4,200 30,549 Sept. ... 528,863 511,543 17,320 372 256 0 35,890 565,381 11,046 3,200 30,811 Oct. ... 528,531 509,091 19,440 248 1,431 0 36,347 566,556 11,046 3,200 31,093 Nov. ... 539,727 512,457 27,270 136 -435 0 33,872 573,299 11,046 3,200 31,163 Dec. ... 555,208 511,833 43,375 110 795 0 36,896 593,009 11,046 2,200 31,219 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. thereafter, "Other Federal Reserve assets" and "Other Components may not sum to totals because of Federal Reserve liabilities and capital" are shown rounding. separately. . . . Not applicable. 6. Before January 30, 1934, includes gold held in r. Revised. Federal Reserve Banks and in circulation. n.a. Not available. 7. Includes currency and coin (other than gold) issued 1. Beginning in 1969, includes securities loaned— directly by the Treasury. The largest components are fully guaranteed by U.S. government securities pledged fractional and dollar coins. For details see "Currency and with Federal Reserve Banks—and excludes securities Coin in Circulation," Treasury Bulletin. sold and scheduled to be bought back under matched 8. Coin and paper currency held by the Treasury, as sale-purchase transactions. Beginning September 29, well as any gold in excess of the gold certificates issued 1971, includes federal agency issues bought outright. to the Reserve Bank. 2. Beginning December 1, 1966, includes federal 9. Beginning in November 1979, includes reserves agency obligations held under repurchase agreements. 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 361 13.—Continued Factors absorbing reserve funds Deposits, other Member bank than reserves, with reserves 9 Federal Reserve Banks Other Cur- Re- Trea- Other Federal rency quired sury Federal Reserve in clearcash Reserve liacir- hold- ac- ing bilities With Curc t u io la n - ings8 T s r u e r a y - F ei o g r n - Other counts 9 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 - d ' ce E ss x " - '1 Banks 566,568 125 6,119 82 265 0 7,031 18,101 8,291 564,877 162 5,004 129 243 0 6,526 18,785 8,647 563,200 174 4,357 125 188 0 6,615 19,752 11,581 563,825 203 15,868 142 251 0 6,535 18,558 6,945 570,521 140 5,445 110 226 0 6,435 15,271 15,199 571,115 76 6,208 105 203 0 6,350 15,719 12,163 568,806 118 5,392 76 228 0 6,259 15,331 10,050 571,430 166 5,961 79 214 0 6,258 15,180 9,343 568,612 184 8,459 139 177 0 6,295 15,243 11,329 572,397 289 5,360 115 245 0 6,346 16,416 10,728 579,545 344 4,382 104 276 0 6,179 18,199 9,679 593,271 450 5,149 216 1,382 0 6,332 17,962 12,713 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

362 87th Annual Report, 2000 14. Banking Offices and Banks Affiliated with Bank Holding Companies in the United States, December 31, 1999 and 2000 Commercial banks1 Statechartered Type of office Total Member savings Total Nonmember banks Total National State All banking offices BANKS Number, Dec. 31, 1999 .. 8,986 8,528 3,320 2,311 1,009 5,208 458 Changes during 2000 New banks 200 192 53 38 15 139 8 Banks converted into branches -444 -431 -243 -160 -83 -188 -13 Ceased banking operation2 -46 -36 -13 -12 -1 -23 -10 Other3 0 5 47 -3 50 -42 -5 Net change -290 -270 -156 -137 -19 -114 -20 Number, Dec. 31,2000 .. 8,696 8,258 3,164 2,174 990 5,094 438 BRANCHES AND ADDITIONAL OFFICES Number, Dec. 31, 1999 .. 67,559 64,246 47,054 35,833 11,221 17,192 3,313 Changes during 2000 New branches 2,013 1,881 1,179 744 435 702 132 Branches converted from banks 444 436 278 181 97 158 8 Discontinued2 -1,528 -1,421 -1,256 -980 -276 -165 -107 Other3 0 172 467 -1,518 1,985 -295 -172 Net change 929 1,068 668 -1,573 2,241 400 -139 Number, Dec. 31, 2000 .. 68,488 65,314 47,722 34,260 13,462 17,592 3,174 Banks affiliated with bank holding companies BANKS Number, Dec. 31, 1999 .. 6,861 6,725 2,770 1,911 859 3,955 136 Changes during 2000 BHC-affiliated new banks 233 223 87 59 28 136 10 Banks converted into branches -412 -404 -236 -156 -80 -168 -8 Ceased banking operation2 -39 -30 -13 -12 -1 -17 -9 Other3 0 5 43 -2 45 -38 -5 Net change -218 -206 -119 -111 -8 -87 -12 Number, Dec. 31,2000 .. 6,643 6,519 2,651 1,800 851 3,868 124 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

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

364 87th Annual Report, 2000 The Federal Reserve System r 9 ~ BOSTON MINNEAPOLIS I 7 12 •_ Q* 3 •• NEW YORK CHICAGO I SAN FRANCISCO 10 CLE 4 V ELAND * PHILADELPHIA KANSAS CITY I ST LOUIS RICHMOND 8 5 11 ATLANTA DALLAS LEGEND Both pages Facing page • Federal Reserve Bank city • Federal Reserve Branch city Board of Governors of the Federal — Branch boundary Reserve System, Washington, D.C. NOTE The Federal Reserve officially identifies Bank serves the Commonwealth of Districts by number and by Reserve Puerto Rico and the U.S. Virgin Islands; Bank city (shown on both pages) and by the San Francisco Bank serves Ameriletter (shown on the facing page). can Samoa, Guam, and the Common- In the 12th District, the Seattle wealth of the Northern Mariana Islands. Branch serves Alaska, and the San Fran- The maps show the boundaries within cisco Bank serves Hawaii. the System as of year-end 2000. 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 365 1-A 2-B 3-C 4-D 5-E Pittsburgh Balti Buffalo •Cincinnati • Charlotte BOSTON NEW YORK PHILADELPHIA CLEVELAND RICHMOND 6-F 7-G 8-H TN_^ •Nashville it; ) m F Birmingham - Detroit Louisville 4^ Jacksonville ©Memphis # New Orleans **o Little) Rock ( M^ ATLANTA CHICAGO ST. LOUIS 9-1 • Helena MINNEAPOLIS 10-J 12-L Omaha* Denver Oklahoma Cit> KANSAS CITY Salt Lake City * Ei Paso •Los Angeles San Antonio DALLAS SAN FRANCISCO Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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

369 Index Abusive practices, home equity lending, Banking organizations—Continued 92 Examinations and inspections, 115-24 Agreement corporations, 122 Internal control, accounting, and Agriculture, U.S. Department of, 105 disclosure, 127 American Homeownership and Economic Overseas investments, 138 Opportunity Act of 2000, 169 Recourse obligations, 125 Applications, processing of, 97 Risk-focused supervision of large, 120 Assets and liabilities Structure, regulation of, 135-39 Banks, insured commercial, by class, Basel Capital Accord, New, 116, 126 355 Basel Committee on Banking Supervision Board of Governors, 310 Reports, 126, 127 Federal Reserve Banks, 320, 332-35 Best Practices for Credit Risk Disclosure, Auditors' reports, 309, 317, 319 127 Automated clearinghouse services, 149, Best Practices in Consumer Credit 184 Education, forum, 100 Automated teller machines, 102 Board of Governors (See also Federal Availability of Funds and Collection of Reserve System) Checks (See Regulations: CC) Consumer Advisory Council, 96, 279 Financial statements, 309-16 Balance sheets Interagency coordination, 167 Board of Governors, 310 Members and officers, lists, 275-77, Federal Reserve Banks, combined, 304-06 319-29 Mission, 165 Federal Reserve priced services, 160 Bank examiners, training, 103 Policy actions, 175-88 Bank holding companies Strategic plans, 165 Applications, 97, 138, 139 Book-entry securities, Fedwire, 148 Financial holding companies, 180, 181 Borrowing, business, 44 Inspections, 115 Business spending, investment, and finance, Municipal securities dealers and 10-12, 42-45, 68-71 securities subsidiaries, 119 Reports to the Federal Reserve, 130 CAESAR (See Complaint Analysis Securities borrowing transactions, 178 Evaluation System and Reports) Stock repurchases by, 138 Call Reports, revisions to, 131 Transfer agents, 119 Capital Bank Holding Companies and Change in Accounts, Federal Reserve Banks, Bank Control (See Regulations: Y) 332-35 Bank Holding Company Act, 135-37 Changes in, Federal Reserve Banks, 322 Bank Merger Act, 137 Framework, simplified, non-complex Bank mergers, consolidations, and institutions, 172 acquisitions, 97 Standards, 124, 126 Bank Secrecy Act, deterring money Cash flows, Board of Governors, 312 laundering, 140 Cash services, Federal Reserve Banks, 149 Banking Organization National Desktop Change in Bank Control Act, 137 (BOND), 121 Changing Financial Markets and Banking organizations, U.S. Community Development, 2001 Capital adequacy, 126 conference, 101 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

370 87th Annual Report, 2000 Check collection and processing, Federal Deposits Reserve Banks, 143, 146 Federal Reserve Banks, 332-35, 357, Check Modernization Project, 143 359, 361 Check standardization, 144 Insured commercial banks, 355 Civil money penalties, 183 Direct bill paying, 102 College for Financial Planning, 100 Direct deposit, 102 Commercial banks, number of, 355, 362 Directors, Federal Reserve Banks and Committee of Sponsoring Organizations of Branches, list, 283-303 the Treadway Commission (COSO), Disclosure and Reporting of CRA-Related 156 Agreements {See Regulations: G) Commodity Futures Modernization Act of Disclosure requirements, 97, 139, 176 2000, 169 Discount rate {See also Interest rates), Community banks, risk-focused 184-88 Disposable income, 8 supervision, 121 Community Reinvestment Act, 104 Economic projections, 37-39, 62-64 Compensation, 49 Economies, foreign, 27-32, 47, 55-60, Complaint Analysis Evaluation System and 84-88 Reports, 108 Argentina, 30, 56 Compliance examinations, 103 Asia, 27, 30, 31, 55, 56, 87 Consumer Advisory Council, 96, 279 Brazil, 31, 55, 88 Consumer and community affairs, 91-111 Canada, 30, 59, 85, 87 Consumer complaints, 108-11 China, 31, 57, 87 Consumer Handbook to Credit Protection Europe, 28, 84 Laws, 100 Indonesia, 31, 87 Consumer Leasing {See Regulations: M) Japan, 27, 29, 86 Consumer regulations, compliance, 104-08 Latin America, 27, 88 Consumer spending, 65 Mexico, 27, 30, 31, 56 Consumers, privacy protection, 91, 178 Russia, 57 Credit bureaus, reports to, 131 United Kingdom, 58 Credit risk, recourse obligations, 125 Economy, U.S. Currency and coin, 150 Business sector, 10-12, 42-45, 68-71 Capital account, 15, 47, 74 Daylight overdraft posting, 183 Debt, U.S., 25, 53 Debit cards, 102 Equity prices, 23-25, 53, 59, 82 Debt and depository intermediation, 25, 53, Financial markets, 51, 80 83 Foreign exchange operations, 32, 47 Debt, U.S. economy, 25, 53, 67 Government sector, 12-15, 45^7, 71-73 Depository institutions Household sector, 7-9, 41, 65-68 Debt, 25, 53 Interest rates, 20-23, 52, 80 Deposits, 330, 332-35 Labor market, 16-18, 48-50, 75-78 Disclosure requirements, 176, 183 Monetary aggregates, 25, 54, 84 Framework, simplified, non-complex Monetary policy, 3-6, 33-40, 60-64 institutions, 172 Prices, 18-20, 50, 78-80 Insurance products, 177 Trade and the current account, 15, 16, Mortgage lending patterns and data 47,73 reporting, 98, 171 Edge Act corporations, 122 Reserve requirements, amendment, 175 Electronic access and delivery, checks, 144 Reserves, 356-61 Electronic Banking Group Initiatives and Risk-based capital standards, 125 White Papers, 126 Securities borrowing transactions, 178 Electronic Federal Tax Payment System Services, Federal Reserve Banks, 153 (EFTPS), 154 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 371 Electronic fund transfers (See also Federal Reserve Banks—Continued Regulations: E), 102, 147-49, 152 Audits of, 156 Electronic Fund Transfers Act, effects, 102 Branches Electronic Signatures in Global and Directors, list, 283-303 National Commerce Act, 169 Officers, list, 281 Electronic Transfer Accounts, 154 Premises, 159, 350 Employment, 17, 75 Vice presidents in charge, list, 281 Enforcement actions, Federal Reserve Community affairs activities, 101 System, 120 Community development activities, Equal Credit Opportunity (See Regula- 91-96 tions: B) Condition statements, 320, 332-35 Euro, 58, 85 Conferences of chairmen, presidents, and Examinations and inspections first vice presidents, 283 Bank holding companies, 115 Deposits, 332-35 Compliance with consumer protection Directors, list, 283-303 laws, 103, 104-08 Discount rate, 351 Fair lending, 98 District Banks Federal Reserve Banks, 156 Atlanta, 101, 159 International banking activities, 122-24 Boston, 101, 149, 153 Specialized Chicago, 101, 149, 159 Fiduciary activities, 119 Cleveland, 101, 153 Government and municipal securities Dallas, 101, 149, 153, 159 dealers and brokers, 119 Kansas City, 102, 149, 153, 159 Information technology activities, 118 Minneapolis, 149, 153, 154 Securities clearing agencies, 119 New York, 101, 153, 159 Transfer agents, 119 Philadelphia, 152 State member banks, 115 Richmond, 153, 159 Supervisory policy, 124-32 San Francisco, 101, 149, 159 St. Louis, 154 Fair lending examinations, 98 Examinations of, 156 Farm Credit Administration, 105 Financial statements, combined, 160-63, Federal Advisory Council, 278 319-29 Federal agency securities Holdings of loans and securities, 158, Federal Reserve Banks, 332-35, 340, 332-35, 340, 342-45, 356-61 356, 358, 360 Income and expenses, 161, 321, 342-45, Federal Reserve open market 346, 348 transactions, 336-39 Officers and employees, number and Federal Financial Institutions Examination salaries, 341, 342 Council, 99, 103, 105, 106, 108, 131 Officers, list, 281 Federal funds rate, 184 Operations, volume, 351 Federal Open Market Committee Payments to the U.S. Treasury, 347, 349 Authorizations, 189, 191, 196, 197 Premises, 159, 320, 332-35, 350 Directives and instructions, 191, 193, Priced services, 145-50, 160, 342-45 199, 200 Salaries of officers and employees, 341, Meetings, minutes of, 194, 209, 218, 342 225, 234, 242, 249, 257 Securities and loans, holdings, 158 Telephone conference, 266 Services Members and officers, list, 277 Automated clearinghouse, 149 Notation vote, 233 Book-entry securities, 148 Federal Reserve Banks Cash, 149 Assessments by Board of Governors, Check collection, 146 346, 348 Depository, 151, 153 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

372 87th Annual Report, 2000 Federal Reserve Banks—Continued Foreign Services—Continued Banking organizations, U.S. activities, Fedwire funds transfer, 147-49 122, 123, 137 Fiscal agency, 152 Currencies, 27-32, 55-60, 84-88, 191, Float associated with, 150 193, 199, 200, 342-45 Food coupon, 155, 351 Economies (See Economies, foreign) Noncash collection, 149 Exchange operations, 32, 47 Postal money order, 155 Office operations, U.S. banking Tax payments, 153 organizations, 122 Federal Reserve notes, 150, 347, 349 Trade, 15, 47 Federal Reserve System (See also Board of Governors) Gasoline prices, 60 Applications and proposals, 135-39 Georgia Avenue Business Research Center, Decisions, public notice of, 139 94 Enforcement actions and civil money Gold certificate account of Reserve Banks penalties, 120 and gold stock, 332-35, 356, 358, 360 Examinations and inspections, 115 Gold prices, 60 Maps, 364, 365 Golden dollar, 150 Membership, 142, 176 Government Staff training, 132-35 Depository services, Federal Reserve Supervision and regulation Banks, 153 responsibilities, 113-42 Receipts, spending, and debt, 12-15, Technical assistance, 124 45-47, 71-73 Federal spending, receipts, and saving, Securities dealers and brokers, 12-15, 45-47, 71-73 examination of, 119 Federal tax payments, 153 Government Performance and Results Act Federal Trade Commission, 105-07 of 1993, 165 Fedline for the Web, check services, 144 Gramm-Leach-Bliley Act, 128 Fedline for Windows, 156 Fednet, 155 Home equity lending, abusive practices, Fedwire, 147-19, 152, 162 92 FFIEC (See Federal Financial Institutions Home Mortgage Disclosure (See Examination Council) Regulations: C) Fiduciary activities, supervision of, 118 Home Mortgage Disclosure Act, data on Financial loan transactions, 98 Disclosure, state member banks, 139 Home Ownership and Equity Protection Holding companies, 118, 128, 136, Act, 92 179-82 Household sector, 7-9, 41, 65-68 Markets, 51 Housing and Urban Development, Statements Department of, complaint referrals, Board of Governors, 309-16 111 Federal Reserve Banks, combined, 319-29 Image services system, 144 Federal Reserve priced services, Income and expenses 160-63 Board of Governors, 311 Subsidiaries, 176, 177 Federal Reserve Banks, 157, 161, 321, Finders, financial holding companies, 181 342^5, 346, 348 Fiscal agency services, Federal Reserve Federal Reserve priced services, 145-50, Banks, 152 160, 342-45 Float, Federal Reserve, 150 Personal, 66 Food coupon services, 155, 351 Information security, 129 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 373 Information technology Litigation—Continued Examinations, 125 Dime Bancorp, Inc., 269 Initiatives, 155 El Bey, 269 Supervision of, by Federal Reserve Federal Bureau of Investigation, 270 Banks, 118 Folstad, 270 Supervisory Information Technology Fraternal Order of Police, 271 (SIT), 132 Guerrero, 269 Insurance products, sale by depository Howe, 269 institutions, 177 Hunter, 270, 271 Insured commercial banks, assets and Individual Reference Services Group, liabilities, 355 Inc., 270 Interagency Guidelines Establishing Interfinancial Services, Ltd., 269 Standards for Safeguarding Customer Internal Revenue Service, 270 Information, 129 Irontown Housing Corporation, 269 Interest rates (See also Discount rates and Kerr, 271 Federal funds rate), 52, 80, 352 Mann, 270 Interests, residual, 125 Nelson, 271 Internal Audit in Banking Organizations Pharaon, 269 and the Relationship of the Reed Elsevier Inc., 270 Supervisory Authorities with Internal Reno, 269 and External Auditors, 111 Sedgwick, 270 Internal-risk-based (IRB) approach to State Department, U.S., 270 assessing capital adequacy, 116 Toland, 270 International Banking Act, applications Trans Union, LLC, 270 under, 137 Treasury, U.S. Department of the, 271 International banking activities, supervision Wasserman, 270 of, 122-24 Loans International economic developments, Characteristics of applicants, proposed 27-32, 84-88 rules, 100 Investments Federal Reserve Banks Commercial banks, 355 Holdings of and income from, 332-35, Federal Reserve Banks, 332-35 342, 351, 356, 358, 360 Fixed, 10, 68 Interest rates for depository High-tech, 43 institutions, 352 Inventory, 69 Home equity practices, 92 Overseas, by U.S. banking organizations, Insured commercial banks, 355 138 Loss reserves, 129 Residential structures, 9, 66 Write-up standards, 130 Job availability, 16-18, 48-50, 75-80 Maps, Federal Reserve System, 364, 365 Margin requirements, 354 Labor market, 16-18, 48-50, 75-80 Margin stocks, 140, 354 Legislation, federal, 169 Member banks (See also State member Litigation involving the Board of banks), 122 Governors Assets and liabilities, 355 Albrecht, 270 Foreign branches, 122 Ali, Sheriff Gerry, 270 Number of, 355, 362 Artis, 270 Members and officers, Board of Governors, Bank for International Settlements, 269 275-77, 304-06 Barnes, 269 Membership of State Banking Institutions Bennett, 270 in the Federal Reserve System (See Bettersworth, 270 Regulations: H) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

374 87th Annual Report, 2000 Merchant banking activities, 128, 181 Publications and reports—Continued Monetary aggregates (Ml, M2, M3), 26, Condition and Income (See Call Reports) 39, 54, 84 Consumer Handbook to Credit Monetary policy, 3-6, 34-37, 60-64 Protection Laws, 100 Monetary policy reports to the Congress Consumer regulation, compliance, February 17, 2000, 33-60 104-08, 132 July 20, 2000, 60-88 Credit bureaus, 131 Money and debt growth, 26, 39, 55, 84 Electronic Banking Group Initiatives and Money laundering, 140 White Papers, 111 Mortgage lending, 98 Interagency Guidelines Establishing Municipal securities dealers, explanation Standards for Safeguarding of, 119 Customer Information, 129 Internal Audit in Banking Organizations National Examination Data system, 132 and the Relationship of the National Information Center (NIC), 132 Supervisory Authorities with National Money Laundering Strategy for Internal and External Auditors, 127 2000-2001, 141 National Money Laundering Strategy for New Capital Adequacy Framework: 2000-2001, 141 Pillar 3, Market Discipline, 126 Payday Loans—Costly Cash, 107 Noncash collection services, Federal Principles for the Management of Credit Reserve Banks, 149 Risk, 127 Nonmember banks, 355, 362 Range of Practice in Banks' Internal Notes, currency, 150 Rating Systems, 126 Report to G7 Finance Ministers and Oil prices, 60 Central Bank Governors on Opt-out requirement, consumer privacy International Accounting Standards, notices, 91, 97, 178 111 Outsourcing guidance, 126 SAR Activity Review: Trends, Tips, and Overseas investments, 122, 138 Issues, 141 Suspicious Activity Report, 141 Payday loans, 96 Payday Loans—Costly Cash, 107 Range of Practice in Banks' Internal Personal consumption, 7 Rating Systems, 126 Point-of-sale systems, 102 Regulations Policy statements and other actions, 183 B, Equal Credit Opportunity, 105 Postal money orders, services, 155 C, Home Mortgage Disclosure, 96, 97, Predatory lending, 92, 97 171 Premises, Federal Reserve Banks, 159, 320, D, Reserve Requirements of Depository 332-35, 350 Institutions, 175, 353 Priced services, Federal Reserve Banks, E, Electronic Fund Transfers, 106 145-50, 160, 342 G, Disclosure and Reporting of Prices, 18-20, 50, 78-80, 82 CRA-Related Agreements, 96, 176 PricewaterhouseCoopers LLP, 157, 319 H, Membership of State Banking Principles for the Management of Credit Institutions in the Federal Reserve Risk, 126 System, 92, 176, 178 Privacy, consumer, 97, 178 M, Consumer Leasing, 106 Profit and loss, Federal Reserve Banks, 344 P, Privacy of Consumer Financial Publications and reports Information, 91, 178 A New Capital Adequacy Framework: T, Credit by Brokers and Dealers, 354 Pillar 3, Market Discipline, 126 U, Credit by Banks for the Purpose of Best Practices for Credit Risk Purchasing or Carrying Margin Disclosure, 127 Stocks, 354 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Index 375 Regulations—Continued State member banks X, Borrowers of Securities Credit, 354 Applications by, 138 Y, Bank Holding Companies and Change Community Reinvestment Act, in Bank Control, 178-82 compliance, 104 Z, Truth in Lending, 91, 96, 106, 183 Complaints against, 109 AA, Unfair or Deceptive Acts or Examinations of, 104, 115, 119 Practices, 108 Financial disclosure by, 139 CC, Availability of Funds and Collection Financial subsidiaries, 176 of Checks, 108 Foreign branches, 122 DD, Truth in Savings, 108 Information technology, 118 Reports (See Publications and reports) Insurance and annuities sales, 93 Reserve Banks' Retail Payments Office, Loans to executive officers, 141 144 Number, 355, 362 Reserve Requirements of Depository Securities clearing agencies, 119 Institutions (See Regulations: D) Securities dealers and brokers, 119 Reserves of depository institutions, 356-61 Transfer agents, 119 Revenue and income Stock repurchases, bank holding Board of Governors, 311 companies, 138 Federal Reserve Banks, 160-63, 321, Supervision and regulation, Federal Reserve System, responsibilities, 342-45, 346, 348 113-42, 176 Federal Reserve priced services, 160, Supervisory Information Technology (SIT), 342 132 Risk-based capital standards, 125 Suspicious Activity Report, 141 Risk-focused supervision program, 120 Systemwide information technology, 155 Rules of Practice for Hearings, 183 Rural Home Loan Partnership, 101 Technical assistance, Federal Reserve System, 124 Salaries, Federal Reserve Bank officers Thrift Institutions Advisory Council, 280 and employees, 341 Thrift Supervision, Office of, 106, 107 SAR Activity Review: Trends, Tips, and TILA (See Truth in Lending Act) Issues, 141 Training, 103, 124, 132-35, 141 Savings bonds, 153 Transfer agents, supervision of, 119 Screening systems, bank examinations, 121 Transfers of funds (See also Regulations: Securities (See also Treasury securities) E), 347, 349, 351 Borrowing transactions, 178, 354 Transportation, U.S. Department of, 105, Clearing agencies, supervision of, 119 107 Credit for purchasing or carrying, 354 Treasury Direct, 152 Credit, regulation of, 140 Treasury Investment Program, 151, 183, Dealers and brokers, supervision of, 119 184 Firms, claims on, 125 Treasury securities Holdings by Federal Reserve Banks, 158 Depository institution holdings, by class Subsidiaries of bank holding companies, of bank, 355 supervision of, 124, 125 Federal Reserve Banks Securities and Exchange Commission, 105 Holdings, 332-35, 340, 342-45, 346, Settlement services, 147 348 Shipley, Walter, Working Group on Public Marketable, 152 Disclosure, 130 Open market transactions, 336-39 Small Business Administration, 105 Repurchase agreements, 332-35, 336-39, Special drawing rights certificates, 332-35, 340, 356, 358, 360 356, 358, 361 Treasury, U.S. Department of the, 13, 154, Special Liquidity Facility, 187 155, 158, 347, 349 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

376 87th Annual Report, 2000 Truth in Lending (See Regulations: Z) Vehicle leasing, computer program, 100 Truth in Lending Act, 107 Truth in Savings (See Regulations: DD) Working Group on Public Disclosure, 130 Uniform Retail Credit Classification and Account Management Policy, 131 FRBl/l-10000-0601 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Cite this document

APA

Federal Reserve (1999, December 31). Annual Report of the Federal Reserve Board, 2000. Annual Reports, Federal Reserve. https://whenthefedspeaks.com/doc/annual_report_2000

BibTeX

@misc{wtfs_annual_report_2000,
  author = {Federal Reserve},
  title = {Annual Report of the Federal Reserve Board, 2000},
  year = {1999},
  month = {Dec},
  howpublished = {Annual Reports, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/annual_report_2000},
  note = {Retrieved via When the Fed Speaks corpus}
}